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2010

A Wall Street Journal article this week, Home Depot Undergoes Renovation (paid subscription may be required to view) once again highlights how this remodeling and building materials retailer continues to try to overcome market share loses to rival Lowe’s. The article notes that Home Depot’s history of supply chain capabilities is hampering the company’s productivity and customer service, as compared to Lowe’s, its prime industry rival.  In the article, Home Depot executives concede that the company’s supply chain still won’t be state of the art even after a current investment phase is completed.

 

Home Depot just reported its first rise in same store sales since 2006, and its stock has lost half of its value over the past 10 years because of shareholder perceptions that the company is not competing efficiently with its industry rivals.  In the article, rival Lowe’s CEO is quoted as noting that he was confident that the Lowe’s supply chain capabilities would continue to provide a competitive edge [over Home Depot].

 

The notion of losing market share does not lie squarely on the shoulders of Home Depot’s supply chain teams. Rather it is on the awareness and actions of its former senior management. They did not adequately address both the need for more responsive customer service and investing in industry leading supply chain operational effectiveness.  Instead of enhancing these capabilities, former management led by ex-CEO Robert Nardelli chose to focus on a strategy of centralization and massive IT, and the results are still a rather heavy anchor for this retailer. Much has been written in traditional supply chain media about the Home Depot transformation story, but in my mind, these stories fall short of addressing insight and learning that can be derived.  More importantly, there are some key takeaways around the specific notion of whether smaller, more-focused IT systems deployments trump large-scale and unwieldy deployments that promise multiple benefits for multiple business objectives.

 

Past history and learning from others are the greatest lessons in management.  There are constant reinforcements and learning that point to the fact that the success of any large-scale transformation lies in the right balancing of the three most important factors of right people, right process and right systems. Take a moment to scan an August 2004 article published in CIO magazine.  The article notes that the origins of Depot’s original success were a decentralized business model where stores were populated with highly knowledgeable sales persons with backgrounds in various building trades.  When customers had a home improvement project, they were confident that their Home Depot store could be just as knowledgeable as the local hardware store in recommending what to buy and how to install.  Regional and store-level managers, those closest to the customer, were empowered with decisions of merchandising and inventory mix. An original business process design principle was that individual stores would serve as principle stocking centers, in essence a warehouse store model.  IT systems were for the most part homegrown, under the belief that the Home Depot business model was unique and beyond the capabilities of packaged software at the time.  Average store revenues in prime geographical markets were roughly $60-$80 million, which could justify high levels of de-centralization.

 

Home Depot’s troubles began when the chain decided to accelerate store growth.  A hodgepodge of different store layouts caused customers to be confused as to where to find articles. Multiple store expansion in primary and secondary geographies also caused average store revenues to decline, exposing inefficiency in inventory management.  The majority of supplier shipments flowed directly to the stores and resulted in the Home Depot being the single largest less-than-truckload shipper in the United States, since about 80 percent of supplier shipments were sent directly to individual stores on half-empty trucks. Individual stores were their own stocking centers and store associates had to spend more time in unloading trucks than serving customers. Managing individual suppliers on delivery performance was an individual store task, causing suppliers to have the upper hand in hiding inefficiency.  Economies of scale for buying from individual suppliers were lost, and transportation systems were not up to the job of managing these higher volumes of activity. The homegrown IT systems also became unwieldy and expensive to modify as the overall scope of business increased. The business model became compromised as to who had the most stores in the most locations vs. superior customer service.

 

When previous CEO Nardilli took the reins in December 2000, he decided to make dramatic changes.  From his origins of senior management at General Electric, the primary goal became lowering the overall costs of operating the business and returning more to Wall Street and shareholders.   Reorganization included the centralization of merchandising, store planning and marketing, which rival Lowe’s was already successful at doing.  The goal was to make all stores look the same for shoppers, as well as to dramatically reduce operating costs at the store level.

 

The prescription further called for large IT that could deliver dramatic gains in productivity, efficiency and decision-support needs. In 2002, he hired a new CIO who came from Delta Airlines, and a $1 billion overhaul of IT infrastructure was prescribed.  This IT transformation included among its projects, replacement of point-of-sales systems, including installation of self-checkout systems, a huge data warehouse for sales and labor management information look-up needs, and assorted ERP investments in PeopleSoft and SAP.  The 2004 CIO article notes a background quote from retail consultant George Whalin, President of Retail Management Consultants.  He did not accept the assertion that all this technology could improve customer service, and further asserted that technology was rather being positioned as the answer to eliminate workers and improve margins.  I found this Whalin quote to be most profound: “their ability to distinguish the stores is going to be badly damaged the more they go to this model of more technology and little in the way of service.”  That was a consultant quote from six years ago.

 

For 10 straight quarters, from Q2 of fiscal 2001, through Q3 of fiscal 2003, same store sales and net earnings paled in comparison to Lowe’s.  Home Depot stock felt the impact, dropping from $67 in December 1999 to $20 in January 2003. During this same post 9/11 era, consumers were very active in their home self-improvement projects, meaning lost-sales for Home Depot. Meanwhile, Lowe’s had already been quite successful in practicing a conservative IT model, one more focused on highly specific business needs such as implementing retail planograms, and empowering existing store associates with automated inventory information. Whereas Home Depot was the first to implement automated checkout, Lowe’s continued to have existing store associates trained to cover registers during peak volumes.  Their assumption was that people were to be supplemented by process improvement as opposed to eliminated.

 

During SAP’s 2005 Sapphire customer conference, the then CIO Robert DeRodes hand picked by Nardilli, was on center stage touting a multi-year, $50 million rollout program. I attended that conference and distinctly recall hearing about the multiple customer support and supply chain process improvements that would be garnered as a result of this SAP deployment. 

 

In 2006, Mark Holifield was hired as senior vice president of supply chain and mandated to modernize the supply chain. Holifield has extensive retail industry supply chain and merchandising credentials, and had previously led the supply chain efforts at OfficeMax, for 12 years. Holifield is a pragmatist, and he rightfully surmised that the supply chain deployment model had to be turned on its head, and fast.  Lowes had implemented a logistics hub and spoke store distribution model as far back as the early nineties. Holifield laid out an aggressive plan of transformation.  A primary goal was to flip inventory flows, moving the majority of inventory through regional flow-through distribution centers, while shifting inventory replenishment decisions to the RDC’s themselves. With the endorsement of current CEO Frank Blake, the company announced an additional $260 million investment in improved supply chain capability through 2010. The end-state goal is have more than 75% of COGS (cost of goods sold) flowing from the RDC’s.  The company also smartly invested in both a supply chain network design and inventory optimization analysis in order to understand the most efficient means to deploy its new RDC network to balance transportation and inventory investment needs.

 

Flash forward once again to January 2007, after the resignation of Nardilli. A blog entry published on ZD Net commented on the IT report card to date, and then speculated that a new CEO would most likely usher in a downshifting on the benefits of large IT. In 2008, Home Depot hired Matt Carey, formerly the CIO of EBay for two years. More importantly Carey spent more than 20 years with Wal-Mart, where he was senior vice president and chief technology officer. During his tenure at Wal-Mart, he managed the rollout of the wireless RF infrastructure and led the implementation and integration of Walmart.com, Samsclub.com and the grocery home delivery business in the U.K.  The sense was that Carey would bring a more pragmatic and complimentary approach to IT, but keep in mind that Walmart is not noted as having a high customer service model within stores. The emphasis has always been on lowest cost.

 

Meanwhile on the supply chain front, Home Depot’s project teams have been hampered by the need to not disrupt exiting retail store operations while the transformation to RDC’s occurs. These same teams must also balance this changed distribution and inventory management model with the existing SAP rollout.

 

Flash forward one more time to January 2010, and in an effort to dramatically impact customer-facing capabilities, there is now the announcement of a $60 million investment in Motorola hand-hand terminals. A direct quote from Carey notes the following.  “If you compare us to a world-class retailer, from a technology perspective, 1991 is kind of where we are pegged. This is the first big customer-service tool we’ve given our associates in a very long time.”  While I suspect that this quote was made in the context of customer-facing IT, it certainly does not endorse the merits of the previous multi-million IT investments.

 

While this has been an uncharacteristically longer than usual posting for the Supply Chain Matters blog, I wanted readers to dwell on the important lessons that can be derived from the ongoing initiatives underway at Home Depot.  Industry competitive advantage is really about the practical ways that teams can balance the needs for people, process and technology to solve customer needs.  Too often, especially in today’s business environment, firms fall into the trap of focusing on the near-term needs for eliminating people to increase profits. Applying massive amounts of technology to solve large problems vs. tailored technology to enhance a business process or in the case of retail, providing answers to customer problems and buying needs seems to be a perspective lost by those who stand to gain by huge transformations.

 

In the specific case of Home Depot, closing the supply chain gap with Lowe’s remains a self-admitted open question. 

 

What your view on near-term vs. longer-tern transformation which occurs in phases?  What about large IT vs. focused IT applied to supply chain transformation needs?

 

Bob Ferrari

 

Last week, the Consumer Analyst Group of New   York (CAGNY), an association of Wall Street related analysts who follow consumer packaged goods companies (CPG), held their annual winter conference in Florida.  The conference features a who’s who of global consumer product companies who make presentations to this audience in an effort to increase investor confidence in these companies.  In fact, last week, Supply Chain Matters published specific commentary related to Kraft Foods, which was a presenter at the CAGNY conference.

 

I took the opportunity to scan some of the CPG presentations in an effort to ascertain both the impact as well as the future objectives of supply chain organizations within this industry.  Thus far, I’ve reviewed presentations from Colgate Palmolive, Con Agra Foods, General Mills, Hershey Foods, HJ Heinz, The Kellogg Company and Procter and Gamble.  While it’s somewhat of an unscientific sampling of some of the major players and industry influencers, I believe it can be a specific indicator of upcoming supply chain challenges for this industry.

 

If I were to summarize common business themes among each of these companies, they clearly focused on maintaining top-line sales and profitability growth from an unprecedented and challenging 18 months of economic recession.  Almost all of these companies noted that they have targeted enormous opportunities for future growth from the emerging consumer markets in the developing regions, most notably the BRIC countries (Brazil, Russia, India, China). A lot of current and planned future product innovation stems from these regions.

 

Because of market challenges, the looking glass for required cost reduction rested squarely on the supply chain.  Many of the presentations positively touched upon the specific cost and productivity contributions driven among supply and value-chains.  Many cited specific programs and results attributed to cross-functional supply chain teams.

 

That’s the good news.  The not so good news is that more seems to be required. 

 

To provide a sampling:

  • ConAgra Foods is projecting $375M in cost savings in each of the next three years
  • HJ Heinz is targeting better than $1B in incremental global supply chain cost savings over the next five years
  • Kellogg has instituted a three year $1B plus challenge

 

Other commonly mentioned initiatives included:

  • SKU and product rationalization
  • Reduction of waste and increased productivity programs, including consolidation of      manufacturing and distribution
  • Reduction in cash conversion cycles
  • More leveraged procurement sourcing
  • SAP ERP optimization, broader deployments/adoption

 

 

Surprisingly, only one company, HJ Heinz specifically cited an enterprise risk management initiative.  That really surprises me considering both the rapidly increasing occurrences of product contamination, along with more extension of supply chains to the developing regions. In fact, some of these same CPG companies, Kellogg specifically, experienced a recent incident with its Eggo Waffle product line.

 

There has been much commentary around the blogsphere as to whether continuous cost cutting has taken a toll on cross-functional supply chain organizations and people.  Over on Supply Chain Digest, Dan Gilmore notes that supply chain managers are simply worn down and dispirited with constant pressures for cost reduction along with high hurdle rates for any new productivity or systems investments. 

 

It seems to me that if this sampling of the CPG industry is referenced as an indicator, there are far more challenges yet to come. 

 

Something obviously has to give.  Supply chain managers need to be upping their executive level communications and game plans, since constant cost cutting without some offset investments in productivity and faster decision-making can be a prescription for both lower morale and lower organizational energy.

 

How do others feel?   Is your industry and organization being affected by these same forces? 

 

What proactive strategies have you exercised to manage such trends?

 

Bob Ferrari

 

A recent article featured on the ASQ (American Society for Quality) web site and originating from the Arkansas Democrat-Gazette notes that Wal-Mart has tightened its delivery windows for suppliers.  Wal-Mart will impose a 3% penalty, based on cost of goods, if a supplier shipment arrives at a regional distribution center outside of a prescribed four day delivery window, either early or late.

 

The notion of delivery penalties is not new in retail but the fact that Wal-Mart has now tightened the window has a lot of connotation for many suppliers to retail.  As Wal-Mart goes, so does the rest of the industry. This strategy is driven by Wal-Mart’s desire to continue to decrease its own inventory levels, transferring that burden to suppliers.

 

The article rightfully points out that Wal-Mart usually does not tighten-up policies without the input of suppliers.  However, as we all know, big business and large volume suppliers tend to have much more influence than smaller suppliers.  Large global CP firms  such as Colgate Palmolive, Kimberly Clark, Procter and Gamble and others have dedicated supply chain planners who can tap into Wal-Mart’s Retail Link information system, as well as various sophisticated supply chain planning, replenishment and logistics systems to coordinate and track shipments.  Small and medium business oriented suppliers often do not have such resources. That thought caused me to ponder that the supply chain stakes for these SMB suppliers continues to escalate, while these same smaller firms stand to lose the most financially with any late delivery penalty as high as 3%.

 

The Gazette article notes that truckers try to avoid loads that come with built-in penalty fees related to early or late delivery. And why not, since shippers can often tender a shipment at the last moment expecting or even demanding that a carrier expedite a shipment, irregardless of weather or other unplanned conditions along the route.  The notion of the “last mile” is often interpreted with that game of musical chairs, when the music stops, the entity holding possession is the one out of the game.

 

As carrier Transplace has done, more and more transportation and logistics providers will need to continue to reach out to shippers and suppliers in providing more “predictive” reporting relative to exception events.  But all of this information needs to be captured in a supply chain information repository.  With these higher stakes, SMB’s themselves will need to focus more on “predictive’ rather backward looking planning processes.  Today it could be Wal-Mart’s delivery window, tomorrow it could be a major customer in a foreign market.

 

The use of MRP or MPS planning logic which attempts to satisfy a customer delivery date without factoring all sorts of dynamic and often changing constraints across the entire supply chain can often fail to adopt to strict delivery window needs.  Small suppliers can no longer use “rules of thumb” planning, such as it usually takes n days of ship time, or production has always required two weeks or order lead time. A more predictive planning tool is often a better alternative, one that allows rapid re-planning based on near real-time events, or that can allow for what-if analysis, when the planning system is alerted to a delay in production or shipment activity.  If a supplier stands to lose 3% by being early or late, the planning system needs to be able to factor that logic against all other alternatives.

 

Before, SMB’s had little choice but to try and swallow a very expensive ERP focused supply chain planning system that was originally designed with classic MPS/MRPlogic, and additionally offered lots of overhead IT infrastructure to maintain. Today, the situation is far different and the good news is that there are more software-as-a-service (Saas) or hosted planning applications available that not only are tailored for SMB needs, but also offer more forward-looking predictive analysis capabilities.

 

The key takeaway for SMB firms is to get serious about predictive vs. reactive supply chain management and fulfillment capabilities.

 

Bob Ferrari

 

In early November, Supply Chain Matters provided commentary and observations on the rather widespread problem involving counterfeit and bogus parts within the supply chains of multiple industries.  The observations came after my attendance at an all-day symposium held by the MIT Forum for Supply Chain Innovation.

 

Two of the sessions in the MIT forum focused on the developing problem within pharmaceutical supply chains, and specifically efforts from individual companies to address the upcoming mandate for item-level serialization, as legislated by the State of California.   The takeaway I came away with was that lack of consensus on industry-wide tracking standards was a significant challenge in fostering further individualized initiatives.

 

An article published by World Trade Magazine outlines how a partnership between Genzyme and UPS to pilot drug serialization is about to go-live.  The lessons learned should be important reading for many residing in pharmaceutical supply chains.

 

The article itself is authored by Dan Gagnon, a Marketing Director at UPS.  It should therefore be no surprise that there may be a bit of boasting included.  For instance, the article indicates the this specific serialization initiative is an industry first.  Actually it is not.  At the last MIT Forum, I viewed a presentation from the supply chain manager for German based drugmaker Bayer AG, outlining Bayer and other European company initiatives to pilot and deploy item level tracking and serialization programs in Turkey and other EU countries. 

 

That however should not deter from the important lessons brought out in the Genzyme / UPS initiative.  They include a validation that selection of the right technology is a rather critical consideration.  The Genzyme team selected 1D and 2D barcoding over RFID because of cost and safety considerations.  Interesting enough, pilots in Europe also converged on use of 2D bar coding. Other learning notes the importance for taking a phased approach and performing a lot of comprehensive testing. Effective use of the data captured in serialization tracking is also a very important consideration since such data is important for not only inventory management but other planning applications.

 

Gagnon notes that the most important learning is that companies have much to gain by getting out ahead of mandate legislation, since the Genzyme initiative took more than a year and a half to complete.  Also keep in mind that UPS is one rather savvy and experienced user of advanced technology, and in my opinion, the initiative may have well taken longer without the expertise of a UPS. 

 

A final note from this author is that many in pharma have the belief that item-level tracking legislation enforcement will have to be delayed because of any industry-wide adoption of a common standard.  As has occurred with other technology-enabled tracking initiatives, as Genzyme, Bayer and others in the industry become much more active in piloting and adoption, technology standards will tend towards those most adopted by the vested players.

 

Congratulations to the Genzyme / UPS teams for these efforts.

 

Bob Ferrari

 

I previously shared some commentary with the community related to barriers coming down for bringing in fresh new thinking within the pharmaceutical industry, and in particular, pharmaceutical supply chains.  I noted that this industry is going through a period of significant change.  Current high margins are under building pressures from upcoming expiring patents, a huge amount of governmental and consumer attention focused on reducing costs, and finally the leadership of forward-thinking supply chain executives within the industry itself.

 

On the 21st Century Supply Chain blog sponsored by Kinaxis, (also appearing in this community site) Trevor Miles did a great job of adding a quantitative perspective to this discussion.  Pharmaceutical companies that provide specialized medicines under patent protection operate under extraordinarily high gross margin and inventory levels. If you needed grounding as to how high, check-out the table of metrics that are embedded within Trevor’s posting.

 

While these margins made seem obscene to some, they cannot last forever, especially when patents on products expire, and products begin competing in a generic competitive environment.  While current high inventory pipeline may also be the byproduct of the phasing of product introduction in the market, as well as the criticality of a particular drug for life saving purposes, it is fairly obvious that such is rather expensive, not to mention the risks for shelf-life expiration or shrinkage.

 

The argument that streamlining supply chain inventory and operating costs may not have strong sponsorship under these large gross margin environments is fairly obvious, but I must applaud industry supply chain executives who are now taking leadership to foster and promote different thinking.  Change comes from both external and internal forces.

 

Remember that in addition to today’s premiere consumer goods companies, companies such as Apple, Dell, HP and others all had to transition their supply chains toward sustaining both lower margin and higher customer response environments.

 

In My view, bringing in fresh, outside thinking provides the pharmaceutical industry the means to challenge and begin similar journeys toward better efficiency and collaboration.

 

What about the community, both residing in pharma and external, do you sense the winds or basis for changed thinking ?

 

Bob Ferrari

 

I came across a recent Purchasing.com article, Supply chain strategy key to Oracle’s plans for Sun Microsystems, penned by Dave Hannon (hat tip to Jason  Busch of Spend Matters for the alert) which highlights Oracle’s current plans regarding its latest acquisition of computer hardware and software manufacturer, Sun Microsystems.

 

On a recent conference call briefing, Oracle’s CFO boldly indicated that the Sun supply chain was far too complicated resulting in a high cost of goods sold. According to the article: Oracle feels that Sun has been building far too many different customized products for customers, a strategy which brings far too many part numbers and suppliers.  So by “saying no” to customer requests and focusing only on the more popular products in the Sun lineup, Oracle plans to leverage more economies of scale and reduce its components and supplier lists.”

 

That statement triggered some thoughts in my mind, and perhaps in yours as well.  First, who the heck are these darn customers asking for specialized products?  Don’t they understand that Oracle knows better about their needs?  After all, an also-ran provider like Sun should be able to institute an SKU rationalization and commodity manufacturing strategy regardless of those darn customers.  Hey HP, Dell, Cisco and Lenovo, you got it all wrong, there is no need for different supply chain capability models to meet different customer fulfillment needs.  Oracle is here to show us how it can be done. We’ll just bundle a whole bunch of Oracle database and business applications our super Sun specialized servers and customers will be tripping over themselves to place orders and await delivery. As Jason  Busch noted in his commentary: Moreover, considering the relatively short full-price lifecycle of the many high-end servers and other gear that Sun provides, it's doubtful that customers will tolerate much of a wait between order and fulfillment, especially in the case of premium gear.

 

I don’t know about all of you in the Kinaxis community, as for me, this CFO view smacks of a lack of understanding of the first principle of supply chain strategy, serving customers comes first. In the case of Sun, it was a select group of rather loyal customers who stuck with this provider if only to demand such variety and customization.

 

You can also read further and chuckle as I did, that contract manufacturers will just have to understand that Oracle will seek fewer of them and will also get “volume discounts, lower costs and higher volumes with more focused purchasing”. 

 

Ladies and gentlemen, I observe a throw down in the making.  In the sprit of the Food Network’s Iron Chef America competition, Oracle has issued a challenge to our supply chain community that they, through the re-architecting of Sun’s supply chain, “will reign supreme in supply chain cuisine.” 

 

No doubt, use of Oracle’s supply chain technology will prove instrumental in this competition, even though there is an occasional “breed-of-breed” application already present at Sun.

 

So what say you Kinaxis community, are you ready for this challenge? 

 

Can the reincarnation of Sun’s supply chain come to pass, by say 2011?

 

Bob Ferrari

 

About a year ago, Sony Corporation initiated a massive corporate restructuring after announcing its first annual loss in more than 14 years.  Sony had a significant profitability crisis which specifically involved its consumer electronics and games businesses and Chairmen and CEO Howard Stringer was forced to take direct operational control of all operating businesses.

 

In May of 2009, Supply Chain Matters provided a commentary, Sony’s Supply Chain Challenges, in which we noted that the restructuring would involve aggressive cost reduction goals for Sony’s supply chain. Taking on a challenge to reduce overall material costs by 20% in two years has proven to be challenging for companies in profitable times, let alone in crisis situations.  I noted that Sony would have no choice but to move quickly, given the economic and industry conditions that were occurring in the consumer electronics sector.

 

The corporate restructuring included a combined manufacturing, logistics, and procurement organization led by a longtime Sony executive, Yutaka Nakagawa. At the time, various reports indicated that the company would close three plants in Japan by the end of December 2009, and the number of plants around the world would be reduced to 49 from 57. Other efforts noted were that the company would also slash material costs by 20% ($5.3 billion USD), and cut total suppliers to 1200 from the current 2500 by March of 2011.

 

In a rather sudden and dramatic turnaround of events, last week Sony announced that it has actually turned a profit in its latest fiscal quarter and will narrow its previous full-year loss projections.  A Wall Street Journal article notes (paid subscription may be required) that in the area of supply chain, Sony has already cut costs by $3.63 billion USD.  That is indeed rather aggressive in such a short period of time.  The article further notes that Sony has closed 20% of its manufacturing plants and now eliminated 20,000 jobs, 4000 in excess of last year’s target.  In the area of material costs, the WSJ article makes note that Sony has targeted a 15% cost reduction for the PlayStation 3 by March 2011.  Currently the company loses six cents for every dollar of PS3 hardware sales.

 

Upon reading the executive briefing transcript published on Seeking Alpha, there is management acknowledgement that the bulk of the supply chain cost reductions thus far were achieved mainly from top-down senior management directives specifically targeting headcount and excessive inventory levels.  Payment terms to suppliers have apparently been extended although it’s difficult to decipher from the transcript. There is also an acknowledgement that no business processes or systems changes have occurred thus far.

 

The picture for Sony in its first year of crisis has the appearance of top-down, slash and burn cost cutting.  While these efforts did result in the required significant take out of cost, the real work related to supply chain process transformation still remains a work-in-process for Sony.  This next phase will be more significant in terms of making the right moves to insure that Sony’s supply chain capabilities can sustain both continued efficiency and adaptability to changing business conditions.  I trust that Sony’s supply chain teams will utilize more advanced analytical methods in navigating this next phase since we all know that cost-cutting alone does not lead to innovation and uniqueness in serving customer needs.

 

Supply Chain Matters will continue to monitor and provide ongoing commentary.

 

Bob Ferrari

 

One of our most favorite and dare I say most reader popular commentaries on the Supply Chain Matters blog is when we comment on Apple Computer’s quarterly financial and operational results.   It seems that nothing gets in the way for Apple. For the Q1-2010 quarter that ended in December, Apple again impressed.

 

Apple continues to defy the economy and will surely maintain its number one ranking in everyone’s top supply chain capabilities listing.  The company reported revenues of $15.68 billion, and profits of $3.38 billion in the quarter.  An accounting change allowing Apple to recognize iPhone revenues earlier skewed these results, but nonetheless, the results are an envy of any global consumer electronics manufacturer.  A 58% quarter-to-quarter revenue and nearly doubled profit increase are extraordinary for these economic times.

 

Unit shipment volumes were again impressive and continue to reflect that Apple’s supply chain fulfillment capabilities stand out as a global benchmark.  Total quarter-to-quarter unit volumes increased over 60%, to over 33 million units shipped. Shipments were fueled by 21 million units of iPods, doubling the September period, and 8.7 million iPhones, a 17.5% from the September quarter.  No doubt, consumers seeking a new iPod or iPhone for the holidays helped to fuel this activity.

 

In our previous commentary, we noted that Apple was running at a Days Inventory Outstanding (DIO) calculation of 4.48 days and would likely have to gear-up to manage the coming surge in holiday shipments.  Apple indeed increased its overall inventory from $455 million in the September period to $576 million in December, but did so in a highly managed manner. My latest calculation of DIO is 3.36 days which is incredible. The company also generated $5.58 billion in cash during the latest quarter and increased gross margin to 40.9%, more than three points from a year ago.  Apple’s fulfillment capabilities have also expanded globally, and the company reports that 58% of sales are derived from international markets. Recent product teardown analysis also reflects that Apple has also been successful in lowering the material and production costs of both the iPod and the iPhone. With the recent announcement of the new iPad tablet computer, the company is now ramping-up production to begin shipping the unit by March.

 

In the coming months and years, business schools and supply chain academics will be seeking out business case studies reflecting which companies smartly managed their way through the global recession that began in 2008.  The name of Apple will surely be included in that collection, as one of the few companies that not only grew top-line revenues, but also extraordinarily and efficiently managed a totally outsourced supply chain. At this current rate of growth, Apple will double its revenues and nearly quadruple its profits from 2007 levels by the end of its current fiscal year.

 

It is no wonder that Apple remains secretive in telling the world about its supply chain business process and IT capabilities. The results speak for themselves.

 

 

Bob Ferrari

 

Amidst all of the attention being made to Toyota’s ongoing product recall and sales suspension crisis related to sudden unattended acceleration of certain model vehicles, another interesting question has been posed.  In the weekend edition of The Wall Street Journal, reporter Daisuke Wakabayashi penned an article (subscription may be required) noted that lean manufacturing can sometimes backfire. 

 

The premise is that the utilization of common designed parts (i.e. the accelerator assembly) across multiple product models can backfire when major quality control issues arise. Toyota utilized one supplier, CTS Corp., to supply the subject accelerator pedal assemblies.  The argument is that cross-model component sourcing risks are magnified as companies expand globally.  The other premise noted in the article is that growing technological complexity… makes it harder for manufacturers to diagnose problems in the early stages, before the issue becomes more widespread.

 

My view is to reject this broad argument. 

 

Lean manufacturing methods and common platform designs are a long proven method for insuring cost, as well as quality efficiency.  In fact it was Toyota that led the way in pioneering these efforts.  Common part designs can enhance product quality and cost by allowing product designers to source from approved suppliers with consistent quality and on-time performance capabilities. Lean production methods, when performed correctly, can also spot any quality malfunctions at the source of production, insuring that corrective actions are taken before a build-up of non-conforming parts.

 

The incident with Toyota, in my view, appears to be more related to a broader feedback loop, one that involves the actual operating use of vehicles and reporting of incidents.  We can all speculate as to when Toyota first became aware of the SUA problem in its vehicles, and what actions were taken to ascertain the scope of such problems.  No doubt, Toyota and certain governmental agencies will be pursuing such investigations.  This has more to do with product management and design than lean manufacturing.

 

I believe the headline for Toyota is not about the backfire in lean manufacturing, but rather an awareness of both design and supply risk management.  This should not be the purview of manufacturing and supply chain, but rather product management and design.

 

What’s your view?  Do you view this ongoing recall as being exacerbated by lean, or by other shortfalls?

 

Bob Ferrari

 

Upon scanning the financial news last week, I noticed an article regarding Novartis AG, one of the largest global drug companies.  The article noted an announcement that the current CEO, Daniel Vasella, will be stepping down from his position, clearing the way for a groomed successor.  However, what really caught my eye was that his successor, Joe Jimenez, has a long background in the packaged consumer goods industry (CPG), and the industry itself has tended to only favor executives with deep pharmaceutical industry experience. Mr. Jimenez, on the other hand, has only been with the company since 2007, having spent most of his career at Clorox, ConAgra Foods and HJ Heinz.

 

What has all of this to do with supply chain?   Lots.

 

The pharmaceutical industry as a whole is going through a period of significant change.    Previous growth was driven by rather aggressive drug-discovery and  market introduction cycles where the bulk of business investment centered on R&D and product innovation.  Margins were hefty because proprietary drugs could draw a premium in the market.  A flash forward to today, and the business situation is rather different.  Patents on key drugs are expiring, exploding costs of healthcare are driving lots of governmental attention on capping steep rises in drug costs, and discovery pipelines are changing.  The business focus has now shifted toward operational efficiencies, and that includes the entire supply chain. 

 

Novartis and other pharmaceutical companies now find multiple supply chain business challenges.  A recent Kinaxis sponsored webcast highlighted how Amgen was approaching such challenges.  New business opportunities lie in rapid development of medicines and vaccines that can be quickly introduced and ramped-up in volume at the height of market attractiveness. Existing prescription drug supply chains must also step-up efforts in traceability, cost efficiency and deeper collaboration with customers.

 

I penned a previous commentary on the Supply Chain Matters blog that reflected on a September 2009 article I read in Supply Chain Management Review, Is Supply Chain the Cure for Rising Healthcare Costs?  (paid subscription required) That article was written by Mike Duffy, Executive Vice President of Operations for healthcare distributor Cardinal Health. Duffy is no stranger to supply chain executive circles, and came to the healthcare industry from previous experience in the Consumer Goods industry, most notably, Gillete.  In his article, Mike describes the current challenges that lie within supply chains and draws many parallels toward these same challenges being ultimately overcome within CPG focused supply chains.

 

Consultants in management strategy and change management often cite the fact that too much of the same type of thinking can derail innovation.  How many times of late have you seen a supply chain related job advertisement from the medical or pharmaceutical industry that requires multiple years of proven pharmaceutical industry experience? Upon reading many of the detailed job descriptions, I’ve often had the opinion that the hiring managers are overlooking their most important need.  Rather than solely medical or pharmaceutical industry experience, the need is often proven supply chain business, programs and transformation experience in an industry that had successfully overcome similar challenges.

 

In his article, Mike Duffy notes that transformation and added efficiency among all of the tiers of the healthcare value-chain involve all players.  Siloed thinking and old paradigms must be challenged.  Many of the these same problems facing pharmaceutical and healthcare supply chains have indeed been overcome by successful business process and IT initiatives undertaken in other industries that had similar challenges and business needs.

 

It is refreshing to observe that Novartis has recognized the need for a new phase of executive leadership with an executive with roots in consumer goods business and supply chain needs.  The remainder of the industry may well benefit from different thinking.

 

Bob Ferrari