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2010

I didn’t intend to cover these two evolving stories again, but some announcements today caught my eye.

 

First of all, The New York Times reported today that China’s commerce ministry has announced it will steeply reduce exports of its rare earth metals in the early months of 2011. I’ve written before about this situation as it continues to evolve, and with this announcement, it certainly seems that manufacturers struggling with short supplies and rising prices of rare earths will continue to face a similar situation next year.

 

China mines more than 95 percent of the global supply of the metals, which are used in smartphones, electric cars, lightbulbs and even military hardware. In addition, the country mines 99 percent of the least common rare earths, the so-called heavy rare earths that are used in trace amounts in clean energy applications and electronics.

 

The problem, however, is that only one-third of the world’s rare earth reserves are found in China. To cope with its own ever-growing demand, as well as that of other countries, China has been steadily reducing export quotas of rare earths over the past several years. In fact, China’s commerce ministry has previously said that the country reserves the right to further slash rare earth exports to “protect exhaustible resources and sustainable development.”

 

The reduction in quotas for the early months of 2011—a 35 percent drop in tonnage from the first half of 2010—is simply the latest in that series of measures. China’s commerce ministry did state that it had not decided what the total export quotas would be for all of 2011. That may be an effort to reassure traders and users of rare earths, or it may not because the ministry typically issues a second, supplementary batch of quotas each summer.

 

The challenge for consumers of rare earths, of course,--as is the case with any supply chain disruption—is to identify and locate both possible surplus and alternate suppliers.

 

 

Secondly, in some pre-Christmas good news for Boeing and its supply chain, the company announced last week that it will now resume flight test activities on the 787 Dreamliner.

 

For anyone not following Boeing or the development of its 787 Dreamliners, the 787 is the first airliner made of composite plastics instead of the traditional aluminum. Boeing has been struggling with the new carbon-fiber materials, parts shortages, redesign work and an increased reliance on suppliers as the company outsourced production of the aircraft.

 

The Dreamliner’s scheduled entry into commercial service has been postponed numerous times, but was most recently planned for the first quarter of 2011. In the latest of a series of setbacks, flight testing of the 787 was suspended last month following an in-flight electrical fire on a test flight in Laredo, Texas.

 

Since then, engineers have redesigned part of the software for the 787’s electrical system to improve power distribution and altered the panels where the fire started.

 

Indeed, according to the Boeing news, Boeing and Hamilton Sundstrand engineers have completed testing of the interim software updates. Verification of the system included laboratory testing of standalone components, integration testing with other systems, flight simulator testing and ground-based testing on a flight test airplane. The company has since then installed an interim version of updated power distribution system software in the aircraft and conducted reviews to confirm the flight readiness of ZA004--the first of the six flight test airplanes that will return to flight.

 

Both of these stories have been interesting to follow. I look forward to hearing in 2011 how companies in both the rare earths and 787 aircraft supply chains address these challenges.

Jim Fulcher

Lessons from Scrooge

Posted by Jim Fulcher Dec 23, 2010

I’m sure most of you are familiar with A Christmas Carol, Charles Dickens’ tale of Ebenezer Scrooge and redemption. It’s one of my favorites, which is why an article on the Supply & Demand Chain Executive website titled “A Spend Analysis Carol,” caught my eye.

 

As you likely recall, Scrooge was visited by four spirits on Christmas Eve. The first being that of his former business partner, Jacob Marley, who had died seven years ago on that very night. But it’s the other three spirits—the Ghost of Christmas Past, the Ghost of Christmas Present, and the Ghost of Christmas Yet to Come—that the article’s author, Paul Martyn, relates to in the article.

 

When Scrooge was visited by the three Christmas spirits, he gained insight into his past actions and their impact on his life, and consequently realized the error of his ways. Martyn, a vice president at BravoSolution, contends that spend analysis can play the role of the Ghosts of Christmas Past and Present by allowing purchasing executives to examine and scrutinize their own and their supplier’s past and present performance, contracts, commitments and risks so they in turn can make better decisions in the future.

 

The place to start, just as it was for Scrooge, is by reviewing the past. Using spend and supplier analytics, purchasing executives are able to examine past purchasing performance. And by using both supplier and spend analytics enables them to determine what went poorly, what was acceptable and what went well.

 

Purchasing executives also need accurate, up-to-date information to support advanced analysis. This way, they can see the reality of today’s transactions and commitments through numbers. That will allow them to determine, for instance, whether it’s best to continue to put out fires and stay the current course or whether they should accept the—perhaps—bitter lessons and take corrective action. These can be tough decisions to make, Martyn says, but if executives have the facts and complete a thorough analysis, they will be more comfortable with the decisions they make.

 

Which leads us to future spending—or that which is Yet to Come. Spend analysis and sourcing provide a new “what-if” course of purchasing. Having analyzed past performance—both their own and that of their suppliers—purchasing executives have some decisions to make. That is, they have an opportunity to learn from the past and take a new, improved course for future decisions.

 

During the supplier-selection process, for instance, innovative companies look beyond a vendor’s current capabilities, thinking about future capabilities and the anticipated cost to bring that capacity online, says Martyn. Using advanced optimization techniques, buying teams can quickly analyze the costs and benefits of making such an investment in a key supplier.

 

Martyn then asserts that by making a strong commitment to developing lasting collaborative relationships with the most strategic vendors, organizations can create the visibility and control necessary to be certain the necessary steps have been taken to reduce risk.

 

What do you think? Let me know if you make decisions by reviewing past actions and events. Of course, if you want to talk about Tiny Tim or a turkey as big as a young boy, that’s fine too.

Reducing overall maintenance costs can be big business for companies in many industries. In the airline industry, for example, maintenance, repair and overhaul (MRO) expenses typically account for 12 percent to 15 percent of airlines’ operating costs, according to the International Air Transport Association (IATA). It only makes sense then, that as airlines continue to look for ways to control expenses, reducing maintenance costs becomes an increasingly important goal. That’s because if an aircraft is delayed in maintenance, it obviously misses revenue-generating opportunities. In other words, it simply doesn’t pay to have aircraft sitting in a hangar waiting for maintenance to be performed.

 

That’s why I’m interested in recent news from Boeing Co. and Fujitsu about a joint service to help airlines lower their maintenance costs by reducing inventory and manual data entry errors without having to create new business processes. Under the agreement, the two companies will jointly create a smart tag-based aircraft parts management system.

 

Fujitsu will provide Boeing with a globally-shared platform that includes automated identification (Auto ID) technology devices, device readers, software applications and a system integration and deployment service—including the production of smart tags that will be attached to approximately 2,000 aviation parts to record data such as equipment life span, maintenance history and scheduled replacement dates. Boeing will then tailor solutions to meet each airline customer’s requirements, integrate those solutions into the customer’s operational environment and establish a long-range plan that will expand Auto ID solutions across the customer’s enterprise. By retrofitting aircraft components, equipment and materials with Auto ID devices, the Boeing Transformation Service will enable customers to automate data management and improve supply chain-related maintenance processes by making them highly visibile.

 

An Agence France-Presse story that ran on the IndustryWeek website explains that data in the system will be read instantly to help identify parts and equipment that need to be serviced or replaced. Furthermore, according to a Fujitsu spokesperson, the system is expected to reduce customers’ overall maintenance costs by 15 percent by enabling airlines to keep parts inventories at airports at ideal levels.

 

Boeing’s Commercial Aviation Services supports more than 12,100 Boeing commercial jetliners (passenger and freighter airplanes) by delivering aviation support—spare parts, training, maintenance documents and technical advice. The company plans to launch this service—which will be offered for Boeing and non-Boeing fleets alike--in the first quarter of 2012. Fujitsu and Boeing anticipate signing approximately 10 customers in the first four years, implying sales of 20 billion yen (U.S. $238 million) for Fujitsu alone, Fujitsu’s spokesperson says.

 

One aspect that I find interesting about this service is that it essentially is about achieving better balance between supply and demand. That is, ensuring that the necessary parts, components and materials are not only available, but also where they need to be, when they are needed. That way, for example, aircraft wouldn’t be grounded while the airline waits for a supplier to expedite shipment of needed parts.

I wrote a couple of weeks ago about what I’ll call good news/bad news. The good news is that leading companies such as Campbell Soup have been working to increase employee productivity and innovation—and they’ve done it too.

 

An article that ran in The Washington Post had pointed out that rising productivity is a contributing factor for most of the 243 non-financial companies listed in the Standard & Poor’s 500-stock index that have rising profit margins. In fact, earnings from continuing operations of companies in the S&P 500 have rebounded 23 percent since the fourth quarter of 2007, even though sales fell 9 percent over the same period.

 

The bad news—not necessarily for those companies, but for the economy in general--was that with sales down and employee productivity increasing, those companies had no plans for hiring additional workers. So, it looked like unemployment would continue to hover just under 10 percent.

 

Now for more encouraging news. An Associated Press story that ran on Forbes.com reports on the results of a new survey by Business Roundtable, an association of CEOs of large U.S. companies. I was interested to see that 45 percent of the executives taking part in the survey noted that they expect their companies to hire more workers. To be fair, another 38 percent of the CEOs said they predict no change in employment levels, while the rest do expect their workforces to shrink further.

 

What I found most interesting, however, is that 60 percent of the CEOs taking part in the survey expect their company’s capital spending will increase, and 80 percent of them expect sales growth in coming months.

 

The results of a recent survey conducted by audit, tax and advisory organization Grant Thornton LLP very closely mirror those of the Business Roundtable survey. As reported in a recent press release, Grant Thornton conducted a survey of senior management at U.S. manufacturing companies in November, and nearly half of that survey’s respondents indicated that they believe the U.S. economy will improve in the next six months--and the same number noted that they plan to correspondingly increase staff during the same period.

 

What’s more, those manufacturing leaders are positive about the forecast for their own businesses, with 81 percent noting that they are optimistic about their companies’ growth over the next six months. In fact, 47 percent of the executives said they expect to increase their purchases of capital equipment, 47 percent of them expect to begin process improvement initiatives and 37 percent of the executives expect to spend more on IT.

 

What I’m curious about, is whether the suppliers of the executives taking part in these two surveys have the same level of optimism. I also wonder if the executives and their companies are working with suppliers and business partners to ensure increasing demand can be met. Some products, such as electronic components, are already in short supply, and considering their lead times, it may be challenging for suppliers to meet their customers’ demand expectations. Then again, a great deal hinges on volatility, or just how quickly that demand is expected to grow.

 

What do you see? Does your company expect an increase in sales in the next six months? Are you collaborating with partners and suppliers to ensure that demand can be met?

When was the last time you experienced a supply chain disruption? Secondly, was it a significant disruption?

 

I ask those questions because I’ve been thinking lately about supply chain disruptions. The results, for instance, from a MFGWatch survey seem to indicate that significant disruptions are fairly prevalent. In fact, as reported in a recent IndustryWeek article, for the fifth straight quarter, more than one-third of North American manufacturers responding to the MFGWatch survey noted that they have experienced a significant supply chain disruption in the past three months. A significant disruption was defined as one that forced the company to engage an alternate source.

 

There is good news, however, as well. That is: the number of survey respondents who indicated that their company has experienced a supply chain disruption fell to 40 percent, which is down from 51 percent of the participants reporting a disruption last quarter.

 

What I find interesting is that it doesn’t necessarily take a catastrophic event such as a hurricane to trigger a significant supply chain disruption. Instead, sometimes a seemingly mundane event can cause a ripple effect throughout a supply chain—and possibly, an entire industry.

 

Consider, for example, what happened to Toshiba Corp. A story last week in the Wall Street Journal explains how a split-second power disruption at a Toshiba factory in Japan could hurt shipments and raise prices for a computer chips widely used in devices such as smartphones, tablet PCs and digital music players.

 

The power interruption at Toshiba’s Yokkaichi memory-chip plant could cause a 20 percent drop in Toshiba’s shipments over the next two months or so of NAND flash memory chips. That’s significant because Toshiba is the second-largest supplier of the chips.

 

As the Journal article points out, big buyers of the chips--such as Apple--have long-term supply arrangements with multiple chip makers. And while the outage isn't expected to have a significant impact on world-wide shipments of flash memory after the next couple of months, the temporary disruption does come at a time when demand for NAND flash is high because companies are working to develop tablet computers to compete with Apple’s iPad.

 

In fact, market watchers say some companies could face tight supplies and higher prices just as they are trying to ramp up production. Krishna Shankar, an analyst at ThinkEquity, even goes so far as to say that the outage couldn’t have come at a worse time.

 

Still, it’s important to note that the outage is caused by a 0.07-second power interruption. That’s right, a power interruption of less than a second. The problem is that chips are fabricated on silicon wafers, and wafers that are inside processing machines during a power outage are often ruined. And since wafers take eight to 12 weeks to process, it’s easy to see the consequences of a power outage—no matter how brief it may have been.

 

Considering that Toshiba is the second largest supplier of NAND chips, and that demand for those chips is currently high, I’m sure this is an extremely trying situation for many electronics manufacturers. But it does demonstrate how a brief, unexpected event can cause significant supply chain disruption. Are you prepared to, and can you, respond quickly in case one of your suppliers experiences a setback of similar magnitude?

A Businessweek article I read yesterday has me thinking about smartphones, and wondering just how much more productive their users have become. That’s because the article reported on a recent Nielsen survey about smartphone usage. It turns out that 60 percent of the apps downloaded for smartphones are games—and that productivity apps only account for around 26 percent of downloaded apps.

 

The article also cites the findings of a recent Pew poll. According to that survey’s results, the most common activity (cited by 76 percent of the respondents) for cellphone owners is taking pictures. Furthermore, only 29 percent of that poll’s respondents report that they ever use an app at all.

 

The article ends—well, actually it begins and ends—with the author questioning whether or not use of smartphones actually improves productivity. While I can appreciate the sentiment, I do believe a distinction needs to be made between consumer and business users of smartphones.

 

Perhaps the real problem comes from even thinking about apps or smartphones as standalone devices. That’s because the value generally comes from remaining in contact with others and being able to exchange useful enterprise information to improve decision-making capabilities. That’s not to imply, however, that smartphones are only suited for e-mail exception alerts, alarms and text messages from co-workers.

 

For example, in a recent Supply Chain Management Review blog post, Bob Trebilcock, executive editor, wrote about SG Software Group, a supply chain software company that created a software application used to automate checklists—the type used, for instance, in the plant and distribution center. Their first customer, Cape Cod Potato Chips, is using the application to inspect pallet jacks, lift trucks, floor scrubbers and a shuttle vehicle.

 

The application, which can integrate with the MRO module in a corporate ERP solution, features typical alerting capabilities, like the ability to send an e-mail or text message. What I think is pretty cool, however, is that the application—which runs on PCs, laptops and so on as well as an iPhone, iPad or an Android phone--also allows users to send attachments. So, for example, a user could take a picture of a piece of equipment that has just been inspected, and then send the photo to someone else with the completed checklist.

 

I was also interested last fall to read an IndustryWeek article about the adoption of smartphone applications oriented toward plant managers and executives at manufacturing facilities. For instance, Invensys launched its SmartGlance technology as a subscription-based service to push plant data reports from its Wonderware Historian system to smart devices such as iPhones, iPads, Androids and Blackberries.

 

Anybody who has ever seen or worked on an Excel spreadsheet using a smartphone understands the limitations imposed by a 1.5-inch x 2-inch screen. The point is, just because you can view a spreadsheet via your smartphone doesn’t necessarily mean you want to do it. What’s interesting about SmartGlance is that instead of forcing users to view production results via a spreadsheet, it takes raw numbers and can convert them to bar graphs to illustrate relative growth or decline—for instance—and it also offers the option to click to see trends for one or several production lines in more easily readable graph forms.

 

Anyway, I do believe that use of smartphones does enhance productivity, but more importantly, overall decision making. What about you? Does your phone allow you to do a better—or at least, more timely—job?

As reported in The New York Times today, the U.S. economy added only 39,000 jobs in November, and the unemployment rate rose to 9.8 percent, according to the U.S. Department of Labor. Those numbers were far below the consensus forecast of an expected 150,000 jobs added and an unchanged unemployment rate of 9.6 percent.

 

While a number of factors have contributed to that weak increase, the one I’m most interested in is that a growing number of companies have been able to sufficiently combine increasing employee productivity and innovation to a degree that the company doesn’t need to hire additional employees. By increasing worker productivity, I don’t mean that employees work longer hours and are afraid to take a sick day—although I’m sure that’s going on too—but instead, that employees and management now work together to further streamline activities.

 

That makes sense because when the economy was in good shape, many companies acquired equipment. Now, however, they have been forced to work to maximize performance of that equipment, streamline business processes and improve employee productivity.

 

An article that ran in The Washington Post last week explains that Campbell Soup Co., the world’s largest soup maker; DuPont, the country’s third-biggest chemical maker; and United Parcel Service, the world’s largest package-delivery business, all have employees striving to reduce costs by working smarter leveraging existing technology. Those companies aren’t alone either. The Post article pointed out that rising productivity is a factor for most of the 243 non-financial companies listed in the Standard & Poor’s 500-stock index that have rising profit margins.

 

Those efficiency gains certainly have paid off in corporate profits. As The Post article reported, earnings from continuing operations of companies in the S&P 500 have rebounded 23 percent since the fourth quarter of 2007 even though sales declined 9 percent over the same period.

 

At Campbell, for example, plant workers meet with management in situation rooms before every shift. In those meetings, the teams write performance metrics and repair issues on white boards, and the teams discuss how fixes can be completed faster and how processes can be improved.

 

Campbell needs collaboration from the highest levels of the organization down to the plant floor, says Dave Biegger, vice president of Campbell Soup Co.’s North America supply chain. Biegger, who created a 20-person team whose sole aim is to find cost improvements, says the plan is to explain, teach, coach and then allow the work to evolve through the creativity and commitment of the team. Then the team works to do more than was previously believed possible.

 

I’m curious about two things, however. The first, is what you see. Is this type of activity taking place at your organization? If so, have you seen similar results or something else?

 

Secondly, how long can this cost savings strategy last? It’s one thing to work to improve productivity and innovation, but this has been going on for much of this year. Can it keep going or has it nearly run its course?

 

What do you think?