Archive for the ‘Integration’ Category

So how much does it cost to make a hamburger — in Nigeria? Turns out, it costs more than you might realize (Burgers Face a Tough Slog in Africa, Dec 10, Wall Street Journal).


This is the breakdown for a Johnny Rockets burger and some of the numbers might seem out of whack — Why should iceberg (!) lettuce costly nearly five times as much in Africa as New Jersey? The answer is simple: It’s imported. Why import lettuce? Because the local supply chains are simply not sophisticated enough to support the quick service business.

But that quest is straining a supply chain that is short on the refrigerated trucks and warehouses needed to keep patties and vegetable toppings fresh. And in many places, Africans are consuming beef at a faster clip than cattle ranchers can deliver new cows, meaning beef prices keep climbing. That is testing the limits of what the continent’s young urbanites can afford.

And this is not just about Africa. (more…)

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Fancy, luxury handbags start off looking like this:


Not exactly the image of exclusivity and sexiness that the likes of Hermes and Longchamp want to project when trying to convince customers to pony up for a bag but leather starts with hides and hides don’t start off in fancy colors.

The image comes from a Wall Street Journal article on Tanneries Haas, an old-school Alsatian tannery (French Tannery in Demand as Source of Top-Notch Leather, Nov 6). The article walks through the production process (quick: name a use for chromium!) but the interesting part of the story is how the industry of supplying high-end hides has changed. Tanneries Haas remains independent but luxury houses are buying up tanneries.

Until just a few years ago, the tanning business was the least glamorous cog in the designer-handbag industry. But recently Tanneries Haas and other French tanneries have found themselves the object of attention from famous luxury labels jockeying for secure sources of top-notch leather. “When they saw a certain number of tanneries disappear, they had to think about protecting their suppliers,” says Jean-Christophe Muller Haas, a sixth-generation French tanner. …

By acquiring suppliers, luxury goods purveyors hope to get more control over raw material costs. Prices of calf hides have soared in recent years due to Europe’s falling veal consumption. Calves are slaughtered primarily as a source of veal and skins are a byproduct. With fewer calves slaughtered to meet shrinking demand for veal, the supply of skins available for luxury leather goods is also diminished.

This move is not just limited to European calf leather. Businessweek reports that luxury firms are also buying up crocodile farms (A Crocodile’s Bumpy Road From Farm to Handbag, Oct 24).


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“We live in a world of speed and cheapness,” says Roger W. Smith, who makes every component of a watch from scratch and by his own hand.  It is the ultimate opposite of that other Smith (Adam)’s division and specialization of labor.  I believe there is room for both in our world.  It takes one watchmaker about 6 months to produce one watch.  The result is a masterpiece…


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While the initial reaction to Boeing’s 787 electrical problems was to blame outsourcing, there is more and more understanding that outsourcing itself is not the issue. Boeing has always outsourced the production of batteries. There are several explanation that emerged since.
(1) It’s not outsourcing. It is the trend of modularization: We know that more modular designs allow for lower cost, but come at the expense of quality and performance. One should say that this is a very valid argument, since modularization is clearly the enabler of the excessive outsourcing trend.

(2) An alternative explanation is that It’s not outsourcing itself, but rather the specific method of outsourcing where Boeing outsources the design and control over sub tiers.  This is the main focus of The Seattle Times’s article (“Boeing 787’s problems blamed on outsourcing, lack of oversight“).


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The Wall Street Journal ran a series of articles on the challenges Airbus is facing. I will try to cover several of these, as each highlights a different issue, and I would like to begin with the one discussing the effort made by both Airbus and Boeing to fight the delays that plagued their operations during the last several years (“Hit by Delays, Airbus Tries New Way of Building Planes“.)

Both Boeing and Airbus have outsourced, during the last few years, not only their production, but also the design of the different parts, as well as the management of the suppliers’ sub-tiers. We have documented these in the past (“Boeing Delivers First Dreamliner“,) and the article, briefly mentions these. Manufacturing problems have left Boeing with more than 40 almost-completed Dreamliners awaiting fixes. Their main customers now expect to get their planes around four years late. The project has cost Boeing billions more than its initial $10 billion budge.  The reader must recall that Boeing has embarked on this ambitious outsourcing plan to reduce investment costs, and speed R&D and production. As we all know, things have not panned well for these two goals. What were the main reasons: loss of visibility of the progress of different suppliers, as well as incentive issues.  It took Boeing quite a while to figure it out, but they finally have:

In a major retreat, it has since bought up suppliers, brought work back in-house and integrated more closely with its remaining contractors.  “We gave away a lot of elements of work that we’d always done in the past, and then didn’t provide the kind of oversight necessary for some of the people that were doing work that they’d never done before,” said Boeing Executive Vice President Jim Albaugh, who ran its airplane division until June, at an investor conference last fall. To retrench, Boeing mobilized hundreds of engineers specialized in manufacturing and industrial issues, who have pored over every element of the program, including at suppliers. At its factory near Seattle, Boeing built a control room with video links to overseas suppliers, allowing its engineers to examine parts live on shop floors in Japan or Italy. For a second, larger version of the Dreamliner, Boeing opted to design many outsourced components itself, such as the plane’s rear section and tail wings.


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Here’s an interesting story at the intersection of supply chain strategy and sustainability. The LA Times reports that Taylor Guitars has bought an ebony mill in Cameroon (Taylor Guitars buys ebony mill, pitches sustainable wood, Jun 7).

For Taylor Guitars, which has used ebony from Cameroon for many years, the chance to ensure a steady supply of legal ebony was too good to pass up, Taylor said in an interview.

The company teamed late last year with Madrid firm Madinter Trade, which sells tone woods for musical instruments, to buy the Crelicam mill outside of Yaounde, the capital of Cameroon. The purchase wasn’t officially announced until late last month.

Taylor said it’s been a difficult process bringing the mill’s wood sourcing and operations up to what he and his partners consider acceptable. The mill’s subcontractors, for example, typically cut down 10 trees to find one with all black wood, Taylor said. He agreed to boost their pay to get them to deliver that ebony that had been considered undesirable.

There are some interesting motives behind this move.  (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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Impact sourcing refers to “the strategy of harnessing the Internet to bring low-cost data management jobs to remote and impoverished communities,” as David Bornstein wrote in the New York Times. He described two social enterprises that extend computer-based employment to people with modest educations in developing countries:

One of them is Digital Divide Data, a pioneering organization that employs 900 people in Cambodia, Laos and Kenya and was founded way back in 2001. The other is Samasource, a fast-growing enterprise that was established in 2008 and has already received recognition for its ability to manage “microwork” in a kind of virtual assembly line that spans 1,600 workers across Haiti, India, Kenya, Pakistan, Uganda and South Africa ― some of them living in refugee camps.

Both Digital Divide Data (DDD) and Samasource were founded by former management consultants whose experiences in the developing world led them to redeploy their skills to alleviate poverty.

Essentially, these companies help people from disadvantaged backgrounds gain a foothold in the global economy.  It is offshored outsourcing, but with an
ethical aspiration: (more…)

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Finally, after many delays, Boeing delivered the first Dreamliner. The Wall Street Journal, which has been following the development closely throughout the years, had a nice article about the topic (“For Boeing, It’s Been a Long, Strange Trip“):

Boeing—eight years after it began developing the ultra-efficient jet—is still trying to prove it can make a success of both its innovative product and new approach to plane-making. For decades, Boeing designed and built its jets in-house, bearing the whole expense. In 2003, it embarked on the unprecedented step of outsourcing most of the Dreamliner’s manufacturing to far-flung suppliers.

The article is correct to point out the new approach to plane-making and the innovative product, yet, I think it is somewhat misleading to say that outsourcing the manufacturing was unprecedented. As we have been writing in several posts about the topic Boeing chose to outsource not only the manufacturing, but also the design and management of sub-component suppliers.  Many of the causes of delays can be attributed to the lost visibility brought by this model. It is true though that under the new model, Boeing has been reduced to a large-scale assembler, and suppliers will do most of the production.  The lack of visibility and miscommunication regarding production responsibilities led to absurd situations:


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As a Belgian, I am partial to Belgian products…  Belgium has a rich cycling heritage and by far the most active racing development programs and scene in the world, producing riders like Philippe Gilbert and Jurgen van den Broeck who are doing well in the Tour so far.  (I am rooting for a podium for Jurgen…).  However, it seems that Belgium has lagged in bicycle and/or component design and sales–I would argue the Italians have done better…

But perhaps this may change: the Belgian bicycle company Ridley surely is making deep investments in new design, technologies, wind-tunnels, etc.  It just announced “F-brake”: “The first fully integrated brake!  The first brake that will let you ride faster…”


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