There is yet another milestone event regarding ongoing supply chain impacts concerning the alternative energy industry.

Readers may recall our recent Supply Chain Matters commentary regarding consolidations occurring in solar panel manufacturing.  Intense competition, overcapacity and certain economic advantages have caused China based producers to continue to benefit from global consolidation and more compelling economics that favor supply chain capabilities within China. We previously noted the events leading up to the bankruptcy of Evergreen Solar, and since that commentary, we can now add the bankruptcy intent of Fremont California based Solyndra, at the cost of 1100 jobs. Each of these companies cited their inability to compete with Chinese producers in an environment of global overcapacity and eroding market prices.

Evidence of similar trends, albeit early stage, are now starting to occur in battery production but with a different twist.  Xconomy reported this week that Boston Power, a developer of advanced lithium-ion battery technology announced a new round of strategic funding.

The company announced that it raised an additional $125 million of funding, but with a new twist to its business model.  That revision caused the company’s existing CEO, CFO and vice president of marketing to resign at the time of the announcement. Beijing based GSR Ventures is leading the current round of funding, and the deal is reported to include other funding from the Chinese government.

The company’s new strategic plan calls for a product direction weighted toward the powering of electric vehicles while production operations and most of product marketing are to be shifted to China, where Boston Power is currently building a new factory.  However, Xconomy reports that research and development, product design and sales will initially remain in the U.S. while hundreds of jobs will be added in China. Boston Power’s original founder and now international chairmen, Christina Lampe-Onnerud will also remain in the U.S. while GSR managing partner Sonny Wu will now chair the company’s board of directors. One of Boston Power’s current strategic customers is Hewlett Packard which utilizes its battery technology in its portable electronics.

In essence, this is an example of a westernized  venture capitalist model with a China thrust.  With R&D and design resources remaining in the U.S. while high volume production and global distribution sourced within China, the Boston Power has the opportunity to leverage lower labor costs, lots of governmental incentives and U.S. developed product technology.

Replication is the best form of flattery.  However, this development is yet another warning sign for existing North America and Europe based producers who continue to compete with Chinese producers for market share and long-term supply contracts. All of this is important since many auto industry observers, including ourselves, anticipate a glut of excess electric battery production capacity over the next 3-4 years.  Such situations always tend to favor the lowest cost, most efficient supplier with the strongest OEM supplier ties.

Once again, as U.S. and European politicians make hay of out-of-control spending without the context of a strategic economic growth plan, China continues to show signs of building out the high volume production and distribution expertise to sustain a long-term presence in important strategic growth markets.  We now must add a venture-capitalist model that favors China’s strategic interests.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

Within the Supply Chain Expert Community, Supply Chain Matters has posted previous commentary relative to Apple’s Secret Sauce- it’s relentless attention to supply chain strategy and operational capabilities.  Our previous commentary in mid-February noted how Apple was plugging strategic and tactical holes in its long-term supply strategy by placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics, along with back-up supply contracts with strategic vendors such as LG Display. We have also commented on the reality that Apple’s influence and buying power within the industry insures that it will receive preferred status during supply crisis such as the one unfolding as a result of the earthquake in Japan.  Apple has also maintained a strong and collaborative working relationship with its prime contract manufacturer, Foxconn International, and in some cases has help Foxconn to invest in innovative new capabilities.

This week, a blog commentary penned by John Paczkowski on Digital Daily headlines that a glance at Apple’s latest 10-Q SEC filing indicates that Apple has invested more of its available cash resources in long-term supply.  Purchase commitments rose from $7.9 billion in Q4 of 2010 to $11 billion in Q1 of this fiscal year. Paczkowski speculates that there are two reasons motivating this 39 percent increase in long-term supply commitments: the tight supply environment caused by recent calamities in Japan and the expected increases in iPad2 shipments, which is in a backlogged, supply constrained situation.  Our community, especially those residing in the high tech sector can certainly add even more insights to the supply dynamics that occurring right now.

There is however a far more important lesson for global manufacturers, that being a sensitivity and commitment by senior management for strategically investing in long-term supply chain capabilities vs. short-term gains.

I read a recent commentary appearing on the Manufacturing News Blog which makes the observation that in the depths and consequent exit from the global recession, major manufacturers such as Cisco Systems, General Electric, Hewlett Packard, Intel, Pfizer, Texas Instruments and others allocated more cash to stock buyback programs as opposed to product innovation or other strategic business investments.  Stock buybacks can accelerate the appreciation of a stock price when earnings are on the rise, as they have been for many global manufacturers. It seems that financial engineering is alive and well.

Yesterday the Wall Street Journal noted (paid subscription required) that the stock-market rebound from the depths of the financial crisis has been a boon to executives who received grants of stock options at rock bottom prices in late 2008 and early 2009.  The depressed stock prices at the time motivated corporate boards to grant larger numbers of options than usual. The WSJ notes that more than 90 percent of CEOs of companies in the Standard & Poor’s 500-stock index received stock options from October of 2008 through September of 2009, and that consequent CEO equity has risen more than $3 billion above original grant valuations.

Our community would have rather strong arguments that a good portion of the business success since 2008 came from the ability of the supply chain to successfully navigate through many numbers of supply, demand or disruption centered crisis situations.  Conversely, as certain industry sectors are discovering, a crisis such as the Japan earthquake will again reinforce the notion that a highly visible supply chain setback can have a direct negative impact on stock price performance.

A recent Tomkins Supply Chain Consortium survey noted that senior supply chain executives now have a higher level of uncertainty than they did in the past. Nearly 31 percent expect riskier conditions in the future with areas of greatest concern centered on business planning, product sourcing, customer service and transportation. While manufacturers have managed to navigate very turbulent waters by dramatically cutting back on people, costs, and perhaps certain controls, more uncertainty, complexity and risk remains.

If as a community, we accept Apple as one highly visible benchmark for excellence in global –wide supply chain capabilities, we can again note that Apple understands that investing in long-term supply, fulfillment process capabilities, and supply chain resources can result in more rewarding bottom-line results and stockholder performance.  We should at least give Steve Jobs the credit for calling out stock buybacks for what they are, the transfer of cash from one pocket to another.

Over the coming months, we will all observe more evidence of where investments in supply chain vs. investments in financial engineering have the ultimate impact on customers and shareholders.

What’s your view?

As manufacturers transition from the severe recession, do short-term perspectives and goal fulfillment remain the norm?

Are investments in strategic supply, risk mitigation and customer fulfillment capabilities now being supported in your organization?

Bob Ferrari

The following commentary can be viewed and commented upon on the Supply Chain Expert Community web site.

As many of the supply chain management community are acutely aware, the after-effects of the earthquake in Japan will have far reaching impacts on multiple industry and global value-chains.  A lot of commentary can be found in the blogosphere and in traditional media, and we at Supply Chain Matters have also added our own perspectives which can be reviewed here and here.

Before continuing with this commentary, we should again emphasize our empathy for the people and victims within Japan who have and continue to endure the effects of this calamity.  Our thoughts and our prayers should continue to be focused on their recovery.

Unfortunately, tragedies bring implications and that is on what this commentary will reflect.

At this particular time in this evolving crisis, the one important unmistakable conclusion is that just like the 2008 global financial crisis, the Japan event will ultimately seed a number of significant watershed changes for industry supply chain strategies and capabilities going forward. The open question is how significant and how deep.

In this commentary, we reflect on a few of the more significant implications.  Jason Busch of Spend Matters called attention to a Paul Martyn, commentary published on Forbes.com that noted an estimate that it would be 9 to 12 months before production can return to pre-disaster levels. That seems to be a reasonable general estimate and there certainly could be some outlier exceptions, particularly in electronics and automotive sectors.  In his commentary, Martyn predicts three major shifts as a result of this crisis:

1.       A lessoning of the rigidity of zero inventory policy that many companies have been following these past few years.

2.       The entry of new players takes advantage of the crisis to seize new revenue opportunities.

3.       Bullish upside for U.S. and perhaps North American based manufacturers that stand to gain in the short-term as alternative suppliers.

Regarding point three, Jason Busch opines that then again, U.S. manufacturers may once again be unable to respond to the new business opportunities because of a lack of required capabilities in key people skills such as machining, welding, design and other specialized manufacturing.  Needs for updated capital equipment are also expressed. Steffora  Mutschler, contributing editor on EDN notes in a commentary a specific prediction from Dale Ford, senior vice-president of market intelligence at IHS iSuppli where Ford asserts his belief that for the semiconductor industry as a whole, the earthquake will provide the biggest impact in the history of the industry. None of the previous natural disasters have been as broad in multiple supply chain impacts.

We would add our prediction that this crisis, when the dust finally settles, will also challenge the very foundations of procurement and outsourcing strategies which will cause product development, strategic sourcing and supply chain management teams to reassess their policies and processes in product and component sourcing.

The crisis will be another critical reminder to the importance of having solid supplier relationships, including how priorities during a crisis will always lean toward established and loyal customer and supplier relationships. While previous strategies were primarily motivated by lower cost considerations, Supply Chain Matters believes that the current realities of business risk and changing end-markets will challenge previous management motivations. The era of the CFO dictating supply chain strategy is about to be shaken to its core.

For the longest time, supply chains have been constantly reacting to all forms of crises, either internally or externally driven.  The voice of the supply chain has been hampered perhaps by an inability to converse with the boardroom and articulate desired business outcomes with required capabilities in planning, agility, procurement policy and customer fulfillment. Too often and too frequently, supply and value-chain strategy directed at needs for specific business driven outcomes have been rather viewed in a ‘cost center’ or ‘shared service’ mentality…  “We will not have inventory!  We do not have the time or budget resources to address specific risk or needs for process agility! Planning on spreadsheets can get the job done just as effectively!”

Traditional industry analysts harp on being more demand-driven or customer focused, and can well cite numbers of multi-national companies who had the foresight and budget to invest.  The crisis involving the after effects of the Japan disaster is a supply-driven crisis, with many implications to all sizes of manufacturers and service providers relative to customer demand, industry competiveness and perhaps the role and fabric of the supply chain.

How have the events in Japan changed thinking in your company, or has it neglected to change any thinking?

Weigh in and let’s get a conversation started.

Also, take the time to participate in our Supply Chain Matters interactive polling question of the month and ascertain how other teams may be impacted by Japan.

Bob Ferrari

The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site where Bob Ferrari is featured as a guest contributor.

Is was not too long ago when many in our community were often frustrated by the lack of recognition by senior management to the impacts and positive effects that global supply chain capabilities can have on business results.  Where supply chain functional teams merely overhead cost centers? Many sought out academic studies that directly tied business or stockholder performance results to developments in supply chain.

Not so any more!

If you have been watching the various financial and traditional news networks these past days, you may have noticed all of the CEO, Wall Street analyst and reporter interviews all commenting on whether the devastating earthquake in Japan will have an impact on the particular company, industry, or least we mention, an Apple product like the iPad2.

This week I was viewing Bloomberg News and noted and interview with Timothy L. Main, the CEO of global contract manufacturer Jabil Circuits. The scrolling sub-title on the bottom of the screen was “Supply Chain Impact”.  Mr. Main’s message was that it is still too early to assess overall supply chain impacts, and it might take weeks to know the real impact.  Wisely stated, and no doubt Mr. Main was briefed by his supply chain planning and procurement teams. Similarly the CEO and Chairmen of General Motors and others have come forward to provide statements regarding the current state of supply chain impact.

IBM published an insightful Chief Supply Chain Officer study that was conducted a couple of years ago.  Of the five concerns identified by the most senior supply chain managers, the number two concern was the elevated sense of risk provided by extended supply chains.  It is a safe bet that if that survey were conducted today, risk would likely be the number one concern.  Of more interest however was an observation brought out by the supporting questions, which uncovered a disconnect between Chief Financial Officers, the majority of whom (in excess of 60 percent) stated their company has a risk mitigation plan in place, vs, the senior supply chain manager, who stated the opposite, that risk was an ongoing concern.

Today’s hyper-intensive world of Wall Street instant trades and hedging can brutalize any company’s stock with the hint of bad news, especially that related to a company’s supply chain.  It is therefore no surprise that CEO’s and CFO’s are speaking out about the status of their supply chains in the wake of the Japan crisis.

In the coming weeks we will all discover what the real impacts turn out to be, and how companies and supply chain teams rise to and overcome the challenges that will occur.  Thus far, the impacts are clearly pointing to be patterns of component shortages in lowest tiers of industry supply chain such as semiconductor, high tech, automotive and other others.  In the end, robust planning, supply chain analytics, responsive sourcing and strong ties with component engineering will likely be important differentiators in the weeks to come.

While it was not to long ago that supply chain recognition may have been taken for granted, another global in-process case study is now underway, which will once again etch that supply chains, and their planning and execution capabilities absolutely do matter for business results.  Japan will eventually get through this crisis. Supply chain and procurement teams will rise to the ongoing challenges.

In the end, we will all discover the importance of investing in supply chain people, process and technology capabilities.

Bob Ferrari

Beginning on Tuesday March 22, Supply Chain Matters will be in Orlando  attending and providing commentary from the SAP Logistics and Supply Chain, PLM, and MFG 2011 conferences being sponsored by the SAP Insider organization.  In addition to Supply Chain Matters commentaries, readers can also look forward to authored commentaries on the SAP Insider blog as well.

This conference occurs annually, draws fairly large attendance, and is where SAP supply chain management customers gather to exchange learning, education and insights regarding SAP’s current and future technology addressing global supply chain process needs.

If you are attending this conference, please seek me out or drop us an email.  We would enjoy speaking with you.

We also extend thanks to SAP for inviting and hosting us at this key customer event.

Bob Ferrari