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2015

 

Shipping from China to Europe through the Arctic Ocean was once considered impossible. Today, it not only seems possible, one company has announced plans for a regular route.

 

Chinese cargo-shipping giant COSCO has announced plans to launch the first regular Asia-to-Europe sailings through the Arctic Ocean, significantly reducing the travel time incurred going through the Suez Canal. This is possible because global warming and accelerated ice melting in the Arctic now make the route viable.

 

Earlier this week, Chinese state-run Xinhua news agency reported that Chinese experts and officials had hailed the route as a “golden waterway” for trade. Later, a spokeswoman for COSCO said, “There is an intention to open a regular line in the future and people are discussing it,” an article in The Japan Times reports.

 

In the past, a thick ice pack, violent storms and plummeting temperatures in the Arctic Ocean made the route unnavigable. However, global warming has transformed the Arctic in recent years, and its summer ice cover has dropped by more than 40 percent over the last few decades.

 

Two years ago, the ice-strengthened Yong Sheng, a 19,000-ton cargo vessel operated by COSCO, began a trip from Dalian, a port in north-eastern China, to Rotterdam through the Arctic Ocean. The 3,380-mile journey was projected to cut two weeks off the traditional route between Asia and Europe via the Suez Canal, thereby not only saving time, but significantly reducing fuel cost as well. The ship successfully made the trip, which ended up being nine days faster and 2,800 nautical miles less than the usual route through the Indian Ocean and Suez Canal.

 

Earlier this month, the Yong Sheng completed a 55-day round-trip voyage between China and Europe again using the Northeast Passage, Xinhua said. The success of the trip has prompted COSCO to move forward with plans to regularly use the route.

 

“Enormous expenditures on fuel, canal transit, security guard, personnel and vessel wear and tear can be saved,” Xinhua said, The Japan Times article reports. “Cost-friendly routes will be extremely significant to COSCO Group in the current difficulties of (the) global maritime industry.”

 

The European Union is China’s largest trading partner, and sailing through the Arctic rather than the Indian Ocean dramatically reduces time. As an additional benefit, the polar route also enables ships to avoid the increasingly pirate-infested waters of the Indian Ocean and the Red Sea, so the route’s appeal is certainly understandable.

 

There are still challenges to overcome, though. For instance, as an article in The Arctic Journal points out, when the Yong Sheng made its first trek two years ago, there was considerable international debate and speculation about an “Arctic boom.” Since that time, however, there has been a considerable drop in global energy and commodity prices, which has made many plans for Arctic development more expensive. There are environmental concerns as well, because it’s impossible to tell in advance just when shipping lanes may open because the melting season is unpredictable.

 

That said, the lower fuel costs and shorter travel times make the route appealing. In addition to China, other countries including Japan, Singapore and South Korea are reportedly preparing for future trans-Arctic shipping. It will be interesting to see how often COSCO uses the Arctic route, as well as if other countries do indeed follow suit.

 

What are your thoughts on shipping through the Arctic Ocean? Is the cost of having such ice-strengthened ships worth it?

 

 

Although the potential benefits are substantial, the case for reshoring or nearshoring may not quite be as clear as it was earlier this year. Now, especially following China’s devaluation of the yuan, companies need to be more strategic than ever as they make decisions about manufacturing sourcing. The key to making those decisions is to focus on case-by-case analysis and tight project management, according to the results from a study.

 

Global business advisory firm AlixPartners conducted a survey of almost 250 senior-level executives in North America and Western Europe from manufacturing and distribution companies across 15 industry groups. A total of 32 percent of the executives in North America (U.S. and Canada) and Western Europe say their companies have recently nearshored manufacturing production or are in the process of doing so. Furthermore, 40 percent of North American business leaders said their company has done so.

 

Interestingly, among North American respondents, 55 percent cite the U.S. as the most attractive nearshoring destination, up from 42 percent in last year’s survey, when the U.S. first achieved that ranking. Mexico—long cited as the nearshoring favorite by respondents to this survey—came in second place, cited by 31 percent of the respondents as the most attractive nearshoring destination. That number is up from last year, but down dramatically from when it was cited as the most attractive nearshoring destination by 49 percent of the survey’s respondents three years ago.

 

The survey results also cite reasons for the rise in U.S. locations being seen favorably. Respondents consistently cited incentives offered by U.S. states, cities and community development corporations, says Foster Finley, managing director of AlixPartners and head of the firm’s Operations Practice in the Americas. Common incentives include tax abatements, subsidized utilities, free worker training and access to old or abandoned buildings.

 

One of the points I find interesting is that a few years ago, companies were hesitant to source production in Mexico, despite its wage advantage over the U.S., due to a lack of efficient transportation options going north. Today, says Finley, the quality of Mexico’s intermodal and rail system is greatly improved, and border crossings are easier as well.

 

Today, however, it appears executives have concerns certainty regarding safety and security issues in Mexico. According to the survey findings, only 42 percent of North American respondents expect improvement in those areas in Mexico. That number is down from last year’s survey, when 55 percent of the North American respondents expected safety and security improvements in Mexico.

 

I was also interested to see that when making sourcing decisions, the availability, or lack thereof, of skilled labor was the key concern for both North American and European respondents. Indeed, 48 percent of Europeans and 42 percent of North American respondents cited the challenge.

 

In all though, the benefits of properly addressing and working through nearshoring issues can be significant because there is so much cost-saving potential stemming from lower prices for local raw materials, labor and plant overhead, as well as cheaper transportation and a lack of currency-exchange expense. For instance, in the study, the average estimated savings from nearshoring cited by all respondents was 8.5 percent, with 13 percent of the respondents saying they expect their company to save 20 percent or more from nearshoring. Among North American respondents, the average estimated savings was 8.3 percent, which is up from 6.4 percent in last year’s survey.

 

When it comes to sourcing, there are no easy or permanent solutions to be found. Finley from AlixPartners sums it all up well by saying, the world of manufacturing and supply chains is in constant flux, and there is no substitute for deep, strategic, case-by-case analysis and tight project management.

 

What are your thoughts on reshoring or nearshoring?

 

 

Mid-size firms using low-risk innovative initiatives produce valuable returns, but the most adept companies with an aggressive innovation profile grow more quickly, according to the results of a new survey.

 

The National Center for the Middle Market (NCMM) research institution and growth-oriented CPA firm Cherry Bekaert LLP “Organizing for Innovation in the Middle Market” report is drawn from the results of a survey of 400 middle market leaders and senior managers who share in responsibility for innovation at their companies. They were asked specifically about best practices used by the most innovative and fastest growing middle-market companies. The U.S. middle market is made up of firms from all industries with yearly revenues between $10 million and $1 billion.

 

I was interested to see that 43 percent of the respondents who rate their companies as “very innovative,” said their company sees annual revenue growth of 10 percent or more. That stands in contrast with replies from 32 percent of respondents who said their companies are “less innovative.” In innovation-intensive industries such as healthcare, technology and industrial, only about a quarter of less-innovative firms experience revenue growth above 10 percent.

 

“Because the middle market constitutes one of the major engines of the U.S. economy, it’s incredibly important to understand the role of innovation among these firms,” says Thomas A. Stewart, executive director, NCMM, which is a partnership between GE Capital and The Ohio State University Fisher College of Business. “The numbers show that even the smallest innovations support significant growth numbers. While the middle market tends to be overlooked as major innovators, we’ve found that the strongest firms are savvy about how they innovate.”

 

When it comes to innovation, the study found middle-market companies capture high returns by investing in fewer and more conservative projects, with each project having a high success rate. The data shows that firms earned a 27 percent profit on their most recent innovation based on an initial investment of $1.5 million, according to the study.

 

Middle-market executives indicate that 57 percent of innovative ideas generated in 2014 went to market, a success rate consistent with innovation by companies of all sizes. These high success rates are likely attributed to the tendency of middle-market firms to manage innovation risk carefully. Indeed, as the report notes, middle-market companies’ choice of innovation projects is often skewed in a conservative direction, with firms focusing on existing markets and employing existing knowledge, with more than half of firms employing a formal process for generating ideas internally.

 

“Through formal processes and a commitment to problem-solving and innovation within the areas these firms know best, middle-market firms have created a successful, low-risk, higher reward innovation system,” says Dawn Patrick, partner with Cherry Bekaert.

 

On the other hand, firms which venture into new markets to develop and deploy innovative projects assume greater risk and are managed by a distinct process for ideation, selection and execution.

 

“Middle-market companies that go off the beaten path and have a more aggressive innovation profile generally are well equipped with off-road capabilities,” says Stewart. “By bringing in C-suite executives and ensuring the appropriate resources and tools are in place, middle-market firms are more quickly rewarded for riskier innovations.”

 

I was interested to see so many companies considered “very innovative” see annual revenue growth of 10 percent or more. Then again, there is significant growth potential for aggressive companies able to make calculated innovations into new areas.

 

What are your thoughts on managing risk during innovation, regardless of a company’s size?

 

 

It has been decades since industrial robots first began to be used on assembly lines around the world. However, in many industries, it’s still cheaper to use manual labor than it is to own, operate and maintain robotics, so their use is still limited. That situation is poised to change, according to new research from Boston Consulting Group (BCG), and companies should take steps to prepare accordingly.

 

The prices of hardware and enabling software are projected to drop by more than 20 percent over the next decade. At the same time, the performance of robotics systems is expected to improve by around five percent each year. The result will be that as robots become more affordable and easier to program, a greater number of small manufacturers will be able to deploy and integrate them more deeply into industrial supply chains, Harold L. Sirkin, senior partner & managing director, Michael Zinser, partner & managing director, and Justin Rose, partner & managing director, at BCG write in a new report, “The Robotics Revolution: The Next Great Leap in Manufacturing.”

 

Many industries are quickly reaching an inflection point at which, for the first time, an attractive return on investment is possible for replacing manual labor with machines on a wide scale, the authors explain. They project that growth in the global installed base of advanced robotics will accelerate from around two percent to three percent annually today, to roughly 10 percent annually over the next decade as companies begin to see the economic benefits of robotics. In some industries, more than 40 percent of manufacturing tasks will be done by robots. The BCG authors expect this development will drive dramatic gains in labor productivity in many industries, and lead to shifts in competitiveness among manufacturing economies as fast adopters reap significant gains.

 

Although robotics adoption will—of course—vary by industry, economy and location, BCG explains that companies need to prepare now. That’s because investing in expensive robotics systems too early, too late or in the wrong location could put manufacturers at a serious cost disadvantage against global competitors.

 

The authors at BCG recommend executives take several actions to prepare for future robotics. As would be expected, they recommend executives be well aware of what their competitors are doing with robotics and understand what they will do. It’s also imperative they stay current with the evolving capabilities of advanced robotics systems so they understand how quickly innovation is resolving technical barriers that, so far, have inhibited the use of robots in their industry, the authors state.

 

There are two tactics that particularly caught my attention. The first is to prepare the workforce. As more factories convert to robotics, the availability of skilled labor will become a more important factor in the decision concerning where to locate production. Tasks that still require manual labor will become more complex, and the ability of local workforces to master new skills will become more critical. The authors explain that it’s vital for companies to prepare their workforces for the robotics revolution, but also to work with schools and governments to expand training in such professions as mechanical engineering and computer programming.

 

Secondly, executives must prepare the organization. Even if the economics don’t yet favor major capital investment, executives should start preparing their global manufacturing operations for the age of robotics, the authors urge. That includes making sure networks are flexible enough to realize the benefits of robotics as installations become economically justified in different economies and as suppliers automate.

 

Considering the complexity and ramifications of introducing, or adding, robotics, manufacturers must be proactive. Once the cost inflection point arrives, robotics installation rates most likely will accelerate rapidly. As is the case with any innovative technology, companies which are prepared to act quickly will be able to rapidly gain global advantage in manufacturing.

 

What are your thoughts on the potential future adoption of robotics? Is the most important step to work with schools to ensure the future workforce is ready for new career paths?

 

 

The investigation into exploding automotive airbags from Takata—and subsequent recalls—continues to grow in complexity. Not only is the number of involved vehicles rising, but federal officials are now contemplating orders to speed the production of replacement parts.

 

The problem with exploding Takata airbag inflators continues to spread to newer vehicles. This time, the defective airbags are found in 2015 General Motors cars and SUVs. As a result, GM is recalling more than 400 vehicles because the side airbag inflators may explode and injure drivers and passengers, according to the company and documents posted by the U.S. National Highway Traffic Safety Administration, reports an Associated Press article.

 

Consequently, U.S. National Highway Traffic Safety Administration (NHTSA) officials say the agency may expand the largest vehicle recall in U.S. history as the probe into exploding airbags continues. The defective Takata airbags may inflate with too much force, blowing apart a metal canister and spraying metal shrapnel into the passenger compartment with enough force to injure or kill vehicle occupants. Ruptured Takata airbags have killed eight people worldwide and injured more than 100 people.

 

NHTSA investigators acknowledge that, while the exact cause of the exploding air bags remains a mystery, their probe continues, an article in USA Today reports. The investigators have determined, however, that vehicles which have been driven in hot, humid climates for at least five years are most at risk. This finding suggests that climate is a contributing factor in the malfunctioning airbag inflators, regulators say.

 

So far, the agency has ordered a recall of 19 million vehicles—14 million of which are from BMW, Fiat Chrysler, Ford, Honda and Mazda. The rest are from General Motors, Mitsubishi, Nissan, Subaru, Toyota and Daimler.

 

The problem with the recall is that production of replacement airbag inflators and the harnesses used to mount the devices is only proceeding at a rate of about 2.8 million units per month, the USA Today article notes. Incidentally, other airbag manufacturers are making about 70 percent of the parts to aid Takata in speeding the repairs. The result though, is that because there are more defective inflators than replacement parts available, regulators are prioritizing replacements based on a number of risk factors—including the age of the inflator and its long-term exposure to humidity and heat, which increases the likelihood of a rupture.

 

“To speak plainly, the nearly 23 million replacement inflators needed simply won’t be available within the next month, or even the next six months,” NHTSA Office of Defects Investigations Director Frank Borris says in an ABC News report.

 

NHTSA encourages all consumers—but especially the six million drivers living in high-risk, high humidity areas along the Gulf Coast and in Florida and Puerto Rico, where the majority of the ruptures occurred—to take the recalls seriously. However, because there aren’t enough available replacement parts, NHTSA also explains some drivers will have to begin with an interim fix. That fix is to replace the defective part with a newer version of the same defective inflator—and then follow-up with a permanent fix when parts become available, ABC News reports.

 

Finally, in what is perhaps the most surprising news, NHTSA officials also say they are considering forcing automakers to accelerate repairs of the Takata airbags. NHTSA administrator Mark Rosekind said at an informational hearing in Washington, D.C., that he would make a decision about requiring faster recalls by Thanksgiving, the USA Today article reports. The agency may also expand the number of vehicles and manufacturers involved in the recall at that time.

 

“That’s part of what the investigation is looking at: Whether or not we have to go further,” Rosekind says.

 

Considering the sheer number of recalled vehicles, it’s understandable that there is a lag in replacement part availability. One must wonder though, how companies would be forced to produce parts faster. And as a follow up, what would happen to companies which failed to increase production fast enough?

 

 

Choosing locations for operations is primarily driven by market conditions and opportunities, the search for talent, and business disruption risks, but by 2020, the drivers are expected to shift to access to technological advances and investment in the talent pipeline, according to a new report. As a result, manufacturers should optimize their footprints to put assets in the right places at the right times to drive performance, the report notes.

 

Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI) recently released “Footprint 2020: Expansion and optimization approaches for U.S. manufacturers,” which examines trends driving global manufacturing footprint shifts, and explores which locations manufacturers are considering as markets and strategic imperatives evolve.

 

The report is the result of a survey, jointly conducted by Deloitte and MAPI, which asked respondents to project where their companies will be making investments in their manufacturing footprint in the coming five years, and how drivers for these investments are shifting. Respondents noted that countries with a strong talent pipeline that can provide access to the latest technological advances and educational infrastructure are projected to see the most increased investment. This observation represents a shift from a traditional focus on regulatory climate and physical infrastructure.

 

According to the report, dominant manufacturing sites in Asia and South America are expected to continue to experience a steady inflow of project investments. The report also notes that South Africa, Turkey and Vietnam are emerging as targets for investment. These markets increasingly draw attention due to their growing middle class and rising spending power. Meanwhile, although some respondents appear to lag in terms of their entry into Brazil, China and India, many companies plan to expand their footprint into these markets.

 

As would be expected, 98 percent of the respondents say their company plans to either expand existing sites, or open new facilities, in countries with existing operations. China and the U.S. are expected to receive the highest number of investments by manufacturers planning to optimize operations in countries with existing activities.

 

“Many emerging markets are currently investing heavily to improve their technology infrastructure and boost their educational programs to support evolving manufacturing needs,” says Matt Highfield, director, Deloitte Consulting LLP and co-author of the report. “Ultimately, these efforts will allow them to become increasingly competitive on the global stage, especially at a time when developed economies continue to battle the challenges of an aging workforce.”

 

As manufacturers contemplate entering new markets, expanding existing manufacturing locations, or reshoring portions of their production, the optimization of their footprint strategy will require considerable research. For example, the report’s authors caution that before making an investment decision, executives should:

 

  • Evaluate potential benefits such as lower cost structure and greater choice of real estate, as well as potential risks that may include lack of talent availability (especially at experienced levels) and underdeveloped infrastructure,
  • Ensure active mitigation and monitoring strategies are in place around cybersecurity, protection of intellectual property and managing corruption risk,
  • Understand trade agreements and how the company may benefit,
  • Consider cultural alignment and the need for local expertise in navigating business culture, local regulations and workforce related nuances, and
  • Evaluate market entry strategies for each investment. For instance, if a company has limited experience with the local standard operating procedures, a joint venture can provide integration support. Additionally, use of contract manufacturers may reduce the burden of labor attraction and management, upfront capital investment and market exit flexibility.

     

What I would like to know, is which countries your company is considering for market expansion? Also, which factors are key drivers in making those decisions?

 

 

Builders working on the Panama Canal expansion project said last week that the project is still expected to be completed by April 2016, despite the discovery of water leakage from fissures in one of the locks.

 

Two weeks ago, a spokeswoman for the Spanish construction group Sacyr, lead member of the Grupo Unidos Por el Canal (GUPC) consortium responsible for the expansion project, announced cracks were detected in one of the walls, allowing water to leak through. The Panama Canal Authority (ACP) further elaborated that the leak, which occurred in the concrete sill between the lower and middle chamber of the Canal’s expanded Pacific Locks, was the result of insufficient steel reinforcing which had been subjected to extreme stress from testing.

 

After exam of all the other sills in both lock complexes, GUPC stated that in addition to reinforcing the sill that presented the issue, they would also reinforce the first and second sill in the Cocoli Locks and the first three sills in the Atlantic-facing Agua Clara Locks as a preventative measure—even though these sills have not presented any issues.

 

The improvement to the 50-mile long waterway, which is used by 13,000 to 14,000 ships each year, has been hit by delays and budget overruns. The GUPC consortium, which also includes Italy’s Salini Impregilio, Belgium’s Jan de Nul and Panama’s Constructora Urbana, overran its initial $5.25 billion budget. That, in turn, lead to financial disputes with the Panama Canal Authority, and work stops.

 

Nonetheless, almost all of the work has been finished, and structural and systems tests are bringing “optimal results.” According to the GUPC, the 16 massive sliding gates of the new locks “are responding positively to all electromechanical tests.”

 

In other canal news, growing concerns about the environmental and social effects of Nicaragua’s proposed $50-billion transoceanic canal have prompted the government to postpone the start of construction until at least March, according to the commission overseeing the project. A project “groundbreaking” that was widely reported last December actually was only the start of an access road for heavy equipment.

 

Hong Kong Nicaragua Canal Development Investment (HKND) claims that it will complete the 173-mile Nicaragua Canal project in 2019. The project is projected to cost $50 billion, and HKND says the canal will be able to accommodate ships of up to 23,000 twenty-foot equivalent units (TEUs). That compares with the 13,000 TEUs the Panama Canal will be able to accommodate after its expansion.

 

The Nicaraguan government strongly supports the canal, and claims the project and side efforts—including a new airport and free-trade zone—will triple economic output over the first decade of operation and raise the country’s living standards. Chief among the opposition, are environmentalists and scientists, who say the project would put pristine wetlands and rainforests at risk, as well as Lake Nicaragua, Central America’s largest freshwater lake, which is in the pathway of the proposed canal.

 

The delay comes after consulting firm Environmental Resources Management (ERM) said several issues should be further researched before the project proceeds. Those issues include seismic risks to the locks and whether there is even sufficient water to fill the 175-mile canal.

 

The study, commissioned by HKND, also urges its client to conduct further consultations with indigenous communities along the canal’s pathway because the plans call for them to be displaced and relocated. It also questions whether Lake Nicaragua, a major source of a source of drinking water and recreation, can survive the dredging of its bottom.

 

Considering the magnitude of the Panama Canal expansion, it is only natural for delays and cost over runs to arise. However, the proposed Nicaraguan Canal has—since it was first announced—been met with opposition. Given the number of environmental concerns, and protests stemming from the proposed relocation of indigenous peoples, one must wonder if work will ever begin on the proposed canal.

 

 

If it seems like the number of auto recalls continues to grow, you aren’t mistaken. Although recalls have an impact on a company’s bottom line—and potential future sales—most automotive companies don’t use advanced predictive analytics to help prevent, prepare for and manage recalls.

 

New Volkswagen Chief Executive Matthias Mueller recently announced the company will launch a recall for cars effected by its diesel emissions crisis in January and complete the fix by the end of next year. But that’s in Europe. There still is no timing for a U.S. recall. Other recent recall announcements include 470,000 Hyundai Sonata sedans in the U.S. for faulty engine parts, and Fiat Chrysler Automobiles announced it’s recalling 7,810 Jeeps in the U.S. to update software for radios to prevent hacking.

 

The growing number of recalls isn’t news to consumers. Car owners report a 40 percent increase in recalls compared to the second quarter of 2014, which—along with rising prices—damages driver satisfaction, according to the American Customer Satisfaction Index (ACSI).

 

“While it’s true that all cars are now much better than they were 10 to 20 years ago, it’s alarming that so many of them have quality problems,” says Claes Fornell, ACSI Chairman and founder. “The number of recalls is at an all-time high. This shouldn’t happen with modern manufacturing technology and has negative consequences for driver safety, costs and customer satisfaction.”

 

What’s surprising is that although 42 percent of the auto executives responding to a recent survey expect more industry recalls in 2015 and 2016, only eight percent of their companies use advanced predictive analytics to help prevent, prepare for and manage recalls, according to a study from Deloitte. Furthermore, almost one-quarter (23 percent) of the respondents to the poll, “Recall Readiness and Management in the Automotive Industry,” report their companies have no operational product safety and recall anticipatory analytic capabilities.

 

Today’s vehicles are among the highest quality ever produced from a safety and reliability standpoint. At the same time, innovations in technology have accelerated such that manufacturers can now identify emerging safety and quality issues much sooner. Nonetheless, as Derek Snaidauf, Deloitte Advisory senior manager in advanced analytics, Deloitte Transactions and Business Analytics LLP, notes, many automakers still take a manual, rearview-mirror approach to vehicle quality and safety. Leading OEMs, on the other hand, are starting to adopt innovative analytic capabilities such as proactive sensing for early issue identification and command centers for campaign management, he says.

 

“By cross-source correlating internal and external data sources, employing specialized advanced analytics and leveraging interactive visualizations, these companies can improve customer satisfaction, vehicle safety and brand perceptions,” Snaidauf says. “They also can realize significant reductions in their total cost of quality spend.”

 

One of the biggest challenges to OEM-supplier collaboration in preventing, preparing for and managing recall-related events was ineffective communication channels, cited by 21 percent of the survey respondents. Regardless of the reason for the recall, most respondents (90 percent) indicated that recalls impact working relationships between suppliers and original equipment manufacturers (OEMs).

 

“Because the stakes are so high in recall management, it now makes even more sense for traditional automakers and those within their supply chains—particularly new industry entrants—to consider investing in predictive analytics capabilities that can help detect trouble earlier,” says Bruce Brown, principal and U.S. automotive and off-highway consulting practice leader, Deloitte Consulting LLP. “Once in place, those competencies can also facilitate richer collaboration and communication between involved parties in times of investigation or crisis.”

 

Whether your company is in an automotive supply chain or not, what are your thoughts on the use of predictive analytics capabilities? If your company is in an automotive supply chain, what are the main impediments to adopting such technology?