Posts Tagged ‘Supply Chain Risk’

EM-BE840_BARREL_16U_20150512051208Bourbon, as you may know, is having a moment. As the graphic above shows, production and sales have soared in recent years. But the Wall Street Journal reports that supply chain problems may keep the industry from growing further (Bourbon Feels the Burn of a Barrel Shortage, May 11). The specific issue relates to barrels. Federal law requires that bourbon be aged for two years in new oak barrels (Why is there a federal law about bourbon? See here.) and it is getting hard to get enough bourbon barrels.

The shortage reflects a supply-chain conundrum. Upstream, barrel makers face a wave of demand because a half dozen established bourbon distilleries and 300 new, craft distilleries are increasing production amid a bourbon boom. Downstream, they face a shortage of white oak wood used in barrels because the lumber industry hasn’t rebounded from the housing market’s collapse. …

All the growth might have been intoxicating except for a sobering fact: The demand for more barrels coincided with a massive contraction in the lumber industry. As the housing market crashed in 2007, sawmills shut down and loggers abandoned the market. Lumber production shriveled to about 5.9 billion board feet in 2009 from 11.7 billion board feet in 2005, according to the Hardwood Market Report, which tracks the forestry industry.


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As you may have heard, West Coast ports are having some labor issues. The Pacific Maritime Association (which represents the shipping lines and terminal operators) and the International Longshore and Warehouse Union have been going at it, affecting about 20,000 workers at 29 West Coast ports. (Can’t name 29 Wet Coast ports? See here.) The LA Times has a nice summary of what is in play. In a nutshell, management claims that the union is engaging in a slow down (effectively striking while getting paid, see here) while the union claims that they are responding to safety concerns (at LA and Long Beach) and that management is misrepresenting their position. In any event, what has resulted is lots of delays and a  slew of ships waiting off the coast for their chance to unload. (Never seen a slew of ships? Check out these images.)

OK, that’s all well and good, but how is this affecting supply chains? The sheer scale of the problem is rather mind-blowing. If it were just a question of losing one port, things wouldn’t be too bad. Ships bound for LA, could be sent to Oakland or Seattle. But it’s the entire West Coast. If the goods need to be offload to an US port, that means going all the way to the Gulf Coast or the East Coast. It’s not clear that is an easy solution. Part of why LA and Long Beach are such busy ports is that they have an entire infrastructure to support them. Even if a ship could get to, say, Charleston, it’s not clear that it would do a lot of good for some of the customers whose stuff is on the ship. If a company’s whole logistics system is based on breaking bulk in the Central Valley, having a bunch of containers in South Carolina is, at best, an inconvenience. (more…)

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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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A dollar today is worth more than a dollar tomorrow so it is not surprising that firms would prefer to defer paying suppliers for as long as possible. As the Wall Street Journal tells it, many large firms like Procter & Gamble and DuPont are working to redefine “as long as possible” when it comes accounts payable (P&G, Big Companies Pinch Suppliers on Payments, Apr 16).

What began as a way to preserve cash when markets dried up a few years ago has become a means of freeing up money to fund expansions, buy back stock and support dividend payouts at a time of lackluster sales growth and shrinking profit margins.

P&G is actually late to this game. It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts. The company is looking to move its payment terms to 75 days and recently started negotiations with suppliers, people familiar with the matter said.


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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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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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