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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 Apple's Secret Sauce Should Be No Surprise to the Supply Chain Communitynoted 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 Paczlowski 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 blog posting 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


Many of us who observe global supply chain management issues and current developments have been writing and commenting upon the recent devastating earthquake that occurred in Japan and the cascading effect that this one unfortunate incident continues to have across different industry supply chains.  The effects of interrupted supply will continue as existing pipeline inventories and safety stocks become depleted. 


Japan, to its credit, has built a strong legacy of product innovation and quality for certain components and materials and manufacturers recognized these advantages in their prior sourcing strategies.  Many manufacturers have discovered risk vulnerabilities in their sources of supply, some discovering that their own suppliers were heavily reliant on components and materials sourced within the impacted regions of Japan. 


Manufacturers who will ultimately provide the agility and capabilities to adapt and respond to this ongoing crisis will be far better off than those who unfortunately continue to struggle in finding alternative supply.  There will surely be leaders and laggards, and some manufacturers will actually gain business as a result of this crisis. 


This week I had the opportunity to read an article published in the Financial Times, Industry Left High and Dry, authored by Peter Marsh (paid subscription or free-preview account required).  The article outlines the far-flung nature of today’s global supply chains by profiling an interview with David Cox, the head of operations for San Francisco based Blue Coat, a manufacturer of internet equipment with a worldwide supply network of more than 1000 companies.  Beyond the specific incident of Japan, Mr. Cox asks a profound question, one that came to my mind, and was probably on the mind of many in our community.


What if this type of tragedy actually occurred near China’s Guangdong province, the heart of manufacturing for many different high and low-tech industries?


Beyond the far-reaching scope of the impacts to supply, how would individual companies be able to quickly respond to a disruption of that magnitude and scope?  It is an interesting and timely question that perhaps has been posed in your own organization.  If it has not, assure the best you can, that it is raised.


A hopeful learning will be that quick access to timely information relative to the complete supply chain footprint, supply risk profiles, revenue vulnerability and alternative sources of supply will become mandatory for globally stretched supply chains.  Another learning will hopefully be that procurement and finance can no longer view cost reduction targets without some linkage to operational risk and capability.  In the end, the loyalty of suppliers to long-standing customers may be the key differentiator to crisis mitigation.


In his FT article, Marsh concludes that the lesson for industry from the Japanese disaster is that consequences of such events across a global scope of operations are always likely to be considerable.  We would add that this tragedy could also have occurred in other disaster prone regions of the world, including China or the U.S. west coast. 


Supply chain risk and resiliency are unfortunately the new table stakes for today’s globally based supply chains, and skills and process competencies need to be directed at identifying and mitigating risk on a much timelier basis.


A final postscript: The photo affixed to the FT article is that of the stranded ocean freighter Asia Symphony.  An internet search notes that the last port of departure for this ship, prior to its arrival in Japan was the port of Tianjin China.


Bob Ferrari


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 Supply Implications From the Earthquake in Japan- How Important Will Planning and Analysis Capabilities Ultimately Be? 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 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.


Bob Ferrari


As the global supply chain community enters the fourth week since the tragic and devastating earthquake in Japan, supply chain planning and sourcing teams are beginning to gain some further insights in the potential widespread implications of the incident to certain industry supply chains.  These implications reach to the lowest levels of product value-chains and could lead to whole industries competing with one another for critical supplies.


On the ground, priorities remain focused on the victims and on stemming radiation leakage that is occurring at the five nuclear reactors located at Fukushima power station.  The supply of consistent and reliable electricity remains a concern for surviving manufacturers while an assessment of impacts to transportation and port facilities continues.


Information thus far points to potential impacts affecting the lowest tiers of value-chain components, components and materials that some companies may have not known were single sourced within Japan.  Goldman Sachs noted that rubber products, plastics and electronic components are heavily reliant on Japanese manufacturers.  In our Supply Chain Matters commentaries we have noted reports indicating the potential scope of supply disruption involved:


·         Automotive airflow sensors- 60 percent of the global supply


·         Compounds that bond integrated circuits to glass panels for electronic displays- 80 percent of supply


·         Raw silicon wafers used to manufacture semiconductor circuits- 60 percent of global supply


·         Polymer used in production of specialized lithium-ion batteries- 70 percent of supply


The most visible and perhaps far-reaching implications are becoming evident in the automotive and high tech industries, where a shortage of semiconductors, electronic components and sensors may force some of the largest high tech and consumer electronics OEMs’ to vie with global automotive OEM’s for available capacity and inventory.  At the same time, potential interruptions in the supply of raw materials could compound interruptions of supply and add more dynamic tension to global supply of critical materials across both of these industries.


Both the Financial Times and The Wall Street Journal (paid subscriptions required) published separate articles noting that the world’s biggest producer of microcontrollers used in automobiles , Renesas Electronics, as indicating that its main plant, damaged by the earthquake, would not be able to resume production at its main production plant for another four months, possibly extending to September. Today’s automobile can contain on average upwards of 50-100 microcontrollers per vehicle. Two other Renesas plants remain idle because of unavailability of reliable electrical power from Tokoyo Electric.


Toshiba’s Corp.’s chip plant in Iwake Prefecture which produces microcontrollers and large-scale integration chips is scheduled to resume some production on April 11. Texas Instruments was the first to communicate a succinct impact as well as to point out that resumption of supply is dependent on availability of raw material supplies.


Shin-Etsu Chemical Co. and Sunco Corp. indicted last week that they do not know when their damaged raw silicon wafer plants will be able to resume production, and both are scrambling to transfer production needs to other existing facilities in Japan or other countries.


What we are about to discover as a community is how important the combined capabilities of supply chain design, capacity, inventory and scenario analysis capabilities will ultimately make a difference for certain companies, or individual companies within industries. Savvy sourcing and supply chain operations management will surely also factor as a differentiator in the coming weeks and months.


The interesting byline to consider and ponder is that two strategic industries are about to compete with one another for critical shared supply at the lowest level of each of their respective value-chains.  One of these industries has a history of supply chain process innovation, collaboration and deployment of advanced analytical applications. The other has been more financially challenged during the recession, and has been somewhat conservative in supply chain analytical and business intelligence process investments. 


The outcome may be interesting learning for all of us.


Bob Ferrari