Skip navigation
2012

On behalf of myself and our virtual Supply Chain Matters team, I would like to extend to the Supply Chain Expert Community sincere best wishes for a joyous upcoming Holiday Season and a happy and rewarding New Year.

 

We share a holiday commentary from U.S. National Public Radio (NPR) that reports on the 12 million supply chain people resources Santa Claus would need to deliver his holiday presents if it were not for Magic.

 

Best Wishes to All.


Bob Ferrari

In June of 2011, I penned a Supply Chain Expert Community commentary, Hon Hai’s Annual Meeting Provides Signpoints for a Changed Contract Manufacturing and Value-Chain Model. That commentary reflected on how the largest contract manufacturer in the world was communicating new strategic direction and important strategic messages for high tech and other industry players to contemplate. Current CMS operating margins averaging 2-3 percent are not sustainable when other parts of the high tech and consumer electronics value-chain are generating far higher margins, including OEM’s such as Apple.

 

The above Community commentary was followed in March 2012, Will Apple’s Supply Chain Strategies Take a New Turn?  This commentary apparently was of interest to this Community since it has recorded over 800 views to-date. The name Apple obviously draws more reader attention. The takeaway from my March 2012 commentary was that strategy changes were forthcoming for Apple’s supply chain for a number of stated reasons, the most obvious being developments coming from Hon Hai/Foxconn.

 

Nine months later, as we wind down 2012, snippets of information continue to support the premise of a significantly changed contract manufacturing model.  The latest edition of The Economist magazine features an article on Foxconn, (paid subscription or free metered view) which I recommend for Community reading. The sub-title of this article summarizes the gist: Can Foxconn, the world’s largest contract manufacturer, keep growing and improve margins now that cheap and willing hands are scarce? Foxconn, who employs upwards of 1.4 million workers across 28 campuses within China alone, cannot find adequate numbers of affordable workers to fill needed positions. A strategy to move facilities to inland areas to take advantage of other untapped sources of labor is yielding mixed results.  More importantly, there is a continued reality that in order to grow revenues and profitability, Foxconn must continue its strategy for both increased factory automation, but more importantly, of horizontal integration up and down the consumer electronics value-chain.

 

The Economist article astutely points out that increased expansion to inland facilities will ultimately add higher inventory and logistics costs, increased direct labor costs as well as declining government subsidies. Instead, Foxconn is moving down the value-chain by buying a previous equity stake in LCD supplier Sharp, which could possibly lead to a rumored line of Apple designed and brand high definition televisions. This CMS firm has also moved into other component areas including metal finishing, enclosures, batteries, lenses, speakers and other value-chain areas. Upstream, there are efforts to leverage Foxconn’s logistics and fulfillment muscle to provide OEM’s and retailers guaranteed inventory management and replenishment services. While Hon-Hai/Foxconn chairmen Terry Gou continues to deny that the firm will ever offer its own branded products, the reality at some point would be that this CMS will de-facto, control a good majority of the manufacturing and logistics value-chain. With Apple representing what the Economist estimates as 40-50 percent of Foxconn revenues, Foxconn can ill afford to aggressively press for higher margins.  However, other OEM’s and product areas may well present more opportunities for applying full value-chain integration and margin expansion opportunities.

 

Thus we have another checkpoint regarding manufacturing and supply-chain strategy for the high tech industry. If firms feel that continuous product design and innovation, coupled with close proximity and communication with manufacturing is of strategic advantage, than they may want to re-think strategic direction.  If on the other hand, individual product design alone is perceived to be the sole strategic advantage, with the majority of the value-chain outsourced to an offshore, full-service CMS provider, than we might adopt the terminology as being “the Apple model”.

 

Candidly, this author believes that there are strong arguments for either model. However, how you decide to manage and oversee either model has vast consequences in terms of people and technology enabled capabilities.

 

One final obvious conclusion.  If industry analyst firm Gartner continues with its Top 25 Supply Chains ranking, it had better internalize the implications of a changed contract manufacturing value-chain model.  The weighting of higher Return on Assets (ROA) negates full capability, reach, and supply chain competency of the new contract manufacturing business model.  Is there no wonder why the world’s largest contract manufacturing firm never appears?

 

What’s your view?

 

Bob Ferrari

Today’s Wall Street Journal features an article, Detroit’s Unsold Cars Pile Up (paid subscription or free metered preview) regarding the building inventory of unsold cars among the U.S. big-three OEM manufacturers, namely General Motors, Ford and Chrysler.  The premise of the article is that despite brisk levels of auto sales across the U.S., domestic manufacturers have built up some alarming levels of finished goods inventories, akin to the economic downturn three year ago.

 

I call special attention to both supply chain management and sales and operations planning (S&OP) teams to perhaps share awareness of the lessons brought forward since, in my view, it is a classic example of how corporate business strategy and desired business outcome can conflict with the realities of the processes and tools provided to operations and supply chain management.  It is perhaps another industry example of how the conflicting goals among finance, sales and marketing as well as supply chain can result in an undesirable situation.  Also, at least in my view, it presents a snapshot of certain S&OP processes not factoring the realities of the market with the required capabilities desired within the overall supply chain.

 

This industry situation developed when Japan based automotive brands, such as Honda, Nissan and Toyota, who were recovering from huge sales setbacks as a result of the 2011 Japan tsunami supply disruption, began to aggressively market their models in the U.S. market at the beginning of this year.  The goal was clear- regain lost U.S. market share through aggressive marketing and discounting of vehicles. Some industry players would refer to this as “old behaviors”.  Regardless, U.S. consumers responded by scooping-up Japanese branded models, and sales volume growth among Japanese nameplates has soared to near double digit levels almost every month.

 

U.S. OEM’s, especially GM and Chrysler, renewed by the bankruptcy and legacy infrastructure bailouts of 2008, have established corporate goals of increased profitability. GM’s goal is to boost sales, market share and profitability without the need for promotional discounting. That strategy would be fine, provided the S&OP and supply chain management process had a means to dynamically adjust the supply chain based on actual vs. predicted demand, with the means to both identify and dynamically adjust inventories by model, by region, or by geographic region.  Chrysler and Ford were somewhat more pragmatic and elected to continue aggressive promotions on certain specific models of vehicles.

 

According to the WSJ article, GM both miscalculated actual demand for certain models of its products while not dynamically adjusting inventory and capacity output. Normal industry finished goods levels average between 60 and 70 days.  GM entered December with over 788,000 unsold vehicles, which included 138 days inventory of various model pick-up trucks, 96 days inventory of the newly introduced Chevrolet Cruze model, and a five month supply of Chevrolet Malibu and Camaro’s.  Other examples cited were Chrysler, having nearly a six month inventory of its new Dodge Dart model and over 3 months of Dodge Ram pickup truck inventory. Ford has more than four months’ worth of Fiesta subcompacts.  Contrasted are Toyota’s current 60 days of actual inventory, and Honda is now operating its North America plants at 90 percent capacity to satisfy consumer demand.

 

While the U.S. market has been the bright spot, global automotive demand has been on the decline, especially across Europe where the ongoing severe economic crisis has cut deeply into auto sales volume. The overall market in China is contracting, with the exception of GM, where its model line-up is currently highly favored by Chinese consumers. Not only must automotive supply chains deal with the sales incentive dynamics of the U.S. market, they must also deal with the realities of a currently hemorrhaging market across Europe, dynamically changing markets in China, Asia and other developing markets.  The industry realities are radically different market demand pictures, highly competitive market competition, all fueled by singular global product platform and supply strategies. If there were ever a definition of a highly dynamic industry supply chain with conflicting forces, it would be today’s global automotive industry.

 

Supply chains can indeed impact business outcomes and help deliver bottom-line results provided they have the tools and processes that are necessary.  In the case of the U.S. automotive market, and certain U.S. automotive OEM’s, these supply chains need senior management support, involvement and commitment in the understanding that a highly dynamic supply chain requires highly responsive supply chain resource and decision-making capabilities. That would include the ability to sense individual product, market, and geographic demand, with the ability of the supply chain to dynamically and flexibly change resource plans.

 

This latest automotive industry development perhaps provides evidence that while come OEM’s get it, other do not quite get-it.

 

I encourage feedback and comments from Community members currently residing or interacting with this industry.

 

Bob Ferrari