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S&OP and supply chain planning teams within B2C and retail focused supply chains are especially challenged this holiday buying season. The period from the Thanksgiving Holiday in the U.S. through the holidays that extend into January of 2013 are a period of seasonal surge, where profitability for the entire year may be at stake.


In 2011, seven individual shopping days surpassed $1 billion in online consumer orders, with peak volumes experienced on Black Friday weekend, Cyber Monday, and every Monday leading up to December 15th. The implication was that orders came in huge surges, and supply chains that were not prepared, particularly those without robust inventory allocation or tight inventory visibility across their brick-and-mortar retail and online retail systems paid a price in customer loyalty. Response management proved to be a key capability for those that benefitted in the 2011 surge.


According to the latest numbers from marketing analytics firm comScore, Inc., U.S. retail e-commerce spending is up nearly 16 percent in the first 26 days of November.  Cyber Monday online sales are now estimated to be nearly $1.5 billion, a corresponding 16 percent increase from last year. The hottest products during Cyber Monday were consumer electronics, computers, video games and consoles. If last year’s online trends hold true, B2C supply chains can expect continued weekly surges.


The 2012 holiday season adds even more challenges.  Many consumer electronics supply chains are supply constrained because of either late new product introduction, or new technologies such as LCD displays that are experiencing lower manufacturing yield challenges. There is a fierce battle among electronic tablet providers for market share volume.  In the gaming console area, Nintendo has nearly sold-out of its new Wii U console and its supply chain is challenged to fulfill remaining holiday demand.


On the demand side, the state of the global economy adds particular challenges for planning individual country demand. Reports indicate that shopping patterns within the Eurozone countries, currently challenged with high unemployment and a highly uncertain economic outlook is considerably different than previous years. Tighter consumer budgets have motivated online and traditional retailers to promote lower-priced goods. According to a recent article published in The Wall Street Journal, European consumers are refraining from buying presents for each other, impacting demand for electronic gadgets and jewelry. Toy sales, on the other hand, remain stable thus far. Shoppers in Spain and Italy are scaling back as much as 4 percent while 9 out of 10 shoppers in France are seeking special promotions before making a buying decision. Consumers in Germany on the other hand, have shown indicators of a slight increase in holiday sales. Similarly, consumers in China are concerned about the contraction in that economy and are expected to cut-back in holiday buying.


There should therefore be no doubt that consumers will leverage all of the mobile and online technologies at their disposal to find the best deals.  That will obviously add to more added tensions among sales and marketing and supply chain teams in what types of promotions and product will be offered in the coming weeks.


In addition to robust response management capabilities, S&OP and supply chain planning teams among B2C supply chains will need to focus on fulfillment plans by individual country, and by individual channel. Inventory balancing will again be a critical capability to insure revenue plans are fulfilled, while not having inventory isolated in a non-performing channel or geographic region. Online retailers will continue to offer aggressive price promotions for the remainder of the holiday surge on inventory that can still be garnered, while combination brick and mortar and online stores will counter with their own promotions to keep people visiting physical stores.  All of these activities will no doubt, challenge S&OP teams to near daily planning of activities.


For B2C supply chains, it is going to be interesting remaining few weeks, and we should expect these supply chain teams to be heads-down in response management and pulling off last-minute supply miracles.


It will also be interesting to reflect on the potential winners, when the dust finally settles.


What’s your view?


Bob Ferrari


The following is the author’s weekly guest commentary appearing on both the Supply Chain Expert Community and Supply Chain Matters web sites.


Global supply chain strategy is highly influenced by global economics, especially as it relates to energy, the primary driver of supply chain costs. Today, business media is echoing the headline that the United States will surpass all other countries as the world’s largest energy producer by 2020.


The headline stems from the latest analysis performed by the Paris based International Energy Agency (IEA) which factors the recent boom and reserves discovery concerning shale-oil and gas finds across the U.S.  A Wall Street Journal article points out that the IEA is not alone in forecasting this strategic shift since both OPEC and the U.S. Energy Information Administration (EIA) have also predicted sharp rises in U.S. petroleum and energy production in the coming years.


This development not only has significant impact on global politics and economies, but has impacts to global supply chain sourcing shifts in the years to come.  Supply chain strategy and sourcing teams need to be cognizant of these shifting trends, if they have not done so. Further, this is yet another wake-up call to the U.S. legislators and the broader supply chain community to be prepared to take advantage of opportunity.


Already, European media has been focusing on the shifting economic advantage that continues to favor U.S. based manufacturing.   More abundant and cheaper supplies of natural gas has caused German based manufacturers to become concerned that high energy consuming foundries or metal-working will no longer be economically competitive for both Germany and Europe as a whole.  The Financial Times reported that global automaker Volkswagen, which actively practices universal global platform and component sourcing strategies, has already begun alternative sourcing from German based suppliers to foreign based suppliers. The FT reports that VW has joined a growing chorus of German based companies that have raised an alarm about Europe’s ability to economically compete given the shifting global energy trends, and Europe’s current dependence on more expensive natural gas emanating from Russia and Norway. In its reporting, the WSJ notes that OPEC will become more dependent on Asia-based energy consumption in the years to come, vs. the U.S., which further shifts global transportation and manufacturing economics.


Supply Chain Matters has previously weighted-in with two separate commentaries, noted here and here, concerning the building resurgence of U.S. manufacturing. We noted shifting strategies reflected in global automotive, discrete manufacturing and process industries. The shift is primarily driven by the changing economics of energy and global currency shifts, as well as future developments in additive or custom manufacturing that allows manufacturers to have much more flexibility in production design. The implications extend to Canada and Mexico as well.


This latest IEA forecast has obvious impact toward high energy consumption manufacturing such as process industry, refining, fabricating and machining.  It is also, by our view, a huge wake-up call to U.S. manufacturers to continue to invest in process automation and address current challenges in training and preparing a higher skilled workforce. For U.S. legislators, unions, and logistics providers, it is another reinforcement on needs for significantly renewing U.S. logistics infrastructure. There are challenges related to furthering efficiencies of designated import and export ports on both coasts. Surface transportation, highways, rail, and logistics transfer movements need to become much more efficient as is continually pointed out in the Annual State of U.S. Logistics reporting. Movement of newly discovered energy sources to designated refineries and/or consuming manufacturing regions is an area already identified by logisticians and policy makers. There are new opportunities to co-locate energy distribution and manufacturing, as well as leverage new sustainable energy strategy in consumption and further re-cycling of materials.


However, the most fundamental challenge remains in addressing the current shortage of a skilled U.S. workforce, one prepared to manage advanced manufacturing processes and more sophisticated production equipment, and prepared to oversee more analytically-driven supply chain management techniques. This author continues to hear senior supply chain management point to this challenge as significant and in need of joint government and industry action.


As the adage is often stated and practiced, opportunity comes seldom knocking, and when it does, those prepared to take advantage, reap the rewards.


Now that the tumultuous U.S. Presidential election is finally headed toward completion, the time is long overdue for both government and private industry to actively come together and prepare for taking advantage of opportunity for the renewal of U.S. based manufacturing and supply chain infrastructure capabilities.


Bob Ferrari


Just over a week since Apple introduced its brand new iPad Mini to the market, we have a first glimpse at the value-chain components that make-up this new device.  On Monday, The Wall Street Journal published highlights of market research firm IHS‘s teardown analysis of the new Mini. (Paid subscription or free metered view).  The analysis includes a comparison to Microsoft’s new Surface tablet as well as Amazon’s Kindle Fire HD.  In our Supply Chain Matters view, the side-by-side comparison provides some insights as to how supply chain strategy is aligned to supply chain outcomes, which is best described by Professor Steven Melnyk of Michigan State University.


According to the IHS analysis, the iPad Mini equipped with Wi-Fi and 16 gigabytes of memory has total estimated component costs of $188 vs. the designated retail price of $329.  That equates to a 43 percent gross margin for this base model.  In the WSJ article, Apple’s CFO is quoted as indicating that this margin is significantly below Apple’s usual average product margin, yet the WSJ notes that the company’s overall gross margin in the latest fiscal quarter averaged 40 percent.  That number gets considerably larger when consumers opt for the more upgraded models of the Mini. Supply Chain Community readers residing in the consumer electronics or high tech industry supply chains may well be aware of the fact that Apple has considerable product pricing as well as component pricing leverage.  Apple garners such margins because of the power of the brand, and the pent-up pull from consumers to own an Apple product, regardless of premium cost.  Indeed, Apple indicated that this past weekend’s launch of the Mini was yet again, a sellout. A strategy of maximizing tablet product margin while leveraging supply chain component scale and negotiating power, combined with maximizing existing high margins on added content and services, yields the extraordinary overall profit margins that Apple can provide for its investors.


There are, however, some other supply chain focused observations when one views the three product comparisons.  The Kindle Fire HD, which arguably may not have all the glitzy features of the Mini, was reported to have a total component cost of $165 vs. a selling price of $199, resulting in 18 percent gross margin.  The WSJ rightfully points out that Amazon’s product strategy, and we would add, its corresponding value chain strategy, is to provide the hardware product with the slimmest of margins, because the broader business strategy is focused on leveraging much higher margin sales of electronic content and online goods.  In essence, Amazon’s business strategy is one of high volume platform concentration, de-emphasizing the device margin for the potential of penetrating the market with a higher concentration of volume devices that can generate recurring sales of content and services. In our view, Amazon demonstrates its willingness to forgo any attractive margins on the Kindle in favor of a much broader profitability strategy that is still playing out in the market.


Concerning Microsoft’s 32 gigabyte Surface, IHS estimates total component costs to be $271 compared to a selling price of $499, indicating a margin of 46 percent. The Surface, since its announcement, has been controversial for Microsoft since it is the first time that this software giant has decided to usurp its hardware partners by directly coming to market with a Microsoft version of what a tablet product should provide in both hardware and software functionality. Many existing tablet and PC vendors remain frustrated by this strategy.  A scan of all the estimated major component costs provided by IHS and the WSJ would indicate that Microsoft was not initially able to take advantage of the component volume scale and negotiating power of what Apple or Amazon currently can leverage. From our point-of-view, this points to a different business and consequent value-chain strategy. Microsoft’s intent is to make a product functionality statement, and not upset the current pricing dynamics of the tablet market, which would alienate existing and future hardware partners. Thus, the supporting supply chain strategy takes on a different set of dimensions.


Sometimes, management teams can lose focus as to the alignment of supply chain strategy with business outcomes, including leveraging the levers of component sourcing, pricing, channel distribution, and integration with broader product strategy.  Our belief is that this latest IHS teardown analysis provides some important indicators as to the differences in supply chain business strategy alignment.


What’s your view? Do supply chain management teams have the attention and understanding of C-suite executives in understanding this alignment?


Bob Ferrari