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2011

 

In a little over a week, significant announcements have precipitated large amounts of uncertainty among PC related supply chains. The speculation continues as to whether the high tech and consumer electronics industry supply chain will undergo a different equilibrium of changes in the months ahead. 

 

The first was the bomb thrown by Hewlett Packard announcinghttp://www.theferrarigroup.com/supply-chain-matters/2011/08/19/hp-drops-a-bomb-of-uncertainty-on-pc-and-mobile-device-supply-chains/its intent to spin-off its Personal Systems Group (PSG). The other, of course, was the announcement by Steve Jobs of Apple indicating that he was relinquishing his CEO position to Tim Cook. Perhaps unnoticed in the shadow of the other two was the announcement from Taiwan based PC manufacturer Acer that it experienced its first quarterly loss in the company’s history, and that it was highly unlikely that the company would break-even for the full year.

 

The HP announcement was the most significant because it raises questions as to whether the PC industry has seen its best days and will be subsumed by product demand for tablets and smartphones as the new wave of mobile computing. HP, by its sudden announcement, in essence sent a signal that it was shedding a significant revenue source as well as well as high tech component volume buying leverage to explore more strategic options in business software and services.  It was, by our view, a statement of financial engineering vs. value or supply chain reengineering, swapping lower margin for higher margin business. 

 

Acer, another force in the PC global markets, with its unprecedented quarterly loss, sent another message of uncertainty as to long-term industry growth.  Acer has admittedly had some senior management problems with the controversial departure of its CEO in April, which was speculated to be over business strategy disagreements. Chairman and acting CEO J.T Wang indicated at an investor conference that the recent quarter was a “correction period” and its loss was worse than expected because of a $150 million write-off of excessive inventory in Europe. Asia based financial analysts now speculate whether Acer has lost market momentum.

 

Last Friday, an article in the Wall Street Journal, Asian Tech Firms Brace for New Landscape (paid subscription or metered view required) speculated that some of the biggest effects of Steve Jobs resignation are likely to be felt by Asian suppliers and PC competitors. The article cites industry analysts concerned as to whether suppliers such as Wintek Corp. and Hon Hai Precision Industry Co. will experience a void in the creative product forces precipitated by Steve Jobs departure. Noted was that Steve Jobs was the catalyst for sweeping change in the smartphone and tablet segments. Not surprisingly, stock prices of multiple contract manufacturers have dropped since the announcement. Also noted in the WSJ article was that any future falloff in Apple’s marketing or product innovation prowess could spell opportunity for competitors such as HTC Corporation, Samsung Electronics and LG Electronics.

 

In our view, we do not anticipate any significant loss of momentum for Apple. As we noted in our Supply Chain Matters initial commentary relative to the Steve Jobs announcement, we view Apple as being in the catbird seat.  After all, which company was the primary catalyst for the current PC industry disruption with its announcement of the iPad? Most of the world now knows that Apple’s new CEO, Tim Cook is the mastermind behind Apple’s current world class and enviable supply chain capabilities. Apple remains numero uno on anyone’s ranking of the best global supply chain for capabilities in product innovation, strategic procurement, fulfillment and B2C retailing.

 

However, the rest of the PC industry and its associated supply chains could see a changed landscape over the coming months.  What if one of the current value chain vertical players, one that supplies both PC and tablet components, makes a move for HP’s PC business? That would send a clear sign of longer-term vertical integration of the high tech supply chain.

 

Which of the existing players will benefit from consumer uncertainties over the long-term direction of HP?  Will it be Acer? Dell? Lenovo? Some other company?

 

What’s your view?

 

In the course of a week, a series of cascading announcements has turned the entire industry into turmoil.  Meanwhile, existing teams need to move forward with innovation, ship product and deal with a very uncertain global economy.

 

That’s why we love the high tech industry. In just a week, the equilibrium of the supply chain presents a whole different set of circumstances and outlook. Very few industries can deal with this level of change.

 

Bob Ferrari

 

Fellow supply chain expert community blogger Lora Cecere has started a Big Data Supply Chains dialogue on her Supply Chain Shaman blog.  Lora points out that supply chain “data volumes are exploding, data velocity is increasing and data types are proliferating.” Lora makes the argument that organizations increasingly need to embrace the concept of “Big Data Supply Chains” which are defined as “value networks that extend from the customer’s customer to the supplier’s supplier, that sense, shape and respond by listening, testing and learning with minimal latency.” Lora advocates that Big Data Supply Chains will transform Advanced Planning and Scheduling (APS) as well as redefine CRM and SRM applications. Some, such as ourselves, point to this new area as being the foundation for predictive analytics or supply chain cockpit capabilities. They are in essence, the next frontier for enabling smarter and more informed decision making in S&OP and other enterprise management processes.

 

Supply Chain Matters read a recent report published by Accenture that makes some rather important observations regarding the direction of predictive analytics.  Many of today’s business warehouse or business intelligence applications are built with design principles of data being attached to particular applications. For instance, SAP installed base customers are well aware that individual SAP applications feed data to SAP Business Warehouse (BW), and when applications such as SAP APO (Advanced Planning and Optimization) require more-timely data intensive reporting, a condensed copy of BW is actually affixed to the application.  Accenture points out those new data platform architectures will be selected primarily to cope with soaring volumes of data along with the complexity of data management, in effect, data de-coupling from individual applications.  The Accenture paper further advocates for streaming databases that include distributed ownership and control of data, not just the physical storing of data in different application silos and data centers.

 

In her commentary, Lora rightfully outlines some of the significant challenges involved towards achieving this concept. While these new approaches have the potential to allow the supply chain to “learn and predict”, they do present challenges for gaining executive level investment support, especially the CFO, not to mention the CIO who has to deal with the consequences of exploding data eating up IT infrastructure. That particular tenant is one we feel is the most important, since without executive level leadership and sponsorship, many IT initiatives have little chance of success. Also, as many in our community know, previous multi-year ERP implementation that ended up consuming far more management time and costing too much money have left a sour taste for technology leapfrog. The principles of predictive analytics imply that various supply chain functional teams will need to have much deeper skills in data management, trading partner collaboration and analytics disciplines. It further implies that trading partners and customers will be comfortable with sharing of sensitive data. There are also strong implications for some organizational centralization of analytics teams.

 

In our view, all of these factors point to fairly significant change management. Change does not occur until and unless organizational motivators for change exist. We continue to believe that success, for the business and for customers and suppliers, are always the best catalyst for change, especially in the current volatile and uncertain business environment.

 

Instead, why not channel big data challenges into baby step initiatives aimed at a portfolio at information hubs augmented with predictive analytics competencies. Consider pilot programs targeted at specific problems in demand sensing, supply risk, or logistics and distribution orchestration.

 

Big data supply chains” are indeed overwhelming organizational and physical resources, adding more challenge to the needs for more timely and market responsive decision-making.   Work closely with IT, business and trading teams and channel the frustration toward a new framework of data architecture and predictive analytics capabilities. 

 

Consider that if we are thinking of doing a major renovation of our homes, and we do not understand all that is involved, we often do some homework, seek knowledge from experts, set a reasonable budget and timeline and gain the support of fellow family members.  This same analogy can be applied to channeling the frustration of drowning in data into the harvesting of predictive supply chain capabilities. Walk before you run and take steps that bring teams to initial successes along the journey.

 

Bob Ferrari

 

Financial media is abuzz with the announcement of Google’s intent to acquire Motorola’s cellphone business in a deal valued at $12.5 billion.  The acquisition of Motorola Mobility Holdings Inc. is being touted as a response to Apple’s momentum in the smartphone markets and eventual possession of an arsenal of 17,000 patents held by Motorola in mobile technology. The deal, if approved, is expected to close in early 2012.

 

Another important implication however is Google’s access to a global supply, channel and supply chain fulfillment capability to produce and distribute smartphones and tablet devices. Readers will recall Google’s previous stumbles in late 2009, when it attempted a direct entry into the smartphone distribution channel by announcing the availability of the then announced unlocked Nexus One phone via an Internet ordering web site.  In our Supply Chain Matters commentaries at the time, we characterized Google’s effort as an attempt to dis-intermediate existing smartphone distribution and selling channels.  As anticipated, Google ultimately experienced multiple issues related to consumer difficulties in purchasing, activating and servicing their mobile phone purchases.  Contract manufacturer HTC, whom Google coerced into playing the role of global supply chain distribution and fulfillment, was placed in a rather challenging position. Eventually, Google pulled the plug on the grand experiment and withdrew that version of the Nexus One.  The intent was noble and classic Google, but the execution was naive.

 

With the acquisition of Motorola Mobility, Google has the opportunity to strongly influence the design of Motorola smartphones and tablets for tighter integration with the Android operating system. The deal opens the door for more options for search and online commerce, along with mobile computing needs for consumers and business. The path of innovative product introduction directly to consumers and businesses has the potential to become a lot quicker. Google also gains a global channel distribution network of mobile carriers which can help it compete with the likes of Apple or other competitors. Consumers may have the option of an alternative to the likes of an iTunes online ordering site. Motorola could also become the premiere provider of Android mobile devices, while other manufacturers are offered different versions.

 

Congratulations to Google and Motorola on a savvy deal.  Supply chain and fulfillment capabilities may well prove to be instrumental for the combined companies in the coming years.

 

Bob Ferrari

 

Supply Chain Matters has previously penned ongoing commentary regarding the supply chain related challenges of Japanese consumer electronics provider Sony.  Supply chain community members can’t help but observe the multitudes of business challenges that have been a part of Sony these past months. The devastating earthquake and tsunami that occurred in northern Japan in March impacted a number of Sony production facilities. A series of multiple large-scale computer hacking attacks directed squarely at the company’s online communities created considerable financial harm and eroded consumer trust Sony’s television business has not achieved profitability for the past seven years. A tops-down directive to slash supply chain costs remains to make a significant impact on bottom-line results.

 

In our commentary in March of last year, we noted how the company’s television business was planning for an aggressive market share attack for the coming fiscal year, planning a 70 percent ramp-up in production, to 25 million units, for the fiscal year that ended in March 2011. Sony’s senior management continued to take an aggressive stance on returning the business to profitability, thus creating a conflict for television. Sony has closed 20 percent of its manufacturing plants, including the closing of four of Sony’s eight television production plants, and eliminated 20,000 jobs. In our commentary in November, we noted that Sony’s CFO, Masaru Kato indicated that the company had no intention of being “adventurous” in its supply chain management and that “pushing products into the market without consumers is not the business we are in.”  The company slashed inventory and began an aggressive plan to outsource additional television manufacturing outside of Japan. Production outsourcing agreements surrounding the company’s Slovakia and North American facilities have been struck with global contract manufacturer Foxconn Technology Group. Senior management also entered into joint manufacturing ventures with industry rivals.

 

Sony recently released its fiscal Q1 quarterly earnings (June ending) and the results were not optimistic. While operating income was reported at $340 million, the company reported a net loss.  Sales for the quarter declined 10 percent, with the consumer business unit recording a 17.9 percent decrease in sales.  The company acknowledged that operations were negatively affected by the earthquake, with $66 million recorded as incremental expenses directly related to damage, repair and inventory write-off. Lower LCD television sales were noted compared to the previous forecast in May.  The financial press echoed headlines that Sony has cut its profit forecast for the remainder of the fiscal year by 25 percent, while management has called for more supply chain cost reductions, including further outsourcing of production. Meanwhile, Sony executives continue to re-iterate the importance of the television business to Sony’s strategic direction.

 

An article published in Bloomberg BusinessWeek notes that as of two months ago, Sony was optimistically forecasting an annual production output of 27 million units for the current fiscal year.  Sony’s annual production forecast has now been lowered to 22 million units, a 19 percent reduction in a matter of two months. The magnitude of the change raises speculation on the effectiveness of Sony’s executive level S&OP planning.

 

Another business and management re-organization is in the works and we all have to wonder that the company’s television related supply chain and S&OP planners have been suffering from whiplash. Eroding market conditions, severe competition, overly optimistic forecasts and an unprecedented earthquake event have all taken a toll. Of more concern, Sony has been surrounded by competitors who have closed the gap in innovation and quality perception. A strategy of market share gain has been subsumed by that of lower cost, market share defense, while the overall market remains challenging at best.  The precipitous events of financial markets this week have not helped to improve consumer confidence and sensing and responding to a changing market is ever more critical.

 

Some difficult decisions lie ahead for Sony’s senior executive and supply chain teams, and Supply Chain Matters anticipates further dramatic announcements. One thing is clear however, over optimism needs to be replaced with more pragmatic, forward oriented and fact-based decision-making. The forecasting logic of the past needs to be replaced with more responsive planning that is tuned to the realities of Sony’s markets. A lot is at-stake.

 

Industry and community members are welcomed to share their observations.

 

Bob Ferrari

 

As many in the supply chain community are aware, the combination of a highly uncertain global economy combined with unplanned disruptive events such as the earthquake in northern Japan have created significantly more challenges to overcome.  On both Supply Chain Matters and the Supply Chain Expert Community, we have Aerospace Supply Chains Are Now Stressed occurring in multiple industries.  The most recent have been pharmaceuticals, high tech components, and especially automotive related.

 

Last week, the Wall Street Journal reported that while demand for new commercial heavy duty trucks is accelerating, supply shortages are hampering attempts to ramp-up production volumes.  Customer demand in the heavy duty truck industry has been severely challenged in the past three years because of new governmental regulations on pollution standards, which have driven up the cost of purchasing a new rig.  Now, customers are electing to re-equip their fleets and one forecast predicts a 64 percent increase in sales for 2011.  The WSJ noted that Paccar, Inc., manufacturer of truck brands Peterbuilt and Kenworth, jolted Wall Street by reporting Q2-2011 falling short of expectations because of reported shortages. Paccar had a stellar reputation for its record of profitability, hence an earnings miss was significant news.  Paccar is now in a position where the supply chain is gating the company’s ability to respond to increased customer demand for trucks.

 

During the earnings briefing, Paccar Chairman and CEO Mark Piggott had significant commentary to share regarding his company’s supply chain.  He noted shortages and supplier capacity constraints span many suppliers and include areas such as tires and chassis components. He further noted that the entire supplier base has suffered as a result of the severe ups and downs that have occurred in the industry, and incidents of temporary supplier shutdowns due to component shortages are occurring every week.  Suppliers in this industry serve both automotive and truck OEM manufacturers. He observed that whereas the bankruptcy actions of General Motors and Chrysler in North America had severe impacts on certain suppliers, automotive suppliers in Europe were able to take advantage of broad governmental programs aimed at retaining employment in the midst of weak demand.  Rising commodity costs in cooling, electrical, filtration and precious metals are also having an impact on suppliers who need to finance more increased costs. To its credit, Paccar is increasing its investment in supplier capabilities.  Piggott notes: “So we want these suppliers to make money.  We want our dealers to make money. We want our customers to make money, so we’re going to see what we can do to help them.”…”There’s a lot of people that are rightfully cautious and conservative, and we’re working with them to meet our needs, but it’s not just all rosy out there.”

 

Supply Chain Matters applauds CEO Piggott for his obvious understanding and informed articulation of what is exactly occurring within his company’s and his industry’s supply chains.  Many more CEO’s should be just as educated and knowledgeable and share a perspective for win-win among suppliers and trading partners.

 

In the meantime, automotive and heavy duty truck industry supply chains will have to deal with the compounding effects of economic uncertainty, higher component costs, and the threats of more disruptive events. 

 

Yet another industry under supply chain stress, and yet another industry scrambling to achieve some form of responsive supply chain planning and management.

 

Bob Ferrari