Designed by Apple in California, Fatalities and Production Delays by Foxconn in China?

Brian Hughes

Last week I traveled to Pittsburgh with Chris Eckert (Apollo President) to give a presentation titled "Solving Supply Chain Problems Proactively" at the ASQ World Conference on Quality. 

We didn't have a packed house, but it was nice to see approximately 75 attendees, especially on the day after the exhibit hall closed down.  Our presentation  discussed how the supply chain benefits when different links in the chain team up to solve problems.  It was a timely discussion in light of the global supply chain problems experienced since the tsunami in Japan dramatically delayed production and delivery of critical components.  The risks of sourcing globally are difficult to estimate - particularly when taking natural disasters (and their man-made multipliers, ie Fukushima) into account.  Add in the trend towards leaning out inventories, caused by the need to demonstrate to investors and analysts that a company is not tying up cash needlessly (you can think of it as 'just in time' rather than 'just in case', which I can't take credit for coining) and you can see just how vulnerable the supply chain really is.  It makes me wonder if companies that have proven to be most vulnerable to supply chain disruptions post-tsunami have robust root cause analysis/problem management processes in place.  If so, did these systems uncover proactive opportunities to identify and mitigate the risks of such disruptions?  It would be an interesting comparison.

Today, I read an article about how a dust explosion at the Foxconn factory in Chengdu, China was threatening to delay delivery of Apple's latest iPad 2.  This is actually what prompted me to write - I owed an entry regarding ASQ last week and this was the perfect prompt.  I actually knew just a bit about Foxconn and the iPad, but only as much as one can learn by attending the one man act "The Agony and Ecstasy of Steve Jobs", a monologue by Mike Daisey currently playing here in Seattle at the Rep.  It describes the author/actor's obsession with all things Apple and his discovery that these little nuggets of technical perfection are actually created by humans.  I learned (if Daisey can be believed) that the Foxconn factory Shenzhen, Guangdong Province of China, employs 250,000 people.  They have 10 cafeterias that each seat 25,000.  They don't just make iPads or iPhones, but electronics for many different companies.  This is a little different than big factories I've visited here in the States.  I've been to the Boeing plant in Everett, WA many times.  It's the largest enclosed space in the world (click the link above to see it - Boeing has a great aerial shot on their website and it's amazing).  They make all the wide-bodied Boeing planes there.  And they employee nothing close to 250,000 workers.  Foxconn's huge factories are the physical manifestation of the global supply chain at work.

Back to the story.  The iPad 2 is selling like gangbusters.  I wanted to buy one for my Dad, but found out that I'd have to line up at 6:00am or earlier if I wanted one.  I got him a jacket instead (Adam Smith's invisible hand?).  What could be worse for Apple than a delay in delivery at this crucial time?

Apple may design their products in California, but they manufacture products in China to take advantage of state of the art production facilities and cheap labor.  Basically, the savings more than offset the cost of transportation.  By concentrating production with Foxconn in two facilities, they can reduce costs by negotiating more favorable production prices.  However, they also take on more risk by placing their eggs in a single basket.  Add in lean inventories (due to demand, management, or both) and a disruption could cause Apple to delay sales, which could in turn cool the public's interest in the new iPad prematurely.  Millions of dollars are at stake.  But that's not all.  One quote from the story stood out...

"There probably is going to be no impact" if production resumes as expected in the next few days, said Citigroup analyst Kevin Chang in Taipei. "If this safety inspection drags on for two or three weeks, then there will be an impact on production."

Did I mention that the article reported that 3 people were killed and 15 were injured in this dust explosion?  We teach in class that there is no such thing as a "safety" problem, a "quality" problem, or a "supply chain" problem.  There are problems which impact various goals of an organization - but problems themselves don't respect our carefully defined boundaries.  Kevin Chang of Citigroup seems to think that Foxconn's biggest problem is making sure that investigators pencil-whip up a safety report asap, because if not there may be an impact on production.

Is it just me, or does it seem like Kevin Chang isn't getting the bigger picture?  It's not just a safety problem, Kevin.  But the fact that this explosion had a - how to say it - negative impact on Foxconn's safety goals did bring the problem to light.  Now I'd be speculating if I were to start listing out causes of the dust explosion.  And I'd also be speculating if I were to say that the safety standards in Chinese factories are woefully low compared to factories here in the USA.  But I'm not speculating when I say that there are very often precursors to a catastrophe such as this.  A mature root cause analysis/problem management program would likely have identified these precursors and provided Foxconn with an opportunity to reduce these risks before they manifested into this outcome, which had both a safety impact as well as a production impact.

I'll get to the point.  Companies that outsource often make the mistake of thinking they've outsourced the risks along with the work, but that's not true.  I'm no protectionist...I'm a proponent of "whatever-makes-the-most-sense sourcing".  But however you decide to set up the supply chain, you will maximize returns by implementing a common problem management effort that transcends organizational boundaries.  That means Apple ought to be involved in this investigation, just as if the explosion occurred at One Infinite Loop, Cupertino CA.  Hopefully that's the case...

By Brian Hughes, vice president

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