I would like to extend to the entire Supply Chain Expert Community my sincere best wishes for the upcoming holidays across the globe, along with a productive and rewarding New Year.
Rest-up and enjoy family, friends and warm friendship.
If you are need of a chuckle or two, you are welcomed to view and contribute to the 2010 Holiday Wish List for Supply Chain Technology.
Kinaxis recently promoted a July 2010 Aberdeen Group research report on benchmarking S&OP processes. What caught my interest was a finding that 51% of North America respondents indicating that product demand volatility was one of their top-three pressures. The other two were improving top-line revenues and reducing supply chain operating costs. The report notes that the emphasis for S&OP has shifted from inventory reduction to management of volatile demand.
I was reading the Wall Street Journal today and two stories in the Marketplace section note how volatile demand has become in the B2C sector during this critical holiday buying season . One article notes that television manufacturers are experiencing difficult challenges in lifting current holiday sales of expensive 3D televisions this holiday season. Many of the world’s top TV brands were counting on sales of more expensive 3-D televisions to boost profit margins. The industry itself has been challenged by annual price declines of 20% on average despite a host of product innovations. As an example, the article notes that a 40 to 44 inch high-definition LCD television with the latest 1080 lines of refresh resolution will sell on average of $684 this quarter vs. $719 a year earlier. Inventories of the new 3-D sets remain challenged, and manufacturers are turning to aggressive promotions to clear out models before a new wave of innovation begins in 2011.
A second article notes that as the 2010 holiday buying season nears its final days, consumers have waited out retailers, hoping to find the best bargains in the final days. Despite lots of promotional hype that began just prior to the Thanksgiving holiday in the U.S., consumers have played a savvy game of watch and wait. Buying patterns also appear to have changed. While apparel and jewelry sales are up, consumer electronics have only experienced a 0.4 percent increase, well below the 4.4 percent increase that occurred in 2009, which explains the challenge of TV makers noted previously. The article quotes a retail industry analyst as noting that 75% of apparel makers were either meeting or surpassing the discount deals offered on “Black Friday’, compared with 50% last year. Consumers are obviously having the final say in what really will attract their buying choices.
I suspect that S&OP teams in the B2C sector can well relate to these challenges as they wind down their planning for December and refresh plans for 2011. There were obviously high expectations set for early promotions to spur consumer demand, only to find a more sophisticated consumer armed with all kinds of Internet related tools for buying intelligence. Some operations teams are probably white-knuckled as they monitor daily inventory balances at channels and distribution centers, while S&OP meetings turn to daily agendas.
The Aberdeen report further cites S&OP best-in-class capabilities for process, organization, technology and performance management components of the process. It is important to take note of the role of technology when attempting to navigate periods of high demand volatility. When markets change on a daily and weekly basis, demand sensing and scenario planning tools have been important tools for consumer focused companies. Consider that Aberdeen notes that 58% of consumer-related S&OP processes cite the ability to respond to unplanned events in a timely manner is a important capability. Technology plays a more important role in overcoming barriers of time and information.
Community members residing in B2C sectors might want to share their own perceptions and best practices for managing demand volatility in today’s challenging consumer markets.
Many industries have their unique planning and supplier risk challenges but we often observe that the high tech and consumer electronics sector seems to take the top position is terms of volatility and challenge. It seems that comedian Steve Martin’s classic line of “wild and crazy” is an appropriate description for those planners and commodity procurement teams dealing with day-to-day high tech product fulfillment needs.
These last two weeks have brought acute reminders to these challenges. Toshiba announced that a brief power failure that occurred at its prime NAND flash memory chip production facility could impact the future output of production by as much as 20 percent in the next two months. NAND memory devices are common in the production of tablet computers, smartphones and digital music players. According to a Wall Street Journal article outlining the incident, (paid subscription may be required) a sudden drop in utility supplied voltage that only lasted .07 seconds significantly impacted complex production equipment within the Yokkaichi facility, which is Toshiba’s prime NAND memory chip production facility. Toshiba is the world’s #2 producer, including long-term supply commitments for Apple, and accounts for one-third of global NAND revenues. This potential glitch in production could have other implications in terms of spot-market pricing and the availability of NAND components over the coming quarter. Industry players competing directly with Apple will be especially challenged since many have been scrambling to bring alternative consumer choices to market, and must now find alternative means of short-term supply.
Contrasting the unique but critical NAND flash memory shortage is a potential glut of LCD liquid-crystal-displays used in high definition televisions. Leading LCD supplier Samsung Electronics indicated that is ratcheting down the production at its various LCD factories to respond to building global inventories. According to a separate Wall Street Journal article, Samsung’s LCD division saw a sharp drop in operating profit margin in the third quarter, amid weaker sales. Number two LCD producer LG Display has also seen a drop in operating profitability because of building inventory and weaker panel prices. Keep in mind that in early 2010, the industry had just come off of a banner period in holiday sales of LCD televisions. Conversely, global inventories of high-definition televisions are unusually high during this upcoming holiday season and many OEM’s have been aggressively promoting products to help clean out these finished goods inventories. If demand were to again surge later in 2011, industry players would have to deal with this current decision to decrease capacity output of LCD devices.
It may seem to some readers that some of us in the blogosphere have been over-hyping the importance of faster planning cycles and more responsive sales and operations planning processes. The occurrence of a .07 second disruption in power again reinforces how quickly planning can change in a volatile world. Issues of supplier risk and supplier dependency are both important reminders for the need for more responsive supply and demand planning in 2011 and beyond.
The U.S. and related North American automotive industry has had its share of business challenges since 2008. The effects of severe recession and high unemployment brought two of the big three U.S. OEM’s, and to a large extent the broader supplier network, to the ultimate brink of disaster. Today, after a lot of governmental assistance and worker concessions, there is a far different picture. Chrysler and General Motors have new leadership and more streamlined business models, having been granted the opportunity to shed unproductive brands, production capacity, and overhead infrastructure. The supplier network has also transformed to leaner structures and more diversified product offerings. Unfortunately, 62 companies had to file for bankruptcy protection in 2009, and many remain in a fragile state.
I suppose, we could make the assumption that renewal would bring a more pointed awareness toward the importance of continuous product and process innovation, with stronger supply chain collaborative innovation, planning relationships and capabilities. To a certain extent, some of this is happening, but yet again, some old behaviors seem to remain. Let’s reflect on that for a moment.
Many of the global automotive companies are adopting design and manufacturing strategies that will leverage increased common platforms and modular components in global-wide product offerings. Companies such as Fiat, Ford, and Volkswagen are aggressively embarking on these global platform strategies. As an example, the Ford Focus is built on a global-wide platform that has various nuances for different global regions.
The implications to supply chain cost and supplier relationships are profound. OEM’s will be able to deploy broader flexible manufacturing capabilities with individual plants having the capability for supporting multiple models or brands. Global capacity can be more easily shifted based on economic or consumer buying factors. Industry players however, predict a survival-of-the-fittest struggle among global based supplier teams as they attempt to position themselves as primary supplier in large volume contracts. There are also strong dependencies for supplier co-innovation and six sigma quality efforts will take on even more significance since a breakdown in quality will have far broader cost implications in product recalls. The supply chain community can also anticipate a far stronger inter-company participation in global based S&OP processes because of common supply needs.
Given this transformation toward modular, global supply, one would anticipate that supplier relationships and collaboration would take on a new meaning. That’s where current evidence points otherwise.
Recent reports indicate that that North American OEM’s, in the zeal to improve current profit margins, have revived the practice of demanding price concessions from suppliers. Johnson Controls notes that annual contract ‘price-downs’ of as much as 56 percent are being sought. Shocking enough, Ford Motor Company, the highly touted prime survivor is noted as being one of the more aggressive in seeking price concessions. Similarly, Honda and Toyota are resorting to former aggressive price concession tactics. One wonders if this is a way to “thin the herd’ of suppliers vs. building stronger relationships.
Even more perplexing are recent announcements where Chinese companies are acquiring U.S. parts suppliers. Recently, General Motors applauded the sale of its steering supplier Nexteer to Pacific Century Motors, a Chinese owned company. This follows the acquisition of the former brakes and transmission business of Delphi to Tempo, another Chinese owned consortium. Industry observers observe that other Chinese companies are eager to find more North American acquisition opportunities. A Financial Times article commenting on this recent trend points to two main goals for current Chinese interest in Detroit centric suppliers; access to western automotive technology and broader leverage toward being a player in global platforms. Even more perplexing are statements by Michigan politicians who indicate they are keen to avoid the mistakes of the past, when Asian and European carmarkers elected to invest in southern U.S. plants and infrastructure, to avoid perceived higher labor costs.
One wonders if this is an example of purely local vs. global based thinking. Is the argument that China’s lower labor costs are the smarter strategy for North American supply chain competiveness?
The question remains, have North America based automotive OEM’s really transferred learning from just a short time ago?
I’m not that sure, and remain somewhat of a skeptic What do you think?