The Price of Your iPad Is Higher Than You Think

There is a glaring lack of ethics in terms of Apple’s supply chain management practices, as suggested by the New York Times.  Many Asian suppliers are violating basic ethical principles. Here are some of the questionable practices cited:

  • Horrendous occupational safety violations
  • High suicide rates due to stressful working conditions
  • Long working hours:  repetitive 60-hour, 7-day weeks
  • Employment of children as young as 15 years-old

Although Apple has responded to problems in its Asian supplier base by conducting supplier audits, the worlds’ largest company—in terms of stock market value—has been reluctant to put its foot down.  The fate of a 22 year-old college graduate, Lai Xiaodong, is a case in point. He moved to Chengdu in southwest China to take a job at Foxconn, an electronics supplier that employs 1,000,000 people. He was quickly promoted to oversee a team that polished iPad cases. This process Chinese Factory with Chimneys Apartments Gansu Province, Qinghai, Chinagenerated dust, which is a known safety hazard.  Mr. Lai and 3 teammates died from a ghastly explosion, which also injured 14 other workers.  After the accident, which seared 90% of Mr. Lai’s body, Apple contacted “the foremost safety experts in process safety,” and assembled a team to make recommendations to prevent future accidents. In December, 2011—7 months after Mr. Lai was killed—another iPad factory exploded due to aluminum dust.  As a result, 59 workers were injured; and 23 hospitalized.

I was initially shocked after reading about the story of Mr. Lai, and Apple’s apparent lack of commitment to correcting poor worker-safety practices. Although allowing unnecessary accidents—resulting in worker injuries and deaths—cannot be condoned, we must take a more nuanced view regarding Apple’s predicament, from both a historical and cultural perspective.

In a supply chain management class that I recently taught, we discussed the ethics associated with the use of child labor in developing countries. One of my students grew up in India. He indicated that poverty in India is severe, and compulsory education is not mandated by law.  To survive in this environment, some families require that their children work. Were we to impose our ethical values and prevent children from working in Indian factories, we would be depriving Indian families of sorely needed income. It is easy—but wrong-headed—to believe that our ethics and moral values are superior to the moral values held by other societies.

The reasons against using child labor are not moral as much as they are practical ones. It is bad business to permit children to build Apple’s products, if young people are simply being used as a means to an end.  Consumers in the west will no longer think that it is “cool” to own i-Phones, if they have been built by Chinese teenagers.   How many parents would want to be part of a 21st scene, taken from a 19th century Dicken’s novel?

In Viet Nam, Nike has implemented an innovative solution to this dilemma.  Although some of Nike’s Vietnamese suppliers employ children, they also provide employees with a regular wage, free or subsided meals, free medical services and training and education. Nike, as well as western consumers, benefit from low labor costs. At the same time, the workers improve their standard of living and also receive access to education.

Regarding the various safety issues that were described by the New York Times, one has to put them into a cultural context. I recently interviewed an executive who lived in China for 13 years, setting up factories and growing American businesses. During the course of our conversation, he made the point that public safety is non-existent. When walking down the street, you have to always be on the lookout for possible hazards. There may be a big hole in front of you, which is not blocked off with barriers. Or, there could be an electrical wire dangling at eye-level. If unaware, you could walk right into it. If a lack of public safety is the norm in China, how can one expect the private sector to be any different?  Would we be correct to impose our ethical standards—as relates to public safety—onto the Chinese?  Specifically, should we preach that barriers should be placed in front of Shanghai’ s sinkholes?

Getting back to Apple, from a business perspective, the company must enforce strict, safety practices for all of its suppliers; otherwise, more articles—such as today’s scathing indictment in the New York Times—will appear, tarnishing Apple’s brand. Only by adding teeth to Apple’s supplier responsibility reports and recommendations, will the company avoid future, public relations disasters.

In conclusion, with global competition, superior supply chain management results in consumers receiving products at low prices. But our western ethical tastes are repulsed at stories of worker abuse. Apple must take strong, corrective measures against suppliers who use workers solely as the means to an end, namely, achieving low, production costs. In supply chain management, good ethics makes for good business.

 

 


Supply Chain Management in China

Interview with James L Waite who set-up factories and grew American businesses in China

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Interview by TIM MOJONNIER

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You lived in China for 13 years. When did you live there?  I arrived in January 1997 and returned to the U.S. in November 2010, with occasional trips back to the U.S.  During my time in China, I spent 8 years in the Shanghai area, and the balance in the south, Guangdong area.

What was it like living in China for all those years? What were the biggest challenges in adapting to the local culture?  Initially, my wife and I felt uncomfortable going into the streets, and shopping by ourselves. Because we were foreigners, the prices were higher and the Chinese way is to negotiate for everything. We also had to acclimatize ourselves to being long term expatriates (expats). Most expats typically live in a country for 2-3 year assignments. Since we lived in China for over a decade, we always had to make new friends. In addition, dealing with a translator was a challenge, because the translator would just translate the words, but not the meaning.  Furthermore, the Chinese do not always speak their mind, and they do not speak directly.  After being there several years we were able to understand the meaning of Chinese conversations. We also learned how to communicate basic things and feel comfortable shopping in local open air markets and moving with the flow in the crowded streets. In conclusion, once we got over the initial shock of living in a different culture, we realized that the Chinese are a warm people, who enjoyed being around Americans, in part because it provides them with an opportunity to practice their English. Chinese business people are all educated and very smart. It was a pleasure working with them, and we have developed many friends who visit us when they pass through Chicago.

What did you do before you lived in China?  After graduating from the university, I worked in the Chicago area for 7 years in construction and design engineering. Later, I held manufacturing management positions such as V.P. Manufacturing and General Manager. I was employed in industries that produced air pollution control equipment, pumps, industrial testing equipment, laboratory testing equipment, etc.

What did you do during your stay there? I had three primary engagements. First, I managed a joint venture between an American ball valve manufacturer and a Chinese company. The assignment entailed overseeing the relationship between the two organizations as well as running the business. Second, for Sloan Valve Co., a global manufacturer and distributor of flush valves and faucets for high end commercial buildings, I developed a business plan that described a strategy to enter the Chinese market selling American products in the China market. The plan was funded, and I started up the operation in China, where I worked for 6 years. Third, I worked for Weber-Stephens, establishing a supply chain management company. The focus was on finding suppliers, qualifying suppliers, and monitoring their performance. I traveled to many places in China for all 3 companies, and gained an understanding of what products are made in various locations and the Chinese customs to do business.

Given ever increasing levels of inflation and local labor rates as well as the appreciation of the Renminbi, is China still an attractive country to outsource production to? If so, why?  $1.90 per hour is the highest Provence minimum wage (Guangdong Providence), which includes all of the employer costs to put an employee on board. However, the City of Shenzhen recently announced increases for the minimum wage effective starting Feb. 2012 = $2.17/hour including burden. Skilled Chinese workers can command more. Still, outsourcing work to China provides a manufacturer with significant labor savings, but you need to have the correct strategy for why you are doing business in China. Companies trying to penetrate the local market have the best opportunity. The Chinese like western products; they desire the things and life style we have. Look at Apple’s phones; they had a sale on their latest model and the demand was so great that they cancelled the sale, and shut shops down. Demand for these types of products is unbelievable. But outsourcing labor-intensive work to China—while developing channels to enter the local Chinese market—is not an easy thing to do. However, the return can be great. Finally, if you are only focused on reducing labor costs, then outsourcing work to places like Viet Nam may be a better option. However, this strategy involves chasing a few cents savings and moving to new factories or new vendors every few years.

What are the main challenges associated with running a business in China? That’s a big question. It depends on whether you are just sourcing components from China or making product for the local Chinese market.  If you are only manufacturing and exporting, then quality is especially important. Also, retaining good employees is always a challenge, especially given wage inflation. Pirating good employees is an issue. You need to have cultural sensitivity, understanding what people expect from an employer. Having a first-rate Human Resources policy and activity is important in order to retain good employees. Also, it is very difficult for small manufacturers. The Chinese think that bigger is better. They believe that it is better to work for a big company, which is especially an issue when dealing with the government. The bigger the company, the greater the likelihood that officials will work with you. If you are a small guy, it is difficult to attract their attention.

What are the main opportunities associated with running a business in China? For the years 2007, 2008, and 2009, the American Chamber of Commerce in Shanghai and Booz & Co. conducted a survey of about 1,000 manufacturers to understand why they came to China. The following is a list of the major reasons, ranked from most important to least important:

  1. 83%:  Access to the local Chinese market
  2. 66%:  Labor cost savings
  3. 51%:  Access to the broader Asian market—having a business in China provides you with
    the ability to export to other Asian countries without import duties
  4. 44%: Material savings
  5. 41%: Strategic move against key global competitors

In November 2011, you returned to China for a month. How have things changed since you were last there? Previously, China put a lot of effort in infrastructure projects, but at the time I left, there was a downturn in this activity. I was surprised to see a great amount of construction still going on. Housing prices are finally coming down, enabling the middle class to buy their own apartments.  Business in general is just booming; people are busy, hustling, you can just feel the energy in the streets. You don’t feel that here [in the U.S.] at all.  Nevertheless, the Chinese business people are concerned. Previously, the economy was growing at a 10 % clip, but it has slowed to 7% projected GDP growth in 2012. However, the government is committed and will make the 7% growth happen. Inflation has increased, and there is concern about an anticipated leadership change in the highest levels of government.

What does your firm do?

Ops-Asia helps businesses to be successful in Asia and/or the U.S. We focus on small to mid-sized companies that don’t have the resources to do this type of activity. The primary market segments served are industrial products, building materials, household appliances & automotive components. We assist firms in 4 areas: business development, operations competitiveness, project management, and supply chain management.♦

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James L. Waite is President of Ops-Asia, which has offices in Shanghai, China and Northbrook, IL

How Steve Jobs Rose to the Top

“The dwarf sees farther than the giant, when he has the giant’s shoulder to mount on.”
—Samuel Taylor Coleridge, in The Friend (1828)

Steve Jobs: He Stood on Others ShouldersEvery business executive and aspiring entrepreneur should read Steve Jobs, a biography by Walter Issacson. It provides a frank, unadulterated look at the career of the greatest business executive in our time. Consider this. Job’s founded Apple in 1976, which began as a 4-person operation in his father’s garage. By 2011, it became the world’s most valuable company by market capitalization. I agree with Isaacson’s contention that Jobs belongs right up there in the pantheon next to Ford and Edison.

There are many takeaways from this book. One of the “lessons learned” is that Jobs stood on the shoulders of others in order to achieve his phenomenal success. We all need mentors, and Steve Jobs needed them more than most. Given up for adoption by his biological parents, he spent much of his life looking for a father figure who he could emulate:

Personal Role Models

            • Paul R. Jobs, his adoptive father, who enjoyed refurbishing and selling used cars after work. Steve spent hours by his father’s side, “eager to hangout with his dad.” Job’s dad was the first person to provide him with exposure to electronics. And the rest is history.
            • Kobun Chino, a Soōtoō Zen master, who served as Steve Job’s spiritual guru. Job’s longtime teacher presided at Job’s wedding. For Jobs, Zen represented more than a philosophy of life; it also infused his thinking about design, which he felt ought to embrace beauty, minimalism and simplicity.

Business Role Models

            • Arthur Rock, a venture capitalist and early Apple Board member, took Jobs under his wing. However, the relationship was about more than just business. “Arthur had been like a father to me,” said Jobs. Rock and his wife Toni hosted Jobs in Aspen and San Francisco. He also taught Jobs about opera.
            • Mike Markkula, Jr., an angel investor and Board member of Apple, was the third employee of the company. Like Rock, he also became a father figure to Jobs. Markkula taught Jobs how to market, sell and package a product. Markkula oversaw Jobs growth and maturation. He served as Apple’s CEO from 1981 to 1983.

Ironically, Rock and Markkula eventually distanced themselves from Jobs. Here is the story. In 1983, Jobs recruited and hired John Sculley, President of PersiCo, to become Apple’s CEO. Two years later, Jobs had second thoughts. He and Sculley had a showdown before Apple’s Board of Directors. Both Rock and Markkula sided with Sculley. Years later, in recounting this event, Jobs broke down in tears. He felt betrayed by his business father-figures, much in the same way that he felt abandoned at birth by his biological father.

We all need shoulders to stand on, particularly during the formative phases of our careers. The poet John Donne said it best: “No man is an island.”

At the age of 16, I was inspired by Dr. Winters, a visiting minister who had a daytime job as a consultant to G.M. He was an outstanding speaker, and imparted numerous, fundamental life-lessons. He piqued my curiosity about business. Many years later, I worked with an external company consultant, A.K. His ideas brought about significant changes within the organization where I was employed. From him, I learned about the power of ideas, and how to present them well. As a result, my career direction changed from management to consulting.

What are your passions? Do you have a coach/mentor/boss/friend who you can learn from? Whose shoulders are you standing on in order to achieve the goals that you seek?

Why Training for Work is Urgently Needed

There are not enough jobs for college graduates whose degrees are in non-STEM areas. STEM stands for skills in science, technology, engineering and mathematics. I know, because as a university professor and parent, I have learned about the predicaments of many young graduates. The plight of Tom K. is a case in point. He graduated from Dartmouth with a degree in history, but the only decent-paying job that he could find was one in construction. Last year’s valedictorian from one of the top 25 law schools is still looking for work, according to a lawyer friend.

These anecdotal stories are buttressed by a report from Georgetown University, Center on Education and the Workforce. The authors project that by 2018, only 23% of jobs will require a bachelor’s degree, and 10% will require a graduate degree. Put differently, 67% of jobs in 2018 will not require a college or graduate degree.

Training for Work

Vocational and Technical School IT Training Class

In short, we are producing far too many college graduates who are finding that the job market has little use for them. To add insult to injury, the typical college graduate is saddled with an average of $25,250 in student loans, a yoke that is heavy to bear. The combination of debt and dim job prospects have together provided the kindling that has ignited the “Occupy Wall Street Movement.”

Our current predicament is addressed in the report “Blueprint for Jobs in the 21st Century,” which was compiled by the Human Resource (HR) policy Association. The HR executives indicated that many good paying jobs are going unfilled, because our educational institutions and government training programs are producing workers who lacked the necessary, technical skills. In addition, the authors of the report indicate that we are gutting our high school vocational training programs, thereby exacerbating the problem.

For example, the New York Times reported that President Obama is prioritizing increasing academic standards and college graduation rates while reducing federal expenditures for vocational training in public high schools and community colleges. The objective to produce a higher percentage of college graduates is reminiscent of our previous public policy to increase the percentage of Americans who own homes. Is the administration unknowingly creating another bubble? Call it the bachelor degree bubble (too many B.A.s and not enough jobs) as opposed to the housing bubble (too many houses, and not enough viable buyers)?

Recommended Course of Action

What opportunities are there for the 67% who need training for work?

First, we must realize that having a bachelor’s degree is not a guarantee to a job, as it once was. We must create a strong vocational option for high school students, so that they can go on to develop the skills that are needed by future employers.

According to HR professionals, certain jobs are going “begging.” During a December 12, 2011 speech before the Economic Club of Chicago, Rahm Emanuel, Chicago’s mayor, indicated that while the city struggles with a 10 percent unemployment rate, more than 100,000 jobs are available.

Skilled trades are always in constant demand. For example, AMR, an aircraft leasing company, indicated that it has 500 openings for aviation mechanics. Experienced mechanics can earn as much as $56,000 a year. Also, rewarding careers are available in occupations such as health care, information technology, etc.

But to develop the requisite skills in these fields, workers need education for jobs and/or apprenticeships. Earlier this week it was announced that the City Colleges of Chicago plans to provide vocational training to meet the needs of business in industries such as health care, and supply chain management.

Government, educational institutions and industry must work together to restructure the educational system. Only by doing so can young people acquire the requisite skills and training that employers seek. Developing these skills will enable youth to be able to earn a living wage, and achieve a productive career.

What is your view? Should we put resources into increasing the graduation rates for undergraduate degrees? Or should we put our resources into developing vocational and technical schools and/or career paths?

MF Global: Déjà Vu All Over Again?

MF Global may have disguised its debt levels to investors by temporarily reducing the amount of debt shown on its books at the end of the quarter before publically reporting its finances (source: WSJ).  Every quarter, for seven consecutive quarters in a row, the debt was always lower at the end of the quarter.  The debt levels at the end of the quarter were lower than the peak for each quarter by an average of 24%. Yet another shell game courtesy of Wall Street!

Although window dressing is legal, it is immoral, because it misleads investors who—based on publically reported information—believe that a firm is taking on less risk than what is really the case. Given MF Global’s bankruptcy earlier this week, investors must  feel that they there were deceived.

Moral Behavior Results in TrustI know the feeling.  I bought some Lehman Bros. convertibles in 2008, based on published financial information.  During that period of time, the company’s management team loaded up on a $85 billion portfolio of risky mortgage-backed securities. At the end of the quarter, the management team moved these securities off Lehman’s books, a practice that the New York Times described as a “shell game.”

It has been over three years since the Lehman Bros. bankruptcy, the largest  in U.S. history. The SEC is considering a rule that would require financial companies to disclose more information about their borrowings, but has not taken action.

George Santayana, a famous philosopher, once remarked: “Those who do not remember the past are condemned to repeat it.”

Is it not time that we pass regulations that eliminate the unethical practice of window dressing that destroys the credibility of our financial system?

Complacency Costs Honda and Toyota Market Share in U.S.

The Battle Between Asian Rivals

Honda and Toyota have fallen down in three areas: New Product Development, Total Quality Management, and Supply Chain Management. As a result, they have lost market share to their Korean competitors: Hyundai and Kia. Honda’s profits dropped by 56% for the quarter ended Sept. 30, according to an article in yesterday’s Wall Street Journal. Also, their U.S. market share has declined by 1% over the past year. Since 2008, Toyota has lost 4.5 percentage points in U.S. market share. In contrast, Hyundai’s (and Kia’s) U.S. market share has increased, from 1% in 1999 to approximately 9% in 2011.

Once, Honda and Toyota were both considered the gold standard in terms of automotive excellence. In the case of the latter company, U.S. executives traveled to Japan in order to understand the secrets of its highly touted, Toyota Production System. But no more.

In the following three sections, I will describe how Japan’s formidable competitors have lost ground to their Korean adversaries.

1. New Product Development

Since Apple ranked #1 in the Boston Consulting Group’s 2010 survey of the worlds most innovative companies, let’s examine Apple’s formula for success. A sleek look and feel—in addition to ease of use—is what distinguishes the company’s products. Steve Jobs indicated that beauty—not novelty—was the highest value. Design, as it were, is an intangible and emotional subject. So, let me share with you my personal experience relating to Honda’s automotive designs.

Our family currently owns two Honda’s: a 1999 Odyssey, and a 2007 Accord. In addition, my wife has owned several Toyotas. We are big Honda and Toyota fans. This fall we were in the market for a new car, so I test-drove Honda’s small SUV: the CRV.

A Boxy 2011 Honda CRV Small SUV

A Boxy 2011 Honda CRV Small SUV

It felt solid and sturdy, but the styling was boxy and dowdy. Immediately afterwards, I drove a Hyundai Tucson.

Not only was the styling beautiful, but also the interior of the Hyundai was contemporary and ergonomic. Although Honda is introducing a new 2012 version of the CRV in the near future, I wondered how could Honda’s management allow the company to become a design follower rather than the design leader?

A Sleek 2011 Hyundai Tuscon

A Sleek 2011Hyundai Tuscon Small SUV

 Incidentally, I test-drove a Kia (sister company to Hyundai) family SUV: the Sorento. In contrast to the Honda CRV, driving the Sorento was delightful. Several years ago, Kia hired Peter Schreyer, formerly Audi’s top design engineer. The Sorento’s Germanic solidness and craftsmanship showed during the test drive. The price was right as well. Ultimately, my positive emotional experience resulted in my buying a Sorento.

Another example of Honda design issues relates to last months introduction of the new, 2012 Honda Civic, which was widely panned in the press. Dan Neil, the Wall Street Journal’s auto writer, said it all: “The redesigned 2012 Honda Civic…is a dud. A Sham. A shud. Massive fail, LOL.” A salesperson at a local Honda dealer said this:  “I could not believe it. The 2012 Honda Civic lacked basic features such as Bluetooth.” As a result of the criticisms received, Honda is responding by rushing a mid-cycle, re-design of the Civic to the market.

In the past, Korean car designs were neutral. It was difficult to tell the difference between one model and the equivalent Japanese car. Now, Hyundai’s design prowess is leaving the two largest Japanese producers in the dust.

A 2012 Kia Sorento Family SUV

A 2012 Kia Sorento Family SUV

Superior design is one of the reasons why Hyundai and Kia have increased their  U.S. market share at the expense of their Japanese competitors. Honda needs to restructure its design group, beginning by bringing in a new design czar, who will oversee the creation of products that delight customers.

2.    Total Quality Management

Akio Toyoda, CEO and grandson of Toyota’s founder, has acknowledged that his firm chased market share over quality during the last decade. The result has been a car wreck: from 2008-2010 Toyota recalled over 10 million cars.  Although Toyota has taken measures to shore-up its quality shortcomings, quality is all-about perception. And the chickens are now coming home to roost: During the last three years, Toyota’s U.S. market share has declined from 16.5% to 12.5% (2011). 

In contrast, the Koreans’ quality has risen substantially. This year, Hyundai and Kia ousted mainstays Honda and Toyota to take the #1 spot in customer loyalty. The Sonata–Hyundai’s newly designed mid-sized sedan–won Road & Track magazine’s 2011 International Car of the Year award. In addition, Hyundai and Kia provide a standard 5 year/60,000 mile bumper-to-bumper warranty, whereas Toyota and Honda offer only  a 3 year/36,000 mile bumper to bumper warranty,  There is a new sheriff in town.

3.      Supply Chain Management

Toyota’s and Honda’s supply chain network needs to be re-evaluated and reengineered. There are two primary reasons for this.

First, the appreciation of the yen vis-à-vis the U.S. dollar has penalized production in Japan. Profitable automobile manufacturing there has become difficult at best, impossible at worst. There are several ways of dealing with the fluctuating exchange rates as well as with the appreciation of the yen:

a)    Develop robust forecasting models for predicting short term and long-term exchange
rates.

b)    Hedge currencies to neutralize the effect of fluctuations.

c)    Offshore assembly/production of automobiles to lower cost countries and/or to countries
where the currency is depreciating. For example, Kia now produces its Sorrento in Georgia, U.S.

d)    Outsource components to suppliers in lower cost countries.

e)    Create excess, flexible capacity so that production can be shifted in response to
intermediate term changes in foreign exchange rates.

Second, as advocated in a recent blog post, all automobile manufacturers must evaluate and re-think their supply chain networks to mitigate against the risk from natural disasters. Honda had 113 suppliers that were located in areas that were affected by Japan’s March, 2011 earthquake and tsunami. Shortly after the earthquake, the company was unable to establish contact with more than 40 of them. (Source: Autoweek). Currently, the introduction of the 2012 Honda CRV may be delayed due to the flooding of Honda’s auto plant in Thailand.

Although Just-in-time (JIT) inventory control—or lean operations—has been a dominant global operations strategy, some of its precepts need to be challenged. For example, some automotive companies have reduced the number of suppliers for critical components to a single-source. But when natural disasters cripple the component supplier, final assembly plants must curtail production; in some cases, they are forced to shutdown their operation.

This is exactly what happened during the Sept. 30 quarter. Due to supplier shortages of components and sub-assemblies, both Toyota and Honda had to curtail production. When shopping for cars this summer, a sales manager told me that a major Toyota dealer in the western suburbs of Chicago parked their cars diagonally, because they wanted to hide the fact that their inventory of new autos was less than 50% of what it should have been.

Unlike the Japanese, the Korean auto companies are less reliant on suppliers in Japan and Thailand. Thus, during the quarter ended Sept. 30, Hyundai and Kia did not experience component shortages due to the recent natural disasters.

In summary, there is a saying: “You cannot sell oranges from an empty cart.” If product is unavailable, regaining market share becomes impossible, and achieving acceptable levels of profitability amounts to a fiction.

Toyota and Honda can do a better job of evaluating—and modifying—their supplier networks in order to minimize risks. There are many risks that can affect the smooth functioning of a supply chain. The main threats that need to be dealt with immediately relate to natural disasters and currency fluctuations.

Conclusion

Honda and Toyota are both great companies. However, they have stumbled badly, and need to regain their footing. To right their teetering ships, they must radically reshape processes in three areas: New Product Development, Total Quality Management, and Supply Chain Management.

What other factors do you think account for Toyota’s and Honda’s misfortunes? What do they have to do to recover?

Autumn: Time for Reflection

When Debbie and I realized that the temperature would exceed 70° F, we took the afternoon off this past Tuesday.  It was a beautiful fall day. Living in the Chicagoland area, we were aware that this might be the last time for playing golf, while enjoying the warm weather.

We gathered our bags and drove 20 minutes to the Indian Boundary public golf course, which borders the Des Plaines River. It was a glorious day, and the trees displayed their magnificent colors. We walked, talked and took-in nature. How delightful!

In prehistoric times, southern Native Americans traveled on the Des Plaines River, and they met with northern tribes and traded with them for copper. At the 7th hole, I took a picture of a pond, which reflected back the clouds and the trees’ vibrant colors. I wondered:  7,000 years ago were the Indians as awestruck as I was by this scene?

Indian Boundary Golf Course Autumn Chicago

Later, other tribes, including the Potawatomis, traversed the trails and waterways in this area, where they engaged in hunting, trapping, trading and war parties. My father unearthed evidence of their presence. As a child, he found–within a mile’s distance from the river–Indian arrowheads in a field,

Indian Arrowheads from Oak Park Illinois

Arrowheads found near the Des Plaines River

As we drove home, Debbie and I both realized that this experience will soon become a fond—but distant—memory come January when the mercury drops and the cold northern winds blow through Chicago. This realization made us treasure the experience even more.

An ancient philosopher once said that the good life involves fulfilling ones spiritual, mental, social and physical needs. Connecting with nature and my life-partner on a glorious autumn afternoon is as good as it gets.

What do you do in the fall to renew your spirit?

 

Reducing Risk in The Automotive Supply Chain

tsunami disrupts automotive supply chainThe effects from last week’s earthquake and  tsunami and the ongoing nuclear crisis in Japan are beginning to disrupt global supply chains. Yesterday, it was reported that GM had to halt production of vehicles at several plants, due to parts shortages from Japanese suppliers. Toyota has suspended production of parts in the mother country that were intended to be shipped overseas. Finally, most Japanese automotive assembly plants remain closed (source: HIS Automotive)

The automotive supply chain is as complex as it gets. There are approximately 20,000 parts in a car, and if only one of those parts is unavailable, then the finished product cannot be shipped. At the top of the pyramid are Tier 1 suppliers that furnish major components, such as engines, that go into a vehicle platform. The Tier 2 suppliers furnish the parts that the Tier 1 suppliers require, such as the piston rod assembly that is part of the engine. As shown in the following schematic, there are typically 3-5 levels in the automotive supply chain, which is comprised by 1,000s of suppliers:

Supply Chain Management Structure for the Automotive Industry

THE AUTOMOTIVE SUPPLY CHAIN

Japanese companies produce many of the components that all OEMs require. For example, the transmissions for the new Chevrolet Volt plug-in-hybrid are sourced from the Land of the Rising Sun. In addition, Japan is a major source of electronic components, furnishing many of the over 30 microprocessors that are found in a typical car. The art and science of managing such a complex global network, spread out over dozens of countries, is challenging even under the best of circumstances. But the Tsunami’s external shocks to the global supply chain are testing the mettle of even the strongest producers. For example, supply chain management at Honda is being stress tested, given that at least 113 of its suppliers are located in the affected areas. As of Tuesday, it had been unable to establish contact with more than 40 of them (Source: Automotive News).

Furthermore, many Japanese components are transported by container ships, which take 30 days to reach U.S. and European docks. So, it is likely that many problems will show up a month in the future when automakers run into parts bottlenecks.

But more than meets the eye is at work here. As reported in Industry Week magazine, the dominant operations strategy of US manufacturers has been Just-in-time (JIT) inventory control or lean operations.  Although producers have benefited greatly from these approaches, this latest disaster sheds light on JIT’s inherent risks.

For example, well-functioning JIT systems operate with less inventory, because inventory—in excess of what is needed—is wasteful. Another implication of JIT is reducing the number of suppliers for each component, which results in significant economies of scale. Some firms have reduced the number of suppliers to sole-sources of components. For instance, Somic, a Japanese firm, made all of Toyota’s steering linkages.

But when a critical supplier is unable to produce material, the entire system breaks down.  For example, several years ago a fire broke out in Aisin Seiki, a supplier that produced more than 99% of Toyota’s brake valves. Most of the 506 machines used to produce the valve were inoperable. Toyota maintained only a 4-hour supply of the valve, so,  the world’s #1 car maker’s production lines quickly shut down. This resulted in Toyota losing production of 70,000 cars. But Saturday after the fire, Toyota and Asin officials summoned many of Toyota’s other suppliers, gave them blue prints, and assigned them the task of making the critical valves. Toyota was able to survive.

But the current calamity has affected not just one sole-supplier of a relatively mundane component designed for a single automotive OEM. Rather, the fate of dozens of factories in northern Japan is unknown. And these firms furnish 100s of different components for many OEMS. In effect, the scale of this current disaster is far more massive than what Toyota encountered with its brake valve.

Clearly, automotive OEMs must rethink risk mitigation strategies to deal with large scale disruptions of their supply chains. There are number of avenues open to them, including:

  1. Challenging suppliers to develop disaster plans so that they can make provisions to move to alternate sites for production, in the event that  they are unable to produce product at their main plant.
  2. Eliminating sole-source suppliers, and developing the capabilities of additional companies. Having one supplier is probably too few, but having five suppliers is too many in terms of achieving economies of scale. One strategy would be to give 80% of the work to the primary supplier, and 20% to a secondary vendor that is located in another country. Part of contingency planning should include provisions for ramping up production of the second supplier, in the event of a calamity.
  3. Analyzing where suppliers are located, and limiting the number of critical component suppliers that are geographically situated in a risky area. For example, an analysis of Volvo’s supply chain indicated “10% of their parts came from 33 Japanese suppliers, 7 of which were located in the catastrophe area,” according to the New York Times.
  4. Review insurance policies and consider taking-out contingent business interruption insurance that protects against losses relating to the inability of suppliers to deliver. Although some of the OEM’s had this coverage, the WSJ suggested that there were so many limitations and exclusions attached to their policies that claims will probably be insignificant.

In light of Japan’s deepening nuclear crisis, it is time that global manufacturers reassess the design of their networks to mitigate against risks associated with large scale disasters.  Those suppliers that do reassess their supply chains, can only benefit by reducing their exposure to the next calamity that will surely occur.

What other actions could be taken to reduce risks in the operation of a global supply network?

The Creative Mind of Steve Jobs

When a creative individual masters one field, and then uses what they know to think about another, often truly original ideas–or mind-bending products–are the result. The story of Steve Jobs is a case in point.

A Woman Reading an ebook on an Ipad 2

A Woman Reading an ebook on an Ipad 2

The Apple CEO dropped out of Reed College, but he hung around campus for 6 months, often sleeping on the floors in dorms where his friends lived. Jobs used the time to attend classes that interested him.  During one term, he took a calligraphy seminar, a subject wherein Reed College excelled.

Years later, when Jobs oversaw the design of the first iMac computer, he commented that all of the calligraphy instruction came back to him, so much so that he incorporated it into the iMac’s software. The end result was the development of the first computer to contain a variety of typefaces and proportionately spaced fonts, a hallmark of the Apple brand. Because Windows PC manufacturers’ copied many of Apple’s designs, had Jobs not dropped in on that class, none of today’s computers would have all of the exciting multiple typefaces.

Job’s innovativeness is shown in the progression of breakthrough Apple products: iMac, iPod, iTunes, iPhone, and now, the iPad. The original iPad came to US stores on April 3, 2010. In less than a year, it has reached $1 billion in revenue, an achievement that few products have ever attained.

Not content with resting on his laurels, Job’s spearheaded the re-design of the iPad. The new version, known as the iPad 2, is being released in stores today. As described in the New York Times, the salient design improvements include more thinness, less weight, more integration, greater beauty—and over 65,000 apps.

In conclusion, technological companies like Apple do require engineers who are experts in science and math. But creativity in product innovation is not based on science and math alone. As described in the book The World is Flat, creativity is about making connections between history, art, politics and science.

Are you a creative manager, designer or executive? How do you connect the dots?

 

Steve Jobs Launches the iPad 2

Apple, iPad, Steve JobsAccording to Bloomberg Business Week, Apple CEO Steve Jobs personally released the iPad 2 at a company event in San Francisco earlier today. This newly evolved Tablet PC is 33 percent thinner than its predecessor, has faster processing power as well as front and rear cameras. It begins shipping in the US on March 11 and internationally on March 25, at the same $499 starting price as the original model.

According to a recent survey by the Boston Consulting Group, Apple is the #1 company in the world for product innovation. And most of the Apple’s product ideas are the brainchild of Jobs. Rather than relying on market surveys that attempt to measure consumer preferences, Apple’s founder has the uncanny ability to understand what consumers’ want, even before they know what they want. He is a soothsayer of complex technological trends, and provides the overall direction for the development of new products and services.

The execution of the detailed nuts and bolts design is left to his chief design lieutenant, Jonathan Ive, a graduate of  Newcastle Polytechnic in England.  Although Jobs looks at the big picture, he is still a hands on executive who–when Apple opened their first retail store in Manhattan–had the marble drop shipped from the company’s Italian supplier directly to corporate headquarters in Cupertino, California, so that he could inspect the veining.

Design geniuses like Jobs come along once in a generation. As long as he is able to remain in charge of new product development, Apple should continue to remain at the top of the heap as far as product innovation is concerned. So it is not surprising that, soon after Jobs appeared today, Apple stock rose by as much as $4.63 a share.

How important is Jobs to Apple’s success in developing new products that delight consumers?