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2010

The fallout from the indictment and arrest of Paul Devine, a global supply manager at Apple charged with wire fraud, money laundering and unlawful monetary transactions involving more than one million dollars in alleged kickbacks, has continued since we first commented on this incident.  As I pen this entry, a Google search notes over 1200 web entries directly related to various aspects of this incident. Commentaries in the blogosphere and among academics are focusing on the implications for procurement and supply planning strategies, and we all have to ponder whether this one, highly visible incident is just another sign of the state of the times or whether this is a watershed incident leading to more focused ethical standards.

 

Reports in various global financial publications such as the Financial Times and The Wall Street Journal are focusing on the general reactions among specific suppliers involved, as various companies respond to protect either legal interests or reputations in the market.  According to the Financial Times, Kaedar Electronics of China, a unit of Taiwan’s Pegatron Corp. and Cresyn of South   Korea admitted it benefitted from the information provided by Mr. Devine. The article notes that “Cresyn and Mr. Devine signed a “consulting services agreement” spelling out what Mr. Devine was required to leak, including Apple product roadmaps and sales forecasts, in exchange for $6,000 in monthly payments.” The Times notes that Pegatron had begun its investigation and had suspended the Kaedar manager allegedly involved. Meanwhile a Wall Street Journal article notes that a Pegatron spokesperson acknowledged that Kaedar did pay a brokerage commission to an intermediate trading company for its business with Apple, but declined to disclose the amount of money paid. Others suppliers reportedly involved are indicting that such practices are not condoned.

 

No doubt, the coming days and weeks will provide even more opinion and commentary on the implications of this incident, and whether it sends a wake-up call on the state of ethical procurement practices when supply chain business pressures and various business cultures collide.  While some may deflect such remedies toward the moral principles or motivations of the individuals involved, or on future hiring and selection policies, in my view, hiring policy has little to do with the underlying root cause of this episode.

 

Individuals respond to the business culture and the goals and organizational expectations practiced within their firms.  We all know that Apple surrounds itself with a culture of extreme secrecy to protect itself from competitors.  Suppliers want an edge on their competitors, and will sometimes go to extraordinary means to secure protected information that provides that edge.  To change all of this, all members of the value-chain need to equally share in the risks and rewards of success, and further need to know where the lines are drawn. Apple has a well articulated Supplier Code of Conduct, and to its credit, is taking very decisive action in dealing with this incident. 

 

I come back toward the needs for insuring that proper risk and reward strategies are practiced and properly monitored among all in the value-chain, and with all professionals involved. Confidentiality and the safeguarding of key information has its place and all parties need to understand that certain behavior and practices will not be tolerated. The anticipation of lucrative business does not warrant unscrupulous behavior.

 

What’s your view?

 

Bob Ferrari

There has been no shortage of significant supply chain related news these past months, but I would dare state that the most troubling thus far this year broke this weekend. 

 

A global supply manager at Apple was arrested and charged with offenses that include wire fraud, money laundering and unlawful monetary transactions involving more than one million dollars in alleged kickbacks. According to the Wall Street Journal article, (paid subscription may be required) this incident underscores the pressures on companies that hope to serve as suppliers to the fast-growing Silicon Valley giant.” An indictment also names an employee of one of Apple’s suppliers as a co-conspirator.

 

The U.S. Internal Revenue Service and the FBI conducted the investigation uncovering an elaborate scheme involving at least three suppliers where confidential information that would allow these suppliers to negotiate on more favorable terms with Apple was shared. The suppliers in question provided mechanical parts, tooling and fixtures related to the manufacture of Apple iPads and iPhones. Information allegedly shared by those indicted include Apple’s planned sales volumes, product specifications, competitors target prices and bids, which in essence provided overall intelligence on how to best bid for Apple’s business. Correspondence with suppliers was made through Hotmail and Gmail email accounts, payments were made in traveler’s checks and as many as 14 U.S. and overseas bank accounts were utilized in depositing the monies.

 

To Apple’s credit, the company reacted swiftly, filing a civil suit against the alleged conspirators charging them with fraud and violations of racketeering laws. The company also issued a statement indicating that it has “zero tolerance for dishonest behavior inside or outside of the company.”

 

The fact that these incidents continue to be uncovered is troubling in itself. As many in our community are astutely aware, Apple fosters intense secrecy about its supply chain activities both among its suppliers and its internal employees. Now that an Apple supply manager allegedly violated that policy for personal gain implies that certain individuals will take extraordinary risks for personal gain, not to mention that certain suppliers themselves felt the need to take part in such unethical and criminal behavior in order to maintain or advance their supplier business interests with the company. Further, as has been noted in past incidents of this type of behavior, the incidents themselves occurred for many months before detection. Apple indicated that activities related this alleged incident dated back to October of 2006.

 

There are real questions to ponder. Does huge supplier contracts with potential for long-term business volume foster an environment that ‘winks’ at unsavory business practices? The suppliers alleged to be involved in this incident stemmed from China, South Korea and Singapore. Would North America or European-based suppliers be just as susceptible to practicing these activities? Are certain corporate security and ethical standards not being consistently enforced?  There are so many questions... 

 

What’s your view?

 

Bob Ferrari

 

Very early in my supply chain career, I had a boss who had an expression: “When certain news about parts shortages becomes public, you know that the crap has hit the fan.”   That was a time prior to sales and operations planning.

 

In a span of just a few days, two major financial media publications, The Financial Times and The Wall Street Journal, featured articles reporting on how select parts shortages are affecting major manufacturing companies, and in some cases, their financial results.

 

The FT article, Supply chain woes threaten global recovery, (free preview account may be required) expresses a concern that big manufacturers could be held back in their financial performance by their inability to secure vital components from weakened supply chains.  The article cites a recent survey by MFG.com noting that: “Some 51 per cent of big US manufacturers said they experienced “significant supply chain disruptions” in the second quarter, while 42 per cent of small and medium-sized suppliers said they had received queries or work from larger companies in need of urgent assistance because of supply chain problems…”   Shortages appear to be particularly affecting electronic components across multiple industries. Companies such as Boeing, Caterpillar, General Electric and Volkswagen were each cited as having challenges. In our Supply Chain Matters Q2 Global Supply Chain Snapshot of global manufacturers, we also picked-up on GE’s and others’ messages of select parts shortages potentially impacting this quarter’s results.

 

The WSJ article, From Snowmobiles to Cellphones, a Scramble for Parts, (paid subscription or preview sign-up may be required) further notes that companies have had to reconfigure offered products due to persistent supply shortages.  It notes that shortages of transistors, capacitors and integrated circuits became pronounced in the first quarter, and persist in the second quarter.  Telefon AB L.M. Ericsson indicated that shortages cost the company $400-$550 million in sales and delayed shipments, and Royal Phillips Electronics, Polaris Industries Inc. Motorola and Whirlpool are also mentioned as being impacted.  Motorola CEO Sanjay Jha  summed it best noting that his company is scambling in a “constrained environment”.  Companies utilizing current hard-to-find components are seeking their own fixes which include offering customers different features or alternative components and/or technologies.

 

This news of critical parts shortages is not a surprise to the supply chain community. Our community deals with these very problems every day.  The fact that they have now reached global visibility, however, is an important sign that now, more than ever, is a critical time for education of senior management on the importance that an integrated Sales, Operations and Inventory management process can have in the ongoing managing of this constrained environment.  I would hasten to add that it also reinforces the need for active participation from Finance, with integration to the company’s financial planning process, or active participation from Product Design and Management to provide alternatives to other components.

 

As a community, we sometimes get accused of placing too much emphasis on the importance of the S&OP process.  Some may wrongfully argue that it may be merely a process to drive consensus around “bad news”.  To the contrary, in the current supply and capacity constrained environment, particularly concerning the impact to the ability of smaller suppliers to scale, the S&OP process is critical towards addressing cross-functional plans and strategies to support a sales plan.  The other take-away message is that change will be a constant through at least the remainder of this year, and the term “agility in the supply chain” has even more criticality.

 

Senior management does not relish news stories about how parts shortages impacted results.  They instead favor stories on how the supply chain overcame difficult challenges.  Now more than ever, fill-in the white space for your senior management team.

 

Bob Ferrari

 

Every now and then, it is important to take a step back from our everyday supply chain and procurement activities and reflect on the big-picture.  Such reflection could well uncover a brewing crisis before it becomes unwieldy, or worse, before it becomes a significant setback to business.

 

As I analyze various trends in cross-industry supply chain and financial performance, I have been reflecting upon why this post-recession recovery transition period has been demonstrating so many conflicting trends.  Large global manufacturing firms, for the most part, have generated rather impressive profitability results in the face of unprecedented business conditions.  Many months of cost-cutting in direct labor, overhead and supply-related costs have provided a far lower threshold to profitability, but a far leaner and vulnerable supply chain.  Some firms have taken a further step to attack any fixed cost associated with their supply chains, outsourcing the bulk of activities to contract manufacturers or key suppliers.

 

The end result is that many of these large global manufacturing firms are amassing large amounts of cash.  The most recent analysis pegs that cumulative cash balance number in excess of $800 billion, and Wall Street analysts are salivating on the potential for an upcoming period of increased acquisitions.  Others speculate why additional hiring has not begun. However you view this situation, there are more fundamental stakes in play, and they directly concern supply chains.

 

This week, the Financial Times published an article , Industrial’s success squeezes suppliers (free preview account may be required), which perhaps gets more to the big-picture, namely that while the larger firms have been practicing financial engineering, they may well have done so at the financial risk to their smaller suppliers.

 

During the darkest days of the recession and continuing into this current transitionary period, smaller suppliers were forced by supply chain dominants to dramatically cut back on costs and capacity. In many cases, suppliers were mandated to absorb longer payment cycles on their accounts receivable.  Some suppliers have survived the crisis, others have not.

 

Now, continued uncertainty relative to the longer-term direction of the global economy has caused many of the survivors to be extra cautious before investing in added resources and/or capacity.  Those suppliers who are experiencing significant increases in demand are finding it rather difficult to borrow money to fund expansion.  The Financial Times reported last month that U.S. small businesses are having to pay more relative to the Federal Reserve’s benchmark borrowing rate then at any time in the last 25 years.

 

In essence, large firms have placed more strategic and tactical importance on supplier capabilities, yet still demand the same upside and downside agility as if they still owned these capabilities in-house.  In the FT article, the CFO of Caterpillar notes that this year, some Caterpillar facilities have ramped from near zero to as much as 70 percent with very little notice being provided to suppliers.  Japanese manufacturing firms who had previously built “kiretsu” partnerships with suppliers that included joint-financing assistance, are now aggressively outsourcing large portions of manufacturing to contract manufacturers.  In its article, FT concludes that “big manufacturers may well take the lesson that careful stewardship of the supply chain is important at all stages of the cycle.”

 

Perhaps we should not call all big manufacturing firms to task for transferring the bulk of supply chain capability to smaller suppliers without some strategic assistance.  Some firms have indeed reached out, but I suspect that the numbers are small.  What is becoming clearer, however, is that dependency on suppliers, whether large or small, is the ‘new normal’ and larger firms have higher stakes in the long-term success of these suppliers.  Perhaps some of the key parts shortages being experienced in the high tech and other industries may have root cause to the current conditions.  In any case, there is, at least in my mind, some basis for the effectiveness of “kirestsu” types of supplier partnerships.  The ‘big-picture’ is that some new form of partnership model is required, one that requires the involvement of business, financial and/or other parties. 

 

The months of severe recession and cumulative cost cutting has shifted the supply chain risk profile.  Today’s volatile and uncertain global economy requires capabilities in supply chain agility. While technology can help with agility, strategic and partnership strategies related to suppliers may be a missing component in today’s environment.

 

Is your organization actively addressing this situation?

 

Bob Ferrari