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2011

 

As companies continue to report their Q2 fiscal results, a picture is emerging regarding how high tech, consumer electronics and automotive supply chains responded to the crisis caused by the Japan earthquake and tsunami that occurred in March.  The headline now reads excess inventory, but the implications may not be all that bad.

 

An article appearing in today’s Financial Times (paid subscription or metered free view required) concludes that fears of supply chain shortages, occurring as an immediate response to the quake, are turning into worries about excess inventory.  Companies exercised precautionary stockpiling of key components to buffer for a potential longer term disruption in supply.  A quicker than expected comeback from Japan’s high tech manufacturers coupled with declining consumer demand in Europe and U.S. markets has inventories remaining extraordinarily high.  The FT quotes the head of Taiwan research at HSBC noting: “Nothing is tight right now.  Those components where there was a risk of shortage are now having the biggest problems (in terms of over supply).”  In the article, FT goes on to note that because potential shortages were addressed so quickly, it was a testament to the flexibility and diversity of supply chains.  Unfortunately, the move coincided with ongoing weaker demand in the two biggest PC markets, Europe and Japan.

 

Nanya, Taiwan’s largest DRAM manufacturer by sales, has indicated that its inventory levels are now double the normal two to three weeks of stock.  The Wall Street Journal noted that Freescale Semiconductor, which derives more than one-third of its revenues from the auto sector, confirms weakness in the automotive and industrial sectors while confirming a buildup of inventory at certain customers and distributors. Similarly, Microchip Technology has indicated a similar trend.

 

So what’s the deal?

 

Wall Street and the financial markets praise the fact that many supply chains have performed extraordinarily in the midst of the Japan earthquake crisis.  Manufacturers took decisive action to buffer critical component inventories, while quickly locating and qualifying alternative components.  Now, the financial community seems concerned about high inventories.  Go figure !

 

Supply Chain Matters has its view regarding this dilemma, and readers are welcome to share their viewpoints as well.

 

Is it not better to be dinged for excess inventory than not being able to support the company’s revenue plan in the midst of a crisis?

 

It is better to have select excess component inventory for sales teams to take advantage of an industry competitor’s lack of inventory, and perhaps leverage new business? After all, the incremental cost of carrying additional inventory pales to the cost of losing significant business from a key customer because teams failed to hedge for a shortage.  Many high tech and other manufacturers  also continue to sit on boatloads of cash, so what’s the big deal?

 

Today’s more responsive supply chains have proven time again their ability to quickly deal with occurrences of excess inventory. The crisis of the Japan earthquake has tested the ability for various industry supply chains to deal with potential financial catastrophe.  Responsive S&OP based planning and what-if scenario analysis have proved to be valuable. Supply chain planning teams will also respond to temporary excess inventory bubbles.

 

Wall Street- which problem would you like to complain about?

 

Bob Ferrari

 

Yesterday’s announcement from American Airlines indicating a split order for new aircraft to be supplied by Airbus and Boeing has a tremendous amount of significance from many business dimensions, not the least of which are supply chain strategy related.  For those unfamiliar as yet with the announcement, currently noted as the largest aircraft purchase in history, American, which was a former loyal customer of Boeing, announced that it would purchase 260 Airbus A320neo, along with 200 Boeing 737 aircraft. Deliveries of both aircraft are slated to be in the 2017-2018 time period.

 

 

In a few short months, airlines have voted with their wallets, with a driven need to bring more fuel efficient and lower operating cost aircraft into their fleets.  Since announcing the A320neo in December, which promises 15 percent better fuel efficiency, Airbus has managed to capture more unit backlog than what currently exists for Boeing’s 787 Dreamliner, an aircraft three years overdue and targeted at lower operating costs. Backlog for the new A320 is approaching 1000 while the Dreamliner stands at 880. With continued new orders now pushing deliveries out seven years, other airlines will be compelled to make their own fleet decisions or risk having a disadvantage over competitors in operating costs.  A buyer herd mentality is occurring. As an example, discount carrier Southwest Airlines has yet to announce a replacement plan for its single aisle aircraft.

 

 

Readers who currently support the aerospace industry are obviously feeling lots of optimism since the current backlog of orders among Airbus and Boeing combined is now seven years and rising.  While elation is in order, we would advise that the time for celebration be brief, since aerospace related supply chains will have many challenges to overcome in the coming months. These challenges will also require different supply chain competencies.

 

This week, the Financial Times provided a pre-cursor introduction to this new era in a published article (paid subscription or metered view required) that noted that swollen aerospace supply chains, already showing signs of stress, have been increasingly concerned as to whether suppliers will be able to meet surging demand.  Aerospace is an engineering-driven environment where specifications and conformance to quality are strict, and qualified raw materials and suppliers are limited.  The current wave of innovation in components has been breakthrough, but has added many new challenges. Capacity has been and will remain a significant challenge, but other capabilities will also be required. A snafu or failure from one supplier can stop an entire OEM final production line, and with this level of growing combined order backlog, a stoppage will be ever more expensive in dollars and reputation.

 

The aerospace supply chain dominants, Airbus and Boeing, remain intensively competitive and reputations are at stake. Other OEM players like Bombardier, Embraer and Comac want their share of orders for their aircraft offerings. Snafus and delays surrounding outsourced supply chain of programs such as the Boeing 787 Dreamliner or Airbus A380 programs speak for themselves and Supply Chain Matters has provided multiple commentaries regarding the lessons learned. Candidly, the industry has not presented a stellar record around sourcing criteria, program management, operational consistency two-way communication and predictability.

 

The FT article noted through select interviews with suppliers that that was the past, and this new era will be different.  Some suppliers have been proactive in leveraging delay time to enhance capacity and their own value-chain capabilities. We certainly hope so for everyone’s sake, since as FT indicated, the stakes are now ever higher. To echo the words of Jim Albaugh, head of Boeing’s commercial aircraft business, the supply chain needs to be ready and able to deal with the implications of this amount of business, the pressure is now on, not only Airbus and Boeing, but the other OEM players as well. Airline and carrier customers remain under pressure to find all means to reduce operating costs and cannot afford any future delays in aircraft deliveries. In short, the stakes are higher and growing.

 

Supply Chain Matters offers some recommendations to aerospace industry participants, and encourages readers to add their own as well.

 

For the OEM’s:

 

Continue to extend supplier collaboration efforts and practice win-win vs. other strategies. Much learning has hopefully occurred from previous supply chain outsourcing efforts and that learning needs to be quickly translated toward insuring suppliers are ready People, processes, and tools are indeed the criteria, but also consider two-way program management, communication and timely visibility to schedule or engineering changes. In our view, Airbus has demonstrated that it has learned from past setbacks, and the introduction of the A320neo is a demonstration of active supplier collaboration and involvement.

 

S&OP processes for OEM’s should consider including more key supplier participation and involvement.  Contrary to traditional S&OP methodology, it would wise for OEM’s to also extend the planning windows of the S&OP process, both deeper into the value-chain, and broader in time windows. Some form of an executive level S&OP in our view, is mandatory to insure no surprises. Automation of S&OP processes should garner serious consideration if has not done so.

 

For value-chain suppliers and trading partners the challenges are more acute:

 

Total upstream and downstream supply chain visibility is essential in an environment that has coordinated or synchronized scheduling.  That includes visibility among all suppliers to OEM production schedules and early warning to any planned or unplanned supply disruptions.

 

More emphasis will be required in response management and business intelligence capabilities.  Utilizing standard MRP or lean six sigma methods coupled with static logic can fall short in the forthcoming highly dynamic backlog environment.  OEM schedules will surely change, orders will be shifted in priority and supply disruptions are inevitable.  Airlines who desire earlier delivery of new aircraft may opt to select an OEM other than Airbus or Boeing, and those OEM’s may come knocking for your capacity. Suppliers who have current business supporting other industry or service parts needs will have to make intelligent decisions on smart allocation of existing capacity, balancing different customer needs. Having agile business processes that incorporate more real-time planning and execution information coupled with supply chain intelligence helps suppliers to proactively respond to additional business opportunities as well as changing day-to-day operating priorities from existing OEM’s.

 

Supply chain risk identification and mitigation will be a significant competency.  The Japan earthquake and tsunami was our wake-up call to the reality that any single-sourced component, compound or material can affect the entire value-chain.  Boeing and other OEM’s are initiating supplier risk assessments and suppliers should be doing the same for their value-chains. Supply chain disruption due to political, governmental or natural disaster events is a new reality for more occurrences, and all suppliers need to have a plan to identify risk areas and insure business continuity.

 

The aerospace industry is in a very enviable position with lots of business and robust demand.  Unfortunately, business processes of the past will not cut the mustard in this more dynamic and looking-glass environment.  Consistent execution, end-to-end visibility, constant collaboration and timely response are the new business stakes for participants.

 

Bob Ferrari

 

© 2011 The Ferrari Consulting and Research Group. All rights reserved.

 

When developing strategies and initiatives directed at supply chain disruption and risk management, organizations sometimes dwell too much on the negative consequences.  That is understandable since a supply chain disruption of the magnitude and scope that involved the devastating earthquake and tsunami that occurred in Japan had far-reaching financial and bottom-line implications that are still being played-out on the global stage.

 

An article published in today’s Financial Times (paid subscription or preview sign-up account required) provides quantifiable evidence of both the negative or positive impacts. A graphic attached to the article quantifies the impact of the earthquake on Japan’s domestic automakers, and their stock price. Four months after the actual incident and Toyota stock has dropped 7.8 percent, Mitsubishi is down 7.1 percent, and Honda has dropped 6.6 percent.  Supply Chain Matters has thus far quantified over $2 billion in direct costs reported to date from Japan based companies.

 

There is however the opportunity side of the disaster.  Some companies were able to leverage the consequences of the disruption to market advantage.  On the stockholder equity side, Mazda stock is up 3.5 percent, Nissan is up 2.9 percent. Nissan continues to communicate that its global sales will rise 10 percent in the fiscal year in spite of the disruption, because the majority of its global production capacity remains external to Japan. Nissan claims that it was able to assess major supply chain issues caused by the quake in about an hour. In early April, the period directly after the quake, Nissan began shipping engines from its Tennessee U.S. V6 engine plant directly to Japan in order to keep its Japan assembly plants operating.  At the end of June, Mazda announced that its Japan based assembly plants had reached normal production levels, including overtime, while Toyota forecasts that normal production will not occur until the fall.

 

The Hyundai and Kia brand combined has posted a volume output increase of 14.6 percent year-to-date. Reports are that Hyundai models are in such high demand that assembly plants are working to maximum capacity to keep-up with global demand.  In May, Hyundai announced that it would invest $173 million to double its engine production capacity in Alabama.

 

On the supply side, supply chain teams who were able to quickly analyze and assess the overall impact to specific component supply quickly moved to lock-up any remaining alternative supplier capacity, assuring continuity of supply as well as headaches for industry competitors.

 

We are often reminded that in the Chinese symbol depicting crisis, the meaning translates to both danger and opportunity.  When formulating a supply chain risk management strategy. Organizations need to remember both of these aspects and have plans to address either scenario.

 

Bob Ferrari

 

We call reader attention to a rather insightful article, Closed encounters with suppliers, published in the July 7 print edition of the Financial Times (paid subscription required).  In the article, author Peter Marsh articulates the differences between closed and open supply chains, along with their implications for corporate and supply chain strategy.

 

March defines the differences of closed vs. open as follows:

 

A closed supply chain is a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the system.”

 

“In open supply chains- common in industries such as automotive, aerospace and many areas of consumer electronics- the emphasis is on standardized components that fit together in a modular fashion. In these systems, suppliers are generally encouraged to be the main innovators and sell the same components to a range of customers.”

 

Open supply chains came about from the efforts of lean and just-in-time initiatives where efficiency, cost control and overall return on assets was the overall corporate objective.  Later, quicker and more timely response to customer and market trends also became a motivator. Differentiation in products are governed by time-to-market and global volume and scale considerations, where common components can be shared across various product families or design platforms. The article makes an argument that rather than simplicity, the pendulum may be swinging back to complexity.  Of course, industry and corporate strategy are other considerations.

 

The article cites examples of closed supply chains as being Apple’s consumer electronics offerings, the Nestle Nespresso coffee maker and Corning’s flat screen glass. Supply Chain Matters would add Boeing’s 787 Dreamliner supply chain to the category of closed. The article points out that closed supply chains have come to the forefront as a result of corporate strategy needs to develop more innovative products that provide an industry edge or cannot be easily copied by competitors. Also noted is that in a closed supply chain, the hub company often requires supplier facilities to be closely situated to orchestrate design and coordinated supply needs. A closed supply chain often requires a more “tops-down” approach for supply chain business processes.  The article also points out that closed supply chains are far more exposed to the risk of greater disruption caused by external events. The March devastating earthquake and tsunami that occurred in Japan was the most recent example of the effects of this disruption on certain closed supply chains.  A recent news posting in Procurement Leaders notes that Boeing is considering a new supplier sourcing strategy to reduce the impact of certain disruptions, such as the recent Japan earthquake had on the 787 Dreamliner supply chain. Similarly, other closed supply chains have had a wake-up call to risk mitigation.

 

Supply Chain Matters would add other considerations, not covered in the FT article.  Organizations considering a shift more towards closed supply chains need to especially focus on the people skill, risk and systems implications of managing a closed supply chain.  From our observations, closed supply chains are managed by a more centralized supply chain organizational structure where critical functions of product management, supply chain planning, strategic sourcing and procurement are better coordinated.  The people skill requirements are also higher.  For instance, sourcing and procurement needs to have skills in understanding product technology and individual vendor capabilities.  As noted by FT, there is also a need for a coordinated strategy and focus related to identification and mitigation of potential supply chain risks.

 

Information systems are another important consideration.  Many closed supply chains tend to shy away from “generic” backbone software applications, in favor of those that provide broader and deeper supply-chain wide visibility and control.  Flexibility to adapt and quickly respond to constantly changing business needs as well as broader supply chain wide collaboration and business intelligence capabilities tend to be the requirements of choice.  Larger enterprises may consider adoption of more agile and less burdensome applications to support innovation required from smaller subsidiaries operating in growing emerging markets. Incorporating social media strategies to gain real-time customer insights and response to newer or updated products is also something to consider.

 

A closed supply chain may or may not be appropriate for every enterprise or mid-sized business. However, if it is a consideration, insure that your supply chain team evaluates the organizational skill, risk and IT requirements of this model.

 

Readers who have experience in closed supply chains are invited to add their observations related to organizational skills, risk and IT requirements to this commentary.

 

Bob Ferrari

 

Supply Chain Matters was very saddened to hear of the unexpected passing of Dr. Donald J. Bowersox, Dean Emeritus and Professor of Marketing and Supply Chain Management at Michigan State University.

 

Dr. Bowersox was a legend and pioneer in the concepts of logistics and distribution. Over his academic career he authored over 250 articles on transportation and logistics and many noteworthy books which continue to be a well-recognized resource for logistics professionals. 

 

Dr. Bowersox was the last living founder of the National Council of Physical Distribution Management (NCPDM) which was later renamed to the Council of Supply Chain Management Professionals (CSCMP). A tribute to Dr. Bowersox is posted on the CSCMP web site.

 

As a young supply chain professional this author, along with other inspired professionals, looked forward to many of Dr. Bowersox’s talks at the annual NCPDM and CSCMP conferences. They were often one of the ‘must-see’ presentations.

 

Dr. Bowersox will be missed by many in our profession and our thoughts and prayers remain with his family.

 

Bob Ferrari