Archive for the ‘Supply Chain Risk’ Category

Here is an interesting factoid for you: 24% of all the vehicles manufactured right now are built on just ten platforms. What’s more, by the end of the decade that number is expected to grow to 30%. The number comes from an Automotive News article that looks at some of the consequences of the trend (With the push for standard parts, quality is key, Aug 6).

First, why automakers are trying to move in this direction is clear. Being able to build multiple model off one basic platform saves a ton of money in product development as well as tooling and build manufacturing facilities. Further, they benefit from a bit of risk pooling; if one model is not selling particularly well, that may be offset by another that can be built at the same plant. Thus, even if a model slumps, all that expensive capacity is till being used. (See this post from last fall on how Ford is cutting its number of platforms from 15 to 9.) Globalization also plays a part in this. What kinds of vehicles sell well might vary across different continents, but if European, Asian and North American models can all be built on the same platforms, manufacturers with a global footprint can be ever more cost competitive.

But what about suppliers? With purchased components making up a significant chunk of the cost of a vehicle, car makers would like standardization there. In a perfect world, you would have the same break system on every model built on a platform, but that brings challenges.

“The requirement that we face is clearly to develop products from the outset in such a way that they can be used in all the platform derivatives without the expense of making changes,” said Sabine Woytowicz, regional quality director at Valeo in Germany.

But with mass standardization, a part with a quality problem can now be supplied to millions of vehicles. That puts a premium on quality. …

Martin Thier, director of corporate quality management at the Mahle Group, said: “When obtaining an order, we check its feasibility for both product development and manufacturing even more closely.”

It comes down to “knowing precisely what you do, what you can do and how good you are at it.”

For example, he said, there is now a more intense interest in investigating how an inconsequential error in one part would produce an effect in a different component.


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So how many different radiator models does a global car company need? Clearly it needs enough to accommodate different sized engines and cars. A big pick up with an over-sized cylinder eight-engine is going to need something different from a subcompact with an under-sized four-cylinder engine. But does that translate to twenty-something radiator designs or ninety-something?

Bloomberg reports Toyota has been thinking about this question for radiators and other car parts (Toyota Airbag Cuts Create Opening for Overseas Suppliers, Jun 10).

In one of President Akio Toyoda’s biggest initiatives since taking over in 2009, the carmaker is winnowing the number of parts it uses and increasing common components across models. The plan will cut both the time and cost for creating new models by as much as 30 percent, according to estimates from Toyota. …

In the past, Toyota focused on developing custom parts. It needed 50 types of knee-level airbags because seats for various models had different profiles. By standardizing “hip heights,” as the automaker calls it, across models, Toyota says it can reduce knee airbag variants by 80 percent.

As of last year, the automaker had slashed radiators to 21 models from about 100, according to Shinichi Sasaki, Toyota’s global purchasing chief. And the company is reducing the number of cylinder sizes in its engines to six from more than 18 by 2016, the Nikkan Kogyo newspaper reported June 4. Toyota declined to comment on the report.

“From now on, Toyota will seek the compatibility of certain parts it uses with standard parts used by many automakers globally,” the company said in a statement outlining its Toyota New Global Architecture, or TNGA, in March.

Some of the anticipated benefits here are fairly obvious. For example, the article mentions that standardizing parts like radiators that customers don’t care much about (beyond knowing that the car has one) will free up engineering time to work on body or cockpit design that customers do care about. Similarly, many of the implementation challenges (such as standardizing hip height) are fairly clear. Customers may not care about knee-level airbags per se, but standardizing those means standardizing some aspect of the interior design. Customer may or may not notice.

The most interesting part of this to me is its implications for supply chain risk. (more…)

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As the New York Times tells it, supply chains are changing (New Hubs Arise to Serve ‘Just in Case’ Distribution, Feb 12).

Major storms like Hurricane Sandy and other unexpected events have prompted some companies to modify the popular just-in-time style of doing business, in which only small amounts of inventory are kept on hand, to fashion what is known as just-in-case management. …

Just-in-case is a response to the vulnerability of just-in-time supply chains, said Rene Circ, CoStar’s director of industrial research. Since the 1990s, just-in-time has made sense for many companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production.

This model also reduced transportation costs, because goods would be shipped only as necessary. By combining the just-in-case with just-in-time strategy, Mr. Circ said, companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things, because inventory equals cost.”

I’ve been trying to think what I should say about this article for several weeks. I have felt conflicted because, on the one hand, it hits on some interesting points. On the other hand, it also leads with one of my pet peeves of business reporting. Specifically, it links any change in inventory management to some failure of just-in-time management. However, I am not convinced that is actually a good description of what is going on here.


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An interesting story from today’s Wall Street Journal (Companies Seek to Avoid China New Year Hangover, Feb 21). Basically, the Chinese New Year is complicating supply chain management.

For toymaker The Bridge Direct, Easter now begins in August.

That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.

The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.


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We already wrote about Sandy and its impact on operations immediately after the storm here. Several stories began to emerge on how firms managed to handle the storm.  Recently, the NY Times had an article on how Eileen Fisher managed the pre-storm preparation and the recovery (“Retailer Shakes Off the Storm“).

Recovery was both an urgent and a daunting task. A broad insurance policy helped a lot. So did some planning and a good amount of luck. As did an almost out-of-body detachment on executives’ parts to see past the emotion of sewage-soaked shirts and stained rolls of fabric to the prize of reopening a ravaged business.

When we talk about Disruption Risk Management, we discuss the three levels that need to be managed well: strategic, tactical and execution. The strategic level requires creating a resilient operations network (internal and external) and instituting effective risk-management process. The tactical level requires identifying and mitigating vulnerabilities in the current operations network, including threat identification and outlining an action plans. The execution level includes monitoring evolving risks and activating pre-planned contingencies. The article provides an excellent example of the interplay between the tactical level and the execution one.


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Sandy is going to affect holiday shopping… I know, you probably say that with many people without houses this is a very minor issues, but not if you livelihood depends on sales you are making during the holidays season.

When a hurricane hits, of course, there is the usual shutting down of shipping terminal and submerged warehouses. Due to the extreme nature of the storm, we saw deliveries being disrupted due to downed power lines, closed roads and scarce gasoline. All of these cause delays that affect every business, but the NY Times article “A Storm-Battered Supply Chain Threatens Holiday Shopping“ brings an interesting angle on the effect of these disruptions on small business, and especially due to the proximity to the holiday season.  The article tells the story of Robert Van Sickle

His pet supply company, Polka Dog Bakery, was relying on a shipment of cardboard tubes from China with a merry design, intended to hold popular holiday dog treats. The products represent about 15 percent of sales at the company. But the New York Container Terminal in Staten Island, where the tubes arrived shortly before the storm, was devastated, and Mr. Van Sickle’s freight forwarder has been unable to track down the containers. It is too late to reorder the tubes from China in time for the holidays, and Mr. Van Sickle has tens of thousands of baked dog treats piled up at his Boston headquarters.


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As I am writing this, Sandy has recently made landfall — which is remarkable given how bad things look even before the storm has really hit. I hope everyone back east is safe and dry.

Given the size of the storm, it seems that the clean up effort is going to be a huge project and for many people that is going to start with a run to their local home improvement store (if they haven’t been there already to get ready for the storm). So how do the likes of Home Depot and Lowe’s get ready for these storms? Here’s what the Wall Street Journal says (Home Depot, Lowe’s Prepare Post-Storm Inventory, Oct 29):

Terry Johnson, a senior vice president of operations at Lowe’s overseeing the Northeast, said in an interview demand has been “incredible” throughout the region. The company has been able to keep up with it for the most part, noting generators in particular are popular.

“We saw this coming, we started early, and we took some calculated risks,” he said, such as pulling in product supply to certain areas before Lowe’s had the path of the storm nailed down. …

Ahead of Sandy’s arrival, both Home Depot and Lowe’s activated their respective disaster-command centers, hubs that coordinate across the companies’ teams and with emergency-response agencies at all levels of government. Both companies’ centers have been working to get products into stores for storm preparation, while simultaneously planning to have inventory staged outside the storm’s path to be deployed once roads are passable again.

Mr. Johnson of Lowe’s said following past disasters like hurricanes, the company has been able to turn itself around to post-storm inventory in about a day.

“Once we’ve identified the need, we’ll have this product put on a truck, if there’s enough to fill it, we’ll release it,” he said. “It’s really important to be efficient, but it’s more important to get the product where it’s needed.”


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It’s been a long time since we’ve posted about illicit drugs, so we’re due! The drug in question is methamphetamine. The Wall Street Journal reports that the gangs making the drug have shifted their operations strategy from having small, US-based labs that produce meth from start to finish to having “conversion labs” in the US that turn meth from a liquid or powder form into crystals that have higher value (Business Plan Remakes Meth Market, Sept 14).

What’s behind the change in production networks? Logistics!

In California’s Central Valley, local labs couldn’t produce as cheaply as Mexican counterparts, in part because they had trouble disposing of toxic byproducts, said Manuel Rocha, who heads a multiagency meth task force in Merced County.

Mexican groups that took over the California market tried different strategies, law-enforcement officials said. They sometimes imported crystallized meth, but transportation often crushed the crystals. They sold meth powder in the U.S., but it fetched a lower price than crystals.

Conversion labs were the answer. Producing powder or liquid meth in Mexico creates the toxic waste there. Converting the imported powder to crystal in the U.S. creates little waste but adds maximum value.

Moving final processing close to the consumer meant drug groups could smuggle large quantities of easy-to-conceal meth powder or liquid, often disguised as products such as antifreeze. Once the product arrived in the U.S., organizations could decide whether to sell it raw for wholesale or add value by converting it.


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I never thought I would use the terms “maple syrup”, “strategic”, and “reserve” in the same sentence. But then someone broke into the Global Strategic Maple Syrup Reserve in Quebec and made off with $30 million worth of Canada’s Maple export.

Probably you ask yourself: Why does Canada have a Strategic Maple Syrup Reserve? Why does it have to be pooled (in other words, why does it have to be global), and how many pancakes does one have to eat in order to consume such an amount of syrup?

Since the 1940s Canada is the global leader in production of maple syrup, churning out somewhere in the neighborhood of three quarters of the world’s supply, so why do they need to keep a global reserve? In this industry both demand and supply (i.e. the harvested quantities) are uncertain:

 The trees need cold nights and mildly warm days to yield sap, meaning production can vary greatly year to year based on the weather. That’s a potential problem for the big syrup buyers, whether they’re bottlers or large food companies that make cookies or cereal. Quaker can’t pour a bunch of time and money into developing a maple-and-brown-sugar-flavored version of Life, only to find out it won’t be able to get enough of its ingredients, or that they’ll have to pay through the nose for each liter of syrup.  (“Why Does Canada Have a Strategic Maple Syrup Reserve?“, The Atlantic)

One cannot manage maple syrup inventory the same way you manage inventory of consumer goods. (more…)

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The financial troubles in southern Europe are spreading and impacting the supply chains of Airbus and Boeing (and Embraer).  Daniel Michaels and Darcy Crowe report in The Wall Street Journal that Spanish supplier Alestis was placed under court administration (the Spanish equivalent of US bankruptcy protection) earlier this month.

The interesting part is that Alestis is in the attractive business of new advanced composite materials (carbon fiber parts—as a cyclist, I love this stuff and have written about this great material before on this blog) manufacturing: it supplies

“major parts of jetliners including composite ribs, panels and skins for the hot-selling Airbus A320 and the A380 superjumbo, the world’s largest passenger jet. Its long-term contracts bring steady payments from established companies. But Spanish banks have slashed lending, so Alestis, like many skilled companies, is operating from one bill to the next.”

So why is this affecting Alestis?

“Alestis was established in 2009 from the merger of several small aeronautic companies around Spain with support from the regional government of Andalusia. It was just coming together when Spain’s real-estate industry went bust. Banks were left with piles of bad loans that have drawn scrutiny from authorities and financial markets. Last week, the government ordered all banks in Spain to raise their provisions against potential losses tied to real estate, which will reduce their capital for lending to companies like Alestis.”

Given that Alestis doesn’t disclose financial results, I don’t know exactly what’s going on but it is quite likely that they need some help in working capital and supplier relationship management. Carbon fiber and finance must go hand-in-hand. With strong long-term contracts from premier customers, Alestis should be able to manage its cash, inventory, and suppliers better.

Airbus and Boeing have learned their lessons when they burned themselves by transitioning to a system integrator business model. (Quick review from our Kellogg Operations Strategy course: They outsourced major parts manufacturing without a parallel sufficient investment in supplier relationship management. To minimize their financial risk, they were going to pay suppliers only when aircraft were finished.  Suppliers invested early but didn’t get paid with the delays in the A380 and the 787.  Subsequent supplier defaults forced A& B to buy up some key suppliers: A bought PFW Aerospace and B bought Vought Aircraft.)

The story with Alestis is different and A & B are keeping a close eye on this and are lending to Alestis.  Interestingly, Airbus must walk a fine tight rope: keep Alestis afloat yet not lend too much because that may make it liable to all of Alestis’ debt. Or will they buy Alestis?

Supplier management must combine strategic contracting and relationship management that drives continuous improvement. It is key to operations strategy and any outsourcing models.

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