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.

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.

Technical issue resolution in open-source software development projects

Open source software (OSS) development platform is one of the most popular software development environments that organizations use to source high quality information system products. For example, the most popular open source product, the Linux kernel powers world’s largest stock exchanges; and Apache, the most popular web server was developed in open source platform, powers 52% of all websites globally. Projects are increasingly being conducted in OSS platform due to increased interest from the organizations. For example, major IT companies including Google, Microsoft and Facebook have increased their reliance on software development initiatives on OSS platforms . These developments have important implications for service operations management, particularly in terms of how projects should be managed within these contexts. OSS provides an Internet based virtual community-like software development venue where software developers collaborate voluntarily toward the goal of developing unique information system products. Such voluntary participation is important for sustainability of the OSS projects as inadequate participation has resulted in 80% of the OSS projects being canceled in the development phase. OSS developers stay motivated to participate in OSS because they enjoy the coding process and value the sense of unity with fellow developers while interacting in the software development project.

Traditional software development in firms differs from OSS development in three important ways: first, for OSS development volunteers the source of motivation is different than pay or career incentives; second, the lack of formal governance structure in a OSS development team excludes managers from exerting project control mechanisms; and third, in contrast to traditional software development, the ability of volunteers to coordinate work among OSS developers is contingent on effective information exchange over the Internet. To that extent, OSS platforms have been created that facilitate information exchanges among project members by means of mailing list or thread communications relating to a software code. However, the effect of increased interaction among members in unregulated virtual environment on project performance in terms of its quality and service delivery is unclear. A lack of synchronous interactions in virtual software development environment may weaken flow of information which may, in turn, impact project performance adversely. Higher interactions present teams with increased overhead which lowers team productivity. However, interactions among team members help members to self-regulate to distribute project activities and enhance productivity.

It seems that some form of interaction in self-regulated OSS teams is necessary for efficient information flow within team and to keep members motivated. On the other hand, beyond a certain threshold it may bring in overload to weigh down team performance. Communication frequency in a cross-functional team in traditional projects may have a curvilinear relationship with project goal achievement. Given the increasingly virtual nature of project management and its implications for operations management, it is important to understand how team member interactions related to performance in projects that are not governed within the traditional project context. To the best of our knowledge, no previous empirical work has considered how team member interactions influence project performance in alternative project context such as OSS development that are characterized by their virtual setting and voluntary participation by team members. The first research objective of this study is to address this gap.

Proactive planning for problem resolution in the traditional software development context is challenging. Given the additional complexities of self-regulated OSS teams including, but not limited to, absence of governance structure in a team, independence of members to contribute to projects, geographical and cultural dispersion of volunteers and keeping volunteers motivated in project activities without traditional incentive mechanisms, proactive project management is even more challenging for a project manager responsible for an OSS development initiative. Traditional project management process, which allows physical interaction among members and offers associated visual cues for managing projects, will fall short in the case of open-source projects. Virtual project venues and online knowledge communities, such as OSS platforms, further accentuate these challenges since team members do not interact in person with each other.

 
To enforce project control, managers of OSS projects often engage actively in discussion threads to remove information asymmetry involving team activities. Such participation helps project team members to access critical knowledge resources that generally much experienced managers bring along. Project managers exploit their connection to other projects to bring critical knowledge resources that enhance project performance. In the OSS development context, as managers are unable to pick up visual and verbal cues, active participation in project discussions becomes all the more important. However, we do not know how self-guided OSS development teams respond to such project control mechanism. Additionally, participation increases information processing overload for team members. Understanding the impact of project managers’ active participation in OSS projects on project performance is relatively understudied and forms the forms the basis for the second research objective of our study.

Project manager’s active participation may not only directly affect project performance but may also affect performance by influencing team member interactions. Effective and efficient ways of enabling information exchanges within team have been a cornerstone of project management research. With decreasing performance the motivation of project members, the glue that binds them to OSS platform, starts to wane and OSS projects may see higher dropouts. Inadequate participation has resulted in 80% of the OSS projects being canceled in the development phase. Project manager’s active participation may help with establishing formal structural coordination mechanisms in OSS development projects, thereby enabling participants and projects to reach their goals. Enforcement of process structure by means of effective project management in virtual software development context can alleviate conflict and enhance performance. The importance of project managers’ active participation in managing team interaction in a self-organizing OSS team structure is notably understudied and warrants research attention. Our third research objective aims at contributing to this need for further research.

We draw on social network theory and task familiarity literature to guide our research. Social network theory posits that ties among entities in a network generate social capital that translates to performance. We use this theoretical lens to understand the impact of team member interactions in a project network on project performance. To examine this relationship, we consider project team member interaction networks for 1842 open-source software development projects on the GitHub platform. For each of these projects we collect panel data that include evolving network measures and other project characteristics for two years (104 weeks) from the time of project initiation. Specifically, within each week we consider the project team member interaction network formed by actual comments and replies by software developers in response to an open issues and pull requests for these projects. Open issues refer to bugs reported in the software bugs management system of OSS platforms such as GitHub. Project members work toward resolution of these bugs by making necessary code changes. The changed codes are then merged in the source code by issuing pull requests.

We draw on task familiarity literature to explain how project manager’s active participation impacts project performance. Task familiarity literature suggests that familiarity with team member activities enables the manager to be aware of the flow of information in the project, which enables effective project management. We build on this reasoning to study the impact of manager participation in the OSS context. To study the relationship, we collect data on project manager’s participation in the network formed by team member interactions in response to the open issues and pull requests. In the GitHub platform closing an open issue is an indicator of completion of a specific project task. We consider the number of closed issues in a given week as our dependent variable and examine how this performance measure is impacted by the direct and interaction effects of network characteristics of team interaction and project manager’s active participation.
The results obtained from analyzing 133,023 observations of unbalanced dynamic panel show that as the density of the network formed by communication instances among project team members increase, the number of weekly closed issues in an OSS project initially increase but then decrease. We find that project manager’s degree centrality in the team interaction network has a direct effect of increasing the number of weekly closed issues as well as a moderating effect of flattening the curvilinear relationship between team interaction and weekly issue closure rate. In essence, project manager’s active participation alleviates the reduction in weekly issue closure rate once the density of team interaction goes beyond the inflection point.

Source: Pal, S., Nair, A., Zhou, Z. XXXX. Managing Projects in Virtual Settings: Information Exchange Networks and Project Performance. Journal of Operations Management.

Implementing emerging technologies in Sourcing

In a recently concluded project my collaborators and I draw from previous studies conducted by Center for Applied Purchasing Studies (CAPS), relevant academic and trade journals, as well as case interview data from relevant organizations to investigate use cases and practical applications of implementation of emerging technologies in supply management. Emerging technologies such as Artificial Intelligence (AI), Robotic Process Automation (RPA), Internet of Things (IoT) and Blockchain are increasingly being deployed in organizations to execute and facilitate supply chain and procurement activities. Yet knowledge is still lacking with respect to the effectiveness of these technologies.  Our study provides insights into the justification, use cases, implementation process, barriers to implementation, critical success factors for implementation, and overall assessment of the effectiveness of Blockchain, Internet of things, Descriptive, Predictive and Prescriptive Analytics, Robotic Process Automation, Contract Analytics, Procure-to-Pay, Spend Analytics, Optical Character Recognition and Radio Frequency Identification technology.

As new technologies continue to emerge in supply chains and in procurement in particular, the adoption and implementation of such technologies will continue to evolve. Our conversations with several procurement leaders help in shaping our perspectives on the future of supply technologies. Overall, we believe that procurement professionals will need to have a clear business case preceding an organization’s technology choice. Niche technologies ranging from spend visibility, track and trace and spend analytics are more likely to solve many of the problems in sourcing as compared to an end-to-end solution. Technology can act as enablers but it is important to first identify the problem, identify potential solutions and upgrade the skill set needed to onboard a specific technological solution.  

Companies are leveraging emergent technology very cautiously. There are a few companies that have clients who embrace the technologies significantly but a large majority are just sort of dipping their toes in the water.The primary reason is that many organizations have been burned by these technology implementations. Oftentimes a technology which looks great on PowerPoint does not turn out to be as promising when delivered. After a lot of expenditure, business cases were made to realize the true value of the technology. Given the budget constraints, many companies are now implementing technologies more cleverly by working around some of the limitations.

There is a lack of clarity as to which technologies should be classified as ‘emerging technologies’ in procurement. One way to think about a technology as ‘emerging’ is to consider the founding or relaunching year of a technology. Around 2014 there were some structural changes to older technologies in terms of API driven methodologies and analytics based tools. Big data was 2014 technology. However, over time, technologies have gotten smarter due to some industry influence and disruptors.  These emerging technologies are in their evolutionary phase and are becoming more prescriptive with a specific focus on a particular sourcing problem. Technologies delivering true value to an organization are typically aimed at doing a particular set of activities and not at doing everything. Managers want very deep solutions in areas such as spend analysis, risk, sustainability supplier relationship, and, hence, technology needs to be best suited to deal with certain situations and has to bring precision to the required solutions.  For example, a sourcing tool that is right for a high volume low complexity environment may not be appropriate for a low volume high complexity environment. A completely different tool might be needed. Similarly, sourcing tools in the manufacturing context could differ substantially from technologies used in the services context.

Emerging technologies in the risk management domain will need to consider lessons learned in the COVID-19 pandemic.  Technologies will need to account for event based risk, cyber risk, financial risk, sustainability risk, etc. The emerging technologies should bring in better insights for risk management. Similarly, technologies dealing with sustainability or relationship management will need to cover additional nuances that organizations will be facing in the sourcing domain. Notwithstanding the need for new models for risk management, sustainability, relationship management etc., before implementation it is still important that organizations have a goal of how to fix the most basic things. The emerging technologies must help organizations in spend visibility, payment centralization, governance mechanisms, and contract analytics and tied to these are some good supplier information management systems. This should get the company doing a basic level of sourcing. Implementation of any emerging technology has to happen in parallel to the basic buildup of functions because if the organization waits to build on the stages they may fall behind exponentially and lose the competitive edge. An organization should find the top three critical points and go ahead using emergent technology to fix them in parallel. The business case for implementing technologies needs to be precise and should unravel the critical need of increasing sourcing velocity. Then the organization should use technology to address the need. The savings the company incurs should be used to fund the next steps.

Although technology implementation needs to be planned by considering specific technologies, it is important to note that as technology usage evolves in an organization these technologies start to get highly coupled with each other. A forward looking implementation plan that considers the coupling and integration between technologies would serve organizations well when decision makers may want to change course. While a long term technology roadmap is effective in planning for technology implementation, such roadmaps should have a certain degree of flexibility to incorporate changing business conditions and requirements.

Source: Goke, A., Nair, A. 2021. Compelling Applications of Emerging Technologies in Supply Management. CAPS Report. (Research assistants: Sukrit Pal, Ashok Gopalakrishnan)

The Effects of External Auditors and Certification Bodies on the Operational and Market-Oriented Outcomes of ISO 9001 Implementation

There are a number of practical implications drawn from the findings of our study. First, our study confirms once again that quality implementation is the key determinant of the operational outcomes of ISO 9001 adoption. At the same time, however, the findings also confirm the important role of external auditors in enhancing the effect of implementation on the operational outcome from ISO 9001 standard. This result is instructive in that it is the quality of auditors rather than the reputation of certification bodies that help firms in gaining the operational outcomes. For many firms, however, this finding could raise a practical problem: how to find good auditors? The answer to this question is not straightforward because, unlike certification bodies who have certain brand equity, auditors are employed by certification bodies and their quality is somewhat hidden from the customers and is only revealed after they are engaged after the ISO 9001 certification is over. Indeed, this problem is exacerbated by the fact that firms cannot simply resort to reputable certification bodies in order to find good auditors. The positive correlations between quality of auditors and reputable certification bodies only show a medium strength and, hence, this does not provide a strong assurance that reputable certification bodies will always send quality auditors. Therefore, while engaging reputable certification bodies is recommended, firms should request that they are served by experienced and quality external auditors whose characteristics are partly captured in this study. At the same time, however, the findings also infer that high quality auditors are not necessarily always employed by reputable certification bodies; they could also be part of less reputable certification bodies. In this regard, our findings also provide a ray of hope for firms who cannot afford to engage reputable certification bodies that normally charge higher costs than their counterparts. In particular, smaller firms with limited resources still have a chance to engage high quality auditors and to benefit from their services.

Our findings show that the reputation of certification bodies (rather than the quality of external auditors) helps firms improve their market-oriented outcome, including broadening their market scope and winning more customers. This finding suggests that customers still rely on “brand image” of reputable certification bodies. Customers perceive ISO 9001 certifications issued by reputable certification bodies to be of higher value than others. While this may be true to a certain extent, it is important to balance this notion with our finding, which shows that certification bodies do not have a direct positive effect on operational outcomes. Instead, firms ought to seek high quality ISO 9001 implementations that are then vetted by high quality auditors so as to obtain operational outcomes. The operational outcomes in turn exert a positive effect on market performance. This result therefore sends a strong message to firms that are trying to attain market-oriented outcomes solely from compliance to the standard’s requirements without internalizing the implementation process. More importantly, since it is operational outcomes that are mainly desired by customers (rather than the certification), simply signaling high quality ISO 9001 implementation by tapping into the reputation of certification bodies could be a misleading strategy to gain market-oriented outcome.

COVID-19 and the Healthcare Supply Chain

The COVID-19 situation resulted in a sudden and unprecedented peak in global demand. This led to inventory shortages and capacity constraints. Healthcare organizations experienced congestion and resorted to demand substitution. The supply chain for pharmaceuticals and medical devices were impacted by disruptions. Pharmaceutical manufacturing companies get their supplies from more than 2000 active pharmaceutical ingredient suppliers as well as from other suppliers. Several of these inbound supplies were constrained during the pandemic. Close to 6,800 branded, generic, and biologic pharmaceutical manufacturers supply to traditional and specialty distributors who account for about 92% of sales. Distributors supply to retail and non-retail pharmacies amounting to more than 180,000 in numbers. The link from pharmaceutical manufacturers to distributors and retail pharmacies also experienced disruptions resulting in shortage of several medicines. The globally dispersed medical devices supply chain is very complex involving several to-and-fro cross border movement of supplies.

 

 

In 2019 the global annual demand of ventilators was 77,000 new ventilators. However, 2020 saw an unprecedented increase in the demand for ventilators. 5000-7000 ventilators were required per week in April and May of 2020. Some ventilator manufacturers boosted their production by 30-50% but, by themselves, could’t deliver the 500 or 1000% growth in production required. Top ventilator manufacturers in this tightly regulated market include Becton Dickinson, (Vyaire Medical), Philips, Hamilton Medical, Fisher & PaykelHealthcare, Dräger, Medtronic, GE Heathcare, Gelinge, Mindray, Löwenstein, and Hill-Rom. About 700 parts go into making a typical ventilator and these ventilators cost about $25,000 to $50,000 each. Some innovative inter-industry tie-ups (e.g. GM and Ventec Life Systems; Ford and GE Healthcare) helped in alleviating some of the pain. Under Defense Production Act, an order was issued to help U.S. ventilator manufacturers by removing "obstacles" to their accessing parts and materials needed to ramp up production of the breathing devices in response to the coronavirus crisis.

The root causes of disruption within the healthcare supply chain are a result of the global dispersion of supply base, supply chain complexity, lack of visibility and delayed response. To address the situation it is important to manage capacity (including labor), understand lead-times for suppliers, and be aware of the interdependencies (e.g. interdependence between testing capability and hospital capacity). Cross-industry collaborations by involving industry partners in automotive, consumer goods and cosmetics was helpful, but more of such collaboration will be needed to address the future needs. Developing new products and finding substitutes is critical to effectively manage the 'bottleneck' supply market. The process of creating private-public partnerships should be streamlined so that quick response to disruptions can be achieved. COVID-19 had taught an important lesson of developing responsive/adaptable supply chains, assessing current allocation/coordination approaches in response to the pandemic, and considering possible supply chain structural and/or regulatory changes.

 

Protecting Brand Value through Anticounterfeiting Supply Chain Strategies

Combating counterfeits is not a matter of developing software or systems or markings. Our research suggests that a multi-layered approach that adopts multiple strategies and engages the entire organization is needed. Initially, the size of the problem must be defined and the return on investment approximated. This can help define the need for a team of experts to work in this area, leading to a set of performance metrics that are aligned with business objectives and outcomes. Next, the key focal product seg­ ments should be targeted, and a system for identifying products through product trade­ mark registration with customs authorities should be completed.

We discuss the roles of Drug Serialization and the Drug Quality and Security Act, Pharmaceutical Security Institute Database, and technologies such as Blockchain for combating the counterfeiting problem.

Condensing the time-line of developing vaccine - Some scenarios

Here are some key points from an interesting opinion piece published in the New York Times.

Assuming we already know Corona virus, vaccine is expected to be ready by May 2036 if no strategies for shortening the time-line is taken:

If we don’t wait for academic research, vaccine can be made available by August 2034:

 

If we rely on work from studying SARS and MERS to shorten preparations before clinical trials and start trials early, vaccine can be made available by January 2034:

If we don’t wait for academic research and start trials early, vaccine can be made available by April 2032:

Neither of these scenarios seem to help the prevailing situation. Hence, there is a need to move at “pandemic-speed” and put all the existing drug discovery work that is underway that relate to Covid-19. There are at least 254 therapies and 95 vaccines related to Covid-19 being explored.

It is important to recognize that less than 10 percent of drugs that enter clinical trials are ever approved by the Food and Drug Administration. The rest are either not effective, don’t perform better than existing drugs or have too many side effects.

Typically, vaccine development process takes a decade or longer.

Since the virus that causes Covid-19, are roughly 80 percent identical to the ones causing SARS, and given that both use so-called spike proteins to grab onto a specific receptor found on cells in human lungs, there has been some head start with regards to research. 

Here are some additional options to shorten the timeline (even earlier than April 2032):

By going with ‘pandemic speed’ time-line and starting subsequent steps before previous phases are completed, vaccine can be made available by July 2030:

By moving more swiftly to Phase 3 trials by combining phases, vaccine can be made available by January 2030:

If the decision is made to go with emergency provisioning, i.e. vaccinating front-line and essential workers early, vaccine can be made available by December 2030:

If the three above-mentioned strategies are adopted (i.e. moving at 'pandemic-speed’ timeline, pushing to large-scale testing sooner, and using emergency provisions), vaccine can be made available to front-line and essential workers by February 2028 and to everyone else by June 2029.

Along with the above mentioned steps, if we take a bet on a successful mRNA vaccine, this experimental technology may be faster to produce than traditional vaccines and the vaccine can be made available by February 2028.

 

Unfortunately, none of these scenarios can make the vaccine available in 12 to 18 months time horizon.

The risks and difficulties of fast-tracking vaccine research are huge ranging from the fact that poorly researched vaccines can actually makes it easier to catch the virus, or makes the disease worse after someone’s infected. Researchers also can’t easily infect vaccinated participants with the coronavirus to see how the body behaves. They normally wait until some volunteers contract the virus naturally. That means dosing people in regions hit hardest by the virus, like New York, or vaccinating family members of an infected person to see if they get the virus next. If the pandemic subsides, this step could be slowed.

As can be seen the longest time in the fastest scenario illustrated above is taken by supply chain activities such as building factories and manufacturing. If factories can be built now and manufacture can begin early, anticipating that factories will be useful for a future vaccine and that the product will clear regulatory hurdles, the timeline can be brought down from June 2029 (without taking a bet on the mRNA vaccine) to October 2023:

Finally if we can start building factories now and can bet on mRNA vaccine, vaccine can be made available by June 2022:

Finally fast tracking federal approval from one year to six months can further bring down the time and make the vaccine available by December 2021:

Source: Thompson, S.A. 2020. How Long Will a Vaccine Really Take? New York Times, April 30, 2020