Being named the most valuable company in terms of market capitalization, with the ability to rack-up almost $33 billion in annual profit, and being cited by Barclays Capital as “the most disruptive force in tech”, comes with a lot of expectations and visibility to any misstep. However, behind the headlines lies one supply chain savvy company.

 

Last week, financial news headlines were buzzing with all sorts of potential negatives pertaining to Apple.  Five consecutive days of stock declines has Wall Street scribes speculating as to whether the constant successes of the Steve Jobs era of Apple might have peaked. Stories continue to permeate regarding ongoing intellectual property lawsuits, potential price collusion in e-books, and yes, significant hiccups involving Apple’s supply chain.

 

Where should we begin. 

 

Many social media and traditional reporters have been reflecting on the implications of the ongoing labor practices audits occurring at contract manufacturer, Foxconn, which began in February. Last week came news that environmental conformance audits would be conducted at one or many China based major suppliers. In our point-of-view, the company is becoming much more proactive in demonstrating to customers that Apple takes social and environmental responsibility very seriously.  The remainder of the industry will in-turn, have to deal with the same realities.

 

Also in February, Japan based mobile DRAM chip provider Elpida, which is a supplier for both Apple iPad and iPhone products, filed for bankruptcy protection.  That opened the door for what Bloomberg Businessweek describes last week as “the hottest takeover plays in tech” potentially involving takeover from another DRAM competitor which could leverage volume contracts with Apple. Eipida’s DRAM chip plant in Hiroshima Japan has over 40 percent of output dedicated to Apple. Whomever ends up with Elpida could well change some of the dynamics of competing with LCD industry leader Samsung Electronics.

 

Last week brought another major development from a supply chain lens. Communications chip provider Qualcomm warned that current supply of wireless chips cannot accommodate existing demand related to 4G network support.  Specifically, Qualcomm has been shifting to a 28 nanometer chip design family to accommodate performance needs of 4G chips for device makers. In its warning, Qualcomm executives specifically cited the supply shortfall to Apple’s transition from predominate 45nm chips in favor of the 28nm design. That is a rather telling indicator that Apple’s plans for its next release of the iPhone will include 4G network support. Qualcomm has increased its overall unit output requirements by 5 million for the current year, and rest assured, Apple will be a beneficiary.

 

Media and analysts will continue to speculate and make checks across many tiers of the Apple value-chain regarding added bad news or potential setbacks but perhaps that same media should exercise a reality check-in with the greater supply chain community.

 

For this describes today's current state of dynamic supply chain management, especially when it involves a firm with the significant high volumes of Apple, the great Kahuna of SCM. 

 

Problems and/or setbacks will arise with current or planned future volumes, and a high volume supply chain requires lots of contingency and back-up plans. New product plans will shift because of highly changing market requirements, and those shifts will be accommodated by strategic suppliers because of the volume clout that Apple represents. Suppliers can encounter financial difficulties, and sourcing and procurement teams will respond with contingency plans and safeguards. Unplanned natural disasters such as the floods that occurred in Thailand impacted available capacity with companies such as Dell, HP suffering consequences, but Apple’s large supply contracts were leveraged at the potential expense of other industry OEM’s.

 

News concerning Apple’s supply chain should not be of concern since they together involve what we in the supply chain community would term “resiliency”, the ability to overcome and respond to any setback to support business needs and business outcomes.  In the specific case of Apple, the primary competitive differences are in the overall strategy, planning, execution and analytical capabilities directed at having world class resiliency and supply chain clout.

 

Bob Ferrari

 

It seems that each passing week brings our community fresh new reminders on the existence of potential risks in the supply chain as well as the upstream and downstream implications on business outcomes. This week alone, there are two additional streaming events that are capturing the interest of business media, and should capture the continued following of supply chain cross-functional teams.

 

In the automotive sector, a recent fire that occurred at an Evonik Industries AG manufacturing plant in Marl, Germany has had cascading impacts related to the overall global supply of nylon-12, a rare resin that is utilized in the manufacturing of fuel tanks, brake and fuel lines. Nylon-12 has been extensively used because of its superior capabilities to be highly resistant to the corrosive effects of gasoline and brake fluid.  Evonik represented over 25 percent of the global supply of the building block specialty resin that eventually makes-up nylon-12, and was also a supplier to another nylon-12 producer, Arkema SA. The Wall Street Journal reported that Evonik executives estimate that it may take more than six months before repairs can be made and production can resume.  Industry observers and participants estimate that there may be no more than one to two months of available inventory in the pipeline, causing industry wide concern, with the potential of disruption of multiple auto final assembly plants in the coming weeks.  The scope of this disruption rivals the same magnitude of the paint pigment disruption that occurred as a result of the tsunami in Japan, or the disruption of upwards of 30 percent of hard disk drive components capacity caused by the floods in Thailand.

 

Earlier this week, in a rare move, executives from eight separate auto producers and 50 parts suppliers met in Detroit with the purpose of drafting an alternative specification and sourcing plan in order to seek an interim replacement for nylon-12. In the spirit of six sigma crisis response, six joint membership committees were formed to develop, evaluate and fast track an industry-wide substitute. Any final outcome as to industry-wide mitigation or impacts to business results are yet to play out.

 

In the pharmaceutical and drug segment, Johnson and Johnson announced its Q1-2012 fiscal operating results this week which included even more stark reminders of the impacts of a combination of quality process breakdowns and supply disruptions.  J&J’s McNeill Consumer Healthcare unit, responsible for the production of brand names such as Tylenol, Motrin and Benadryl, continues to deal with the impacts of cascading quality snafus and product recalls that forced the closing of an entire manufacturing facility. The unit has been operating under an FDA Consent Decree affecting 3 manufacturing plants, including the Fort Washington Pennsylvania facility which was shutdown for a complete overhaul over a year ago.  In its recent briefing to analysts, J&J executives disclosed that Fort Washington, originally planned to resume operations late this year, may not be able to resume production until 2014.

 

A blog commentary penned by Ed Silverman posted on the Pharmalot blog titled, Gang That Couldn’t Shoot Straight, draws an analogy of completely renovating a gourmet kitchen to produce “a shiny new bistro ready for an Iron Chef showdown “only to discover a conundrum that the homeowner is using the same recipes geared for the older worn down kitchen. Silverman continues: “ (But) rebuilding an entire plant takes a lot of effort and tech transfer can be an imperfect science if the underlying processes were problematic in the first place.”

 

While all of this is occurring, McNeill sales are estimated as falling over 2 percent during this past quarter as consumers turn to alternate brands for their medication needs. J&J has also be forced to spend additional monies in market education initiatives to restore trust in its OTC brands

 

On the pharmaceutical side of J&J, the supply of the cancer fighting drug Doxil remains on severe allocation caused by the unexpected shutdown of J&J’s prime contract manufacturer for this drug. The result has been over an 80 percent decline in revenues of this drug.  J&J executives do not anticipate Doxil to be available until late 2012 while restoring a reliable supply of the drug remains “our most urgent priority.” J&J further indicated that it was pursuing both longer-term as well as shorter-term options to restore supply.

 

So what can readers’ takeaway from these latest reminders of unplanned disruption and impacts on business results. 

 

·      First, identification and early warning visibility to disruptive and costly supply risk must be extended to multiple tiers of the supply chain. 

 

·      Efforts of cost control directed at consolidating suppliers must also factor important considerations of sole supply risk.

 

·      When an incident occurs that has the potential to severely impact upstream and downstream supply and/or demand, marshal required cross functional and cross-business resources and get all pertinent information into the process of mitigation response. Physically rebuilding or overhauling a plant or contract manufacturing facility or production line must also include a re-visit of underlying process, technology, people and decision-making processes that are attached.

 

Supply chain risk mitigation is not a singular supply chain process, it is rather an enterprise-wide response to a significant business problem.

 

Bob Ferrari

 

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

This author recently had the opportunity to view a promotional webcast featuring Gartner analysts, that set the framework for the upcoming designation of Gartner’s Top 25 Supply Chains in 2012. Some community readers may have viewed this webcast and had reactions to the messages delivered.  We would like to share ours.

 

According to Gartner, the overall criteria, among others, for being designated on this prestigious listing are supply chains that are:

 

  • ·        Predictable and reliable

 

  • ·         Flexible to changing business conditions

 

  • ·         Exhibit a profitable response to product demand

 

  • ·         Exhibit sustainable growth and satisfied customers

 

  • ·         Move from words on a PowerPoint slide to attitudes and demonstrated practices

 

Readers might recall last year’s the top ten listing, which included:

 

1. Apple

2. Dell

3. Procter & Gamble

4. Research In Motion

5. Amazon

6.  Cisco

7.  Wal-Mart

8.  McDonalds

9.  Pepsico

10. Samsung

 

The year 2011 was very challenging for these supply chains, not only from the perspective of a rapidly changing and dynamic global economy but also major incidents of supply chain disruption. My first reaction was to take note of the listed supply chains and reflect on how many of them had a reported stumble during the year.  I came up with at least four.  Even Apple has had to deal with the challenge of heightened visibility to labor practices. Community readers may come up with the same or a different number. That triggered a pointed reminder that even the top supply chains are not immune to vulnerabilities. The real criteria are how each responds to such challenges.

 

Another theme brought forward by the Gartner presenters was the possibility of changed ranking or new names appearing in the 2012 ranking. That brought forward a reminder that no supply can rest in the satisfaction that it has reached the pinnacle of capabilities. The global economy and events move far too quickly, and there will always be next objective to address. One supply chain stumbles and another takes advantage. One supply chain is mandated to reduce costs to the detriment of certain capabilities while another aligns to business needs and business outcomes.  The result is the shifts that we continually observe.

 

If this listing included mid-market supply chains, those that included the challenge of far more limited resources and higher stakes, perhaps the listing would further reveal how wide the gap in capabilities has become. Many mid-market companies were severely impacted by either the global recession, or the disruptive consequences of the tsunami in Japan, and the floods in Thailand.  Their influence over suppliers was morphed by larger supply chain dominants, perhaps some of those listed in the Top 25. Perhaps they who have successfully overcome these challenges and maintained an objective for responsiveness and resiliency should have recognition as well.

 

The takeaway from this commentary is that we as a community sometimes place too much emphasis on a singular tenet or goal.  In one year it may be lean, another demand-driven, resilient or agile.  Perhaps the reality is that the top supply chains must have the ability to respond to many challenges, along with multiple objectives. They must have a lens that extends well beyond the current quarter, or current fiscal year.

 

Finally, Supply Chain Matters would like to provide a helpful suggestion to those of you that have volunteered to be Peer voters for the 2012 Gartner rankings. It might be helpful for all in the supply chain community if your lens of ranking included multi-dimensional, multi-geographical and multi supply chain tried perspectives of the top supply chains. The reality is perhaps that the entire value-chain eco-system of partners really determines which supply chains are top ranked. Perhaps the lens of ranking is really weighted toward attitudes and consistent demonstrated practices in spite of the realities of constant change.

 

Bob Ferrari

 

This author just returned from the Supply Chain World North America 2012 conference, sponsored by the Supply Chain Council, which was held this week in Miami. The theme for this year’s gathering was Taking Supply Chains to the Next Level, and as was the case last year, the speakers were extraordinary and the messages fairly consistent.

 

I had the distinct opportunity to moderate a panel consisting of various well noted supply chain thought leaders and influencers. The panelists included:

 

Steven A. Melnyk, Professor of Operations and Supply Chain Management, Michigan State University

 

Roddy Martin, Senior Vice President, Global Supply Chain Practice, Competitive Capabilities International (Former Vice President at AMR Research/Gartner)

 

Matthew Davis, Research Director, Supply Chain, Gartner Inc.

 

Bob Parker, Group Vice President, IDC Manufacturing Insights and IDC Retail Insights

 

One particular question that I posed to the panel was on the topic of S&OP and included the following:

 

Many companies are now embracing sales and operations planning (S&OP) processes as a key mechanism to align anticipated product demand with supply and operations requirements.

 

What do you believe are the logical next steps for organizations in their S&OP journey?

 

Do you believe that the benefits of S&OP are being overhyped?

 

In the spirit of education and continual learning, I wanted to highlight with this broader supply chain community some insightful responses from our panelists regarding this important topic. Too often, as a community, we tend to get wrapped up in project management thinking, viewing an existing process in the lens of sequential steps.  Sometimes it helps to take pause and instead reflect on the overall business and supply chain outcomes required from an important process such as S&OP.

 

All the panelists were in agreement that S&OP is not a short-lived, vendor-hyped process and is not going away anytime soon. They characterized S&OP as a journey toward multiple outcomes and benefits. What is most important is knowing what the current and required maturity level should be.

 

Matthew Davis observed that S&OP can be positioned as a means to determine where decisions and what decisions need to be made regarding the need to represent the one face of the firm to customers.  It brings together teams that directly touch and/or influence product demand and supply, along with those responsible for influencing resources or making decisions as to options. The activities incorporated are generally focused on demand shaping or the ability to influence and respond to changing customer needs.  In terms of future needs, with more and more manufacturing and service firms positioning product offerings as “solutions-centric”, the process will need to synchronize a combination of product, technology and coordinated services needs. As an example, in the high tech industry, a product could involve a combination of hardware, software and services coordination.  All of this implies that the planning process changes from that of materials and physical needs to further include a broader context of project management based synchronization.

 

Technology’s role in the process is to help overcome time latency and aide in the ability to integrate information with the capabilities needed to influence and respond to customers. A broader scope of product solutions adds a project management dimension to the process.

 

Bob Parker added the need to incorporate portfolio, situational and scenario based analysis to manage products, tradeoff decisions, as well as to mitigate risk, with an overall goal of continuous planning. He cited as an example, Procter and Gamble’s circles of cadence, involving strategic, tactical and operational decisions that need to be coordinated.  The S&OP process never ends, it is continuous.

 

Professor Melnyk added the need to focus the process on required business outcomes, not so much in the sense of hard metrics, but on the required outcomes needed to satisfy customer and business needs.

 

Roddy Martin added that the future of S&OP is framing the process differently, as a journey toward integrative decision-making. Too often, S&OP teams rush to include senior executives in the process without the process maturity, and the right level of information that can context business impact or business options. Having arguments as to the accuracy of information or the meaning and implications of information, chases senior executives away and can derail efforts. That is perhaps, the worst mistake. Executive S&OP is the summarization of all business planning and execution across various time horizons, along with the business decision implications related to resource plans. 

 

What I took away from these combined insights is that we as a community may be framing the question of the future of S&OP in an improper context.  The future is a given, the opportunities are enormous, but our context and lens needs to broaden.

 

Waht is your view?

 

Bob Ferrari

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