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2011

 

CSCMP’s recent Supply Chain Quarterly reported that a recent survey of supply chain executives, conducted by the Tomkins Supply Chain Consortium found that many executives have a high level of uncertainty about the future than they did in the past. Nearly 60 percent of executives polled expect business to be riskier, with those executives representing larger companies to be the most apprehensive. A majority of SMB executives also view high levels of uncertainty within their industry settings.

 

None of this should be a surprise to the Supply Chain Expert Community, since there has been a lot of sharing and exchange of information regarding the current uncertainties concerning many industry value-chain environments.  Supply and value chains are far more extended and many are supported with very lean, just-in-time oriented resources.

 

We recently posted our own commentary regarding our view The Two Most Significant Supply Chain Management Challenges in 2011.  Current social and political turmoil across the Middle East coupled with high volatility of oil prices, along with reports of thwarted terrorism attacks only add more uncertainty to global supply chains.

 

To add comfort, however, supply chain executives are not alone in their unease.

 

Accenture released the results of a recent survey representing more than 1000 CFO’s and senior finance executives across Asia, Europe and the Americas.  This report cites 79 percent of senior finance executives seeking more flexibility in their operations. The authors also point out that three out of four of the respondents (78 percent) seek flexibility in planning and forecasting, rather than a traditional annual process. Also noted was that a majority (53 percent) of these same financial executives desire to expand their content and data (including analytics) in planning and forecasting, and 48 percent also indicating that they needed to modify their corresponding IT systems. Keep in mind that finance executives were also calling for reductions in overall supply chain costs these past two years.

 

This is, in our view, another endorsement of the need for many organizations to evaluate enhanced supply chain analytical, business intelligence and sales and operations planning (S&OP) process and IT support capabilities.  Uncertainty is unfortunately going to continue throughout the coming year, and executive consensus on heightened risk is already a foregone conclusion.

 

The real challenge is coming together with a timely set of plans for where sense and operational response plans need to be enhanced for short and long-term effectiveness.  Near term sensing and synchronization of activities is the most pressing capability today.

 

Supply Chain Matters recommends that overall cycle times of planning processes be examined and challenged, along with finding ways to conduct quicker, more scenario-based analysis of various options related to changing business conditions.  As an example, what is our response if customer demand suddenly drops by 10 percent, or better, increases by 10 percent because of some unplanned factor in the market? How quickly can we change our supply chain resource plans?

 

The good news in the midst of lots of news reflecting on uncertainty is that the senior executive suite already concurs.  The challenge is to position the organization for investing in the process capabilities that are needed now vs. sometime in the far distant future.

 

Bob Ferrari

In March of 2010, Supply Chain Matters provided commentary on how the afte reffects of major economic downturns can often lead to new and different business models. We specifically cited an evolving trend for disintermediation and structural change within certain industry supply chains, motivated by certain business performance needs. The ongoing developments currently occurring in the beverages industry provide learning for certain other industries.

 

Within the beverages industry, the separate acquisition announcements by both Coca Cola and PepsiCo for buyout of each of their major North American distribution groups made significant news for that industry. Both previously held major equity interests in their named franchise bottling groups, but major shifts in consumer buying preferences toward flavored waters, juices and other drinks caused both industry giants to embark on a strategy of acquiring the assets of major bottlers. PepsiCo was first by acquiring both Pepsi Bottling Group Inc. and PepsiAmericas Inc. for $7.8 billion. Coca Cola followed later with its acquisition of the North American operations of Coca Cola Enterprises for $15 billion. Both companies at the time indicated the need for more flexibility in production, distribution and new product innovation cycles.

 

In our prior commentary we speculated that both companies were about to gain a new appreciation for geographical supply chain operational flexibility, inventory management and smarter asset management. We also wanted to keep an eye toward the evolution of both efforts, since there are often mixed results to major M&A efforts. Both companies have now posted fourth quarter and 2010 earnings and the first signposts are emerging.

 

Coca Cola’s fourth quarter earnings soared, and the Wall Street Journal report attributed some of the results to the acquisition of North America bottling operations.  Sales volumes in North America rose 3%, excluding the impact of acquisitions, and unit shipment volumes are increasing. Quarterly profit nearly quadrupled and total worldwide revenues were up 40 percent. Current opinion in the Wall Street analyst community is that growth has come at market share expense of competitors. Coca Cola was not immune to higher inbound commodity costs and anticipates overall costs to be up $400 million in 2011. More importantly, increases in juice, aluminum, plastic and energy will be more impactful since Coke now controls major portions of bottling and distribution, and the company has already embarked on incremental price increases among products, which may extend through the remainder of 2011.

 

PepsiCo reported fourth quarter revenues up 37 percent but earnings came in at 10 percent. Full year earnings increased 34 percent, with profits up a mere 6 percent. North America operations grew operating profit by 8 percent, the strongest growth in the decade. However, volume levels were relatively flat. Total inventories were also up 28 percent from a year ago. The company indicated in its earnings briefing that synergies from its previous acquisitions are exceeding original estimates. Hmm…

 

PepsiCo further indicated that commodity costs could increase to as much as $1.6 billion, considerably more than was reported by Coke. We should however point out that PepsiCo has a more diverse snacks and food portfolio, including its Frito Lay division, which increases its exposure to increased commodity costs. Some on Wall Street are skeptical on Pepsi’s outlook, expressing concern on the bottling acquisition as well as investments in a major Russian distributor and other emerging markets were Coke is stronger.

 

Wall Street may be on the right track in terms of its observations, and I’m sure that our community readers will have more pointed observations as to these initial signposts on efforts to own more of the bottling and distribution value-chain. From this author’s perspective, the initial evidence points to how more efficient inventory, operational and commodity management can impact the overall success of these initiatives, as well as the bottom line. In the end, supply and value-chain capabilities always matter.

 

Students and practitioners of supply chain management should continue keep a keen eye on the beverages industry because what is unfolding is yet another case study on how supply chain transformation, change management and process capabilities do matter for companies and industries. We previously commented on the notion of an integrative improvement framework where operational improvement efforts scale with the clock speed of business. The beverages industry continues to undergo a living test of these concepts.

 

Bob Ferrari

 

We have penned a number of commentaries regarding Apple’s extraordinary supply chain operational management capabilities, the latest being last week’s posting, Apple’s Secret Sauce Should Be No Surprise to the Supply Chain Community.  This week, more public news has surfaced regarding Apple’s strategies and capabilities, specifically two different developments. Keep in my mind, Apple’s corporate culture is one of high secrecy and information in the public domain only scratches the surface to what’s actually going on.

 

Apple continues to cast a very wide net in assuring production capacity and capability, and at the same time, is becoming a more influential force for overall consumer electronics supply chains.

 

Over on the International Business Times web site, Carl Bagh noted that Apple is again plugging strategic and tactical holes in its long-term supply strategy, placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics.  As noted in our previous commentary, while competitors scramble to launch alternative products in tablets and smartphones, Apple continues to aggressively negotiate long-term supply contracts with strategic suppliers, potentially locking-up key industry capacity.  In his commentary, Baugh cites DigiTimes as reporting that LG Display will benefit from a 35 million unit order for iPad displays in 2011, but also is not able to singularly meet Apple’s growing thirst for these displays. Also noted are Apple’s co-investments with key suppliers in building more manufacturing capacity, including Sharp Corp.’s $1.2 billion investment to build a new production facility for small and medium sized LCD displays.

 

On the supply chain social responsibility front, SiliconValley.com reported yesterday that last June, at the height of the incidents of worker suicides at Foxconn International, Apple’s largest volume contract manufacturer, COO and now acting CEO Tim Cook was quietly dispatched to China to personally meet with Foxconn management. The extraordinary but non-public visit of Apple’s highest ranking operations executive was intended to send a rather serious message, Apple was not going to tolerate these worker suicide incidents and wanted a remediation plan.  An Apple social responsibility report noted that Cook was accompanied by two experts in suicide prevention, which spawned later interviews of more than 1000 Foxconn employees. Keep in mind that some other companies might have issued a wide distribution press release noting such a visit.

 

The article also highlights other social responsibility actions that Apple has undertaken, including 97 first-time supplier audits in 2010.  Of particular note, 40 percent of these suppliers noted that this was the first time any large customer had audited their facilities.

 

Apple continues to cast a rather wide and profound influence across consumer electronics supply chains.  The question remains, are these strategies forcing Apple’s competitors to struggle for their required capacity and inventory, and will the industry be challenged with yet another year of supply and innovation challenges?

 

Community members, add your observations.  Has Apple’s continual influence in product innovation and supply contracting increased the stakes for competitors, or has it benefitted the industry as a whole?  Can consumer electronics players all benefit from Apple’s strategies?

 

Bob Ferrari

 

On the Tech Broiler blog featured on ZD Net, Jason Perlow penned a perceptive commentary, Apple’s secret iPad advantage: The supply chain, which amplifies the critical importance of having integrated supply chain procurement, business process and business intelligence capabilities.

 

In his commentary, Jason reviews the current landscape of so-called competitive offerings to Apple’s iPad tablet computer, and concludes that no competitor can currently match the iPad in terms of functionality and price attractiveness, primarily because of Apple’s supply chain prowess.  He notes: “How is Apple able to do this where nobody can?  It has to do with buying up the entire supply chain and being able to leverage quantity 10 Million+ manufacturing orders in advance with its partners in China like FoxConn and with semiconductor component suppliers such as LG, Samsung and Phillips.”

 

 

Besides Supply Chain Matters, many other bloggers and industry analysts have cited the world class supply chain capabilities of Apple. It is important however to again note that Apple’s current differentiating capabilities are not just from one singular dimension, either product innovation, strategic sourcing, or any other, but the entire compendium of global supply chain capabilities.  That includes world class sales and operations planning, business intelligence and the ability to quickly re-synchronize the supply chain when extraordinary or unplanned events occur.  Think back to the many product launches where millions of Apple’s products were sold on the very first day or weekend, and where the supply chain was able to quickly respond with new supply in a matter of days. It is like the flight deck of an aircraft carrier where operations run continuously, everyone understands their role in either command, control or coordination, and where arrays of planning and intelligence information are constantly being synchronized.

 

In the midst of these commentaries, Apple is also working with Verizon Wireless on tomorrow’s public launch of the iPhone 4 on Verizon.  There is a lot of speculation as to whether Verizon will sell out in hours, but then again, Apple will surely respond with more phones. Yesterday and today,, the Wall Street Journal broke the news that Apple’s next generation iPad 2 is already in production, with a thinner, lighter and faster processor. Since Apple’s supply chain has initiated iPad 2production, a new launch date may be a matter of weeks, which strikes another blow to Apple’s competitive landscape..

 

The sun never sets for Apple’s supply chain teams, and as we often note, Apple is probably one of the best examples of why agile, integrated and global wide supply chain capabilities will always matter as a key differentiator for sales and bottom line profits.

 

 

Bob Ferrari

 

This morning, I happened to be reading the latest commentary published on the Gartner’s First Thing Monday newsletter, “The “Digital Natives’ Are Restless: The Pending Revolt Against the IT Nanny State.”  (Free user signup required)  This commentary, penned by Jim Shepherd, essentially concludes that the balance of power regarding IT application decisions is rapidly shifting to the business user.  Shepherd notes: “Gartner has seen a steady increase in the percentage of IT spending that’s directly funded by user departments, rather than the corporate IT budget.”  Readers should take somewhat special notice to this Gartner commentary, which was written in the tone of the recent social upheaval occurring across certain countries in the Middle East

 

 

Many in our supply chain management community would view this type of statement as not especially news, since supply chains teams have not been shy during these past months in assuming responsibility and control for certain IT application investments.  I argue that this trend in more business and functional driven investment actually began in supply chain circles.

 

Yes Gartner, “The Times, They Are A- Changin”, and supply chain functional teams have been leading the way for some time now. 

 

We at Supply Chain Matters actually cited these Bob Dylan song lyrics in December when outlining Prediction Eight of our Supply Chain Matters Top Ten Predictions for Global Supply Chains in 2011.   It was noted in the context of past vs. current thinking in healthcare related supply chains, and how quickly healthcare related supply chain teams have been taking more ownership for addressing required process and information needs.

 

We are all acutely aware that supply chains and their functional teams have been under enormous pressure these past few years.  Continued cost pressures, uncertain and rapidly shifting markets, and a more demanding customer requires higher levels of business intelligence, faster response and quicker decision-making in many supply chain process areas.

 

The revolt has already occurred and supply chain teams are indeed assuming more influence and accountability for selecting and implementing required IT applications. The fact that Gartner has acknowledged the revolt should embolden those business teams who have not taken on such leadership thus far to get cracking and join those who already have.

 

Bob Ferrari