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2010

Parsing through Kinaxis Manufacturing Central this morning, I came across a Wall Street Journal article, Chinese Firm Meets Global Branding.  This article outlines the market strategies of Chinese firm Changzhou Asian Endergonic Electronic Technology Co., or its English brand, Züuma (pronounced zoo-ma), a name created by its U.S. partners. This firm manufactures the portable dashboard mounts that house many of our portable GPS units, and the article hit home with me since I actually purchased one of these mounts about a year ago, but it carried a private brand label from a GPS manufacturer.  By the way, the mount is very stable and works well on my car dashboard. By creation of the Zuuma brand, the company will offer a higher featured mount for the U.S. market. If successful, more product margin will be able to be garnered.

 

The article further notes through an interview with the CEO that Chinese companies have difficulties understanding the implications of fostering global brands. We should add that understanding global market needs also connotes having agility and flexibility in one’s supply chain planning and fulfillment capabilities. Zuuma, however, wisely engaged the assistance of two U.S. partners who provide branding and distribution services.

 

I recall surveys conducted of Chinese firms as much as five years ago that also pointed to the fact that in order for China to succeed in the global marketplace, management skills in global product marketing would be a necessity, and were in very short supply. The Journal article notes that the Chinese government has loosened rules for foreign investment and now offers education to encourage Chinese companies to develop their own brands and move up the value chain, just as Japanese and South Korean companies had.  Make no mistake, Chinese government officials understand the tenets of moving up the supply chain.

 

The Journal accurately notes that few Chinese companies have truly developed a full global brand presence, and cites Lenovo Group Ltd. in computing, Haier Group in appliances, Sany Group in construction equipment, and Mindray Medical International Ltd in medical devices as on the threshold.  Lenovo itself gained its global marketing guidance from its previous owner, IBM, who spun off its Chinese manufacturing partner, and today the Lenovo brand has become much more recognized by consumers.

 

My sense is that Chinese companies mastering global branding is much closer than one thinks, and will be achieved via acquisition of certain global brands.  Readers may want to refresh their memories regarding the announcement of  Volvo being acquired by Geeley Holding Group, and Geeley’s management announcements that brand management will remain in Sweden.  Little-known heavy machinery maker Sichuan Tengzhong Heavy Industrial Machinery tried to buy GM's Hummer group, but that attempt failed. 

 

There will no doubt be other announcements in the coming months. Think of contract manufacturer Foxconn’s tremendous production and supply chain capabilities being married to a noted brand.

 

If your professional skills lie in global product marketing and/or global supply chain fulfillment, you might want to consider a mastery of Chinese corporate culture. Your skills are going to be in great demand.

 

Bob Ferrari

About a week ago, The Wall Street Journal ran an insightful article regarding FedEx, FedEx Looks to 777’s to Deliver an Edge.  (paid subscription or sign-up account may be required) The article provides yet another example of the critical importance of investing in supply chain capability to be positioned for post-recession recovery in industry markets.

 

Several years ago, FedEx Chairmen and CEO Fred Smith influenced Boeing to design a cargo version of the 777 passenger jet with the objective of providing longer flying range and faster speed than current cargo planes. FedEx’s emerging fleet of 777’s will provide 2100 more miles of flying range and 14,000 pounds of additional lift than its current MD-11 workhorse.  By the end of fiscal 2016, FedEx plans to have 31 777’s in its aircraft fleet.

 

The article points out that the flight time advantage capability of the 777 allows Asian based manufacturers two additional hours of production time and still have goods shipped for next-day delivery to other geographic regions such as North America and Europe.  Considering the current component shortages of displays and devices being experienced today in consumer electronics, high tech and automotive markets, that may be something for all of us to ponder.  FedEx’s investment in new planes is part of a fiscal 2011 $3.2 billion investment in infrastructure capabilities, up $400 million from last year.

 

FedEx notes that this investment in enhanced capability is a ‘game-changer’ for the industry.  Rival UPS who is mainly invested in older 747-400 and MD11 aircraft counters to the opposing view that existing aircraft capacity can be readily adjusted to any changes in customer shipping needs.  Due to the effects of the past global recession, UPS has been rather aggressive in its overall cost cutting and investment activities.  The latest fiscal fourth quarter earnings reports from both companies indicate that while FedEx delivered $696 million in profits compared to a $849 million operating loss in the prior year, UPS delivered $757 million in profit, three times its profit from a year ago, but revenue fell 3.5% overall.

 

Chairmen Smith readily admits that FedEx has embarked on a rather aggressive strategy to invest in game-changing capability, and is also betting that Asian and emerging markets production output will continue to surpass North America and European markets.

 

The end result of this FedEx strategy certainly warrants continued observation, and it also provides another evidence point on contrasting two opposing strategies in preparing for post-recession recovery:

  • Investing in supply chain capability to leverage industry or game-changing advantage
  • Divesting or cutting-back on supply chain capability to insure positive financial results during the transition.

 

My observation is that too many companies are exercising the latter strategy, and there well may be many ‘game-changing’ case studies for us to comment upon in the evolving months.

 

Bob Ferrari

 

The commentary throughout the blogosphere and in this Community has been rather active regarding Apple’s new product release of the iPhone4, the consequent oversold situation, and now potential reception problems brought on by the ‘antenna band ‘design. In my previous related commentary, Apple's Supply Chain Capabilities- Extraordinary or At-Risk: Commentary Two, I posed the question as to whether Apple introduced too much increased supply chain risk in too few supply chain partners. The latest twist in this ongoing development is the now infamous antenna design issue, which unfolded most of last week and culminated in a well covered Apple news conference hosted by Steve Jobs himself. 

 

The question I now add is whether Jobs practiced proactive risk management and deflected a potential other crisis?

 

Media reports indicated that Apple’s product designers knew of the antenna band problem’s interruption of signal almost a year ago, but were reportedly reluctant to feel the wrath of Steve Jobs in raising this issue.  Now, as more phones reach the hands of consumers, the dropped signal issue has seen the light of the Internet and the power of social media, which clamored for a rather expensive recall of all sold iPhone4’s earlier last week.

 

The Wall Street Journal’s latest twist in the article, A Defiant Steve Jobs Confronts ‘Antennagate’, (subscription or preview sign-up may be required) noted how Steve Jobs  has confronted the situation by potentially deflecting the issue to be a common one among all smartphones.  More importantly in my view, Jobs practiced proactive risk management, and perhaps we should give him credit for doing so.  I support this view with the following evidence:

 

  • Steve Jobs did not assign responsibility for conducting last week’s news conference to his very able COO, but rather took on the task himself, as he should. A solid tenent to crisis and risk management is indeed executive presence and leadership. 

 

  • He openly apologized to customers who experienced the antenna related problem, but stopped short of acknowledging a design flaw.Yet he made the statement: “We are being totally transparent.”

 

  • He stated that less than 1% of iPhone 4 customers had called attention to the antenna problem and that customer return rates thus far were low. Of course, not stated was the fact that supply shortages have reduced overall availability and customers have had limited time to exercise their phones. That may not matter to Apple customers since Jobs is looked upon as being the essence of Apple’s products.

 

  • He deflected the specific Apple antenna issue to an industry-wide issue, arguing that all smartphones have similar reception problems. The WSJ article notes the immediate reaction from other competitor CEO’s.

 

  • Jobs offered a solution for customers- a free rubberized band to wrap around the antenna. “We’re not feeling right now that we have a giant problem we need to fix.” ..”We care about every user and are not going to stop until every one of them is happy.”

 

  • Finally, Jobs attempted to place an overall perspective to the problem. This has been blown so out of proportion that it’s incredible.”  That was Jobs message to social media and the blogosphere to cool the rhetoric.

 

 

Community and smartphone industry members may well have views regarding the specific antenna issue related to the iPhone4, but step back a moment and view this latest event in the context of risk management and mitigation. Steve Jobs has taken on a potential added disruption to Apple’s newest product launch, has dodged an expensive bullet and may have bought more time to resolve other risk issues related to the iPhone4.

 

Proactive risk management involves the perception of transparency and executive leadership.  Was that not what Steve Jobs practiced?

 

Bob Ferrari

Last week, Rapture World in Europe hosted a follow-up webcast concerning AMR Research/Gartner designation of the Top Twenty-Five Supply Chains for 2010.  This webcast was designed as an opportunity for European supply chain professionals to ask some specific questions related to the process, criteria, and characteristics related to companies that were named Top 25, and the questions were all very probing and insightful.  You will find other commentaries related to this year’s AMR Top 25 within this community.

 

One of the questions that really caught my interest, and perhaps this community as well, concerned why any contract manufacturing service providers (CM’s) were not included in the listing.  Kevin O’Marah, senior vice-president of supply chain research at AMR Research (Gartner) responded quickly that in his view, contract manufacturers should have been considered.  He did however raise a rather interesting qualification to this consideration, namely, how much of the total global supply chain responsibility does any one contract manufacturer have?  What process capabilities and competencies do certain CM’s provide, and how does this compare with the OEM’s that are also considered for Top 25 designation?  The answer may be closer than once believed.

 

I believe that is an interesting question for discussion and comment in the Kinaxis Expert Community, and not being bashful, I would like to get the ball rolling.

 

From my perspective, contract manufacturers most definitely should be considered in anyone’s top listing of supply chains.  The scope of supply chain activities performed,  the volume / scope of supply purchasing, manufacturing and distribution, the adoption of SCM related technology and the agility in managing all forms of globally-based manufacturing are noteworthy.  Hon Hai Precision Industry Co. Ltd. (Foxconn) alone is probably one of the world’s largest manufacturers in terms of volume and headcount, and other CM’s bring their own set of unique competencies. A recent article appearing in Electronic Design makes note that a recent three-in-one merger completed by Hon Hai could allow this CM to be one of the most vertically integrated manufacturers of LCD TV’s.  The merger included control of three top suppliers of LCD panel displays that make-up the majority of component material costs in today’s high tech devices.  In addition, OEM Sony, under considerable cost and profitability pressures, has been outsourcing a significant portion of its previous owned LCD TV manufacturing capacity to Foxconn. When Foxconn’s current original design manufacturing (ODM) capabilities are combined with a horizontally integrated supply chain, this CM could well be positioned to control a significant portion of the entire LCD TV market, or at least provide significant competition to existing players such as Samsung.

 

When I ponder the broader criteria of being demand-driven, overall financial performance, time-to-market, sales and operations planning and customer responsiveness, I can’t help but stumble upon a conflict.  If a CM indeed demonstrates most of the outlined supply chain competencies or characteristics of anyone’s Top 25, then by definition, they are actually a self-contained independent entity as opposed to a ‘supplier’.  In the case of Foxconn in LCD TV’s and perhaps other consumer electronics products. the only missing element is ownership of the brand. (e.g. Apple, Cisco, Dell, HP, Sony…)  

 

Now some readers may be chomping to point out at this point that I may be making too many broad assumptions and disparaging the complete set of competencies and proven capabilities that have been established by Top 25 designees.  I’m purposely being provocative to point out a broader view and spur a discussion.

 

If and when a global CM makes the Top 25 listing, it will most likely be at the displacement of an exiting brand owner.  In another words, that CM will be a de-facto brand owner.  And when that happens, it will be not only a breakthrough but a huge wake-up call to the existing industry players. 

 

Those that control all aspects of the supply chain, including product innovation, ultimately control the brand.  That is when and industry has been disintermediated. 

 

Should CM’s be considered- yes!  When they make the list- watch out!

 

What’s your view? How close are CM’s to becoming Top 25?

 

Bob Ferrari

The reports indicating worldwide manufacturing activity in June are all correlating to a potential speed bump on the road to cross-industry recovery, and provide a reinforced reminder to the overall importance of active what-if scenario planning capabilities within sales and operations planning (S&OP) processes through the remainder of 2010. 

 

While Q1 proved to be very optimistic in terms of production growth, manufacturing growth in the U.S. and most of Asia and Europe all turned downward in June.  The Institute  of Supply Management (ISM) PMI index was reported as 56.2 in June, down roughly 4 percentage points from April.  The more significant new orders index was recorded as 58.5 in June, down 7.2 percentage points from April, most likely reflecting the fact that a surge in inventory restocking has run its course.

 

Similar, as noted in a recent Wall Street Journal article featured on Kinaxis Manufacturing Central, PMI indexes for Australia, China, India, South Korea and Taiwan all reflected similar cutbacks in manufacturing activity in June.  As an example, the China Federation of Logistics and Purchasing PMI fell to 52.1 from 53.9 a month earlier, and South Korea’s PMI fell to 53.3 from 54.6 in May.

 

The consensus from economic forecasters seems to reflect that this worldwide moderation in production may not necessarily reflect the often feared ‘double-dip” recession, but more likely other economic and market factors. Previous government stimulus programs are winding down, inventory replenishment cycles may have run a course, but the Asia and emerging market based economies remain strong.  It is yet another sign that challenges remain in the planning of supply chain resources and activities through the remainder of the year.

 

Now more than ever, S&OP teams will need to be very diligent in noting any significant changes in demand or supply, and plan accordingly.  Overall inventory levels remain low across many industries, and many stories abound noting that key supply shortages are inhibiting critical orders. In a previous Community commentary, I noted reports that such shortages were already impacting key growth industries such as telecom and high tech. All of which imply that any upside flexibility may still present a problem without an adequate planning horizon, or what-if contingency plans.

 

In a recent Kinaxis sponsored webcast on the very topic of S&OP, some live audience polling was conducted within the webcast.  Trevor Miles of Kinaxis notes in a recent posting that over 70% of the attendees of that webcast indicated that there has been a big increase in the importance of what-if capabilities within the S&OP process.  Yet, only 12% indicated that they felt that their organization had adequate what-if capabilities, and over 40% stated their company is only just starting to use what-if capability within the S&OP process. I was also perplexed at these indicators, but the current indicators of manufacturing and supply chain activity should provide some justification to step-up your efforts toward incorporating more what-if scenario planning.

 

Demand and supply volatility is an unfortunate reality for the remainder of 2010, and

the industry leaders of 2010 will be those firms who best navigate the waters of supply chain uncertainty.

 

How is your organization approaching its supply chain plans for the second-half of 2010?

 

Bob Ferrari