global supply chains – Page 5 – The OM Blog by Heizer, Render, & Munson

OM in the News: The Stressed Global Auto Supply Chain

The automotive supply chain is a complex, global network of interdependent businesses ranging from small, family-owned manufacturers based in the U.S. heartland to large publicly traded overseas auto parts companies—all working in unison to keep cars rolling off the assembly line. But fights are emerging across the auto industry over who should bear the costs of tariffs, leading to new stress along the supply chain, reports The Wall Street Journal (Nov. 10, 2018).

Recently, Pierburg US, a manufacturer of parts used in the Ford F-150 pickup truck and Jeep Wrangler SUV, sued one of its suppliers over new tariffs imposed. The two sides have been in business for 20+ years. Pierburg says that the supplier’s refusal to ship electric motors from China to Pierburg’s factory in South Carolina unless it paid the 25% tariff cost in full was “extortion.” A failure to deliver the parts could shut down multiple auto factories and “plunge the automotive industry into complete chaos,” Pierburg added. Sorting out the cost of tariffs is difficult because some parts cross the U.S. border multiple times before being installed in a car, blurring the lines of what is “domestic” content.

A typical vehicle is made up of roughly 30,000 individual parts, and car companies on average work with hundreds of suppliers at once for each model line, either buying components directly or contracting them out further down the chain. Thousands of individual contracts outline in detail parts orders, delivery dates and prices, and many of them are locked in place months and even years in advance.

Toyota has told suppliers they shouldn’t count on the Japanese car maker to help absorb the higher tariff-related costs. The average operating profit margin in the auto parts manufacturing business is already slim–about 7%—so extra costs can hit earnings hard.

Classroom discussion questions:

Describe the auto supply chain.
What is the impact of tariffs proposed?

OM in the News: Auto Makers Plan to Shift More Manufacturing to North America

Some vehicles assembled in North America use engines or transmissions from outside the region. (Source of engine in gray, transmission in red).

Foreign car makers are considering moving more of their manufacturing to North America following the recent U.S. trade deal with Canada and Mexico, writes The Wall Street Journal (Oct. 8, 2018). As the U.S. and Canada reach a pact to replace the roughly 25-year-old North American Free Trade Agreement, foreign car makers suggest changes to their supply chains that would result in more auto-parts manufacturing in the U.S., Canada and Mexico.

Daimler said the new agreement could force the company to move more engine manufacturing to the U.S., where it builds vehicles at a factory in Tuscaloosa, Ala. The Renault-Nissan-Mitsubishi alliance said the new pact would spur the car-making group to invest more in both the U.S. and Mexico.

The deal, which replaces Nafta, requires auto makers to build at least 75% of a car’s value in North America to remain duty-free within the region, up from 62.5% currently. Cars that don’t comply with the new rules will be subject to a 2.5% tariff. (Foreign-based car brands made up 56% of light-vehicle sales in the U.S. last year.)

The new rules will be phased in over the next 2-5 years, about the time it takes to develop a partially or fully revised car model. Car makers are likely to look at moving engine and transmission production first, because those parts make up roughly 30% of a car’s value.

Classroom discussion questions:
1. What is the significance of the graphic on the left? (Click to blow it up).

2. What will be the impact on domestic car manufacturers?

OM in the News: Cobalt Mines, Supply Chains, and Ethics

Mine workers, move rocks containing cobalt in Kolwezi, Congo

Dozens of global manufacturers found themselves on the defense when Amnesty International reported that the cobalt in some of their batteries was dug up by Congolese miners and children under inhumane conditions, reports The Wall Street Journal (Sept. 13, 2018). Many of the companies said they would audit their suppliers and send teams to Congo to fix the problem. But at a Chemaf-owned cobalt mine in Kolwezi, Congolese workers could be seen descending underground without helmets, shoes or safety equipment. The mine’s owner is part of the global cobalt supply chain for companies including Apple and VW.

Miners there were using picks, shovels and bare hands to unearth rocks rich with the metal. Water sometimes rushes into holes and drowns miners, and an earth mover buried one alive last year. “Of course, people die,” said the mine’s owner’s CEO. “This is really shitty work.” He called the miners “barbarians” and said Chemaf had resisted giving them safety equipment because they would sell it. “I don’t care about supply-chain problems,” he added. “That’s a problem for Apple and Samsung.”

Global demand is soaring for cobalt, which is used to conduct heat in lithium-ion batteries in products from smartphones to electric vehicles. Cobalt prices have more than doubled since 2016, putting Congo in the spotlight. It isn’t easy for global manufacturers to trace cobalt’s source in Congo, because it passes through multiple companies and countries. Some mining operations mix industrially produced and hand-dug cobalt. Samsung says it is aware some of the cobalt it gets from Chemaf is produced by the miners. If companies stopped buying it, said Samsung, it would put people out of work.

Amnesty recently applauded Apple’s moves to weed out child labor from its supply chain, saying it is “the industry leader when it comes to responsible cobalt sourcing.” Amnesty said VW hadn’t addressed whether certain companies in its supply chain received cobalt from Congo. Its report added: “Some of the richest and most powerful companies are still making excuses for not investigating their supply chains.”

Classroom discussion questions:

Why is this a complex OM issue?
Why is cobalt so important to supply chains?

OM in the News: Merck Introduces Automation to its Supply Chain

German pharmaceuticals firm Merck plans to deploy artificial intelligence and predictive analytics throughout its entire supply chain by the end of 2019, reports The Wall Street Journal (Sept. 11, 2018). Occupying the forward edge of an industry-wide shift towards automated supply chains comes with a competitive advantage. But it also will require that Merck address those jobs affected by the technology, a process called AI augmentation.

The company is using analytics software from Aera Technology to mitigate supply shortages, predict spikes in demand and bottlenecks with about 100 products. It plans to expand the pilot program to its 5,000 products by the end of next year. Merck views AI as a way to augment the jobs of the company’s supply chain planners, and reduce often tedious and repetitive work. By 2021, AI augmentation will save billions of worker hours.

The Aera software captures supply chain data from dozens of data bases and ERP systems throughout the company. Then machine learning algorithms analyze it and suggest recommendations, such as whether and when to adjust product supply or demand forecasts. The algorithms factor in external data such as weather, natural disasters, trends in patient health and expansion plans of pharmacies.

In the pilot test, 10 supply chain planners get detailed alerts via automated phone messages every morning about supply shortages and spikes in demand. The system offers suggestions, based on real-time demand data, such as whether to increase inventory, start production or identify a replacement product across 100 drug products globally. By the end of 2019, one hundred supply chain planners will be using the technology. The goal is eventually to have the retrained supply chain employees make more accurate decisions about how to better position inventory, in order to guarantee supply for patients more effectively.

Classroom discussion questions:

What is predictive analysis?
What is the goal of AI augmentation?

OM in the News: The Weak Link in the Supply Chain

In Supplement 11, we discuss the risks of natural disasters (such as the Japanese tsunami) to global supply chains. But as Supply & Demand Chain Executive (July 13, 2018) rightly points out, today’s supply chains, though increasingly efficient, are highly vulnerable to digital threats. Since global organizations can support operations with partners in countries with varying infrastructure reliability, streamlining communications is a severe and sometimes impossible challenge to overcome.

In an era when real-time transfer of information between international stakeholders is critical to business, secure communications are the most important, and the most frequently overlooked, component to response planning. A recent survey found that supply chain managers are “very concerned” about data security, natural disaster and war. As mass-connectivity has made it easier than ever to source partners, most businesses now have touchpoints across the global supply chain, regardless of their location or the markets in which they serve. This connectivity has brought tremendous financial, productivity and efficiency benefits. However, it has also created a dependence on a globally-connected, real-time communication system that has fears of disruption proliferating among manufacturers that are adopting JIT supply chains. What might start as a little ripple in a supplier country on the other side of globe can turn into a wave of failure by the time issues reach a production facility.

So, in addition to natural disasters, cybersecurity is now a major concern. Partnerships with third-party cloud services, off-premises data storage providers, unauthorized mobile device usage, email phishing and aging infrastructure are all boosting risk. One in 5 firms in tech, defense and aerospace, for example, use outdated browsers that make them vulnerable to malware. Email especially, is inherently subjected to security threats. One survey found 77% of businesses expect to fall victim to email fraud in the next 12 months. Three-quarters also said that they have experienced at least one targeted email fraud attack in the past 2 years.

No entity within the global supply chain can prevent natural disasters and mass cyber incidents. But they do need to be prepared, as we point out in the text.

Classroom discussion questions:

What can operations mangers do to prepare for these digital threats?
What forms can the communications threats take?

OM in the News: The Quest for Rare Earths Leads to Japan

Rare earth mining can be a dirty and ecologically damaging business. Here, a rare-earth metals mine in China.

“Japan has discovered hundreds of years’ worth of rare-earth metal deposits in its waters,” writes The Wall Street Journal (April 12, 2018). Why is this important? It reflects Tokyo’s concern about China’s hegemony over minerals used in batteries, x-rays, TVs, cell phones, electric vehicles, and 100s of other electronic devices.

The deposits were found about 1,150 miles southeast of Tokyo. Extracting them will be costly, but resource-poor Japan is pushing ahead in hopes of getting more control over next-generation technologies and weapon systems. A 965-square-mile seabed contains more than 16 million tons of rare-earth oxides, estimated to hold 780 years’ worth of the global supply of yttrium, 620 years’ worth of europium, 420 years’ worth of terbium and 730 years’ worth of dysprosium.

The U.S. Department of Energy and the E.U. have issued warnings about shortages of rare earths as China’s own consumption of them increases. “This is a game changer for Japan,” said an industry expert. “The race to develop these resources is well under way.”

In 2010, China pushed rare-earth prices up as much as 10 times by cutting its export quota on 17 rare earth elements by 40% from the previous year. It said it wanted to clean up a polluting industry, but the move left Japan and other nations seeking more independence from prices dictated by its neighbor. It is important for countries’ supply chains to secure their own source of resources, given how China controls the prices.

Classroom discussion questions:
1. Why are rare earths important to OM?

2. Where else can supply chain managers turn to procure these critical minerals?

OM in the News: Walmart Tries Out Blockchain

Walmart found blockchain can improve the speed and accuracy of product recalls

Blockchain isn’t only about bitcoin. The technology best known as the record-keeping system behind cryptocurrencies seems poised to play a broader role in business, where it could change how supply chains work.
Walmart is using the blockchain technology to manage supply chain data for mangoes, berries and dozens other products. “The system, built with IBM, will help Walmart figure out where bad food came from during product recalls,” writes The Wall Street Journal (Feb. 7, 2018).

Here is how it works: A blockchain ledger allows participants to add blocks of information after each party runs algorithms to evaluate a proposed transaction. If the parties agree that the transaction looks valid — identifying information matches the blockchain’s history and follows the rules created by the participants — then it will be approved, time-stamped and added to the chain.

For example, after a mango is picked from a tree, it makes many stops before getting to a store shelf. Farmers, packing-house workers, and others along the way use a mobile app from Walmart to send details such as harvest dates, locations and images of their fruit to the retailer’s blockchain. The process is simpler and more secure than the array of barcodes, scanners, paper forms and individual databases Walmart usually uses.

In a simulated recall under the blockchain system, Walmart traced the origin of a bag of sliced mangoes in 2.2 seconds. With Walmart’s other systems, the same exercise took 6 days, 18 hours and 26 minutes. This speed and accuracy could save sales that otherwise would be lost as stores pull all mangoes off shelves while waiting for trace-back results. It could also prevent illness and death. “We’re all after trust in the supply chain, especially in a crisis,” says Walmart’s head of food safety.

Classroom discussion questions:

Explain what a blockchain is.
Why is the concept so potentially valuable as a supply chain tool?

OM in the News: Pain in Boeing and Airbus’ Supply Chains

Boeing and Airbus both built more jets last year than ever (763 and 718, respectively), but not enough to ease supply line strain as orders boom. The delivery frenzy has been a boon to both plane makers, lifting profit and share prices. “But it also has strained manufacturing and supply lines around the world,” writes The Wall Street Journal (Jan. 16, 2018).

Airbus and Boeing have already struggled at times to get planes out the door because of a lack of seats, toilet doors, and even engines. Airbus fell short of its target of building at least 200 A320neo planes last year because of lingering engine supply issues. The A320neo is the latest version of Airbus’ best-selling narrowbody jet. It and Boeing’s latest 737s have become the workhorses of both legacy and budget carriers because of their size, fuel savings and versatility. Airbus had 30 planes waiting for engines at year-end, and won’t commit to higher output of the plane until it has monitored supplier reliability for several more months.

Boeing and Airbus ended the year with a combined backlog of 13,129 planes, or 9 years of production at current output levels. To cope, both firms have promised to build even more planes this year—further stretching factories around the world that are already running at full tilt.

Supply chain tightness has spurred supplier consolidation to gain scale and become more financially resilient to afford the investments in production capacity Airbus and Boeing require. United Technologies last year agreed to acquire aircraft equipment maker Rockwell Collins. Rockwell in April closed a $6 billion acquisition of cabin interior specialist B/E Aerospace. French supplier Safran SA is expected to soon close its purchase of seat maker Zodiac Aerospace SA.

Classroom discussion questions:
1. What can Airbus and Boeing do, if anything, to exert better control over suppliers?

2. What do they need to do to reduce the backlog?

OM in the News: Boeing Tries to Streamline its Supply Chain

“Boeing has begun a push to streamline its supply chain, reducing overlap between existing divisions and cutting layers of management and bureaucracy,” writes the Seattle Times (Nov. 10, 2017). The firm’s enormous global supply chain delivers more than a billion parts to its assembly plants every year, everything from buckets full of fasteners to entire wings for its 787 Dreamliner. The management of that global network is the focus of Boeing’s plan.

One tool it has turned to is increasing its use of modern information technology and digital analytics to track supplies and identify blockages in the pipeline. Boeing’s current supply chain has grown organically over many decades with multiple internal divisions all using separate tracking systems. The extended study, currently under way, will also help Boeing better determine which suppliers are working well and which are underperforming — so that it can allocate contracts accordingly, and in some cases take work in-house.

Boeing expects the first organizational pieces of the streamlining initiative — bringing together supplier management, raw-material management and elements of engine systems supply — to be in place by year end.

Classroom discussion questions:

Why is Boeing struggling to control its supply chain?
Why is a large percent of the supply chain outsourced, and why to many different countries (refer to the Global Profile that opens Chapter 2)?

OM in the News: Samsung and Apple’s Love-Hate Supply Chain Relationship

“When the iPhone X goes on sale next month, Apple rival, Samsung, has good reason to hope it is a roaring success,” writes The Wall Street Journal (Oct. 3, 2017). The South Korean company stands to make $110 from each $1,000 iPhone X that Apple sells. The fact reflects a love-hate dynamic between the phone makers that is one of the more unusual supply chain relationships in business. While each company vies to get consumers to buy its gadgets, Samsung stands to make billions of dollars supplying screens and memory chips for the new iPhone—parts that Apple relies on for its most important product. “These are two of the largest companies on the planet deeply tied at the hip and directly competitive,” says one Harvard prof.

Apple and Samsung are expected to be the world’s two most-profitable companies in 2017. And they will depend on each other to get there. Apple needs Samsung’s parts to make the iPhones that accounted for 2/3 of the company’s $216 billion 2016 revenue. Samsung needs Apple’s orders to fuel a component business that delivered 35% of the South Korean firm’s total revenue of $195 billion in 2016.

The relationship grew after Apple moved into selling smartphones. Apple’s immense demand for parts—it sells more than 200 million iPhones a year—limits the field of possible suppliers. Samsung is one of a handful of semiconductor makers that can make a small chip crammed with extra memory capacity. And it is the only significant manufacturer of the organic light-emitting diode displays Apple has adopted to create the iPhone X screen.The relationship took an acrimonious turn in 2011, when Apple sued Samsung over patent infringement, accusing the Galaxy S of ripping off the iPhone’s design. Samsung countersued Apple with its own patent-infringement. Six years on, the U.S. lawsuit is unresolved.

Classroom discussion questions:

Describe similar relationships between competitors in other industries?
Why does Apple depend on Samsung so heavily?

OM in the News: Foxconn’s U.S. Factory Plans

Foxconn makes iPhones and other gadgets for Apple

Foxconn, which helped turn China into the center of electronics manufacturing, just announced it will build a $10 billion plant in Wisconsin to make display panels used in TVs and other products. This marks the first major U.S. investment for Foxconn, the world’s largest contract manufacturer of electronics and the maker of iPhones.

“Foxconn,” writes The Wall Street Journal (July 27, 2017), “is betting the U.S. can rebuild an electronics supply chain that largely shifted to China and other lower-cost Asian countries in recent decades.” The factory is expected to employ 3,000 people initially and as many as 13,000 people eventually. The state is providing Foxconn with a $3 billion, 15-year incentive package of tax credits.

In addition to the factory workers, it is estimated that the plant will create 22,000 indirect jobs and another 10,000 construction jobs– and draw as many as 150 supporting suppliers to Wisconsin and nearby states. The average salaries for the 13,000 jobs at the factory would be $53,000 annually, plus benefits.

The 20-million-sq.-ft. campus will primarily produce high-resolution liquid-crystal displays, known as 8K resolution LCD, used in smartphones and car dashboards, in addition to TVs. Many TVs currently sold in the U.S. are assembled in Mexico, so it is possible that the displays made in Wisconsin could be shipped across the border to be installed in TVs that are later shipped back to the U.S. for sale.

Classroom discussion questions:

Why is Foxconn entering the U.S?
What are the benefits and risks to Wisconsin?

OM in the News: BMW’s Supply Chain Disruption

BMW is halting or slowing production of certain models in response to a shortage of parts caused by delivery problems from first-tier parts supplier, Bosch. “The hiccups show how dependent manufacturers are on a global, smoothly running supply chain,” writes The Wall Street Journal (May 30, 2017). Even small disruptions anywhere along the line can cascade into delays in getting the company’s big money-making products off the assembly line and into showrooms.

In BMW’s case, the culprit is a “Lenkergetriebe,” or steering gear, manufactured by Stuttgart-based auto-parts giant Bosch and used in BMW’s Series-1,2,3, and 4 models. “Our supplier Bosch is not currently able to provide us with a sufficient number of steering gears,” said a BMW exec. Bosch, in turn, said the trouble arose when a 2nd-tier supplier in Italy experienced difficulties in delivering the casing for the steering gears.

As a result of the shortages, production is restricted at several BMW plants in Germany, China, and South Africa. “Automotive value chains are international. An interruption in delivery of parts from a partner in Europe can therefore also have implications in China,” said the BMW exec. “The vehicle is not complete until all parts, most of which are supplied just-in-time, are installed. It is, therefore, understandable how a missing part—even if only a small one, as in this case—can have a major impact.”

Classroom discussion questions:

What can BMW do to prevent such supply chain disruptions in the future?
What are the differences between 1st, 2nd, and 3rd tier suppliers? Provide an example of each in a non-automotive industry.

OM in the News: The Mexican Medical Supply Chain

Workers at the Greatbatch Medical plant in Tijuana

“Nafta has transformed Tijuana from a gritty party spot to a world capital of medical devices,” writes The New York Times (April 1, 2017). Boulevards are lined with factories bearing the names of American-run companies: Medtronic, Hill-Rom, DJO Global and Greatbatch Medical. Inside, Mexican workers churn out millions of medical devices each day, from intravenous bags to artificial respirators, for the global market. Nearly everyone in America who has a pacemaker walks around with parts from here.

A proposed border tax could fracture the industry’s sophisticated global supply chain and force American hospitals to pay more for vital necessities. Hospitals in the U.S. rely on bandages and surgical gloves from China, suturing needles and artificial joints from Ireland, and defibrillators and catheters from Mexico. Annual imports of medical devices has reached $43.9 billion, with Mexico as the leading supplier, ahead of Ireland, Germany and China. Tijuana houses the highest concentration of Mexico’s medical device firms, 70% of which are U.S.-owned.

The high-tech operations emerged after Nafta helped transform Mexican border factories, called maquiladoras, into industrial powerhouses. Now, instead of being garment sweatshops, many maquiladoras in Tijuana employ a new generation of Mexican engineers and skilled technicians to make medical devices. Technicians at these factories earn $14 an hour, compared with $25 an hour for technicians at U.S. factories.

Mexico’s medical device industry buys much of its raw materials and capital machinery from American suppliers. The American-owned Integer plant in Tijuana, for example, buys 90% of its raw materials, duty-free, from the U.S.: stainless steel to be stamped into cups used for hip replacements and plastic to be molded into catheters. Then half of the factory’s output is shipped back to the U.S. and much of the rest to American-owned companies elsewhere. The company, like many others here, is seamlessly integrated: Employees in Tijuana videoconference with R&D teams in the U.S. to fine-tune product designs.

Classroom discussion questions:

What factors appear to threaten this supply chain?
Why is it hard to move the medical factories to the U.S?

OM in the News: Global Sourcing Creates a Giant Backlog at Boeing and Airbus

“The aviation industry is bulging with orders for new planes,” writes The Wall Street Journal (Feb.24, 2017). If only it can get them made. There were so many almost-finished jetliners, missing their engines, piled up at an Airbus factory last May that executives joked they were in the glider business. It ceased to be funny when a frustrated Qatar Airways canceled orders for 4 planes that were months overdue.

Airbus and Boeing must build 30% more planes annually than they do now to meet existing orders, in one of the industry’s steepest production increases since World War II. The scale of the ramp-up is putting companies to the test.

Suppliers of seats, toilets and engine parts are stretched to the limit and sometimes falling short. In one of the worst holdups, Pratt & Whitney informed Airbus in September it would ship only 75% as many engines in 2016 as planned. P&W struggled with making the engine fan blades, which initially took twice as long as expected. French aviation-parts supplier Zodiac Aerospace was late delivering business-class seats, which cost about $100,000 each, for new Boeing 787s headed to American Airlines. Zodiac also was late delivering seats and lavatory doors to Airbus for its A350 long-range jet, at a time when Airbus was sharply raising production of that plane in 2015.

Both Boeing and Airbus are making adjustments to cope, retooling factories and tightening oversight of their globe-spanning supply lines. Airbus may dedicate more resources to “supporting and understanding proactively possible hiccups with suppliers in the future,” said its CEO.

Classroom discussion questions:

Why are the supply chains so hard to manage?
Can Airbus and Boeing bring more manufacturing in-house?

OM in the News: How Samsung Survived the $5 Billion Galaxy Smartphone Recall

Samsung’s recall of overheating Galaxy Note 7 phones attracted global scrutiny and hurt its brand image. But even with the $5 billion October disaster, Samsung’s 4th-quarter earnings were the highest in 3 years. “The reason,” writes The Wall Street Journal (Jan. 7-8, 2017): “competitors’ growing demand for Samsung components, a reminder of the company’s central role in the global technology supply chain.”

While Samsung’s smartphone results took a hit, the company thrived on sales to Apple, Dell, HP, and Sony, whose smartphones, laptops and TVs rely on parts Samsung manufactures. As recently as 2014, Samsung’s phones were the cash cow. But with consumers no longer snapping up new phones every year, the company—which is the world’s biggest maker by shipments of both smartphones and memory chips—has shown there is plenty of profit to be made in the parts of devices not visible to most consumers.

Even when smartphones were selling strong, Samsung poured tens of billions of dollars into semiconductors and display panels to enable phones to run faster, hold more storage and offer crisper images. Recent advances have made its components more powerful than those of competitors—positioning Samsung as an essential parts supplier for many of its rivals. This friend-and-foe dynamic means Samsung can profit even when a consumer ditches a Galaxy phone for a competitor’s product.

As its reliance on smartphones has diminished, Samsung has looked to build on its dominance in electronic components by expanding its capacity as a chip and display-panel manufacturer. It is investing over $1 billion in its Austin, Texas, semiconductor factory to beef up production of processor chips for smartphones, and $10 billion to expand its production of organic light-emitting diode displays that are thinner than traditional liquid-crystal displays.

Classroom discussion questions:

1.What is Samsung’s core competence?

2.Compare this industry to supply chains for auto makers.