Perspectives on Various Issues of Interest

Innovation and supply chain management for uplifting underprivileged communities

Last month (July 2022) I spent time in an Indian village working with an organization that connects rural communities to solar, water, education, professions and advocacy to help communities and individuals take control of their lives and the well being of their communities. As part of its mission, Barefoot College International (BCI) aspires to increase economic mobility by making vocational and educational opportunities accessible to women and girls from the most marginalized communities around the world. The organization seeks to ensure that every woman and girl has the skills and knowledge she needs to be a catalyst for change to the benefit of herself, her family and her entire community. The organization is involved in four programs - Solar, Enriche, Water, Livelihoods.

The Solar program seeks to ensure that every woman and girl has the skills and knowledge she needs to be a catalyst for change to the benefit of herself, her family and her entire community. BCI achieves this by making vocational and educational opportunities accessible to women and girls from the most marginalized communities around the world. By training women to become Solar Engineers, even if they are illiterate or have no formal education, rural resilience is forged by each village at a time.

The Enriche program supports women’s aspiration to transform themselves and their communities. It provides them with the opportunity to embark on an empowerment journey; a journey to gain the confidence, skills and knowledge they need to reach their full potential as agents of sustainable change and to support their entrepreneurial aspirations.

As part of the Water program, the organization aims to harness every drop of fresh water that falls from the sky rather than relying on hand pumps, wells, and unpredictable groundwater levels. By combining traditional harvesting practices with new technologies, BCI make water accessible, clean and safe to drink for millions of people in need.

The Livelihoods program plans to address the challenges of climate change by envisioning soil-based livelihoods that generate resilience and dignified wages for small landholding farmers using Regenerative Agriculture, Permaculture Principles and Agroecology built systems to sustain life and care for land.

I primarily worked with the team that manages the supply chain for the Solar program. 

Notwithstanding the lack of formal education (in the case of many team members), I observed a strong desire to learn and improve operations and supply chain. I shared some thoughts on improving supply management, inventory management, and quality management practices with the team and also learnt from them.

My work with the organization gave me an opportunity to understand how best practices that are widely used in developed (and for-profit) contexts need to be tailored in light of the underlying contingencies.

I also learnt about the innovative ways in which educational programs are being developed for women.

Overall, an enlightening experience and I hope to continue my efforts to contribute to strengthening grassroots innovation, operations and supply chain management practices that are aimed at uplifting underprivileged communities.

Digital Transformation of Procurement Value Chain

Maturity spectrum to manage a pandemic event

Source: https://spendmatters.com/2020/04/06/coronavirus-response-supply-risk-mitigating-and-recovering-from-the-grey-swan-of-covid-19/

 

Thermal management technologies - Supply chain and operational issues

In this post, I cover supply chain and operational issues faced by a small and medium enterprise providing thermal management technology for consumer electronics, lithium batteries, and electric vehicles. I will also allude to actions that are being taken to address supply chain issues. I would be interested in hearing your thoughts on the outlook for small and medium enterprises operating in this space in light of prevailing operational and supply chain challenges.

The thermal management technologies market is evolving rapidly, especially in the case of consumer electronics and lithium batteries use. Increasing adoption of renewable energy resources is the major factor driving the thermal energy storage market with the rapid industrialization across the world has increased the need for continuous power supply, which positively leads to the growth of the overall thermal energy market during the forecast period. Developments in the electronics industry have culminated in a considerable surge in the power densities, which have led to the introduction of smaller, smarter products. These advancements in the industry have led to an increased need for innovative thermal management technologies as they improve the system performance and reliability by avoiding the heat generated by the devices. The electronic packaging trend has increased the performance and reduced the size of the product. This has led to a significant increase in the power consumption of the system. A report from Grand View Research said that the global thermal management technologies market size is expected to reach USD 20.14 billion by 2024, according to a new report by Grand View Research, Inc. The industry is primarily driven by the growth in the emerging trend of miniaturization of electronic devices and components.

The Grand View research report said: "Advanced technological research is expected to produce more efficient and cost-effective thermal management solutions in the future. The key industry participants are extensively focusing on the development of optimized thermal management solutions that are cost-effective and are applicable across a range of end-use applications. However, the industry is anticipated to witness various issues associated with modularity in designing and reliability of modeling, which are presumed to challenge the growth over the forecast period. Current cooling technologies, standard heat sinks, and fans are rapidly approaching their cooling capacity limit, and thermal management is becoming a critical step in enabling enhanced product functionality. The thermal management software is anticipated to exhibit a significant growth in the near future owing to the increasing adoption of the software heat removal techniques and simulations to reduce moments of peak heat impact and reduce the risk of failure."

Several companies compete in this sector including Arkema S.A., BorgWarner Inc., Continental AG, Dana Limited, Gentherm Incorporated, Grayson, Hanon Systems, Kendrion N.V., Lord Corporation, MAHLE GmbH, Marelli Corporation, Modine Manufacturing Company, NORMA Group, Orion BMS by Ewert Energy Systems, Inc., Polymer Science, Inc., Renesas Electronics Corporation, Robert Bosch GmbH, Samsung SDI Co. ltd., Tesla, Inc., Valeo S.A., VOSS Holding GmbH + Co. KG. and KULR. Given that many of the competitors are OEMs or diversified corporations, focusing on a small and medium enterprise offers some insights into key supply chain pain-points in this sector. I am focusing on the 2022 Q1 experiences of KULR Technology Group, Inc. (ticker symbol: KULR:US) to identify some of the supply chain and operational issues in this sector.

KULR Technology Group, Inc. (ticker symbol: KULR:US), through its subsidiary, KULR Technology Corporation, develops and commercializes thermal management technologies for batteries, electronics, and other components applications in the United States. It offers lithium-ion battery thermal runaway shields; fiber thermal interface materials; phase change material heatsinks; internal short circuit device; KULR battery cell screening and testing automation system and tech safe case; cellcheck; and CRUX cathodes. The company's technologies are used in electric vehicles, energy storage, battery recycling transportation, cloud computing, and 5G communication devices. It sells its products for applications, such as lithium-ion battery energy storage, electric vehicles, 5G communication, cloud computer infrastructure, consumer, and industrial devices. The company was formerly known as KT High-Tech Marketing Inc. and changed its name to KULR Technology Group, Inc. in August 2018. KULR Technology Group, Inc. was founded in 2013 and is based in San Diego, California.

In 2021 the company increased its revenue by 287% as compared to 2020, mainly reflecting expansion in the commercialization roadmap. Shareholder equity was increased to $16.4 million in the year ending December 31, 2021, from $6.1 million in the year ending December 31, 2020. Gross margins decreased to 54% in the year ending December 31, 2021, from 70% in the year ended December 31, 2020, primarily due to a change in product mix from higher margin products to lower margin services. Selling, General and Administrative (SG&A) Expenses in the fourth quarter of 2021 increased to $3.8 million from $768,000 in the corresponding period in 2020 due to the addition of management and operations team members, sales and marketing activities, and non-cash stock-based compensation paid to employees and consultants. R&D expenses in the fourth quarter of 2021 increased to $705,000 from $68,000 in the same period last year, reflecting a combination of new engineering hires, investments in manufacturing automation, new product developments, and research in high-areal capacity battery electrodes and solid-state electrolyte. Loss from operations was $4.0 million for the fourth quarter of 2021, compared to $677,000 from the same period in 2020. Higher SG&A costs offset higher sales while the gross margin decreased from 76% in the fourth quarter of 2020 to 70% in the comparable 2021 quarter, as a result of lower margins on some larger jobs. Net loss for 2021 increased to $11.9 million or a loss of $0.15 per share, compared to a net loss of $2.9 million, or a loss of $0.03 per share in 2020. The Company reported cash balances of $14.9 million as of December 31, 2021, compared to $8.9 million in the same period in 2020. 

In the first quarter of 2022, KULR's sales reduced by 52%, from $418,000 in 2021, to $200,000 this year. General and admin expenses increased to $3.5 million in the first quarter of 2022, from $1.5 million in the corresponding quarter last year. The increase of 136% was due to additional marketing and advertising expenses, consulting fees, and non-cash stock compensation pay for employees and consultants, and the expansion and kiting out of new office facilities. R&D expenses increased 486%, from $123,000 in the first quarter of 2021, to $721,000 in the first quarter of 2022. The loss from operations increased 141%, from $1.5 million for the first quarter of 2021, to $4.1 million for the first quarter of 2022. The increase in the operating loss included 0.9 million increase in non-cash stock-based compensation expense, and increases in payroll, advertising, and marketing expenses, as well as professional fees and research and development projects. The company's net loss increased by 141%, from $1.7 million in the first quarter of 2021, to 4.2 million in the first quarter this year. The net loss per share for the first quarter of 2022 was four cents, compared to two cents for the comparable period last year. As of March 31st, 2021, the company reported cash balances of $10.1 million, compared to $6.2 million on March 31st, 2022. The company raised over $7 million from the issuance of warrants and promissory notes and have established a $15 million standby equity purchase agreement. 

Over the course of past five years, the company's sales, cost of goods sold and profit margins saw major increases in 2018, followed by two years of decline (2019 and 2020) and then an increase in 2022. Except for 2019, the sales, general and administrative expenses have increased as would be expected for a growing company in a growing sector. Similar trend can be observed in R&D expenses to keep up with new innovations and product development.

The company's earnings before interest, taxes, depreciation and amortization are negative.

Supply chain disruptions and action plan

Based on the information available for 2022 Q1 earnings call, the following supplier chain issues and remedial actions were highlighted.

• supply chain disruptions resulted in over $325,000 worth of inventory that couldn't be shipped due to the COVID lockdown
• COVID lockdown that occurred in Shanghai, China at the end of March, left KULR production on the dock with no option to ship.

To respond to these issues primary following initiatives were taken:

• secured $55 million in additional capital to drive two key initiatives
  • securing battery cell supplies of over 500 megawatt hours in energy capacity from tier one battery manufacturers, who are securing the inventory in anticipation of fast-growing demand from key end markets in energy storage and e-mobility.
  • control supply chain and manufacturing costs and reduce disruptions risk by bringing much of the supply chain and production capabilities to North America
• maintain its margins through improvements in logistic flexibility and response times that can offset potential increase in labor costs.
• create a buffer stock of materials, which the company is in negotiations to have its customers take immediately as a hedge against future potential lockdowns
• continue investment in new and automated test and production equipment first implemented in the Q4 of 2021.
• onboarding new tier one battery manufacturers to obtain battery cell supplies of over 500 megawatt hours in energy capacity.
• multisourcing
• geographical diversification of suppliers
• onshoring production in North America
• creating a buffer stock of materials
• developing modular platforms for new product development
• expand operations and support new business

Information on accounts receivables indicate a growth in the past two years. Finished goods inventories and investments in plant, property and equipment have been growing

Past five year balance-sheet:

The accounts payables saw a decline in 2020 but then increased in 2021, reflecting expanding operations.

For the fiscal year ending 2021, the return on assets were -50.60% and return on equity was -105.95%. Total debt to equity ratio was 5.04, current ratio was 6.41 and book value per share was 0.16.

Below, I present the summary of stock market performance:

 

Strengthening the Personal Protective Equipment Supply Chain

The vulnerabilities of global supply chains were exposed by the COVID-19 pandemic. In this post I first consider the geopolitical landscape and disruptions in PPE supplies by reflecting on the conditions before the pandemic until the time when countries started to take steps toward managing the crisis. Next, I discuss prevailing contextual conditions, future demand and supply trends, and directions for risk management through government interventions, public-private partnerships and organizational best practices.

It is instructive to start from pre-COVID time to understand the distribution of various PPE products and global demand. Before COVID-19, the global PPE market was worth roughly $60 billion. PPE products are destined for numerous different economic sectors such as healthcare, mining and construction. According to an April 2020 analysis by the Asian Development Bank, the healthcare sector PPE market alone was estimated at $2.5 billion in 2018 as shown below where the revenue is in $ millions.

As for 2020, the United States (US) was a major manufacturer, accounting for 20 % of the global production of every category apart from gloves.

Source: Mordor Intelligence (updated in November 2020 ), Statista research department, COVID-19 PPE demand and supply perspectives, Industry experts interviews (November 2020)

Despite being a major PPE producer, the US relied heavily on imports to meet local demand.

Source: ITC Trade Map

The global trade network in 2018 shows high geographic and regional concentration in the PPE supply chain. There are three regional clusters: Asia, Europe, and the US. Among countries making these products, China (PRC) clearly plays a central role in the trade network (except for gloves where countries such as Malaysia, Thailand, Indonesia are dominant due to abundance of rubber).

Source: ADB calculations using data from United Nations. Commodity Trade Database.

In fact, PPE concentration in Asia has intensified in the past decade or so.

Source: Asian Development Bank (2020)

To counter the supply shortage of PPE during pandemic, several nations had instituted export restrictions. The efficacy of these measures could be debated since they also could have resulted in less optimal investments in new capacity (since manufacturers would take the restricted market into consideration when taking capacity decisions), high burden on public finances (since governments had to provide greater fiscal inducement to encourage domestic manufacturers to increase capacity aimed at the restricted market), and loss of cooperation as well as potential retaliation by nations.

Source: International Trade Center website (in November 2020)

Source: Global trade alert                                                                                   Source: : Committee for the Coordination of Statistical Activities (2020)

Considering product shipments from China to US, once China was able to control its own pandemic, supply chains for garments, visors, thermometers, gloves, simple masks and N-95 masks linking China to the US adapted very well. The need for gloves in the US market was served by other countries such as Malaysia, Thailand, and Indonesia, since the plastic gloves from China are relatively less in demand in the US. Technological sophistication of ventilators made in China also were not compatible with the US needs, which reduced the adaptive ability of this supply chain.

Source: Dallas, M. P., Horner, R., & Li, L. (2021). The mutual constraints of states and global value chains during COVID-19:The case of personal protective equipment. World Development, 139, 105324.

There was indeed a component of luck in that the pandemic in China had eased as it spread to the west. Future pandemics may not reflect such a temporal dynamic. Additionally, the phenomenal increase in the exports of simple masks and N-95 masks could have been a result of mislabeling and customhouse chaos during the pandemic.

The PPE supply chain is faced with several bottlenecks as shown in the following illustrative example.

Medical supplies were delayed due to shipping challenges. Demand for shipping and transportation services had increased significantly, but the labor available to provide these services had reduced. The backlogs and congestion produced significantly delays, uncertainty and cost increases.

To respond to the crisis, several countries boosted their domestic production base. In the US, the Defense Production Act was activated to mobilize domestic industrial base. The EU accelerated joint procurement procedure with 26 member states to ensure supply of medical equipment across Europe. Structural funds were directed to the supply of medical equipment. In India, financial incentives were provided for the production of critical supplies. Digital platform was developed to identify and fill the shortage of critical supplies. Japan provided subsidies for the production of face masks. State-owned firms in China were repurposed to supply medical materials. Loans and subsidies were provided to firms producing critical supplies.

In a survey, over half of respondents expected a significant or somewhat decreased presence of supply chain components in China, while 75 percent expected a significant or moderate increase in the United States. Similar expectations emerged for the European Union, the UK, Canada, Australia, and New Zealand, for which half of respondents expect an increase in components.

Source: Atlantic Council

44 percent and 53 percent of respondents cited inadequate planning for both near and long-term disruptions as the top vulnerability in their supply chains, respectively. In addition, over 40 percent of respondents listed geographic or regional concentrations as well as bottlenecks and single point dependencies as core vulnerabilities.

Source: Atlantic Council

Over 60 percent of respondents foresee more prioritization of contingency planning and crisis modelling in response to the pandemic’s disruptions. In addition to planning, they ranked location diversification of their supply chains as a top priority, followed by relocating them within the borders of the primary country of operation.

This focus on re- or onshoring due to the growing concern about foreign dependencies and increasing demand for self-sufficiency resulted in several new manufacturing sites being established for the production of PPE products.

Source: Health Industry Distributors Association

Going forward, PPE spending is forecasted to nearly triple by 2027. Demand for N95 respirators will continue to grow more than 5% per year through 2024. Increased demand and limited manufacturing capacity combined to create a predicted 37% shortfall in nitrile gloves in 2021. Raw material shortage used in making isolation gowns will continue to impact prices.

 

The US PPE market is expected to group 12.5% a year through 2024, with 80% of sales in four highly fragmented product segments.

 

Increased focus on workplace safety, product usage to encourage end-user adoption, growth in industries that are heavy PPE users, and shift to online sales will act as tailwind in this market. On the other hand, competition from private labels and low-cost producers as well as uncertain raw material availability will act as headwinds. Some of the price-sensitive segments will witness disruptions while others will need to differentiate in this market.

Government can play an important in strengthening the PPE supply chain by means of reforms to domestic and international trade rules and agreements. It can take necessary diplomatic, economic, security, trade policy, informational, and other actions. Frequent supply chain review and reforms to make supply chain analyses and actions more effective could help. Government can also help in fostering innovation, developing world-class American manufacturing base and ensuring adequate stockpiles in the future.

Public-private partnership can help with coordinating various aspects within the PPE supply chain. These include establishing policies, incentives, and focused federal procurement guidelines; guiding input, development timelines, and product portfolios; initiating combined exercises and planning efforts; incentivizing emergency essential businesses’ use of federal purchasing vehicles; and enabling vertical and lateral supply chain distribution activities. The partnership can help with managing pricing by assessing and maximizing the value and efficacy of federal investments in latent manufacturing capacity. Increased supply chain visibility and data sharing as well as cost-efficient maintenance of inventories could be part of public-private initiatives. Finally, these partnerships can help maintain a specified level of pandemic preparedness and formalize pandemic preparedness as a condition for participation in federal programs.

Organizations need to recognize that supply chain disruptions are becoming more frequent and severe.

Source: McKinsey Global Institute, 2020

Supply chain pressure is only increasing in recent times as reflected below:

Source: Michigan State University's Supply Chain Pressure Index 

Source: New York Fed's Global Supply Chain Pressure Index

Supply-chain leaders believe that the issues by the pandemic will transform supply chains. 73% of respondents in a McKinsey survey indicated that they encountered problems in supplier footprint, 75% faced issues in production and distribution footprints, 85% struggled with insufficient digital technologies, and 48% experienced delays in planning decisions.

Organizations need to understand the bottlenecks along the PPE value chain due to increasing manufacturing capacity. For respirators, supply pressure arises mainly from shortages of melt-blown non woven, a critical ingredient. Supply pressure in for medical masks also arises mainly from shortages of melt-blown non-woven. And for gloves, supply pressure is driven both by nitrile shortages and limited specialist manufacturing capacity

 

Source: COVID-19 PPE demand and supply perspectives, Industry experts interviews (November 2020)

Consumers and non-healthcare workers will drive surgical mask demand in 2021 before dropping by ~ 40 % p.a. in 2021-25. A significant shift in the weight of global PPE demand will move towards Asia.

Source: Source: Mordor Intelligence (updated in November 2020 ), EPI model, WHO assumptions

According to a McKinsey surveys of global Supply Chain leaders, 93% expect to increase resilience across the supply chain, 90% plan to increase digital supply chain talent across supply chains, and 54% expect changes in supply chain planning after COVID-19. As for measures for resilience, 53% plan to consider dual sourcing, 47% plan to increase inventory of critical supplies, 40% are considering near-shoring and increasing their supply base, and 38% plan to regionalize their supply chains. To improve digital supply chain talent, 70% are planning to resell their supply chain labor force and 55% are considering acquiring new talent from the labor market. For supply chain planning 60% are considering implementing advanced analytics, 58% will consider centralizing supply chain planning, and 50% are going to retail faster sales and operations planning cycle. 11% of the respondents indicated facing budget challenges associated with transforming their supply chains.

Given the importance of resilience among supply chain leaders it is important to consider both resistance and recovery capabilities. Resistance capabilities help avoid and contain disruptions. Recovery capabilities enable stabilization and return to normalcy. Companies need to consider not only risk factors (impact and probability of disruptions), but also uncertainties (known, unknowns and unknown, unknowns) associated with disruptions.

Investment strategies need to be considered to manage disruptions effectively. These investments strategies can be categorized as those related to discovery, information, supply chain design, buffers, operating flexibility, security, and preparedness. Discovery related investment strategies would require investing in the ability to identify potential problems in the supply chain as close to the event occurrence as possible. The types of investments include information technology/information sharing, early warning by supply chain partners, forecasting, demand sensing, monitoring of performance in the supply chain. Investment strategies in information call for improving the quantity, speed, and quality of information flow within the supply chain. These could be facilitated by improved information technology, effective communication, and visibility. Supply chain design investment strategies involve designing and implementing supply chains that can be configured and reconfigured quickly in response to changes within the supply chain. Supply base management and supply base reconfiguration can help in this regard. For buffer related investment strategies organizations need to create excess cushions in the form of inventory, capacity and lead times by considering human resource capacity, human resource capabilities/experience, inventory, operating flexibility, and redundancy. With investments in operating flexibility organizations can create a system that can change either the flow or product specifications in response to supply chain problems. Alternatives for transportation and variable bills of material are examples of such investments. Investment in security can help protect the system from supply chain shocks by creating firewalls, quarantine protocols, and development of strengthened supply chains. Finally, preparedness related investment strategies require designing contingency plans for dealing with potential supply chain shocks and carrying out drills using these plans so that various groups would know what they must do and what their specific responsibilities are. This can be facilitated by investing in planning for contingencies, training/rehearsing, risk assessment and insurance.

Different investment strategies contribute towards different stages of resilience. Avoidance stage is best handled by investment strategies in discovery, information, security and preparedness. Containment can be managed by investments in supply chain design, buffers, operating flexibility, security, and preparedness. Investments in supply chain design, buffers, operating flexibility, and preparedness can also help with stabilization. Finally, the return stage is best managed by investments in operating flexibility and preparedness.

Organizations need to realize that there are several modes of reshoring as shown below. Firms can relocate manufacturing activities performed by wholly-owned offshore facilities to wholly-owned onshore facilities (in-house restoring); can relocate manufacturing activities performed by wholly-owned offshore facilities back to onshore suppliers (restoring for outsourcing); can relocate manufacturing activities performed by offshore suppliers to wholly-owned onshore facilities (reshoring for in-sourcing); and can relocate manufacturing activities performed by offshore suppliers back to onshore suppliers (outsourced reshoring). 

Source: Gray et al. (2013)

To be successful, new entrants will need to achieve scale and secure raw materials and specialist machinery. The will also need to acquire technical expertise and quickly build brand strength.

Source: COVID-19 PPE demand and supply perspectives, Industry experts interviews (Nov. 2020)

Organizations need to consider a range of supply (shift away from sole-source contracts), data aggregation and predictive modeling capabilities, understand the price-points for competitiveness, manage quality of products, have built-in redundancies, invest in innovation & reusables, create transparency in their supply chains, and foster talent. 

Russia-Ukraine Crisis and the Automotive Wiring Harness Supply Chain

Modern vehicle is much more of a digital device than a mechanical one. Whether it is engine control systems, driver assistance systems or media centers, electronic technology is omnipresent. The advancement towards the "connected car" and autonomous driving is only accelerating this trend. In this increasing presence of electronic systems in a car, the wire harness is one of the key backbone that integrates various digital components, links digital components with  mechanical and structural components, and ensures that the onboard electronic systems get the required power supply. It is also critical for enhancing efficiency and ensuring vehicle safety.

In a typical car, the cables forming the wiring harness stretch more than 3 miles in length and Ukraine is a key supplier in the supply chain for this essential backbone. Leoni AG, a global supplier of wiring harness, has sites covering more than 65,000 miles in the Lviv region in Ukraine. The company employs more than 7,000 people in Ukraine and the cable assemblies made in Ukraine are supplied to LEONI plants in Poland, Slovakia, Hungary, Czech Republic, Germany, Spain, Portugal, Italy, Belgium, the UK, the USA and Austria. These plants in turn supply the wiring harnesses to car manufacturers such as Opel, Porsche, Volkswagen, Audi and Lamborghini. 

Fujikuru, a Japanese company that make wiring harness, also has sites in Ukraine and supplies cables to car manufacturers such as Volkswagen, Porsche, Audi, and the Czech Republic’s Skoda. Sumitomo Electric Bordnetze with 60:40 split in terms of shareholding between Sumitomo Electric Industries and Sumitomo Wiring Systems has facility in Ternopil, Ukraine. Nexans, headquartered in France, is another such company with sites in Ukraine. Along with these companies other suppliers such as Germany's Forschner, Kromberg & Schubert, Prettl, SEBN and Japan's Yazaki have built up wire harness production sector in Ukraine. In fact, Ukraine supplies nearly 7% of all imports of wire harnesses in the European Union. These wire harness manufacturing sites are among about 22 automotive companies that have invested more than $600 million in 38 plants and employing over 60,000 Ukrainians.

The western part of Ukraine bordering Poland was a relatively safe haven in the conflict until now. However, today's missile strike in the Lviv region has upended the situation. This morning (18th March) several missiles had struck an aircraft repair plant at the airport complex in Lviv, destroying the buildings. 

While several manufacturers preempted the situation due to rising hostilities and had moved high volume production of parts for vehicles out of the Ukrainian plants to other locations, it wasn't an easy transition. The factory space, machinery, tooling, workers and financing requirements are going to add a fair amount of lead time to be up and running. Automakers will have to find short and medium term solutions. As of this writing, the Volkswagen Group was trying to boost production of wire harnesses in neighboring locations in Europe and North Africa such as Romania, Hungary, Tunisia and Morocco, but also in farther locations such as Mexico and China.

Data: CRU

S&P Global Mobility downgraded its 2022 and 2023 global light vehicle production forecast to to 81.6 million for 2022 and 88.5 million units for 2023. These figures are 2.6 million units lower for both years than previous year. The European forecasts are expected to be 1.7 million units lower with almost 50% of the figure resulting due to part shortages of chips and wire harnesses. The remaining 50% would be due to reduced demand from Russia and Ukraine. European automakers such as Volkswagen, Porsche, BMW, Audi, Mercedes-Benz have suspended production at some of their plants. Since Ukrainian wire harnesses constitute almost 45% of imports in German and Poland, German automakers are particularly going to be affected due to this crisis and the profit margins are going to witness a squeeze. 

This is a reversal of the trend that we were seeing in January and February. According to LMC Automotive, the selling rate in Germany had improved slightly in February to 2.7 mn units/year from 2.6 mn units/year previously. Similar trends were visible in other European markets. However, although LMC anticipates the 2022 annualized selling rate to improve over the course of 2022, it will grow at a slower rate than forecasted last month due to the current conflict. This is due to supply disruption, inflationary pressure and lowering of consumer confidence. 

Source: LMC Automotive 

US auto industry will also not be immune to this supply disruption. According to S&P Global Mobility North America light-duty vehicle production will be reduced by 480,000 units in 2022 and by 549,000 units in 2023. According to the company there will be a shortage of nearly 25 million units of global light-duty vehicle production from its forecast between now and 2030.

Russia-Ukraine crisis and the resulting supply chain disruption - a reflection

Russia's invasion of Ukraine that began a week ago (on 24th February 2022) is setting in motion a set of dire conditions that supply chains are going to face in coming weeks and months. In this post, I reflect on the effect of the crisis on oil prices, energy prices, supplies for product manufacturing, service supplies, food supplies, and metals. 

The Brent Crude Oil Continuous Contract Price opened today at $107.34 and is ranging between $106.83-$113.94 at the time of this writing.

This crisis has taken the oil price above $104 for the first time since 2014. As the third-largest oil producer and second-largest oil exporter, Russia exerts power in the oil supply equation. Low levels of inventories, spare capacities, and stockpiling activities are putting upward pressure on the oil price. Addressing this would require sale from alternative sources such as the U.S. Shale, OPEC or Iran.

In addition to transportation costs due to increasing oil prices, transportation is also being affected due to the effect of the crisis on the estimated times of arrivals and pricing. Trade lines from China to North America are exploring various options to manage this crisis. The quantities transported from China to the EU increased in the first half of last year (at 336,500 TEUs, it was more than 44% higher as compared to 2020 and 99% higher than 2019) and this trend was continuing this year. However, these shipments that were transported by rail will now need to use alternative modes (ocean or even more expensive air). 

This can cause ocean freight rates to go up by two to three times (from $10,000 per container to more $30,000 per container) and the air freight spot rates and lead times to go up three to four times.

With Russia providing about 35% of the supplies of Europe, energy prices have started to witness an upward tick. Russia has already reduced the supply of natural gas and is potentially going to further reduce the exports as a retaliation to sanctions. Compounding this situation is the fact the almost 10% of the liquefied natural gas flows through pipelines from Ukraine to the European Union; these assets are at risk of being damaged due to the invasion. These rising energy prices will increase the operating costs of various entities in the supply chain, including manufacturing firms, distributors and retailers. Without alternative sources of supplies from places such as U.S. and Qatar, the costs of operations can become very high. The situation is also going to test Russia's ability to withstand the financial impact of reduced supplies to Europe.

There is also an expected impact on supply shortage since a large set of organizations (more than 2000 US firms and more than 1000 European firms) receive their supplies from first-tier suppliers that are located in Russia. Additionally, several companies (more than 450 US firms and more than 200 European firms) also have their first-tier suppliers operating out of Ukraine. Companies located in Russia and Ukraine are also prominently suppliers of services, including software and IT services (13%), consumer services (7%), and trading and distribution services (6%). On the product side, 4% of industrial machinery as well supplies such as oil, gas, steel and metal products are supplied from these two countries. Overall, as compared to other countries such as China, the overall trade impact due to tier-1 supplier disruptions may not be very high, but when tier-2 and tier-3 suppliers are added to the mix, the impact can be substantial since close to 200,000 firms in the US and more than 100,000 firms in Europe have upstream suppliers (tier-3) from these two countries.

Russia is the top wheat exporter, Ukraine is the top exported of rye, barley and is the third largest exported of corn. Given these trade situations, food supplies are expected to get disrupted in coming days.

On the metal commodity front, markets for copper, nickel, platinum and aluminum are expected to be squeezed due to the conflict.

Overall, the supply chain disruption caused by this crisis is just unraveling and will manifest fully in coming weeks and months. Organizations should take necessary steps to reduce the potential impact that the conflict might have on their businesses by proactively taking steps for continuity planning.

 

Quality penalties and continuity of health care

In a study my co-authors and I examine whether quality penalties aimed at reducing readmissions improve continuity of health care. We investigate if the quality penalty policy impacts continuity of care for services that were targeted by the policy through what we refer to as primary spillover effects. We also investigate the secondary spillover effects of the quality penalty policy on continuity of care for related ailments that were not targeted by the policy. The findings of this study show that externalities from quality penalties for readmission not only benefit continuity of care for the regulated ailments, but also allow health care organizations to adapt their existing routines and unlock continuity of care improvements for related, but non-targeted ailments. The finding that continuity of care does not diminish for unrelated services assuages concerns that hospitals respond strategically by neglecting or redirecting resources away from unrelated services. We provide novel insights as to how organizations respond to regulation by actively re-configuring their care patterns and coordinating service provision with attendant spillover effects on a variety of patients. Processual mechanisms such as the source of patient admissions and length of stay, and structural mechanisms such as system size and investments in continuity of care facilitate the spillover effects. 

Source: Ananthakrishnan, R., Deore, A., Nair, A. Virtuous Spillover Effects of Quality Penalties on the Continuity of Health Care. Working paper.

 

Supply chain integration for improving performance of not-for-profit organizations

Food banks are not-for-profit organizations that aim to alleviate the hunger problem in the society by working with donors on the upstream and member agencies on the downstream of their supply chains. These organizations operate in highly complex environments due to the uncertainties associated with supply and demand. In order to cope with the uncertainty and to be able to deliver food to the underserved communities, food banks need to utilize information and coordinate well with their partners so that the donations can be matched with demand in a timely manner.Therefore, effective and efficient supply chain management approaches become critical in this resource-constrained setting, where it is unknown which resources are available. Based on what we know from the previous research on for-profit firms, and given the complexity of food bank supply chains along with the necessity of food banks to work with partner firms, it is natural to contend that supply chain integration is a key determinant of performance. Exactly how the constituent parts of supply chain integration relate to each other in humanitarian organizations, however, is an open research question. Three common integration dimensions that have been investigated in the supply chain management literature include internal integration, demand integration and supply integration. Demand integration and supply integration are also referred to as external integration in some studies. Collaboration between functions and information sharing processes within an organization determines the internal integration. Some indicators of internal integration in the literature include intra-firm functional team activities between functions, such as operations, marketing and logistics, to achieve the goals of the supply chain. Moreover, demand integration relates to the collaboration activities and information sharing with key customers to meet their expectations and improve supply chain performance. Similarly, supply integration involves coordination activities as well as information sharing with key suppliers to achieve supply chain performance by enabling better planning, forecasting and process design. We study the three key dimensions of supply chain integration – supply integration, demand integration and internal integration and empirically examine how each is related to the others and how they impact food banks’ ability to create basic programs that help in delivering food to the underserved communities.

 

 

Identifying Holistic Patterns for Operations and Supply Chain Management

Identification of holistic patterns is crucial when studying several pertinent Operations and Supply Chain Management (O&SCM) issues. If we view each business practice as a single node, then a firm’s overall operation can be conceived as a system of interconnected nodes. The abundance of business practices and the complex interactions among them present challenges in detecting ways by which firms can attain competitive advantage. This challenge is further accentuated by the fact that it may not be a single business practice, but the configuration of a set of practices that drives firm performance. Firms grapple with ways to transform themselves into high-performing organizations. How do high-performing firms differ from low-performing firms? Specifically, how do these firms differ in the amount of connectivity among practices? Which practices are central to a high performing firm? What configurations of practices are salient in high-performing firms but not in low-performing firms? Answers to these questions pinpoint the core strengths of a high-performing firm and provide guidelines to align a firm’s investment with the target areas for improvement. Finding empirical answers to the above questions is a challenging task. One difficulty is caused by the lack of observations to properly model the complex interactions among a large list of variables. Because firms operate as complex systems made up of copious interconnected business practices, to properly model these business practices we need to analyze datasets that have high dimensions (i.e., containing a large number of variables). However, in order to analyze a high-dimensional dataset, the conventional data analysis methods require a large sample size. Ironically, O&SCM research has historically faced the issue of low response rate, leading to low number of empirical observations. This lack of sufficient sample size is especially problematic when examining complex relationships among a wide range of variables in searching for the right configurations of capabilities. Thus, it is critical to find a technique that can work with a relatively small sample size and still be able to derive meaningful business insights from a high-dimensional dataset. Another problem with small sample size is that it is often sensitive to violations of the normal distribution assumption. This violation of normality assumption is common in empirical datasets and is more problematic in small samples. Therefore, it is important to find a tool that is robust against violation of normality, or to provide a remedy that overcomes this challenge. In a study we use the Sparse Inverse Covariance Estimation (SICE) method, in conjunction with bootstrapping technique, to address the above problems.