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Apple’s Cobalt Play: A Lesson in Competitive Strategy, Navigating Uncertainty and Securing the Supply Chain

female hand holding white phone with low charged battery screen on table laptop

Another Apple Trifecta?   If recent reports of Apple being engaged in discussions with cobalt suppliers are true (and I bet they are) then we are about to witness another  lesson in how to gain competitive advantage as Apple simultaneously executes competitive strategy, uncertainty navigation and supply chain risk management.

Competitive Strategy

CEOs and strategists often define competitive strategy as a point-of-view about the future in which they execute against.  To do so requires focus, unique value and achieving superior returns on capital investment.  One of Michael Porter’s key principles to competitive strategy is that one must thoroughly understand the industry value chain and the value creating and cost generating activities associated with it.   Note:  competitive advantage is achieved at the activity level or in this example, the supply chain resources, technology and processes.

Apple’s leadership has achieved competitive advantage over the past decade by consistently and thoroughly understanding the industry value chain as well as their own product supply chains and related sourcing activities.   As a result, uncertainty surrounding these activities has been greatly reduced thus allowing faster and bolder investment decisions.  The sourcing activity has clearly provided Apple with unique and sustainable value.  Decision making about the future of essential materials, such as Cobalt, are viewed simultaneously through a market and operational lens, then linked to financial performance.

For example, in 2011, Tim Cook revealed that he had entered into long term component supply contracts worth $3.9 billion over the next two years. Apple had locked up 60 percent of the world’s touch panel capacity, creating an industry-wide shortage and making it hard, if not impossible, for competition to release new products or keep the shelves filled. Not the first time, or the last, Apple leveraged its deep insight into the market, strategic suppliers and “timing” opportunities throughout its materials-to-customer supply chain to separate themselves from the competition. They exercised similar prowess with batteries, NAND flash memory, LCDs glass for iPad retina display, memory chips, image sensors, and the special resins that are used to hold chipsets together. Events like these delay competitors from coming to market or keeping inventory on the shelves.  (excerpt From: Gary S. Lynch. “Uncertainty Advantage.” iBooks. https://itunes.apple.com/us/book/uncertainty-advantage/id1196773501?mt=11).

Navigating Uncertainty and Managing Risk in the Supply  Chain

As EVs (Electric Vehicles) and energy storage become more widely adopted the  lithium ion cathode battery demand and use of cobalt will shift from mobile devices to mega-industry equipment for transportation and energy.   Cobalt is an essential material in the production of the lithium ion cathode and Apple’s leadership certainly understands the potential risk.  More importantly, their view is not limited to their primary industry value chain but also competing and adjacent value chain (another Porter principle, competing for profits and understanding the five forces).

Apple once again is aggressively navigating uncertainty, clearing the obstacles ahead as the proceed down the highway.  To do so not only requires a willingness to take risk but also a commitment to gain deep insight into the broader industry value chains, the activities that differentiate their products and the competitiveness for key commodities and capacities.

Now the elephant in the room, do organizations in the healthcare, food and other industries exercise similar rigor?  Are they prepared for a potential large-scale shift in capacity or cost?    Will organizations in these industries be able to compete for supply with the mega-energy and automotive industries?  A shortage of radio-isotopes in 2009 should have been a wakeup call to the industry and strategic planners that a broader view of industry value chains that support their products and services would be needed.   It that case it was the failure of a major producer.  Now these industries are faced with a similar threat because cobalt is used in many products including:  external beam radiotherapy, sterilization of medical supplies and medical waste, and radiation treatment of foods for sterilization (cold pasteurization) – (Wilkinson, V. M; Gould, G (1998). Food irradiation: a reference guide. p. 53. ISBN 978-1-85573-359-6)

 Bottom line:  Apple continues to demonstrate the opportunity to leverage uncertainty for competitive advantage.  To do so requires relentless pursuit of the data and details while simultaneously understanding the competitive landscape both within and outside your industry.

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Toyota navigates uncertainty, manages risk by design

Interesting article from CNBC that reflects how risk is being considered as part of the design and innovation activity.

Toyota is trying to make electrified vehicles less dependent on Chinese minerals

Toyota is navigating uncertainty and managing risk by design.   As a result, Toyota may be able to minimize customer/dealer delivery disruptions of it EVs (electric vehicles) arising from changing trade policies, higher sourcing cost, and/ or geo- socio-political- events (e.g. tariffs, taxes, political posturing, war).

Bottom Line:  I don’t believe this is an isolated case but rather it reflects the early stages of an emerging trend.  Personally, I’ve recently received a number of calls from Supply Chain and Operations Executives who are seeking greater insight and risk related data.  As the discussion evolves, it is clear that their intent is to gather this data for competitive differentiation rather than defensive investment. 

I’ve included several examples in my recent publication, “Uncertainty Advantage:  Leadership Lessons for Turning Risk Outside-In” including an excellent example of how Rockwell Automation incrementally improved their risk and resilience investments from defensive to offensive weapons (Chapter 7, pages 242 – 244).

UA 3D 1 on 1 to Left

 

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KFC Chicken Shortage Reveals Limitations of Current Resilience Strategies

CNBC recently reported that up to 900 KFC branches in the UK faced a chicken shortage due to issues related to switching to a new delivery partner, DHL.

Screen Shot 2018-02-19 at 8.27.50 PM

Source: CNBC

Organizations mitigate supply chain inventory disruptions through a variety of strategies including:

  • Stock redundancy (safety stock)
  • Stock diversification
  • Direct ship
  • Alternate sourcing
  • Inventory substitution or repurpose
  • Increase inventory investment within a channel
  • Segmentation and prioritization (allocation)
  • Salvage or repackage

However, these strategies in combination with the organization’s risk and resilience programs are typically limited to operational activities.   Business continuity, crisis management, and supply chain risk programs seldom link to market intelligence and the financial rigor needed to exploit uncertainty at the onset of a disruptive event.

No chicken, no customers?   Should that be the organization’s assumption when the core product or organization’s unique value evaporates?   Or does this single point of failure actually represent a single point of opportunity?   For example, from a market or industry perspective does the disruption represent an opportunity to accelerate the acquisition of a competitor or alternative product that will eventually lead to a broader, more appealing menu?  Is this disruption an excuse to exit an unprofitable business in favor of a more promising opportunity?  Or in the case of KFC, does a brief shortage represent an opportunity to promote a different set of products on their menu at a deep discount (or for free)?  What did KFCs competitors do to exploit the opportunity, did their playbook include a strategy for exploiting this type of market disruption (i.e. the failure of a competitor)?   The following case is provided to illustrate how GM outflanked Toyota when presented a significant recall.

Bottom line:  organizational risk management fails as a strategic weapon because it ignores the most pivotal facts of the business landscape – the market and financial objectives.   Markets move fast, organizations do not.  Supply chain resilience programs are the starting point, however, these programs must be linked with broader contingency/opportunity strategy that includes the market and financial performance.

 

NEWS AFTER THE ORIGINAL POST

550 outlets remain closed

 

 

A case in point is a comparison between GM and Toyota in 2014. GM recalled 29 million cars worldwide in 2014, following thirteen deaths and fifty-four crashes due to a faulty ignition switch. Chevrolet Cobalt models were the culprits. The way GM handled this is instructive in comparison to the Toyota response in 2009– 2010 when acceleration problems led to recalls. In the case of Toyota, an attempt to diffuse the situation through public relations— including a denial that the problem even existed— nearly destroyed the company. The Toyota error was instructive to GM, and it reacted in a very different way. The GM focus was not on the profits impact but on markets.  

As a result, sales and profits rose after the recalls, when you would naturally expect them to fall. Why? Jessica Caldwell, a senior analyst with Edmunds, explained, “You’d think it would damage their brand, but it’s actually helping to drive purchases at the dealerships.” Recalls brought people into the dealerships, of course. But GM saw this as an opportunity and focused its energies there. In July 2014, GM posted its best monthly sales in seven years despite the massive round of recalls. They sold over 256,000 cars that month alone, a 9 percent uptick from one year before. The consumer visits to the dealership as part of the recall sparked more trade-in activity that would have occurred without the recall. GM offered attractive low-cost financing coupled with employee-level pricing, a 34 percent discount from retail price.

SOURCE:  Gary S. Lynch. Uncertainty Advantage: Leadership Lessons for Turning Risk Outside-In (Kindle Locations 1703-1709). Archway Publishing. Kindle Edition

 

 

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Time to move beyond supplier risk?

Time to move beyond supplier risk?

Why are so many organizations “surprised” when they find out that their supply chain had become a victim of the latest disruptive event?   I’m not referring to just those who manufacture the product but rather to all those that depend on it; customers or patients, suppliers & distributors, producers, and yes, even competitors.   Recently, hospitals experienced an IV saline bags shortage and Newell’s  Rubbermaid brand experienced a shortage of resin.

Why the surprised?  After all, haven’t most organizations invested in supplier (3rd party, vendor) risk management programs and technologies.   In my last blog, we even discussed the maturing process of the supplier risk product market.  So why are organizations and customers/patients still experiencing major shortages and supply chain disruptions?

They say a picture is worth many words, so I’ll try to set the stage for the following illustration.

SCM SCOPE

As you can see, the scope of what risk in the supply chain is actually being managed is part of the issue.  The scope narrows further when you consider that only a portion of the suppliers, the ones considered the highest risk to the organization, are actually being actively monitored and managed.  If you rely on property-based supply chain risk assessments than the scope is typically limited to just your property, plant, equipment, and maybe inventory (it may include suppliers and your loss of revenue if you have contingent business or time element coverage – consult your broker).   The business interruption insurance may be limited as well, to a narrow set of events such as fire, rising water, and other similar hazards.

What’s needed?

The scope of what should be considered begins with an understanding of industry economics and your organization’s role in creating value.  It’s important to first understand the broader industry value chain for your “franchise” products.  When a disruptive event occurs this understanding will simplify your understanding of market dynamics amongst buyers (customers, patients, wholesalers), producers, suppliers, and competitors.   How will demand change?  Will you be subject to displacement exposure such as when IV saline bags moved from Puerto Rico to Mexico?  Once you understand the industry value chain and forces you will then need to look to your business units/divisions to uncover the “franchise” products or services and the associated activities that create and deliver value to the market.   I suggest a little bit of research and discussions with executives to identify the “franchise” products or services and the measure to use.   The goal is to reveal whether the economic priorities such as revenue, margin, liquidity/cash, innovation/growth, etc.  At the end of the day, it’s all about profitability but the reality is the organization’s incentives will drive the behaviors.

Now you have the target, i.e. what matters most.  You can then move on to the critical activities that support the “franchise” products or services.  The supply chain encompasses many of these activities but the important element here is to highlight the activities that create your distinguishable or unique value.   By doing so, you establish the operational priority and associated financials.  Eventually this will get you to the allocation but more importantly, this framework provides a holistic view of the most critical supply chains.  Remember – if you’ve seen one supply chain, you’ve seen one supply chain.

You are now ready to map the extended supply chain for what matters most (from an economic perspective).  The mapping should not only look far beyond the 1st tier up and downstream but also should like at critical resources such as labor and skills; technology, processing and data; physical assets; and relationships.    This might sound like a bit of work but remember, this is your franchise and the leaders pay attention to what matters most.  Also, it’s important to do your homework and talk with others in the financial planning, process improvement, risk & insurance management and other areas.  Much of the data and profile most likely exist.

Once you have the map you can then analyze the importance and contribution of the individual node in that particular supply chain, assess and measure the risk, identify mitigation and financing options, model a risk-return on investment, gain support for the investment, deploy the solution, monitor and report on it, drive towards continuous improvement.   That’s a mouth or a mindful so I plan to break down some of these elements in future blogs.  However, you can get a jumpstart by picking up a copy or image of the book, “Single Point of Failure:  The Ten Essential Laws of Supply Chain Risk” or references on my website.