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In this week’s Gartner’s First Thing Monday update, Jim Shepherd pens a somewhat controversial commentary titled Do You Really Need an IT Department Anymore? (Sign-up account required).


In his commentary, Jim argues that since firms expect people to type their own letters make their own travel arrangements and administer their own payroll and benefits plans, is it not time for departments to manage and have accountability for their own software applications?


Jim offers a number of arguments in his commentary. The principle argument is that department managers do not take responsibility for determining their information systems requirements and that a business should be staffed to manage its own systems.  Regarding the obvious question for who will have responsibility of managing overall IT infrastructure, Jim’s argues: “… there are few companies that could really claim that application management or data center operations are either a core competency or a business differentiator, especially since there are lots of options for cost-effectively outsourcing this stuff to organizations that do this for a living.”


Readers certainly may have their own pro or con opinion about eliminating IT and can feed these views back to Jim at Gartner.  However, since supply chain business processes interrelate with many other enterprise processes, the argument of eliminating IT, if embraced, has significant implications for our supply chain community. With that in mind, I will share some considerations for discussion items with the supply chain community in mind. 


Before handing over the keys to IT, let us consider the following:

  • Many firms continue to struggle in overcoming supply chain wide functional stovepipes in strategy formulation and goal alignment. Before taking over the keys to IT, should teams first achieve some form of organizational alignment?
  • With IT comes the budget for software investment and maintenance spending.  That may be a pro or a con, depending upon your particular organization’s corporate perspectives.  It could translate to increased innovation and agility for responding to global-wide supply chain business process needs, inserting systems of innovation or differentiation where required. On the other hand, it could be another budget line-item subject to further supply chain cost reduction efforts.  Either orientation could be applicable. Another consideration relates to which team holds overall P&L responsibility, individual businesses or the supply chain function.
  • What about IT technical skill requirements?  There has been much recognition of late about growing general management and technical skill gaps among various supply chain functions.  Is our community ready to embrace the technical aspects of managing IT applications and business intelligence needs? Here again, some organizations may be ready, some not so ready. We have observed many successful efforts of IT and systems responsibility embedded under the supply chain organizational umbrella.  Some organizations, however, may not be close to ready.
  • Supply chain functional ownership of IT may not sit well with the major ERP providers who have marketing and sales strategies pegged to the career strategy of CIO and his/her IT team.  Are you ready to deal with the hordes of ERP sales and business development types calling on you to consider maintaining annual maintenance, development or new investment spending? Do you have the patience to accept multi-year promises of promised functionality? Do you have the stones to recommend a dis-investment in any existing ERP application?
  • When applications go down and suddenly stop working, who are you going to call when your team owns applications? Is the fault related to the IT infrastructure outsourcing entity, the software vendor, the network connection, or an outside hacker attack?  Are you ready to place this determination on your plate?  After all, you have nobody in IT to bug!


Regardless of who owns IT applications, do not presume that ownership of accurate data and robust business process such as S&OP is part of this debate.  Supply chain teams own these, regardless of the ownership of IT.


Perhaps this can be some food for thought and conversation over beer and burgers during the 4th of July weekend.


Feel free to chime in with your own viewpoints and do not forget to sign-up for that management development course: How to Manage IT in Five Easy Steps!



Bob Ferrari


Last week much of the aviation industry came together at the Paris Air Show and the event may well be remembered by Airbus as a spectacularly successful event.  The show also provided our supply chain community critical reminders of the importance that proper timing of new products and value-chain collaboration can play in an industry market.


During last week’s event, Airbus landed a total of 730 orders for aircraft at a catalog value of slightly more than $72 billion, which was double what executives previously estimated.  Not bad at all for one week’s haul, an envy for any value chain.


The primary headline however was the short-haul aircraft market and recent release of the updated A320neo, which accounted for 667 orders representing over 91 percent of commitments made at the show. The A320neo further attracted one of the largest orders on-record for Airbus, 200 A320neo aircraft from AirAsia Bhd valued at $18.5 billion. Airbus has now accumulated 1029 orders of the updated A320 since its announcement in December, an order volume that is sure to capture the attention of Airbus competitors. Another takeaway from the enormous success of the updated A320 is the new market power and enthusiasm of Asia based and lower-cost airlines that have fueled buying interest thus far.


The “neo” (new engine option) A320 boasts of an efficiency improvement package which incorporates both wing Sharklets and newer engine technology that Airbus claims will deliver 15 percent reduced fuel consumption, less CO2 consumption, additional payload and 500 additional nautical miles of aircraft range.  Airbus claims that the updated A320neo can deliver 16 percent less fuel burn per seat compared to Boeing’s 737-800, and 1300 more nautical mile range than Bombardier’s new C-series CS300 aircraft. One other product marketing claim is that the updated A320 has 95 percent spares commonality with the existing A320 family.


Two different aircraft engine options are being made available for the A320neo, the Pratt or Whitney PurePower PW11000G geared turbofan, or the CFM International LEAP-X. Each of the engine manufacturers collaborated with Airbus on meeting fuel efficiency and design targets. CFM is the engineering and product design consortium among France’s Snecma (SAFRAN Group) and General Electric Aircraft Engine Group. The LEAP-X turbofan is characterized as a new generation aircraft engine designed to leverage the newest technologies.  CFM has secured firm orders for 910 LEAP-X1A engines thus far valued at more than $11 billion in catalog pricing.  CFM engines are also exclusive to powering the Boeing 737-600, 737-700, and 737-800 aircraft.


According to an Airbus brochure, deliveries of the A320neo are planned to begin in October 2015, and according to financial media reports from last week’s show, many neo customers were motivated to place orders to secure their delivery slots, which are now estimated to be in 2018


Boeing, arch competitor to Airbus, competes in this short-haul aircraft segment with the popular 737 series aircraft. Other new market competitors Bombardier C-Series Joins in the Global Supply Chain Outsourcing Perils of Aerospace and China Takes Aim in Aerospace. Boeing has yet to decide whether to re-power its proposed new version 737NG or come up with a new design that would offer airline customers greater cost savings.  Industry speculation is that large influential airline customers including Southwest Airlines and Ryanair have been urging Boeing to decide on a direction for the 737NS.  Judging from last week’s unprecedented activity among airlines willing to plunk down a monetary commitment, Boeing may well be in a difficult catch-up position, since it only garnered 80 new orders for 737’s last week. Reports indicate that Boeing may well opt for a entirely new design for the 737.  That new design will have to best the A320neo performance as well as meet expected delivery windows for customers, which places more pressure on Boeing teams.  The commercial arm of Boeing also continues to play major catch-up with overdue deliveries of the 787 Dreamliner aircraft, and that track record does not bode well for Boeing’s predictability.


The Eagles had a very popular tune, In a New York Minute, who’s first refrain included these lyrics:


In a New York Minute
Everything can change
In a New York Minute
Things can get pretty strange
In a New York Minute
Everything can change
In a New York Minute


The airline industry, and especially its new wave of Asia, Middle East and emerging market carriers are redefining low-cost travel, growth and profitability, and now, aircraft market demand. Last week was perhaps a watershed event in determining the new competitive dynamics in listening to customer needs and proper timing of a new product. We can gather some important learning from this one show.


Bob Ferrari


This posting is a follow-up to Another Validation of a Year of Unprecedented Inbound Commodity Price Hikes- Planning and Internal Collaboration is Essential regarding the impact of higher inbound material prices on global supply chains. In January, Supply Chain Matters noted that the two most significant challenges in global supply chains for 2011 would be rising inbound material costs and product demand uncertainty. Two corporate statements this week now point to a pending business slowdown in emerging markets as another indicator of the interrelationships of these challenges.


An article in the Europe Business News section of the Wall Street Journall (paid subscription may be required) quotes the Executive Vice President of Nestle SA as indicating that natural and man-made disasters coupled with the spiraling costs of raw materials will impact sales in emerging markets in the coming months, especially China. Higher inbound material costs have caused price increases among food companies and these price increases are fanning inflationary forces as well as consumer unrest and pullbacks. Nestle’s Asia-Oceania-Africa zone was the fastest growing region in Q1 and accounted for around two-thirds of exposure to emerging markets. That region may now experience reduced growth. Although these forces will slow the rate of expected growth, Nestle cautions that overall growth from emerging markets will continue, albeit at a slower pace than originally anticipated.


As we noted last week, Nestle has acknowledged that price increases have to be selective, especially in the price-sensitive emerging markets, and is further implementing a number of strategies to overcome the impact of rising inbound costs. Mentioned strategies in this latest report are reducing waste and packaging, along with re-engineering products with cheaper materials. The article notes that target prices for goods distributed in countries such as Vietnam or China have been determined and where costs exceed these targets, other means of cost reduction need to be made.


Supporting these market slowdown announcements are media reports of a wave of violent worker unrest across urban areas of China as migrant workers feel the impact of lost jobs caused by industry sourcing shifts and vastly higher food prices brought about by inflation. China’s rate of inflation was reported as 5.5 percent in May. Violence has been reported in the southern China city of Zengcheng, a city of about 800,000 located close to the Guangzhou manufacturing region, along with other rioting in central China. Readers may recall that the recent multiple uprisings across the Middle East, or the so-termed “Arab Spring” have also been motivated by population unrest over the higher cost of food and staples. Civil war in the Ivory Coast caused Nestle to shut its factories in that region, and flavorings producer McCormick had to secure alternative sources of supply as a result of the uprising in Egypt.


Glencore International plc, who controls a large share of international trading among metals, minerals and agricultural commodities, also issued a warning.  In an article published in the Financial Times (paid subscription of free preview account required), the CEO of Glencore, Ivan Glasenberg, warned that high inflationary prices and the Chinese government’s actions to curb those forces have caused a pullback in China, and added his hopes that this pullback would be temporary. He in turn noted that China’s monetary tightening would be temporary and the pullback could be short-lived. Since industrial commodities are the first stage of many different industry value-chains, this current pullback will be felt within upstream portions of supply chains over the coming weeks.


The effects of rising inbound costs are not just reflected in internal supply chain impacts. They also impact external demand trigger points. This is an important consideration for having the sales voice on emerging markets demand as part of the sales and operations planning (S&OP) process. If there have been aggressive assumptions made relative to product demand growth stemming from emerging markets, now may be the time to revisit those assumptions and run some additional scenarios of lower growth.


What is the view from your organization?


Has product demand from emerging markets such as China started to decline or taper-off?


Bob Ferrari


Last week, AMR Research / Gartner announced the 2011 slate for the Top 25 Supply Chains and to no surprise, Supply Chain Matters Post Award Musings Regarding the 2011 Top 25 Supply Chain Designees in supply chain capability by a wide margin. 


Who can contest Apple’s continual capabilities to ship millions of product units each and every quarter from a primarily outsourced value-chain and strategic commodity procurement model.  Achieving 70 percent jumps in profit margins is also a significant feat that many a company continues to envy.


The other side of Apple, however, stems from its dominant contract production arm, Hon Hai Precision Industry Co., and its Foxconn International Holdings Ltd. contract manufacturing division which represents Apple’s and other high tech OEM’s de-facto production presence.  This week, Hon Hai held its annual meeting and there were important strategic messages for high tech and other industry players to contemplate, namely that the high-volume contract manufacturing business model motivated by purely a low-cost labor and asset-shift model will have to change.


Hon Hai Chairman Terry Gau told assembled reporters that the company’s long-term direction was to continue to develop more technology prowess.  A direct quote: “We are a high-tech manufacturer, not a contract manufacturer.” Last quarter, a cover story featured in Bloomberg Businessweek outlined exactly what that means in product and process design capabilities. Foxconn capabilities already include toolmakers, mold and die makers and process specialists that can quickly take a product design to volume ramp-up.The reason of course is that Foxconn makes far more money on parts and developed technologies vs. assembling iPhones and iPads.


Business margins remain difficult.  Reuters notes that Hon Hai’s operating margin has dropped to 2.87 percent in 2010 from 5.43 percent in 2005. The company has now posted two quarters of declining profits because of higher labor costs in China and burden incurred for relocating production to more interior regions of China where labor costs are lower and production facilities can be operated with a different, less dormitory-like operating model. Rumors are swirling that Apple has goals to ramp-up this year’s existing iPad production levels to over 10 million units per quarter and both Gau and other Apple suppliers acknowledged that tablets are currently challenging to make at higher volumes.


For high-tech volume manufacturing, Gau acknowledged that many more Japan based, brand-oriented high tech companies such as Sharp, Cannon and Hitachi are abandoning their in-house production models and will continue to provide Hon Hai more opportunities for volumeand technology growth.  However, the company’s future profitability growth lies in more upstream vertical integration in high tech value-chains.  As an example, Hon Hai recently setup a joint venture with Sharp to develop more advanced LCD technology.


The company has plans to invest in operating models that support customer needs for more geographic in-sourcing needs, as well as the lower-cost labor manufacturing model.  In geography presence, Hon Hai plans to invest $12 billion in Brazil over the next five years to support rising demand for tablet computers across Latin America. The company also indicated its intent to invest in production facilities on the African continent.  No doubt, that signals intent to tap additional sources of low-cost labor.


As Hon Hai continues to invest and develop both advanced technology and high volume production process capabilities that extend further along high tech value-chain, it will increasingly find itself in competition with current tiered suppliers including the large Korean based global suppliers. Apple and other high tech OEM’s will have to face the reality that they cannot place a majority dependency on Hon Hai as a singular production services provider for fear of locking-out other major suppliers, or fostering a major global competitor.


Supply Chain Matters had previously commented that if you accept the notion that high tech and consumer electronics value-chains can be the bellwether of what is to come, than the high volume contract manufacturing model driven by lower-cost labor has run its course and a different model will emerge, one that will provide more interesting dynamics in vertical integration and changing roles in the months to come.


OEM’s may well run the risk of outsourcing too much of core capabilities if they believe that outsourcing of manufacturing is just an asset avoidance strategy. CEO’s and CFO’s would be wise to keep an open dialogue with their senior supply chain and sourcing executives as well as industry observers.


Bob Ferrari


Yesterday, Nestle’s senior procurement executive declared what many consumer products and other industry supply chain and business executives are fully aware, that prices for inbound raw materials and commodities have increased at unprecedented rates.  Of more concern, this situation could continue for some time to come. 


In an article published in today's Wall Street Journel subscription of preview account required), Kevin Petrie, the head of procurement for Nestle noted that a combination of factors attributed to financial speculation, bad weather, and the rising price of oil are dramatically impacting the cost for cocoa, coffee and other ingredients.  He added: “We see tremendous volatility and headwinds.”  That statement is significant since as the WSJ points out, Nestle is one of the biggest raw food buyers in the world with an annual spend of over $71 billion.  Mr. Petrie noted one specific example where investment funds accounted for 38 percent of the New York Arabica coffee futures market, with no intentions of taking delivery.  Political crisis in areas such as the Ivory Coast and the Middle East and the vast extremes in weather events during recent years have also added to crop failures or setbacks.


The obvious question for procurement and supply chain strategic teams is how to prepare or try to overcome these significant headwinds.  One obvious conclusion is that strategy, size and buying leverage do matter. The WSJ observed that Nestle has established commodity research teams to forecast prices six-quarters into the future, peg longer-term trends, and is itself utilizing futures contracts and hedging to lessen exposure to price swings.  That strategy is not for everyone, since some companies have experienced setbacks in the past when short-term markets collapsed, and hedging provided negative results. 


Another company that practices active strategic commodity planning is Apple, which has not been shy in placing multi-year, multi-billion dollar contracts for strategic long-term supply. Just this week, a posting on notes that in 2010, Apple became the world’s largest buyer of semiconductors, amounting to $17.5 billion of semiconductor spend.  That is leveraged buying power and comes with some significant influence. A Table listed in the article shows that among the top five global buyers, there is a 110 percent difference in buying power from number five Nokia, to number one, Apple. Another interesting observation is that the number two buyer Samsung also serves as Apple’s largest supplier.


The most significant takeaway from this commentary applies to companies who cannot garner such buying influence, or who cannot afford to invest in strategic commodity teams and hedging.  A couple of thoughts come to mind:


·Be prepared to absorb some form of price increases, or find other means to offset these increases.


·Explore buying co-operatives where multi-company needs can be pooled


· Now, more than ever, it is very important to have supply agreements spread across multiple suppliers. Supplier loyalty and continuity is a rather important strategy right now and this is not the time to be consolidating the vendor base that provides strategic raw materials.


Finally, strategic commodity planning requires the best available product demand plans and forecasts.  It is rather important that senior procurement managers be active participants in the executive level S&OP process.


What other recommendations can you share regarding the current challenges in high commodity prices?


Bob Ferrari


Just about every year at this time, supply chain teams can look forward to AMR Research’s (now Gartner) designation of the Top 25 Supply Chains.  Similar to entertainers and recording artists having their Oscars, Emmy Awards and Grammy’s, there is the Top 25 supply chain designation that can be instrumental in a career journey.  Just as awards can provide recognition of the obvious, as well as surprises, so also is this year’s line-up.


First, Supply Chain Matters extends its congratulations to all of the 25 designees, as well as the finalists in the 2011 competition.  Quantitative and qualitative recognition for hard work, long hours, commitment and determination is always important.


In the spirit of the many entertainment shows, we will now share our Supply Chain Matters post award reactions of this year’s Top 25 designees.


Overall Listing


The overall list itself has many familiar names and global brands. It would be nice for one year to have a small or mid-market company make the listing. Outsourcing the major portions of your supply chain provides a high ROA, and that can get your company a good shot for making it on the list. Speaking of effects outsourcing, once again, there is no presence from major process manufacturers (BASF, Dupont, Dow Chemical) and that remains a disappointment.  A lack of recognition of any major global contract manufacturer, those that own the majority of production and in some cases process design assets (Foxconn, Fextronics, Jabil) also remains disappointing.  While the overall list has some non-U.S. names such as Samsung and Inditex, it should include other capable names as well.


Perhaps there should be some added categories like:


Best effort in undergoing supply chain transformation or


Best supplier supporting role in bailing out a global OEM during a supply chain crisis such as the Japan earthquake.


The Coveted Number One Designation


Number one designee Apple had to be the obvious choice, as demonstrated by its very high composite score.  No other designee came close.  We are not alone in commenting on all the superior aspects of Apple’s broad supply chain capabilities and accomplishments.  The only comment to add is that being a repeat number one comes with continued responsibilities to lead and set the benchmarks in areas such as social responsibility, sustainability efforts, and openness.


Sound bites for the top-tier designees:


#2 Dell: Up three slots from last year, but not by much.  P&G merits this slot.


#3 P&G:  The obvious choice, always consistent performer and benchmark.


#4 Research-In Motion: Up 5 slots and in a very competitive field.


#5 Amazon: Up 5 slots and well deserved.  A demonstration that one can make the list with lower ROA.




In the category of rising stars:


#13 Colgate-Palmolive: Up 4 slots with better quantitative results than industry peer P&G.


#15 Unilever: Up a whopping 6 slots, also with better quantitative results with P&G.




In the category of new entrants:


#18 Nestle: It’s about time.


#24 3M: Significant achievement considering the diversity of products and supply chain needs.


#25 Kraft: Well-deserved and overdue for recognition




In the category of surprises:


#6 Cisco: Dropped 3 slots from last year.  Major re-organization underway to reduce management layers and speed decision-making.  Will Cisco’s supply chain be impacted?


#21 Johnson & Johnson: Dropped 7 slots and is still in the midst of non-stop product recalls brought about by lapses in quality.  Does being under watch by the FDA qualify as a Top 25 criteria?  Since J&J was the only life sciences company to be in the top 25, we have to categorize this one as a disappointment.  Perhaps there needs to be a category of “on-probation”.


#22 Starbucks: New entrant in the Top 25 with a rather low Gartner opinion vote.  Retail coffee distribution was outsourced to #25 Kraft before this year’s brew ha-ha and termination.  Next year will be the retention test.


There you go, our Supply Chain Matters post award musings for theTop 25.


What about your reactions and opinions on the selections?


Bob Ferrari