Skip navigation
2010

 

During the past few months, in this community and on the Supply Chain Matters Blog, I have been sharing commentaries regarding the evolving new era of aircraft manufacturing which has had such a strong dependence on an outsourced supply chain of suppliers and partners, a dependence model that still exhibits needs for improved coordination in product innovation and material flows. The time has come to comment on a third potential player, one that presents a threat from a different perspective of the supply chain.

 

Most everyone is aware of the continuous setbacks that have occurred with Boeing and its 787 Dreamliner program.  The latest setback occurred just a few weeks ago with an unfortunate in-flight electrical fire causing one of the test aircraft to make an emergency landing.  The Dreamliner’s scheduled first customer ship scheduled for Q1-2011 remains in jeopardy, and is now over two years late. We also commented on Bombardier’s C-Series program, a single aisle aircraft that is the cornerstone of that company’s plan to compete head-on with likes of Boeing and Airbus.  The C-Series also has a high dependence on a globally outsourced supply chain including major component assemblies sourced in China, Ireland, Italy and Germany.

 

Both of these programs are a high-stakes gamble for competitiveness and attraction among global based airline customers, especially those in the emerging markets.  Success is keyed on who can best coordinate and integrate the most breakthrough innovative technology with the most cost-efficient, global-based supply chain. Is the case of aerospace, sourcing equates to innovation, cost, and access to a potential growth market that has political dimensions of presence.

 

The third player, Commercial Aircraft Corporation (COMAC), is now coming into broader visibility.  COMAC is a China based, state-owned aerospace manufacturer who has embarked on its own program of innovation and cost.  The C919 (not to be confused with Bombardier C-Series) is a single-aisle aircraft being designed to carry up to 150 passengers. It is also being designed to be an alternative to the Boeing 737 or Airbus A320.

 

A recent Bloomberg Businessweek article notes that some key suppliers that supply both Boeing and Airbus, such as General Electric and United Technologies, are also working with COMAC.  They are hitching their wagons to all major aerospace players in the overall game of global competitiveness and who will become ultimate winners.  The reasons are fairly obvious; suppliers want to insure access to China’s and other very large aircraft markets that will unfold in the coming years. Bloomberg points out that China alone accounts for 22 percent of Airbus’s 2010 orders and 15 percent of Boeing’s.   Thus far, COMAC has received orders from three Chinese airlines and two leasing companies, all state-owned, for a total of 90 C919’s, even though the maiden flight is not scheduled until 2014. That situation alone provides one key advantage that the company has in terms of China’s airline market, its influence as being China owned and resident.

 

Much has been written of late about China’s high speed rail market, and how quickly China’s state-owned railway was able to master world-class technology in such a short period of time.  China’s railway is now competing for large-scale rail projects not only within China proper, but in other global regions, including the United States.  The major high speed rail OEM’s from Japan, Germany and France were all compelled to form joint-partnership arrangements in China in order to assure market access.  Now, some of these providers believe that their technology may have been compromised.

 

There is no doubt that in the coming months and years, product design, innovation, reliability and supply chain sourcing will all be primary factors as to which aircraft ultimately succeeds as favored by global carriers.  The Bloomberg article summarizes the bottom line of its article as noting that China’s commercial aircraft industry is getting help from Western aerospace companies who wish to branch out beyond today’s major industry players. By being resident in China, CMOC may already have a cost advantage, but has a strong reliance on product innovation and engineering.  It will be interesting for all of us to observe how a low-cost producer can overcome innovation and intellectual property barriers. 

 

The stakes are even higher and a lot can be learned from the current episodes in high-speed rail. We could possibly read business case studies ten years from today that outline the circular trend in commercial aircraft component sourcing, moving from a past one nation, one contiguous resident supply chain, to multiple nation component supply chains, and back again to one predominant resident supply chain, which could include China.

 

In any case, don’t be terribly surprised if in the next five years, you find yourself traveling on a Chinese commercial aircraft, especially if you are flying between Chinese cities.

 

Bob Ferrari

 

There has been a lot of articles and commentary of late addressing brewing conflicts among global economies concerning the valuation or volatility of certain currencies and the implication to manufacturing and supply chain outsourcing is already unfolding

 

The most significant movement concerns Japan, where a fifteen year high, on a nominal basis, on the value of yen, has led to more and more Japanese manufacturers moving to increasing outsourcing of manufacturing to other lower-cost regions.  In previous commentaries, we noted decisions by consumer electronics providers Panasonic and Sony Electronics to aggressively move previous home country manufacturing operations to contract manufacturers in other Asian regions. The latest significant tremor involves Toyota and Nissan.

 

 

In early November, Toyota, who already sources over 50% of production outside Japan, threatened to move significantly more production out of Japan.  A Financial Times article at the time noted (free preview account may be required) that Akio Toyoda, Toyota’s President called the surge in the value of the yen a “big problem” that threatened all of Japanese industry. Toyota executives note that the company is quickly losing competitiveness, especially as sales in other emerging regions are diluted by home currency issues.  The FT article contrasted Toyota to Toshiba, who since 2009, moved more supply and final production outside of Japan, and was able to profit from the yen’s rise in the first half of September. Today’s Financial Times has a front page article noting that Nissan is planning to shift the balance of its production and support functions towards dollar-linked economies, including China and the U.S., in order to protect itself against currency volatility. CEO Carlos Ghosn is also noted as indicating that Nissan wanted to correct a “big imbalance’ in costs and revenues caused by producing cars in Japan to sell in the U.S. and other dollar-linked economies.

 

The November 20-26 edition of The Economist also features an article, Leaving Home, indicating Japanese firms currently do 30% of their production overseas, twice as much as the early 1990’s, and that that figure is sure to rise with current trends. Three different factors are cited as accelerating this shift and include the rising nominal value of the yen, closer access to faster-growing economies, and the burden of corporate taxes and tariffs. The Economist article also astutely points out that as major production shifts from Japan or other countries, local suppliers atrophy from lack of skills and innovation.  Also noted was that a previous belief that keeping “mother factories’ in Japan to refine production processes and retain skills is also losing favor, since in 2008, three quarters of Japanese-owned were at the same technical level as Japanese domestic plants.

 

Manufacturing outsourcing continues to be a delicate balance of multiple factors. Access to growing consumer-based economies, shifting and volatile currencies, higher transportation and quality control costs, and concern for intellectual property protection all interplay in the dynamics of outsourcing. 

 

From our perspective, two conclusions stand forth.  First, outsourcing decisions will continue to involve dynamic factors, and the degree of flexibility and agility of manufacturing and supply chain networks will continue to be a key consideration in supporting outsourcing needs.  That also implies the ability to analyze and assess all the various factors. Second, no country can claim to have an economic growth plan without consideration to the global competitiveness of its manufacturing and supply chain infrastructure, as Japan is unfortunately beginning to understand.  Other countries may follow, and none are immune.

 

Bob Ferrari

 

The nature of inventory can evoke a lot of opinion and management response.  Most senior financial managers and some CEO’s believe that too much inventory is a detriment to working capital performance. It is just plain, evil. Marketing and sales executives view inventory as an ultimate enabler, and having inventory of a hot selling product is tantamount to ‘candy’ to a child, or exclaims, “Give me more!” 

 

Our community knows all too well that having the right balance and composition of inventory is the real test in the ability to satisfy all stakeholders. A previous mentor on mine, Larry Lapide would often evoke the cholesterol analogy regarding inventory in his presentations to clients.  There is good and there is bad cholesterol in our bodies, and the challenge is to optimize good and minimize the bad as much as possible.

 

There is a rather interesting business situation being played out, which includes inventory, and it involves supply chain icon Wal-Mart.  The world’s largest retailer recently reported its fiscal Q3 quarterly earnings, and while announcing a 9 percent increase in profitability, this retailer experienced the sixth straight quarter of declining growth in existing U.S. outlets. Nearly a fourth of overall sales now originate from non-U.S. retail outlets. Wal-Mart is quick to note that the condition of U.S. consumers has a lot to do with fueling this declining U.S. sales trend. The retailer points to a “pronounced” pattern of store sales at the beginning of the month, as soon as paychecks and welfare payments are issued.  The implication is that U.S. retail consumers have little to spend, have a difficult time in managing cash flow, and have a very keen focus on value. Meanwhile, rival retailer Target Corp. recently reported a 1.6 percent increase in same store sales, with traffic counts up by 2.1 percent. 

 

For those readers unfamiliar with the Wal-Mart situation, there is some history to reflect upon.  Wal-Mart suppliers are acutely aware of the relentless focus on supply chain cost, which includes inventory, payables and process efficiencies. The latest initiative is a program directed at purchasing more goods directly from select global suppliers, bypassing intermediaries. Wal-Mart believed that it could gain even more efficiency through direct purchases of standard items.

 

In late 2009, Wal-Mart embarked on an aggressive store re-vamp and inventory reduction program.  The intent was to stock only high volume, high demand intems while creating a more streamlined, uncluttered look and feel to a Wal-Mart U.S. store. The premise was value at traditional low prices. Gone were the days of stocked pallets placed in main shopping aisles giving the appearance of a cluttered warehouse atmosphere. The new merchandising plan was designed to help customers navigate easier and located expensive or impulse items in select high-traffic areas.

 

At mid-year, Wal-Mart reversed course, re-assigned certain U.S. management, and is now adding more merchandise variety to stores. The Wall Street Journal noted that inventory has grown 7.7 percent compared to a year earlier.  By my calculation, in the most recent quarter, days sales of inventory is up to its highest level ever, no doubt in anticipation of an aggressive holiday buying season.

 

Rival Target has also embarked on a revised U.S. store merchandising program, but the results thus far, seem to be different.  Target speaks to a strategy that allows customers to indulge in small, affordable ways. Target also emphasizes that it is striving to constantly listen to customers and fulfill customer shopping needs.  Both retailers currently stand at very similar days inventory outstanding profiles, yet U.S. sales performance is different. In food and grocery items, Target is boosting food item selection with strong indications that this has been a multiplier effect on same store sales.  Wal-Mart on the other hand, may be losing food and grocery sales to not only Target, but a Costco Wholesale as well.

 

Technology and business process methodologies have come a long way in the ability to optimize merchandising, plan shelf space, analyze and optimize inventory investments based on consumer needs and revenue targets.  Management behavior or intuition it seems, has not made the same rate of progress.

 

What’s your view?

 

Bob Ferrari

 

The holiday season is fast approaching and many supply chain professionals are doing their ‘magic’ to make holiday dreams come true, not to mention quarterly performance metrics. 

 

I thought of a great idea to start a conversation thread for our community; let’s start a holiday wish list to be sent to all supply chain technology vendors, including Kinaxis.  This list should include some cool applications that would make everyone’s work lives a lot easier.

 

The staff here at Supply Chain Matters would like to get the ball rolling with a top five listing of the coolest applications that vendors could deliver as holiday gifts: the SOPI, STUPID, IMSCREWED,MUTANT, and AHH apps.

 

 

The S&OP Intelligence App (SOPI)

Anyone who has had participation in a sales and operations planning (S&OP) knows that participants sometimes get carried away with assuring that their individual or functional agenda gets played out in the process.  How many times has marketing and sales been overly optimistic concerning customer demand?  Conversely, finance’s view of inventory hedging and safety stock balances.

 

This SOPI App monitors all previous phases of the S&OP review process and calculates a behavior indicator of process based on likely probability and/or artificial intelligence algorithms.  An example of such outcome probability values could be the following:

 

a)   Straight Shooter: Consistently exhibits good judgment and reliable commitments; the go-to participant for action planning or crisis. Participant feedback: “Good call!

 

b)    Opportunist: Some history of gaming or one-sided bias and /or exaggeration. Participant feedback: “Are you for real? Let’s really think about that!

 

c)    Player: This participant is always grandstanding, plays to the crowd. Participant feedback: “The community theatre group rehearsal is every Tuesday night!

 

d)    Illusionist: This participant dwells in fantasyland. Participant feedback: Give me a break, will ya!

 

 

 

The Supercharged, Turbo Universal Probability Inventory Deployment App. (STUPID)

In this uncertain period of post-recessionary recovery, managing inventories has become a constant and difficult challenge.  CFO’s and financial teams continue to want to preserve cash and improve working capital while customers practice sophisticated and distinct buying behaviors. Many companies are looking to expand sales in emerging economies and inventory balancing is a continual challenge. If you reside in consumer or high tech electronics settings, you definitely feel the pain. Sophisticated inventory optimization technologies are not well understood and we have just about given-up on trying to get any timely analysis from our ERP related inventory planning applications.

 

The STUPID App will optimize customer demand patterns with available and planned inventory by outputting a series of supercharged, Venn-like diagrams. These diagrams will be the equivalent of a ‘large glob of goo’ that provides a near real-time analysis of the various forces impacting inventory and their likely plan outcomes.  The STUPID App is not so much an analytical tool, but a means to mesmerize the CFO and his team for a few days while inventory is re-positioned.  Whoops- how did that happen?”

 

 

Intelligence for Materials, Specialized Commodities, Resources, Engineering Requirements , Workforce and other Enterprise Distribution App (IMSCREWED)

The current explosion in inbound commodity and materials prices are causing significant challenges for strategic sourcing and procurement professionals in overcoming these price increases by seeking new sources of supply, or working with existing suppliers and product management to find alternative materials.  This is a real problem, where previous cost savings are being obliterated by current price explosions in food, metals, electronics and other commodities.

 

The IMSCREWED App is a highly sophisticated tool that analyzes all current and future market factors, and outputs a series of probable procurement related scenarios or options.  IT development resources need not be intimidated or taken-back by this rather complex application description. This application must be able to take advantage of today’s most sophisticated of gaming, hedging or probability outcome technologies, and be able to deliver practical action plans.  The application also needs to be very user-friendly, since it must appeal to a wide-ranging collection of users.

 

 

Mobile Universal Trumpet Alert and Notification Technology (MUTANT)

The unsung superheroes of this rather difficult era of non-stop supply chain challenges have been the teams of logistics and transportation professionals who have been constantly called upon to be the masterminds of ‘can-do’ or ‘make-it-happen’ when forecasts were inaccurate, supply was late, or customers placed last-minute orders.

 

MUTANT is a universally deployed, mobile based application that runs on any smartphone platform.  Whenever logistics and transportation has solved a significant problem, made carriers perform extraordinary tasks, or performed beyond the call of responsibility, a universal alert is automatically sent that triggers all mobile devices to play a trumpet flourish.  This would be similar to what one would hear in a cavalry charge on the field of battle, engineered with a high frequency and unmistakable tone. This mobile-based technology needs to have sophisticated programming that targets specific mobile devices held by certain senior management, or other specific targeted teams.

 

 

The Aura-Halo-Hug App (AHH)

We all need a cool gift for those countless, good, unrecognized supply chain related individuals on our holiday list that we just want to recognize for their good works.

 

AHH is a unique application that emits a constant warm glow, a soothing tone, a sense that all is well and we all need to get along with one another in harmony and tranquility.  I’m personally dedicating myself toward working on development of this App, and then selling the rights to Apple.  At that point, I’m going to retire from supply chain activity and find a beach somewhere and let the rest of you space out on your AHH App.

 

 

There you have it- our Supply Chain Matters top five holiday wish list for supply chain technology. 

 

Chime-in everybody, what’s on your holiday wish list?

 

Bob Ferrari

 

Kinaxis held its annual Kinexions customer conference in Phoenix and I was pleased to not only be an attendee but also provide real-time blogger commentary directly from the conference.  On the Supply Chain Matters blog, I penned various dispatches along with my summary impressions of the conference on the last day. If you would like to view individual commentaries, you can double-click on any of the following links:

 

Dispatch One

 

Dispatch Two

 

Dispatch Three

 

Dispatch Four

 

Dispatch Five

 

Summary Impressions

 

http://www.theferrarigroup.com/blog1/2010/10/28/kinaxis-kinexions-conference-summary-impressions/

 

Now that I have had the opportunity to return to my office, I thought about correlating certain messages delivered by various customer presentations at Kinexions, with two recent supply chain related data points related to current executive sentiment. I have noted some consistency, especially concerning important shifts underway in supply chain planning requirements.

 

In a previous Expert Community posting, I penned commentary regarding the recent PRTM published survey involving 340 participant companies from multiple industry environments across Europe, North America and Asia.  The intent of this specific survey was to ascertain what are the supply chain priorities on the COO agenda for 2012 and what priorities are firms placing on supply chain initiatives.  The summary conclusions of this PRTM survey noted the following:

 

  • Volatility and uncertainty have permanently increased in many industry settings, and the COO seeks a more market dynamic, demand sensing, and cost-optimized supply chain configuration
  • Top-line revenue growth requires a global customer and supplier presence
  • The existing supply chain organization is not truly integrated or empowered
  • Managing supply chain risk involves the complete end-to-end supply chain

 

PRTM summarized its survey noting five key priorities in the 2010-2012 COO agenda:

 

  1. Improve customer access and accuracy of supply chain planning
  2. Increase upstream and downstream supply chain flexibility
  3. Focus on total supply chain cost engineering
  4. Implement end-to-end supply chain risk management
  5. Integrate and empower the supply chain organization

 

At Kinexions, customer presentations from Cisco, RIM and Qualcomm each noted a far more accelerated pace of business requiring quicker planning and decision-making cycles. Shifts to business models focusing more on consumer-driven markets and a globally extended supply chain fulfillment presence have each added to an increased clock speed to required business decisions. Cisco and Qualcomm noted how elements of push-pull supply chain frameworks were needed to address needs for agility in overcoming needs to balance critical long lead-time components with customer product forecasting and order fulfillment needs. A common theme for all was centralized and empowered supply chain planning processes that required quicker, more forward oriented planning cycles.

 

A second data point comes from my recent involvement and attendance at the Supply Chain Council’s recent Executive Summit involving over 100 attendees, where I also penned observations on the Supply Chain Matters blog. Supply chain executives in this group noted that volatility; variability and business change is a permanent phenomenon going forward.  Further observations noted that the COO agenda in the coming months reflect challenges in helping the business to improve top-line revenue growth and customer access, insure upstream/downstream supply chain flexibility, along with a continued emphasis on risk mitigation and total cost engineering.

 

Amgen reinforced these themes, noting how significant changes occurring in pharmaceutical business environments are being reflected on a rather complex, biology driven supply chain planning environment with long lead times.  Issues of growth within emerging markets, expensive capacity, product risk, product shelf-life and expiry, interplay with the critical need for high service levels concerning life-saving drugs. Major initiatives of market segmentation, risk mitigation and new partnerships surrounded the common theme of managing increased complexity. In the end, Amgen concluded that a means to manage these challenges lies in the ability to perform more rapid planning cycles, to align network planning, and have an S&OP process grounded in forward-looking, information rich scenario planning. That could not be easily achieved with a current ERP APS environment.

 

Make no mistake, many firms in many industry settings, are coming to the realization that current external and internal business challenges require more responsive alignment of supply chain planning, execution and S&OP processes,  A dependence on older, in many cases ERP driven planning technology, or multiple planning applications with far different design principles solely grounded in historic data and longer planning cycle-times cannot keep pace with the current rate of change.  Neither can a dependence on IT to provide the long-term answer, often reflected as next year, or the following year.  Change is here and now, and the new industry leaders are those that have mastered rapid supply chain planning and execution alignment.

 

Bob Ferrari