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2011

 

It was not too long ago when many in our community were often frustrated by the lack of recognition by senior management of the impacts and positive effects that global supply chain capabilities can have on business results. Were 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 comment 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 Chairman 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, verus 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 CEOs and CFOs 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 and its people 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

 

Last year, after the announcement of  the AMR /Gartner Research ranking of Top 25 Supply Chains for 2010, I penned a Supply Chain Expert Community commentary, Should Contract Manufacturers be Included in Anyone’s Top 25 Supply Chains?.  My commentary was directed at the lack of consideration of any major contract manufacturer in the AMR ranking, and for that matter, any Asia-based global manufacturer.

 

Since many contract manufacturers (CM’s) have become such a key participant in industry value-chains, my view was that contract manufacturers should be considered in this or any other ranking. At the same time, if the broad rating criteria of being demand-driven, financial performance, time-to-market, S&OP and market responsiveness were weighted in the ranking, than the dilemma may be whether a CM is a major ‘contracted supplier’ or a self-contained brand owner and distributor.  The one critical performance metric of return-on-assets (ROA) may well be the Achilles heel in the AMR Top 25 ranking since we all know that CM’s came into existence as a means of brand owners to shed expensive design and manufacturing assets.

 

In a March 14, Gartner First Thing Monday commentary, (complimentary sign-up account required) AMR’s vice-president Kevin O’Marah acknowledges that Asia based supply chains should be considered in the overall ranking, and further notes that the overall ranking may have been flawed. AMR will soon release a cut of 2010 data based on the highest-scoring companies based in Asia Pacific, but industry peer ratings among Asia-based manufacturers have become a challenge.. Further noted is that the top five 2010 listing would include the names of Samsung, LG, BHP Billiton, Toyota.  The primary advantage for these companies are their performance in ROA.

 

According to the commentary, the only CM to make the 2010 listing would have been Flextronics, primarily from the enthusiasm of key customer Research In Motion (RIM).  O’Marah also questions: “Where is Foxconn?” The largest of all the CM’s is not considered in noted capabilities by Asia industry peers.

 

From my lens, AMR should be complimented for extending the Top 25 ranking to include Asia based manufacturers and retailers.  Overcoming the challenge of garnering an industry peer level forum resident within Asia, I’m sure, can be overcome in time. 

 

The more knotty issue perhaps continues to lie on the weighting of ROA in the ranking criteria, and whether this presents a obstacle for inclusion of major CM’s.  In another words, if names like Apple, IBM, Dell, HP and others qualify as Top 25, are their major CM’s a key enabler of that ranking? 

 

Is it time for a listing of just the Top 25 CM’s, with different quantitative and qualitative ranking criteria?

 

What’s your view/

 

Bob Ferrari

 

As I pen this commentary our global community is approaching five days since the tragic earthquake and tsunami tragically occurred in Japan on Friday, March 11.  Compounding this unimaginable tragedy is widespread human tragedy and powerful images we may not soon forget. An evolving nuclear-related crisis involving four, and possibly six separate nuclear reactors located at the Fukushima power complex can add all sorts of other crisis implications. We should all take notice of the courage, resilience and resolve of the people of Japan as they deal with the aftereffects of this tragedy.  The word “resilient” is often an over used term but in the context of this ongoing tragedy, it takes on a new significance.

 

For community readers in semiconductor, high tech and consumer electronics value-chains, and perhaps others as well, the situation in Japan presents significant current and longer-term value-chain challenges as events continue to unfold.  Initial supplier assessments are still a work-in-progress, and further patience will be required, given the magnitude of this tragedy.  There are media and industry analyst reports already noting the potential implications on high-tech value-chains. 

 

A Reuters news story notes that the prospects of prolonged supply disruptions, particularly in NAND flash memory, DRAM memory, Microcontrollers, LCD displays and other electronic components such as capacitors are already flaming spot market prices. Texas Instruments has warned that its two Japan based chip plants would be down until July, and is in the process of re-directing 60 percent of output to other sites.

 

Potential shortages of needed parts are a strong possibility. While value-chains generally have a few weeks of safety stock supplies, business continuity plans will need to concern themselves with different forms of scenarios, ranging from alternative suppliers, shifting production, or spot market buys. Already there is industry speculation that major supply influencers such as Apple, HP or others will fare better in this pending crisis because of inherent market buying influence among impacted suppliers.  The implication is that other buyers may be more impacted, perhaps having to tap secondary sources to make-up any future temporary supply shortages.

 

We at Supply Chain Matters would suggest that it is very important for planning and S&OP teams to focus on various aspects of scenario and contingency planning. Consider the following as three potential near-term assumptions:

 

The current situation in the impacted areas in northern Japan is described as a “logistical nightmare”.  Roads are blocked, port and air cargo facilities are severely damaged. As we observed in the earthquake that occurred in Haiti, the priority for transportation will initially focus on getting food, water, fuel to those impacted.  Concerning the evolving situation, one could further speculate that evacuation of large numbers of people may also become a transportation priority.  Thus it may be wise to assume that it may take additional time for transportation assets in northern and other parts of Japan to resume to normal status, and further transport delays should be factored into inventory and supply planning.

 

Due to the current loss of power generation capacity brought upon by these compounding catastrophes, most of Japan is operating under rolling blackout conditions.  The open question is how long this condition will continue, since many of the high tech production facilities need reliable and uniform power to sustain production levels. Thus, assumptions regarding normal shipping and fulfillment schedules of component or finished parts will remain uncertain, at least in the coming days. Plan accordingly, and conduct scenarios with conservative supplier output assumptions.

 

Moving to secondary markets as a means to buffer parts shortfalls may become a reality, especially if targeted secondary suppliers in China, Korea, and the U.S. are quickly sold-out of their available inventory or near-term capacity. If this becomes the scenario for your organization, teams should be very diligent to be on the lookout for counterfeit parts.  When markets are imbalanced, counterfeiting activities increase, especially in suspect countries.  Redouble your efforts for detecting non-conforming parts.

 

Community members, especially those residing in Japan and other high-tech manufacturing sectors may well have other recommendations or considerations and are welcomed to share them.

 

Many industry supply chains will again be challenged in the coming days and weeks.  Conducting assessments, planning for various scenarios and incorporating contingency plans for risk mitigation are important priorities at this point.

 

In the meantime, our hearts and sympathies continue to be focused on all the people and community members in Japan.

 

Bob Ferrari

 

 

 

This morning I had the opportunity to join fellow bloggers Trevor Miles and Lora Cecere in a thought leader’s webcast focusing on the topic regarding the potential of the social supply chain. 

 

Trevor set the context for what is described as social, by noting what Geoffrey Moore, noted author and IT observer, labels as systems of engagement.  Lora touched upon current examples and the potential use of social methods in the customer-facing side of supply chain, while I explored some examples and potential that I believe are applicable on the supply side of supply chains.

 

If you did not have the opportunity to view the webcast, I believe that a replay will be made available on the Supply Chain Expert Community web site.  Fellow community bloggers Jim Fulcher and video host and resident hipster Bill Dubois have additionally shared some of their thoughts on social supply chain potentials as well.

 

The topic of leveraging social systems can evoke a number of different responses and I’m sure that your organization is no exception.  In my discussions with other supply chain professionals and even among the blogosphere, there are differing opinions and viewpoints.  Some will note that social media is really nothing more than Twitter and Facebook, and who has the time (or desire) to want to read an endless stream involving all sorts of personal or other updates. Some senior executives may currently have this viewpoint.  However, if you examine some of the efforts of early adopters, and if your lens is broadened to the notion of how people and teams can communicate with one another and gain insights, the value of social supply chain may have a different lens for your organization. Social concepts do not equate to endless 120 character streams of unrelated or broadcasted information. 

 

Like any other new technology, the focus should not be centered on the technology itself, but rather the business problems that need to be solved, along with the various options available to solve these business problems.  For instance, how can we gain more early warning on pending supply or specific supplier problems?  Are certain products experiencing extraordinary quality failures?  How are our customers responding to our new product launch and what connotations will that have on supply plans? If a supply chain related disruption occurs, and existing communication channels are temporary unavailable, how will we gain insights as to what is happening at the source?

 

Yesterday, I had the opportunity to hear a talk from Dr. Andrew McAfee, principal research scientist at the MIT Sloan School of Management, who originally identified the term, Enterprise 2.0. Dr. McAfee observed that while there is some healthy skepticism, leveraged use of social systems have the potential for organizations to connect teams of knowledge workers.  He provided a powerful quote from Lou Platt, a former CEO at Hewlett Packard: “If only HP knew which HP knows, we would be 3X more productive.”  Dr. McAfee further noted that the pace of business has permanently changed, and change will continue to come at a faster pace, and in global perspectives, sometimes despite all means of planning. While we are in the early days of this transformation, unlocking the explicit and tacit knowledge of teams of individuals can be the difference in how tough problems are tackled and solved in a much more timely manner.

 

On our webcast, Trevor Miles reminded our audience of a quote from Angel Mendez, senior vice president of supply chain for Cisco Systems.  There are over 20,000 employees involved in the activities of Cisco’s supply chain, only 2,000 of which work directly for Cisco.”

 

That is the new reality of supply chain management for many in our community and that, I would argue, is the strongest consideration for keeping an open mind in incorporating social concepts in your supply chain processes. While we are in the early adoption phases of incorporating social mechanisms, the competitive benefits are important to consider for supply chain management needs.

 

Now is the time for our community to share its views.  Do you envision a benefit for use of social systems in supply chain processes? 

 

Do you feel that senior management has the proper view of these concepts, and is more education needed? 

 

Do you believe that there is competitive advantage for those companies who actively and selectively augment supply chain process with social tools?

 

Share some feeback and commentary.

 

Bob Ferrari