Supply Chain Expert Community members probably know that this author has spoken and written about the emerging positive benefits in leveraging “systems of engagement”, the social media based systems that bring both people and teams together to solve problems or orchestrate more timely and informed decisions.  Unfortunately, like many things new, there can be a negative side to these systems, one that senior business and supply chain leaders need to consider.

 

Readers will recall the recent well-publicized incident concerning additives utilized in the production of beef hamburger in the U.S... A company Beef Products Inc. (BPI) developed a food product which makes ground beef leaner.  The product was called “lean finely textured beef” and many restaurant and food chains found the product to be innovative, enough to sustain a growing business and the need for four production facilities to support upstream customer demand.  Customers included very well respected brands to include Burger King, Kroger, McDonalds, Taco Bell and Wal-Mart. A man by the name of Eldon Roth, who founded BPI, has been inducted into the Food Industry Hall of Fame because of his recognized innovation in beef products and positive contributions to this industry.

 

Then, something went terribly wrong.  Many referred to the product as “pink slime” and that caught the attention of food and socially conscious bloggers. An online petition drive ensued to have the product banned from use by school children, and then traditional media, not to be undone by social media, began to run with the story of a potentially unsafe substance in hamburgers eaten by our children.

 

For a full account of all the details of this story, I recommend reading the April 16-29, 2012 Bloomberg Businessweek article, Was a Food Innovator Unfairly Targeted? The article points out that at peak production last year, BPI produced over 500 million pounds of its product. Social media bloggers, with a motivated concern relative to what school children were being fed, leveraged the ugly negative connotations of “pink slime” to eventually influence many educational institutions, restaurants and food purveyors to ban the use of the product because of the public outcry relative to food safety.  The Businessweek article quotes Matthew Salganik, a Princeton University sociology professor noting: “Social media is something that adds oxygen to the environment… It increases the chance that a small spark will turn into a big fire.”

 

BPI however was and remains viewed as an industry innovator. Businessweek states: “BPI has been in the forefront of food safety in the beef industry for a decade or more.” In mid-March of this year, while insisting that the BPI product was safe, the U.S. Department of Agriculture indicated that it would let schools and other food purveyors elect whether to buy meat with or without the BPI textured meat additive. Although BPI began aggressive efforts to tell its side of the story, that being the positive benefits of their product, including initiating the web site pinkslimeisamyth.com, events cascaded beyond control and consumers elected not to allow their families to consume beef containing the BPI lean additive. BPI eventually had to close all but one of its plants and the negative connotations also affected other meat processing producers such as Cargill and AFA Foods. Hundreds of workers have since lost their jobs.

 

We at Supply Chain Matters submit that there is obvious important learning from this beef industry incident. Senior business and supply chain leaders cannot afford to ignore or dismiss what occurs on social media. Whether you embrace the power of “systems of engagement” or not, what occurs in social media can and will have an impact on either the business, or the way people, and especially your employees, gather and exchange information, and make conclusions. There are both positive as well as negative connotations to this reality. 

 

In this commentary, we have highlighted the consequences of a negative connotation associated with a product, and how potential good intentions can spiral without offering factual education.  More importantly, it serves as a reminder that firms need to have designated people responsible for monitoring these systems, along with proactive strategies directed at both leveraging or mitigating any business impacts.  The obvious lesson is ignoring social media and “systems of engagement” as a well understood component of business practices is not wise given the highly mobile and social world that exists today. Representation of your product is managed by both traditional and social strategies. That is a new reality for business, and for supply chains that must respond to product management needs.

 

What is your firm’s strategy related to “systems of engagement”? Does your company view the positive benefits, as well as the potential impacts to business strategies?

 

Bob Ferrari

 

About a month ago, Negative Vibes Concerning Apple Should Not Necessarily Translate to its Supply Chainreflecting on how any sort of news, positive or negative, emulating from Apple’s supply chain, can directly impact a company’s stock valuation.  That applies not only to Apple itself, but also its suppliers. The sheer scope and volume of Apple’s value-chain should cause any supplier to covet Apple’s business and volume scale.  Where the phenomenon of a negative market valuation drop was once attributed to a major supply chain disruption or snafu, when it comes to Apple, it can be any negative news deemed significant by equity markets.  Our readers are probably aware that both Apple and Samsung provide a rather unique industry relationship. While they each compete in the same markets for consumer electronics devices, Samsung has been a long-term key supplier of various supply components for Apple.

 

Thus, in yesterday’s financial media, are reports of the near $10 billion drop in the market valuation of Samsung, after a Taiwan based publication reported that Apple placed a rather large contract order for 12 inch DRAM chips with Japan based Elpida. As was noted in our late April commentary, Elpida, a DRAM chip competitor with Samsung and Hynix Semiconductor, among others, previously filed for bankruptcy protection, and has become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech”, because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.

 

A Reuter’s article reporting on the Samsung impact quotes an Asia based equity analyst indicating that the shift in supply contract implies that Apple does not want Samsung or Hynix to dominate this market segment.  Reuters also reports that U.S. based Micron Technology Corp. are in talks to acquire Elpida, and the prize has just become more valuable.

 

In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base.  Visibility to Apple Provides Clear Evidence for Active Supply Chain Mitigation, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.

 

Here’s another evidence point. Financial media is today reporting that Apple is sourcing a bigger screen for the upcoming new release of the iPhone. This 4 inch diagonal screen (contrasted with the current 3.5 inch screen) is reported to be sourced at suppliers LG Display Co., Sharp Corp. and Japan Display Inc. Consider that in March, Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn, invested $800 million to take a 46.5 percent stake in Sharp’s LCD production facility in Sakai, western Japan. Japan Display was previously formed from the merged LCD production entities of Sony, Toshiba and Hitachi, that each decided to consolidate as one to garner more volume scale. If sourcing reports turn out to be accurate, Apple would, in essence, be balancing geographic related risk (Korea and Japan sourcing), and supplier and scale risk in having LCD supply alternatives beyond Samsung.

 

Being the goliath in terms of volume and scale of the consumer electronics value-chain comes with tremendous influence for long-term revenue and capacity planning.  At the same time, such influence must include a balance of risk and influence.  We should all take notice of Apple since it continues as a benchmark in these practices.

 

Bob Ferrari

 

The automotive industry continues to encounter some significant learning regarding major supply chain disruption and mitigating global supply chain risk.  In 2011, the effects of the massive earthquake and tsunami that impacted northern Japan, followed by the massive flooding in Thailand brought about by an unusually strong monsoon event led to a new awareness of supply risk that extended to critical components at the lowest tiers of the value-chain. In March of this year, Supply Chain Matters provided updated commentary regarding this learning, along with efforts being taken by major Japan based Automotive OEM’s to mitigate such risks in the future.

 

Last week, major automotive manufacturers in Japan reported results from their March ending fiscal year closings, collectively forecasting record production volumes and increased profits for the coming fiscal year.  Toyota and Honda, both severely impacted by supply disruption, reported optimistic forecasts for the upcoming 2013 fiscal year, but not without the need for aggressive sales campaigns. The Financial Times reported that Toyota produced 2.5 million vehicles in its March ending fiscal year, surpassing both Volkswagen and General Motors annual output. The company however incurred a 2.2 percent decrease in annual revenues and a 24 percent decrease in operating income. According to its annual reporting, Honda produced slightly under one million units (988 thousand), noting increased output for the North America market but decreased output in Asia due to the ongoing effects of the Thailand floods. Honda had both of its Thailand car assembly plants totally underwater directly after the floods. Honda’s profitability levels within its automotive group have recovered to just under FY10 levels.

 

The most significant headline, however, is that of Nissan, which reported robust 7 percent increase in operating income, exceeding the results of its larger Japanese rivals. Both the Financial Times and the Wall Street Journal noted that Nissan was the quickest of Japan’s big three auto makers to recover. With this headline comes the reminder of the two sides of major supply chain disruption, turning disaster into an industry opportunity because of more agile and responsive supply chain capabilities. Two weeks after the quake struck Japan, Nissan indicated that it had assessed all of its suppliers and production facilities and determined that the situation was not as dire as some had originally predicted. Nissan resumed partial production on March 24, 2011 utilizing inventory of components and parts, supplemented by parts from overseas factories. The majority of Nissan’s global production capacity was external to Japan and Thailand. In early April of 2011, Nissan took bold actions in shipping V6 engines from its U.S. based Tennessee engine factory directly to Japan to keep its assembly plants operating. The same agility occurred after the Thai floods struck. In February, Nissan’s COO asked all of its suppliers to disclose details of their component supply network.

 

After these incidents, Honda has since announced its intention to shift a major portion of its production capacity into North America over the next few years, as a hedge to future major supply disruptions.  Toyota remains committed to a significant manufacturing presence within Japan and has embarked on an aggressive goal aimed to restore any of its manufacturing operations in just two weeks after the occurrence of a major disaster.  Preliminary analysis uncovered that some 300 production and/or supplier locations could be at risk.

 

One year after the original Japan quake, the financial and operational impacts to supply chains, to the bottom line, and to stock price remain. As noted in our March commentary, we as a supply chain community need to continue to have a more risk aware perspective to the profile of the global value-chain, along with an assessment of what sourcing, analytical assessment and risk response areas need to be shored-up for mitigating such events in the future.

 

The evolving lessons from the automotive industry continue as an ongoing reminder of the importance of identifying and mitigating risk.

 

Bob Ferrari

 

I pen this commentary on a Friday after a very long week involving extended travel and consulting services activity.  Knowing that I’m overdue for my weekly Supply Chain Expert Community commentary, I thought I would come up with something different, a fruit analogy related to supply chain capabilities.

 

Lately, many commentaries related to global supply chain business process capabilities focus on Apple, which often, and deservedly, lands on every supply chain analyst’s top ranking and many business media related articles. Many in the supply chain expert community can point the finger at this author for often penning commentaries highlighting Apple, but I’m not alone in doing this.  Lately, much of Apple’s supply chain capabilities have come to light, both positive, and not so positive.

 

An analogy that can come to mind is that of the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Some content of the apple is used to make or blended to make other delicious products such as pies, cakes or juices. Because the apple is so shiny, and because the apple is loved by millions and millions of consumers, sometimes the apple gets attention that it does not necessarily desire.  Sometimes the apple can develop blemishes.

 

The apple also competes with other fruit for consumer tastes.

 

Let us turn our attention to another fruit, the orange.  It has a rather complex structure, there are actually embedded layers within the orange, each providing a piece of juicy, and yes, sometimes tart , but fairly enjoyable taste. The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes. You can eat the orange itself, either at breakfast, or as a daytime snack. The orange peel is utilized in baking recipes and sometimes the pulp can is used in other products or snacks.  The orange itself can be converted into delicious juice, a huge market seller. You see, the orange also serves as a multi-purpose fruit, but perhaps more behind the scenes.   Because its peel is pebble-like, its blemishes are more easily ignored.

 

Can you guess what our orange analogy equates to?

 

Our analogy points to Samsung.  A global giant, not only in smartphones and tablets, but also in major consumer electronics value-chain components such as semiconductor chips, high-resolution LCD displays and memory components.  Last week, business media began recognizing Samsung as the global market leader in smartphone shipments. According to market forecasting firm Strategy Analytics, Samsung shipped 44.5 million smartphones in the first quarter compared with Apple’s output of 35.1 million units.  Business media has been quick to declare Samsung the market leader, surpassing both Apple and Nokia.  Once more, according to the Financial Times, the company recorded record quarterly profits, with its mobile division accounting for 73 percent of that total operating profit.  Because Samsung is a major supplier to Apple and other brands, this vertically integrated producer also gains additional benefits in overall market unit volume sales.

 

While Apple seems to top many rankings in supply chain capabilities, Samsung does not. Its unit volumes, supply chain breadth and volume output shine above others with few glitches or supply disruptions. Global consumers have obviously embraced Samsung mobile devices as an alternative to Apple’s iPhone, by witness of these latest results. As our orange analogy notes, Samsung also can play a very influential role in the innovation of future products, since it is positioned as a major value-chain player.

 

The shiny apple does indeed get lots of visibility in the fruit bowl, but we had better pay attention to the orange as well. That includes ranking of global supply chain capabilities.

 

Bob Ferrari

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