We would like to call Supply Chain Expert Community readers attention to a Supply Chain Matters commentary calling attention to what we would characterize as a rather disturbing account of the state of hiring practices in the lower tiers of high tech and consumer electronics supply chains. It is yet another reminder of the existing gaps in social responsibility practices in certain industry global supply chains.


The Bloomberg Businessweek article, An iPhone Tester Caught in Apple’s Supply Chain penned by Cam Simpson, paints a disturbing web of subagent migrant labor brokers who feed off the high-tech industry’s culture of excessive demands for high-volume production ramp-up by locating large numbers of workers and charging these workers excessive broker fees. A quote from the article states: “Companies tap an informal, largely unregulated and transnational network of thousands of recruiters. They fan out, often hiring subrecruiters, into the farm fields and impoverished cities of Indonesia, Cambodia, Myanmar, Vietnam and even into the Himalayas in Nepal. The positions they’re trying to fill are so coveted that they’re not merely offered, they’re sold.”


The article itself tells the story of a farmer in Nepal who was recruited to work at a Flextronics contract manufacturing factory south of Kuala Lumpur in Malaysia. According to the article this worker was compelled to pay $1000 in broker retention fees just for the opportunity to interview and work at a contract manufacturing facility.  A recruited worker’s passport is retained by the employer to insure the worker does not flee and brokers tell recruited workers never to reveal the arrangements in the fear of being charged and punished.


The article reports that in 2008, Apple discovered in its factory audits that worker passport were being confiscated, and that this practice smacks of bonded labor or a modern day form of indentured servitude. According to Bloomberg, last year, Apple’s own audits uncovered up to $6.4 million in fees paid by workers beyond prescribed limits, compared with $6.7 million paid in the previous combined four years.  That obviously points to a growing and disturbing pattern, one that can no longer be swept under the rug as an unspoken or tolerated state of affairs.


Bloomberg further reports that in response to its reporting, Flextronics has indicated that it has commissioned an outside group to conduct forensic audits on labor fees paid by temporary workers. The company further states that it will reimburse those employees that have been charged excessive fees by labor agencies.


In the article, a spokesperson for Apple is quoted as indicating that they were the first in the industry in uncovering and preventing abuse of migrant workers, dating back to at least 2008, and that Apple continues to aggressively investigate any claims of bonded labor. The article also states that the subject Flextronics facility is no longer in Apple’s supply chain.


In September of 2012, this author penned a guest blog commentary in this community, Time to Factor the New Realities for Low Cost Manufacturing and Supplier Social Responsibility. In that commentary, we opined that social responsibility change and reform is long overdue.  The industry and our community can no longer turn a blind eye to labor practices occurring in the contracted supply chain. The notion that an OEM, in the midst of the latest new product launch, preparing for a peak consumer buying period or extraordinary market opportunity can continually dictate unplanned changes, insist that virtual capacity exists without ramifications to social responsibility practices no longer suffices.  While this Bloomberg article specifically addresses Apple and the consumer electronics supply chain, challenges also exist in the apparel and other industries. This is not an area where supply chain planning or response technology has the ultimate answer.


As noted, when dominants such as Apple, with the sheer buying buyer that this OEM possesses, continues with actions in resolving these unacceptable business practices, than the industry and our community needs to acknowledge that practices need to change.


Bob Ferrari

The following posting is a recent commentary published on the Supply Chain Matters Blog.


Frequent readers to guest postings by this author are more than aware of the many commentaries I have scribed addressing supply chain risk management and business continuity planning.  While many consultants and others are jumping on this bandwagon of late, we at Supply Chain Matters were calling attention and advising our readers and clients on strategies related to supply chain disruption and risk management as far back as 2008.


One area that we continually focused on in both blog commentaries and conference presentations was making teams aware of the importance of leveraging social media tools as a component part of a risk management strategy.  To state that this was somewhat hearsay just a few years ago is an understatement.  In 2011, I co- participated in a webinar sponsored by Kinaxis, that addressed how some early innovators were leveraging social-media based tools and concepts to effectively manage business continuity planning and overcoming some of the potential perils of brand or product risks. During that webinar, both myself and Lora Cecere, a co-presenter, stressed both the importance, but also cautioned on the internal obstacles that needed to be addressed.

The reason for recounting this history is because a very critical milestone has occurred. 


I believe that the Supply Chain Risk Management Council (SCRLC) represents one of the foremost benchmarking resources and leadership forums for identifying and managing supply chain risk.  Its membership represents the true innovators in this important area. When we present to audiences or workshops related to supply chain risk management, we cite SCRLC as a benchmarking resource for teams to consider.


In the latest SCRLC Quarterly Newsletter, the lead article is titled: Social media- A Valuable Operations and Risk Management Tool.  This article describes that during its recent triennial meeting, SCRLC members discussed the growing importance of social media outlets on business operations and its potential for minimizing supply chain risk.  We urge supply chain leaders and teams to absorb the very important messages brought forth from this leadership forum.


The article notes that social media can be defined in five categories that include Blogs, Facebook and Twitter. It acknowledges that while social media can present a slippery slope, corporations can benefit in many ways from an effective social media based strategies.  One important quote of the article declares: “When executed properly, social media can be a boon, but it carries considerable risk as well.”  The SCRLC discussions further stressed that it is very important to remember that social-media is a two-way communication tool. “Critical information gathered from clients can improve operations and reduce overall risk.”


If you had doubts on Supply Chain Matters previous insights as to the importance of incorporating aspects of social-media mechanisms in your supply chain risk mitigation plans, we call your attention to how the recognized global leaders in this critical area view its use. If you needed further evidence to help your senior management understand its importance, benefits or risks, the SDRLC can be an important resource.


We again encourage readers to share their views on leveraging social media based mechanisms as a component to supply chain risk mitigation action planning.


Bob Ferrari

In Part One of this commentary stream, I reflected on some conversations related to the history of online B2B adoption.  I made reference to a research report written in June 2000 that outlined the positive benefits of electronic B2B processes, but even back then, raised some cautions and practical watch outs.  So much has changed in this online B2B technology wave since that time.

 

In the June 2000 AMR Research report, this author outlined important business and technology change management considerations that warrant some important reflection.  The report concluded:

 

Trading exchanges have the potential to provide the mechanisms for impacting how companies interconnect, streamline, and reinvent their interaction with customers, suppliers, service providers and channel partners.  However, they need to be considered in the context of broader comprehensive strategy that addresses a company’s overall strategic business goals and how e-business and supply chain strategy will enable those goals”.

 

The above statements addressed the all-important internal and external organizational change management factors that needed to occur within many industries and their supply chains. From an internal perspective, procurement teams discovered that e-procurement practices layered on former methods of bludgeoning suppliers for the lowest material cost would not yield mutual benefit. While adoption of e-procurement practices yielded benefits in indirect procurement, many lacked the energy or resources to broaden initiatives to direct materials and complex services, without additional change management assistance. Companies needed to build trust and collaboration in their trading communities.

 

Sales, marketing and supply chain fulfillment teams discovered and overcame issues in cross-functional business process and organizational reward alignment. There were obstacles in channel conflict and consistent pricing that still exist today. Some readers may recall battles of the B2B platforms which placed suppliers in precarious positions of which platform to support. Adoption of standardized processes, terms and taxonomy, along with information integration capabilities that span the enterprise also had to align. Onboarding a new supplier in the early days of exchanges was fairly painful and often requited direct IT assistance, and days to complete.

 

In the external sense, a number of severe global economic recessions provided the mandate to reduce overall supply chain costs, leading toward a wave of global outsourcing and extended supply chains as a mechanism reduce material and labor costs.  Many companies accepted the vision of the Internet as the facilitating mechanism of online commerce at their own pace, after observing the success of others, or after internalizing the compelling differentiators for their businesses. Consumers and businesses become far more comfortable in leveraging online commerce tools to secure goods and services. There were few visible innovators, at least those who were willing to openly share strategic intent.

 

On the technology side, the eventual development of more mature software-as-a- service (SaaS) platforms coupled with improved online integration tools  linked with cloud computing platforms have moved the online B2B maturity curve forward.  While some issues remain, manufacturers and service providers can now understand the important value propositions that were missing before, namely more extended reach across the extended supply chain, quicker time to overall deployment, and reduced IT infrastructure costs.

 

In the year 2000, companies like Apple, Amazon and Samsung never appeared in the listing of the top ten most valuable companies. At the end of 2012, both Apple and Samsung appear on that while Amazon is not that far behind. Each has a business model that leverages a world class supply chain that surrounds E-commerce and online business processes. They are supply chain intensive companies designed to leverage required business outcomes. There were no examples of Linked-In, Facebook and Salesforce.com to help teams understand the notion of the network is indeed the system, and that systems of engagement are the other enabler of deeper collaboration and quicker decision-making.

 

According to a report published by the Boston Consulting Group, in three years, the Internet economy will reach $4.2 trillion among the G-20 economies, a size surpassing some countries. During this past holiday buying season, consumers clearly stepped-up their preferences towards online channels as their  preferred buying option. According to comScore, the growth rate of online retail commerce is outpacing the growth of brick and mortar retail by a 4X factor.  In the U.S. alone, total retail and travel-related E-Commerce sales reached $289 billion in 2012, 13 percent higher than the previous year.

 

It may have taken over a decade for all the business, technology and change management factors to align, but those companies and technology providers who embraced change, stayed the course and adjusted to the lessons of the market are now reaping the benefits. We can unfortunately speculate as to more industry casualties to come from those companies and service providers who were not as adept at catching the online B2B wave.

 

As noted in Part One, we are now entering the third platform wave of online business, the fusing of transactional, advanced analytical and social engagement information where line of business, B2B and supply chain teams will be able to harvest incredible capabilities.  The takeaway is accepting the learning of the past as the passport to the future.  The spheres of Technology, Process, People and Business will need to again align. The winners will be those who provide the leadership and mentoring toward achievement of the vision, and execution of the components in manageable and organizational readiness phases.

 

I would be interested in your views on the evolution of online B2B, especially those readers who have first-hand navigated their organizations through this era.  You can contact me via email at: info <at> supply-chain-matters <dot> com.

 

Bob Ferrari

Within the last couple weeks, I have had some fascinating conversations with technology professionals who have participated in the young history of B2B networks. The conversations included Sean Rollins, Vice President of Product Marketing, E2open, Greg Johnson, Senior Vice President of Marketing and Greg Kefer, Vice President of Corporate marketing, GT Nexus.  The gist of our conversations centered on the history and current day adoption rates of electronic B2B commerce and how certain actions and events 10 years ago would change what we see today in the B2B technology landscape.

 

Over ten years ago, there was lots of market interest in the vision of electronic B2B processes, but lots of doubt also existed. There was confusion in the definitions of private, public consortium or industry trading exchanges. There were enormous claims relative to both the customer and supplier facing online commerce potential of online processes, fueled from both the industry analyst and the vendor community. These were the times that featured trading exchange names such as Chemmatch, Chemconnect, Logistics.com, TradeMatrix.com, Hightechmatrix.com, Covisint, Myaircaft.com, Exostar, and others. Some succeeded and continue to exist today, while others did not.  In 2013, we have a far different picture of mainstream adoption, with analyst firms such as IDC predicting a ten-fold explosion of industry focused platform-as-a-service (PaaS) offerings in the next three years.

 

These recent conversations motivated me to search back to some research reports that I personally authored for AMR Research (now subsumed by Gartner) almost 13 years ago, in the year 2000. The title of a specific report was: Get Your Supply Chain Ready for Trading Exchanges. I doubt that not all Supply Chain Matters or Supply Chain Expert Community readers will recall the report, since so much has transpired since then, but bear with me in this two-part look-back commentary as I point to some important takeaways.

 

The conclusions of that 2000 research report were that while the (new) concepts of electronic B2B trading exchanges had the potential to fundamentally alter supply chain management processes, companies needed to address whether utilizing online processes would give them a competitive model for supply chain best practices, and whether online processes should be incorporated in the overall adopted supply chain strategy.

 

In the year 2000, there were many skeptics to these models, believing that the technology vendor community was over hyping the fact that online business processes would become the new fabric of business.  At the time, while many of us at AMR Research believed in the potential of online B2B, we raised cautions as to market overhype.  That 2000 report noted:

 

AMR Research predicts that most current electronic trading exchanges will fail because of errors in revenue strategy, technology choices, functionality integration, or marketplace liquidity.  Integrating multi-billion trading communities will involve considerable complexity and heavy lifting. This will take time, commitment, and patience.”

 

For the most part, these statements turned out to be true.  Needless to state, AMR Research was not on the favored list of some of the leading vendors because of its stated caution to clients. Certain of its readers can possibly recall claims from vendors such as i2 Technologies, CommerceOne, Manugistics, Oracle and others regarding the new coming of E-commerce.  Alumni of i2 Technologies will certainly recall an atmosphere of market leadership in B2B and supply chain vision. Unfortunately, some of the PowerPoints sometimes got ahead of the actual existence of released software. Doubt and fear were reflected on prospects in compelling messages of “new” vs. “old” economy companies and who would eventually survive in the industry.  Technology vendors were riding the Y2K and E-business wave, with lots of third-party venture and investor funding.  The visions were spot on, but the execution in overall scale and depth of the technology was a bit premature. That was then.

 

At the time, companies were very invested in their four-walls oriented backbone ERP systems and were concerned that best-of breed e-commerce vendors lacked maturity and scale for companies to place their trust.  Even during those early times, manufacturers, retailers and service providers raised concerns over the security of the Internet, and specifically, the security of their data.  The price tags for early entry were not cheap, since software sales reps wanted to extract the same seven figure values of existing ERP implementations. There was an inside joke within the original AMR Research supply chain management practice that customers would not get the attention of any visionary B2B vendor sales rep without willing to open-up the purse strings, big-time.  On client calls, I would actually queery clients as to how much they had budgeted for their B2B investments and have to break the news.

 

At the time, some industry analyst firms were too vested in spouting the visions of B2B and certain vendors vs. the realities of business adoption. Sean Rollins and I reflected on whether a couple of changed strategic decisions, alliances or technology breakthroughs would have altered the eventual timetable and the listing of today’s vendor landscape.

In Part Two of this commentary stream, I’ll explore further in history and in what I believe are some specific takeaways for the B2B and supply chain community.

 

Bob Ferrari

Industry analyst firm IDC published actual Q4-2012 worldwide tablet shipment numbers (paid subscription required or free metered view) which should be of interest to supply chain focused B2B and B2C fulfillment teams. Supply Chain Matters and Supply Chain Expert Community readers might recall our late November commentary which contrasted the latest IHS teardown analysis of various Tablets to supply chain strategies addressing the desired business outcomes.

 

According to IDC, worldwide shipments of electronic tablets grew by 75 percent to a fourth quarter record, thanks to lower selling prices and new product offerings.  Tablets were also high on the holiday wish lists of global consumers. Nearly 53 million tablets were shipped, up from a near 30 million shipped in the previous quarter.  That is quite a hockey-stick uptick and kudos to the supply chain fulfillment teams that managed this surge in product demand.

 

This author does not subscribe to any notion that supply chains may be failing- quite the contrary. Supply chains and fulfillment teams, for the most part, have successfully responded to unprecedented challenges related to economic uncertainty, supply disruption, volatile markets and more demanding customers.

 

Getting back to the IDC numbers, as Supply Chain Matters previously noted, shipments of Apple’s iPad tablets grew 48 percent from a year earlier, boosted by the introduction of the iPad Mini. This was accomplished in a mainly supply constrained period where demand stayed ahead of supply. However, IDC notes that Apple’s overall market share in the Tablets market actually slipped roughly three points, which brings home the severity of market competition.

 

Samsung’s shipments almost quadrupled on a year-over-year basis, shipping upwards of 8 million combined Android and Windows tablets in the quarter. On Supply Chain Matters, we previously called for due recognition of Samsung’s supply chain prowess and consistent fulfillment capabilities. IDC names this vendor as second in overall tablet sales.

 

One of the most anticipated questions for this blog prior to the holiday buying season was how would Amazon, Barnes and Noble and Microsoft tablets fare in the quarter? It turns out that Amazon shipped more than 6 million of its Kindle line of tablets.  IDC notes however that Amazon market share slipped over 4 points.  This author was candidly surprised to read of that number.  The Nook family from Barnes and Noble shipped close to a million units, also suffering a significant market share decline.  Rounding out the top five players was Asus and its Nexus 7 line which IDC notes as experiencing the highest year-over-increase of the top five players, but also slipping 2 points in market share.

 

IDC reports that Microsoft’s Surface tablet shipped just shy of 900, 000 units. In our view, the Surface suffered from a late introduction to the market, a tepid response to the Windows 8 operating system and limited channel distribution leverage.  Microsoft purposely limited production and distribution because of the sensitivity to its existing hardware partners who did not take well to the company’s direct market entry. Considering that Microsoft’s strategic purpose was perhaps to make a credible market presence, more work may be required.

 

I don’t know about you, but reviewing these market results leads to this author’s conclusion that the competitive stakes in the Tablet and the impacted PC markets have dramatically accelerated, and synchronized planning, response management and fulfillment are mandatory just to stay in the game.

 

Congratulations to all teams in their accomplishments in this dynamic market.

 

Bob Ferrari

Once a year, the Ferrari Consulting and Research Group and our Supply Chain Matters Blog provide a series of predictions for the coming year.  These predictions are provided in the spirit of setting management agenda for the year ahead and helping our readers and clients to prepare their supply chain management teams in establishing meaningful programs, initiatives and educational agendas for 2013.

 

Our process included a re-look at all that occurred in the current year, a reflection of future implications, and soliciting input from clients and other supply chain and blogosphere observers. We incorporate a lot of thought into our predictions and actually scorecard our annual predictions at the end of the year.   During December, we published a series of Supply Chain Matters blog commentaries that covered each of our ten 2013 predictions which consisted of the following:

 

Prediction One:

Yes, yet another year of global challenges to support revenue and profit growth

 

Prediction Two:

Stabilized and potentially reduced inbound commodity prices, but certain exceptions in 2013

 

Prediction Three:

The renaissance of U.S. based manufacturing will continue in 2013, but further momentum is dependent on addressing key challenges in legislative and industry barriers and the new transformation of manufacturing.

 

Prediction Four:

For manufacturers and retailers, supply chain talent retention, management and development will remain a significant problem across global supply chains, with special emphasis in China and Asia.

 

Prediction Five:

Two industry supply chains, B2C and the Aerospace Industry, will undergo more significant challenges or increased turmoil in 2013.

 

Prediction Six:

Supply chain organizations must either embrace and augment resiliency and responsiveness capabilities in 2013, or deal with the consequences of poor business outcomes.

 

Prediction Seven:

Chinese based manufacturing and service firms will markedly increase their presence and influence in global supply chains during 2013.

 

Prediction Eight:

The executive level voice and shared accountability of the supply chain organization will invariably extend itself into three broader areas in 2013.

 

Prediction Nine:

Similar to what transpired in 2012, higher and more expensive incidents of counterfeit products, theft, and other unscrupulous ‘grey” market activities within and across industry supply chains will finally motivate industry to step-up mitigation efforts.

 

Prediction Ten:

Cloud computing and managed services options, enabling supply chain business processes, will continue to gain more traction, provided that vendors resolve current lingering customer concerns.

 

Supply Chain Expert Community readers are invited to review the details and logic behind each of these 2013 predictions in either of two ways:

 

First, individual predictions can be viewed in a seven part series of individual Supply Chain Matters Blog commentaries.  All of these postings can be accessed at the following bundled Bitly web link.

 

All of the 2013 predictions have also been assimilated into a more detailed complimentary research report, Annual 2013 Predictions for Global Supply Chains.  If you would like a copy of this report for reading or archiving, please send an email request with your name, title and email address included to: info@supply-chain-matters.com

 

Bob Ferrari

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

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

 

This author had the opportunity to both attend and participate in the 2012 Kinexions Customer Conference hosted by Kinaxis in Scottsdale Arizona. 

 

The Supply Chain Matters blog featured a series of commentaries regarding our impressions of the conference which existing or prospective customers of Kinaxis might benefit. Supply Chain Expert Community readers can double-click Supply Chain Matters Coverage of the 2012 Kinexions Conference- Summary Observations to access commentaries.

 

Enjoy

 

Bob Ferrari

 

As major global companies continue to report September-ending quarterly earnings, the warning signs for global supply chains, as well as their implications, are becoming more and more evident.  Investors and equity markets are also taking notice as a litany of what is being perceived as disappointing earnings downbeat forecasts continues.

 

Snapshots of certain key players across various tiers of global supply chains provide a consistency in warning signs.  In the chemicals sector, both DuPont and Dow Corning have reported troubling news related to top-line revenue momentum. DuPont swung to a net-loss noting that revenues in Asia-Pacific and Europe have declined.  Dow Corning’s CEO noted significant impacts for Dow regarding the existing economic model in Europe, and predicted a “remake of the European model”. Dow further announced the closing of 20 manufacturing plants along with a 5 percent reduction in its global workforce, seeking to save $500 million by 2014.

 

Industrial and construction equipment manufacturer Caterpillar indicated that it was not expecting rapid growth in the coming months.  It predicted slightly better world growth in 2013, a modest improvement in the U.S., China and the rest of the developing world. In its reporting, The Wall Street Journal pointed to equipment manufacturers acknowledging that customer orders are being canceled or put on-hold amid a climate of high uncertainty over pending governmental economic policies. The CEO of United Technologies forecasted a continued slow recovery within the U.S. with Europe remaining a significant challenge. The CEO of Parker Hannifin indicated that his firm experienced a wave of canceled or delayed orders in the month of September from customers in construction and mining equipment. The environment was described as a flat-lining, waiting for something to happen.

 

Diversified manufacturer 3M reported quarterly earnings below expectations and lowered its full year outlook.  General Electric’s CEO has noted cautious optimism regarding the world economy in his travels among various audiences.

 

In the transport sector, shares of stocks among transportation companies are experiencing a discernible decline amid warning signs as to structural changes in global shipping patterns and economic activity.  As of late September, the Dow Jones Transportation Average was down 1.2 percent year-to-date but experienced a 5.9 percent drop in mid-September alone. FedEx has previously reported disappointing quarterly results and cut its global growth forecasts for both 2012 and 2013. It has since announced a $1.7 billion cost reduction initiative directed at the company’s priority air business segment. UPS in its earnings announcement this week noted a slowing of global trade and changing market dynamics. The company also expressed some uncertainty around the magnitude of the upcoming Q4 holiday shopping season. It will be interesting to note any significant shipment volume declines as the major railroads and ocean shipping companies subsequently report their earnings and operating results.

 

Many recent surveys reflecting supply chain management organization and business priorities have noted a shift from previous year’s priorities on cost reduction to supporting top-line revenue growth or enhanced customer services. That was a good sign, reflecting that supply chain teams could move beyond crippling cost cuts and invest in long-delayed new capabilities in added productivity, responsiveness, improved early-warning and agility.  However, the latest round of earnings reports among significant tiers of global supply chains are providing stronger signs that supply chain business priorities will once again be prioritized on driving further cost reductions from the overall supply chain. That in our view will have significant longer-term consequences and will add to the existing vulnerability of supply chains in assuring consistent product quality, resilience to a significant unplanned disruption or timely seizing upon a market opportunity.

 

Regardless, supply chain management and broader sales and operations planning (S&OP) teams should expect continued challenges in planning and executing their 2013 operating plans.  They should seek as much insightful information as they can garner. Accurately predicting product demand, meeting higher service requirements from customers and assuring consistent supply will remain a significant challenge in the quarters to come.  Costs will once again be placed under the looking glass and since previous years of supply chain cost reduction have eliminated the obvious, there will be added pressures to challenge prevailing thinking and shift value-added cost to other supply chain tiers or service providers.

 

The current signs of continued economic uncertainty and consequent declines in export markets fueling previous top-line revenue growth should be a clear warning sign to supply chain management teams to be prepared to shift priorities and expect added challenges for removing inefficiency and cost.

 

Bob Ferrari

 

 

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

 

In previous Supply Chain Expert Community commentary, we have called attention to the fact that today’s deployment of certain global-based supply chains have added new risks for disruption caused by natural disasters.  Recent research studies sponsored by insurance interests identified 10 countriesWhere Does Global Supply Chain Risk Exist? such as flooding, earthquakes and tropical cyclones. Advisory firm Maplecroft identified the countries of Japan, China, Taiwan and Mexico as having the highest economic exposure to natural hazards in economic terms. In fact, Supply Chain Matters alerted our readers in August to unusually difficult flooding events that were impacting low-cost manufacturing areas in China and other Asian countries. A series of devastating flooding events further impacted the Manila region in early August.

 

Perhaps i n the past few months, your value-chain was impacted by the effects of these natural disasters.

 

There is yet another quantification of economic risk in these important manufacturing regions. Global reinsurance intermediary Aon Benfield compiles a monthly Global Catastrophe Recap report.  The most recent September 2012 report quantified nearly $7.5 billion in economic damages across major manufacturing regions in Asia, with the majority of loss occurring in China. A six day stretch of catastrophic flooding in early September was reported to have caused more than $4.9 billion in losses alone.

 

August was not any better. Aon logged an overall total of nearly $8 billion in losses among incidents in China, the Philippines, Taiwan, Pakistan and Vietnam. The summer monsoon season thus delivered in excess of $16 billion in economic losses.

 

The implications of this continuous stream of quantified data are again reinforcement for increased risk of disruption within certain low cost manufacturing regions. Increased incidents and insurance payouts will fuel higher business interruption and loss insurance rates within these specific regions. That could add additional cost factors to a sourcing decision, and strategic sourcing and business risk teams will need to take particular note of this trending. A recent The Wall Street Journal report on the first anniversary of the 2011 floods that impacted Thailand noted how companies such as Nidec Corp., Omron Corp., Western Digital have since permanently moved certain of their production requirements to other Asian countries to offset risk. The same can be stated for certain Japanese based automotive component suppliers.

 

More importantly, is the need for supply chain and product management teams to have a supply chain risk identification and mitigation plan that can effectively support a response to these increasing value-chain disruptions.

 

Bob Ferrari

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