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2012

 

Experienced senior executives should know that given today’s more dynamic clock speed of business, the fortunes of any business and the consequent effects on that company’s supply chain can change rather unexpectedly. Thus are the current challenges facing Ford Motor whose stock closed yesterday at a level last seen two years ago.

 

This proud, family legacy, automotive OEM was the only U.S. big-three automotive manufacturer avoiding bankruptcy and bailout in 2008-2009, and consequently was viewed as the success story of the U.S. automotive industry. Ford now finds itself dealing with some increasing high profile challenges in both business and product dimensions.

 

Last week on the product front, Ford had to recall about 11,500 of its brand new 2013 Ford Escape SUV vehicles equipped with the 1.6 liter engine because of a serious potential for a fuel leak.  This recall is significant for two important reasons.  The first is the severity of the problem which motivated Ford to take the unusual measure of instructing owners to stop driving their vehicles altogether and make arrangements to have their recalled vehicles transported to local dealers for repair. Owners are offered a loaner vehicle while their vehicle is being repaired. According to a Reuters published report, the defect is determined to be a manufacturing flaw in fuel lines supplied by parts supplier T1 Automotive.  Reuters reports: “Some of the fuel lines were "mechanically scored" at TI Automotive's plant in Ashley, Indiana, according to documents Ford filed Friday with the National Highway Traffic Safety Administration.”

 

In April, Supply Chain Matters featured commentary related to a major fire that occurred at an Evonik Industries AG manufacturing plant in Marl, Germany that 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. Eight separate auto producers and 50 parts suppliers took the unusual step to meet in Detroit for purposes of drafting an alternative specification and sourcing plan in order to seek an interim replacement for nylon-12. Whether the Ford Escape fuel line issue was a consequence of this industry problem remains to be seen.

 

In addition to its 2013 model, Ford also recalled about 485,000 of the older 2001-2004 Escape model years to check for a damaged cruise-control cable that could cause the throttle to stick open.  That recall involves Escape vehicles sold in both in North America and Europe, where this vehicle has the Maverick nameplate. The recalled vehicles are equipped with the 3.0-liter V6 engine and cruise control.

 

This week, Ford issued an additional recall concerning 8,266 redesigned 2013 Escape SUVs in the U.S. to fix carpet padding that could hinder proper braking. Ford indicated that wrongly positioned carpet padding could reduce space around the pedals and cause drivers to hit the side of the brake pedal when switching from the accelerator.

 

The 2013 Ford Escape was totally redesigned for 2013 to leverage Ford’s global single platform strategy, and represented one of the two critical product launches planned for 2012.  This market introduction strategy now appears to be botched given the building amount of negative oriented news concerning the Escape nameplate.

 

This author has some first-hand consumer experience related to the 2013 Escape product launch since I was actively in the market shopping for a new SUV vehicle in the spring.  I read of the new features of the redesigned Escape on Ford’s web site and registered myself for alerts to product availability at dealer showrooms, which was communicated by Ford in February to be “early spring, 2012”.  Receiving no web updates for weeks, I made the effort to visit a number of local Ford dealers in late May in hopes of securing a test drive. No Ford dealer in my vicinity had inventory of this new model for consumers to physically view or test drive.  It was evident that a good number of the former 2012 Ford Escape models were still sitting unsold on these same dealer lots.  Did Ford hold back the availability of the new model from dealers to sell the former model inventory?  Many of the Ford current TV commercials in the U.S. still feature the 2012 Escape model.  Now, as the volume pipeline of the new model Escape is finally making its way to U.S. showrooms, this unfortunate timing of embarrassing product recalls adds a reason for pause among North American consumers.

 

On the global business side of Ford, the worsening economic crisis in Europe compounded by slowdowns in other economies such as China and Latin America are further impacting Ford’s bottom line. The company reported a 57 percent drop in its latest second-quarter earnings.  Many automotive manufacturers operating across Europe have reported heavy discounts and pricing pressures within the market. According to a recent published article of The Wall Street Journal, Europe represents 30 percent of Ford’s global volume coupled with a presence of five final assembly plants. Ford now anticipates losses of $1 billion as a result of eroding sales and excess capacity issues in its European operations.

 

In the midst of an ongoing aggressive investment in manufacturing presence in China, that market is slowing as well. Operations in Latin America have been impacted because of efforts to undo free trade agreements with Mexico where Ford has pinned its export strategy for this region.

 

One of my favorite Don Henley tunes is titled “In a New York Minute”. It laments how quickly everything can change.  For Ford, the headline of being the U.S. automotive success story now changes to once again dealing with difficult challenges in product, business and supply chain dimensions. 

 

The learning for our supply chain management community is that the best tenet of agility- a resilient supply chain, is its ability to deal with both growth as well as business setbacks.

 

Bob Ferrari

 

Many analysts and academics in our supply chain world often point to Inditex S.A. and its apparel retailer Zara as a benchmark in supply chain agility. It seems that in spite of many industry challenges, this retailer continues to demonstrate resiliency to changing fashion, market entry and economic conditions. It is no surprise that this retailer provides the content for many business case studies.

 

I recall reading a Wall Street Journal article published in mid-June indicating that the company again posted another profit increase in spite of the challenging economic conditions across Europe. In the April 30 ending quarter, Inditex posted a 30 percent increase in profits. Second quarter retail sales have also been trending higher. All occurred in a building environment of economic uncertainty.

 

Zara has rapidly expanded its presence across Asia and Latin America and expects to have 425 stores across China alone by the end of this year.  This retailer has averaged an opening of more than a store a day in recent years and now is moving toward implementing an online sales presence.  Continuing to support these efforts is a supply chain response capability with deep information technology demand sensing capabilities that can respond to changing consumer tastes in a matter of a few short weeks.

 

In investment circles, Zara’s continued growth and profitability has been attributed to its broad geographic market diversity along with its responsive supply chain network. Volume production facilities have been located close to its corporate headquarters in Spain where upwards of 5500 suppliers are currently located, augmented by a logistics capability that can replenish any store twice a week. While production costs tend to be more expensive with this production sourcing model, supply chain agility compensates with quick adaption to changes in consumer tastes. At the recently held Annual General Meeting, Inditex Chairmen and CEO spoke of the new addition to corporate headquarters, the construction of a new state-of-the art logistics center involving an investment of 190 million euros, and continued deployment of supplier clusters.

 

As the economic crisis worsens across Europe, with Spain being one of the epicenter countries of financial concern, we can all speculate whether Zara will suffer some setbacks as the financial environment surrounding this retailer becomes ever more challenged. Then again, a legacy of supply chain agility and resiliency rises to the occasion.

 

Bob Ferrari

 

The Supply Chain Matters blog has provided previous commentaries reflecting on the battle of the electronic tablet wars and the dominance of Apple and its associated supply chain capabilities within this product segment. Our commentaries have pointed out the important significance of a supply chain supporting lower price and leveraging higher volumes of tablets as a means to gain a platform for future sales of higher margin electronic content vs. a supply chain that supports high margin, high profit product.  Just like smartphones, this is a battle for numbers of installed devices that can be leveraged for future products and services.  Once more, in today’s high tech and consumer electronics segment, a matter of weeks can equate to significant change in the competitive landscape.

 

In a Supply Chain Matters commentary in mid-February, we highlighted published reports of indications among some Apple’s suppliers that the company was working on a smaller screen sized variant of the highly successful iPad. An obvious question Supply Chain Matters raised related to how serious Apple wanted to compete for the hearts and minds of price conscious tablet consumers by pricing a smaller screen version tablet as a serious competitive alternative to current lower cost offerings.  Also, was Apple willing to forego its current fat and highly profitable product margins to enter a battle of volume?

 

This Sunday’s New York Times featured an article (paid subscription or free metered view) which notes how the electronic tablet race has heated up with the recent entry of the new Nexus 7 from Google, the new Surface from Microsoft, and indications that Amazon is working on a larger display version of its Kindle. The Times also reports that Apple “is developing a new tablet with a 7.85-inch screen that is likely to sell for significantly less than the latest $499 iPad.” The article goes on to quote analysts and technology industry executives who speculate on the reasons why Apple has embarked on this lower-cost version of the iPad, mainly “to lure customers who want different sizes of tablets into the iPad product family.” Also noted was that Apple previously followed a similar successful product strategy with its iPod product family, ultimately dominating the MP3 music player market, and more importantly, leveraging the iTunes web property as a dominant and highly profitable source of electronic content distribution.

 

The Times article also cites NPD analyst Stephen Baker indicating that this smaller tablet can help Apple seize the majority of the market by widening the audience for this device.  Supply Chain Matters has a similar viewpoint and in a Will Apple's Supply Chain Strategies Take a New Turn?, we speculated whether Apple’s supply chain strategies will take a new turn, and whether Apple has reached a crossroads concerning its strategic supply chain strategies and future capabilities. The sheer visibility and brand image of Apple has placed the company supply chain practices under the looking glass and it now faces a challenge to shift its supply chain strategy to a higher cost model to fund more social responsibility practices.  A lower-cost, higher volume product strategy demands more consideration for the profit considerations of Apple’s channel and retail partners who will be instrumental in penetrating higher volume consumer markets such as China and India.

 

As noted, which direction Apple eventually takes is up to Tim Cook and his senior supply chain team. As a supply chain community, however, we should anticipate that some strategy changes may be forthcoming. We would not be surprised if clearer signs of supply chain segmentation become more visible in Apple’s supply chain practices.  The need to support high feature, high margin products should not be mingled with the needs to penetrate new, untapped consumer markets where the main objective is numbers of devices that can tap more profitable electronic content distribution. 

 

It will be interesting to observe how Apple navigates this new chapter of upcoming supply chain capabilities and whether a new model of supply chain segmentation comes forward. We also include Apple’s competitors in the electronic tablet product segment, who must also counter any Apple shifts in strategy.

 

The dynamics of the consumer electronics market segment undergoes significant changes in a matter of weeks and short months, and supply chain related strategic and tactical business processes, along with fulfillment capabilities will be the ultimate differentiator to the dominants of this market.

 

Bob Ferrari

 

On the Information Week web site, Dr. Larry Tieman, former VP at FedEx and experienced CIO has posted a series of commentaries on the theme: Why CMO’s and CFO’s Will Rule Above CIO’s. The premise of Tieman’s commentary is that disruptive forces such as cloud and mobile computing will continue to reshape the role of IT and potentially dilute the executive influence of CIO’s and the IT organization over time. His premise is that while the title of CIO will survive at some companies, particularly those where IT is an integral component of the business model, fewer CIO’s will organizationally serve at the C-Level, diluting their current influence in the organization. The commentary also provides scenarios where IT-savvy CFO’s and CMO’s will chip away at current IT strategies.  As an example, Tieman postulates that as the CMO spends more money on customer and market focused IT projects, the CFO will opt to challenge existing IT infrastructure costs and cut the IT budget. Cited is a recent Economist survey of 536 C-level executives with a finding of 57 percent respondents expecting their IT function to significantly change, and 43 percent indicating that their company will increasingly use IT as a commodity service, bought only when needed.

 

Supply chain and their corresponding IT teams may elect to either agree or take issue with the statements made in the above commentary.  That, I submit, would be non-productive.  What’s important is to focus on and prepare for the implications of this trend on current and future supply chain business process and technology based initiatives.

 

There are two areas for teams to consider and prepare. 

 

The first challenges the assumption that existing ERP backbone systems will continue to be the primary choice for any future supply chain related technology needs.  Why? The principle recurring cost-driver of ERP systems is the burden of annual maintenance charges, along with the associated internal IT costs of various functional and best-of-breed systems integration needs. As was pointed out in the IW commentary, the new era of cloud-based and Software-as-a-service offerings in the marketplace can provide more cost efficient alternatives for businesses, alternatives where IT infrastructure costs are assumed by the software vendor, and where costs are a predictable monthly charge of operating costs.  Tech-savvy CFO’s are already challenging existing assumptions related to IT infrastructure burden, and that is sure to spillover to the supply chain.  We can identify with the operating principle related to systems: “if it isn’t broken, don’t mess with it” Forget that premise!  In some cases, if it costs too much, you will have no choice but to mess with it.

 

While on the subject of software systems, supply chain teams must also be prepared to take more of the leadership role in technology selection.  In many cases this is already occurring, and our Supply Chain Matters view is that the ERP vendors are in for an even more stark reality to the shifting influence of supply chain teams on the ultimate selection of technology. No longer is a “lock” on the resident CIO a given, and no longer can technology vendors tailor their marketing and sales pitches solely to IT.

 

The second challenge is the assumption of securing the priority of the C-Suite in approving critical supply chain related investments.  Many in our community can relate to past situations where difficult cost savings extracted from supply chain operations were later utilized to fund higher priority sales, marketing or product-related investments.  Supply chain teams were the loyal soldiers who made the sacrifice for the sake of business.  However, too many cuts exposed highly vulnerable processes monitoring quality, conformance and other important requirements and have come back as disruptive costs.  Some have led to costly product recalls or negative consequences to the product brand. With organizations such as sales and marketing potentially able to pitch their own IT spending initiatives such as an enhanced online presence or customer focused business intelligence directly to the C-suite, supply chain executives and their IT support teams may find themselves in yet another situation of being “the good soldier” and foregoing needed supply chain process and technology investments.

 

Supply Chain Matters submits that what this implies is that the new success in supply chain leadership demands much more tech-savvy knowledge, the ability to understand the tradeoffs in recurring IT costs, along with the ability to leverage and influence cross-functional and cross-organizational IT initiatives.

 

The summer months are often a time to focus on individual and organizational training needs, and a time where teams come together in “retreat” to discuss organizational goals.  A good investment may well be a discussion on enabling a much more tech-savvy procurement and supply chain organization.

 

What’s your view regarding tech-savvy supply chain leaders?

 

Bob Ferrari

The 4th of July holiday in the U.S. is often a time of great summer celebration, complete with fireworks, family picnics and group barbeques.  But when supply chain professionals return to their work places, the latest economic indices will challenge Sales and Operations Planning (S&OP), supply chain planning and procurement teams to analyze and prepare many different scenarios regarding supply chain activity in the second half of 2012, along with next year.

 

The impact of the ongoing European financial crisis and a slowing of China’s economy accounted for significant drops in key supply chain related indices for June, and considerable notes of caution have surfaced. The U.S. focused ISM June PMI Index dropped 3.8 percentage points in one month, from 53.5 in May to 49.7 in June, reflecting a below 50 contraction and the appearance that the European economic crisis has a spillover effect. The all-important new orders index, a key indicator of supply chain momentum, plunged over 20 percent, from 60.1 in May to a reading of 47.8 in June. Exports dropped 6 percentage points from 53.5 in May to 47.5 in June. The inventories index fell 2 percentage points from 46.0 in May to 44.0 in June.

 

The headline for preliminary HSBC China PMI also reflects a drop of activity, but more importantly, export demand from both Europe and the U.S. was especially weak. Overall, new export orders sank 2.7 percentage points to a 39 month low of 45.8. Elsewhere, the June PMI for Brazil sank for the third straight month, while the June index in both South Korea and Taiwan also contracted for the first time in five months.

 

Global supply chains are catching a chill from both Europe’s deepening economic contraction along with the impact of China’s efforts to cool down a previous overheated economy, compounded by the building contraction in Europe.  This author has heard talks from two different noted economists over these past two weeks, and both pointed to a multi-year period of contraction in Europe before the Eurozone can work its way through tough economic challenges. Since many U.S. corporate supply chains extend to Europe, that is a significant prediction to factor.

 

Since considerable portions of U.S. based corporate revenues and profits have come from these overseas markets, planning for the coming months and quarters will be challenged, to say the least. Needless to state, prior or generalized product revenue forecasts are not going to cut it in this new period of global uncertainty along with plans that extend 12-18 months. The reality is that product plans will have to reflect near real-time demand from individualized countries as well as key customers and scenario based planning tied to supply chain business intelligence are a must. Similar to what occurred in 2008-2009, diligent market sensing and agile response to any marked changes in product and services demand will be the norm in the coming months as events unfold. The current extreme and highly unusual weather patterns spurning frequent natural disasters along with more frequent occurrences of earthquakes add uncertainty and risk as well.

 

On a more positive note, the print edition of today’s Wall Street Journal’s featured a front page article (paid subscription of free metered view) observing that pricing for inbound raw materials have plunged dramatically because of the sudden economic downdraft.  In fact, raw material inventories are on the rise.  Overflowing oil storage facilities and metal and raw materials warehouses in China spilling over to adjacent areas are sure signs of a back-up in supply chains. Past principles related to the time it takes for raw material prices to ripple through the supply chain are no longer valid in times of just-in-time inventory principles, and customers will again add to pressures to reduce prices sooner.

 

The Independence Day holiday in the U.S. is a celebration of the founding of a nation, and how a small team of visionaries and patriots could prevail.  Thomas Paine, an American patriot, scribed an expression: “These are the times that test men’s souls.” This expression is perhaps appropriate for S&OP and supply chain teams as they plan the second-half of 2012.

 

Bob Ferrari