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Lenovo has announced that it will start- up a U.S. personal computer production line in Whitsett, North Carolina, near Greensboro.  Lenovo anticipates that this production capability will commence in early 2013 and will create 115 new manufacturing jobs.  Plans call for the assembly of Think-branded notebook and desktop PCs, along with tablets and engineering workstations.


Our readers will probably note that the size of this facility is not really large, compared to contract manufacturing facilities in China that rival the population of cities. The fact that the facility will be deployed as an adjunct to an existing distribution center further implies a smaller-scale assembly-type of operation geared to unique customer needs of the U.S. market. A Wall Street Journal article noting the announcement was quick to point out Lenovo statements that implied that this move was more than just symbolic.  The announcement also comes at the high point of the U.S. presidential election season, which has its own resonance when any global company announces an expanded U.S. presence. We as a supply chain community are best equipped to assess the longer-term implications to high tech and consumer electronics supply chains in the U.S.


The Supply Chain Matters blog has featured some recent commentaries regarding Lenovo’s existing business and global supply chain strategies, and thus we were not all that surprised by this announcement.  The industry implications, however, are worthy of some speculation and commentary.

Lenovo desires to continue to grow market share in the U.S., and with a brand associated with China, it must overcome certain inherent buyer perceptions.  A U.S. manufacturing presence, however small, sends a statement of commitment to the U.S. market and the needs of U.S. customers. Lenovo continues to demonstrate that very strategy in other countries, including Latin America. Because Lenovo’s hybrid supply chain capability is deployed as a leveraged combination of both in-house and external contract manufacturing operations, a U.S. production presence has the potential to provide Lenovo yet another edge in a more timely response to U.S. market needs.


We wonder if this announcement sends another statement, especially to the global supply chain teams of competitors Apple, Dell and HP.  Manufacturing strategies involving China are now under the looking glass. Given the current high visibility issues related to labor unrest and involving responsible supplier social responsibility strategies, the Time to Factor the New Realities for Low Cost Manufacturing and Supplier Social Responsibility concerning high volume manufacturing within China. An associated challenge resides within global based ocean and air transportation industry players awash with excess capacity, attempting to offset current high fixed costs by announcing considerably higher shipping rates for 2013. 


Supply Chain Matters thus proposes the following question to high tech and consumer electronics related supply chains: Are the business and economic factors related to low cost manufacturing strategies concerning China in need of a review?


Let’s be clear, China continues to represent an enormous consumer market, and there will always be a need for a significant value-chain presence to support that market. However, the economics for fulfilling needs in other global markets are changing, and a looming economic downturn implies more sensitized views from consumers as to where their electronic devices originated. Global supply chains must therefore move toward a more demand-focused orientation.


The takeaway of our commentary is to not dismiss Lenovo’s announcement as just symbolic. The factors related to global sourcing have reached a new complexity.


What’s the view among your supply chain and product teams? As the focus turns toward 2013 strategies, insuring the value-chain is focused toward more demand-focused supply chain fulfillment capabilities will be important.


Bob Ferrari



As is usually the case, business and financial media has been obsessed with the topic of Apple’s recent iPhone 5 product launch. A product launch total of 5 million phones sold during the initial week of product launch have apparently disappointed some Wall Street analysts and the bylines now point to a constrained global supply chain as the culprit. The latest lament seems to be why couldn’t Apple support a buying surge of 8 million new phones?


According to media reports, Apple has now admitted that it has entirely sold out of the initial supply of the iPhone 5 and has declined to comment on why it has not been able to provide more supply. In today’s Wall Street Journal, an article penned by Ian Sherr and Drew Fitzgerald raises a rather interesting question noted as follows: “Another theory is that Apple may have reached a theoretical limit to how many products can be produced in a specific window of time.” The article goes on to quote industry observers as noting that Apple’s challenges are extraordinary, having to balance the needs to control product information leaks in its global supply chain, with needs to have a massive production ramp-up leading to product launch date.  Even if product management was late in the release of the final design, our global supplier base is always up to task of making up the difference in time.


In this author’s view, the recent Apple product launch represents a watershed reminder that there are now new realities for the high tech and consumer electronics supply chain in terms of the presumed availability of endless flexible capacity.  It seems that before, the assumption was presumed that contract manufacturers and component suppliers residing in low cost manufacturing regions would always have the ability to insert legions of workers and ramp-up working hours to meet ever changing peak periods of supply chain demand dictated by an OEM customer. 


Workers are demanding their basic rights to fair wages, safer working environments and appropriate working hours.  As we have noted in commentaries on the Supply Chain Matters blog, Apple’s efforts in actively supporting audits by the Fair Labor Association will have far reaching effects on the broader industry, and on the supplier base. Samsung is also actively supporting its own directed supplier social responsibility audits.


Change and reform is long overdue and the industry can no longer turn a blind eye to what may be occurring among suppliers and contract manufacturers. The notion that an OEM can dictate unplanned changes or insist that virtual capacity exists is now being challenged by the realities of supplier social responsibility. Whether the objective is a new product launch, the peak consumer buying season, or an extraordinary market opportunity, there are new realities occurring in global based supply chains, and as community, we need to be aware of the implications.


When global supply chain dominants such as Apple, with the influence and sheer scale that it can exhibit, experience these new realities, other players will be impacted, especially smaller industry players.  There will be implications in the need for increased automation of assembly tasks, flexible and multiple sourcing strategies and better planning. Product marketing and executive teams may presume that the global supply chain will always respond to the needs for endless agility and flexibility to changing market needs or market opportunities.


The new reality is that, like or not, more realistic, responsive and intelligent planning, supported by an effective Sales and Operations Planning decision-making capability that realistically manages business expectations and supply chain response, are about to again serve as the new realities for global supply chains.


In time, a new paradigm will develop around global sourcing flexible production capacity and the ramp-up or ramp-down of the global supply chain to support product milestone needs. This author often cites a Bob Dylan tune of the 1960’s to depict a period of significant change, namely: “The Times They Are a-Changin”. These new realties are certainly a basis for thought and discussion in planning supply chain resources for 2013 and beyond.


What’s your view?  Is your firm and supply chain team dealing with the new realities of a socially responsible supply chain?  Have the prior assumptions concerning low-cost manufacturing permanently changed?


Bob Ferrari


Imagine for a moment that the CIO or CFO of your company has just encountered a vendor audit of the resident backbone ERP system and informs your supply chain organization that the cost and payback of that recent best-of-breed focused supply chain planning or business intelligence capability will now cost more than previously assumed. Would that change the direction of existing or planned future technology automation efforts?


While ERP vendors continually speak to “openness” of their systems, the potential of collecting software licensing fees for what is termed “indirect access” is too lucrative to ignore. 


Supply Chain Matters calls attention to an important posting on the SAP North America Users Group (ASUG) web site titled SAP Systems Open Up, But Watch for Software Licensing Gotchas.  The ASUG posting notes that SAP in its periodic audits of existing customer installations is citing certain customers for unpaid access to SAP generated data.  Examples may include tapping into SAP from a, supply chain or sourcing and procurement focused application. The posting points out that “indirect access” have been stipulated in contracts since the late 1990’s but generally unfamiliar to most SAP shops.  It further notes that apparently SAP has not provided a clear definition of what is meant by the term, except when audits are performed. Also noted is that there can be upwards of 60 different definitions of “user” that can be applied, along with vagueness as to real-time or batch access to an SAP application.


It is important to note that this ASUG posting communicates to the broader community that SAP will not risk the wholesale ticking-off hundreds or thousands of its customers, but will uphold a principle that SAP generated information is subject to software license privileges. It does not preclude the surprise that may come at the conclusion of a user audit when multiples of non-SAP software applications are tapping SAP applications for needed data. In our view, it is positioning the SAP community for what to expect.


This trend also reinforces what some independent analysts, such as this author, have been warning, that as more innovative supply chain and B2B focused applications gain market attractiveness, larger enterprise technology vendors will attempt to buffer the market attractiveness by extracting suitable value.  You can call it a form of an excise tax.  In our view, it provides more ammunition for C-Suite executives to question a best-of-breed approach in favor of harvesting existing cost-benefit value provided by the resident ERP backbone. Even more profound to contemplate are future S&OP enablement, business intelligence or supply chain control tower initiatives that will tap countless existing sources of supply chain and supplier related data from the resident ERP backbone or other supplier ERP systems.


Interesting enough the article notes that some of SAP’s more innovative customers such as Burberry and Kimberly Clark have elected a strategy to innovate their business processes via “indirect access” to SAP applications, from other best-of-breed platforms such as Salesforce.  Their lies future conflict as well as customer realities.


The takeaway for the broader supply chain community is that the continuance of ERP vendor’s insistence on collecting information access licensing adds a different dimension to the cost-benefit equation. It introduces added tension among supply chain functional and IT teams since added access licenses initially hit the IT budget and our invariably allocated to various functions or business units.  The determination of that allocation could get messier to say the least, adding additional unplanned cost considerations or could temporarily de-rail some truly innovative initiatives.


In the end, customers will ultimately determine the course of events in existing backbone ERP and best-of-breed software strategies.  Firms have been rather aggressive in pushing back on ERP providers in the increasing cost of annual software maintenance and licensing, especially in times of economic challenge and uncertainty which is again evident today. We would argue that the increased adoption of cloud computing, B2B and/or other new systems innovation practices are the direct consequence of this ERP customer pushback. These latest “indirect access” license enforcements only add more to the overall market dynamic and could accelerate strategic change in the market.


In the meantime, stay aware of the fact that information may not be necessarily free, depending of whom is your ERP backbone provider.


Bob Ferrari


Last week, a Twitter alert from Steve Keifer, Vice President of Global Marketing at GXS made reference to a New York Times published article, China Confronts Mounting Piles of Unsold Goods (paid online subscription or free metered view). Supply Chain Matters also alerts Community members to this article because of the important implications to global supply chain sales and operations planning (S&OP) strategies in the coming months.


The Times article reports that a potentially severe inventory overhang is occurring across many of China’s manufacturing industries. According to the Times, the severity of this inventory problem has been apparently masked by the previous government reported data in order to prop up confidence in China’s economy. It cites situations where Chinese suppliers and end-item manufacturers have refused to cut back production while demand for goods has been steadily declining. Many cross-industry products are mentioned in the Times, and particular mention is made of the automotive sector, a known bellwether of a vibrant economy.  It describes situations where auto dealers have run out of physical space to store unsold autos even as OEM manufacturers continue to insist on shipping product. Reinforcing evidence comes from the most recent HSBC Purchasing Managers’ Index (PMI) which indicates that China’s output dropped to a nine-month low in August, but also pointed to increased idle capacity and building inventory.


This situation should be a concern for S&OP teams managing either their firm’s product demand fulfillment within China or outsourced activities involving suppliers, because it is an indication of an environment that currently will mask the real data to protect other interests. In our view, it also points to lack of fundamental supply chain inventory management and other principles that can only lead to more severe problems in the not too distant future.  A glut of inventory and the consequent building of idle excess capacity across many industry sectors can often lead to desperate measures which harm the market. They further imply a harder landing for China’s economy, and that could well involve other supply chains. 


Traditional business media has provided reminders of China’s previous hard landing of late 2008, when export orders collapsed and thousands of smaller factories were forced into bankruptcy. S&OP teams may recall that this situation led to a collapse of export orders into China as well as a scrambling to find alternative qualified suppliers.  More importantly though, another major cutback of direct labor workers could provide a shock to China’s consumer markets.


Our advice to S&OP and supply chain planning teams is to pay much closer attention to the numbers and data coming from China. Closely monitor inventory data and push-back with any indication of irregularity or inconsistency. Augment data with on-the-ground observations and experienced insights. We all know that an inventory glut for one company is challenge enough, but when it involves many companies and many industries, it is a prelude to much broader implications not only to the China supply chain, but across global dimensions as well.


Bob Ferrari


Two recent research reports better catch the attention of supply chain management and corporate operational risk leaders. Then again, the predictions may already be known, but not absorbed by senior management. The potential for a major supply chain disruption exists in many existing and emerging supply chain geographic concentration areas, including in all likelihood, your supply chain.


A posting appearing on the Environmental Leader LLC web site makes reference to recent studies and charts produced by global risk analysis firm Maplecroft. The analysis indicates that the countries of: “Bangladesh, the Philippines, Myanmar, India and Vietnam are among 10 countries where supply chains are at greatest risk from natural hazards such as flooding, earthquakes and tropical cyclones.” That quote captured our Supply Chain Matters attention for two significant reasons.  First, these countries have been often referenced as being emerging candidates for current and next era of low cost manufacturing for certain industry supply chains, or an important industry sourcing hub. In the case of the Philippines, it serves as a concentration for semiconductor packaging, test and assembly activity as well as a building concentration of external customer support centers. Second, unusually severe monsoon driven rains in the past several weeks have caused severe flooding conditions in these countries, the most severe of which has been the Manila area.  Severe flooding conditions inundated that city forcing the evacuation of thousands, along with interruptions in transportation and business activity. The risk is thus in the moment, and ongoing.


Maplecroft also names the countries of Japan, China, Taiwan and Mexico as having the highest economic exposure to natural hazards in economic terms.  No need to reiterate how crucial these individual countries are as supply and production concentrations among industry supply chains, particularly China.  When this author conducts workshops or provides consulting in supply chain risk management, I can often get total attention of an audience by posing one question: As devastating as the 2011 floods were in Thailand, what if a similar flooding event occurred in China?


While on that specific topic of China, a posting this week on Epoch Times, makes reference to a study published by the Journal of the International Society for the Prevention and Mitigation of Natural Hazards (obviously have wide letter head). That study identifies Shanghai, the largest city in China, and indeed in the world, as the most vulnerable global area to major coastal flooding, surpassing cities such as Bangkok, Dhaka and Manila.  The researchers in this study expanded their assessment criteria beyond the hydrologic factors for flood surges, to include “the effect it actually has on communities and businesses and how much a major flood disrupts economic activity.” The supply chain community knows the critical importance that the greater Shanghai area has both as a center for automotive, industrial, heavy equipment and other types of manufacturing along with serving as the host region for the busiest inland and export container port in the world.


A Response to Supply Chain Risk Management in 2012 I have urged manufacturers, service providers and their associated supply chain teams to have active supply chain risk identification and mitigation process frameworks augmented by robust response management capabilities.  Whether you agree or disagree with any one study or methodology, the mounting evidence and occurrence of a supply chain disruption is becoming rather profound. Once again, insure your organization has a plan.


Bob Ferrari


Like it or not, the power of the Internet has moved us as a society into a more social-media dominated focus of views, insights and perspectives.  Consumers turn to individualized reviews or impressions of products from other consumers to help make a buying decision for a product.  Technology providers utilize social media based marketing practices to create added interest in their products, or in the case of Apple and others, added hype. Political campaigns and news media leverage polling to either sway voters or predict election outcomes. It may seem that “voices” surround all issues and it may sometimes be difficult to understand what the most meaningful trends and opinions turn out to be.


The practice of supply chain management is unfortunately not immune to the effects of these trends, both positive, and not so positive.  Supply chain teams remain in need of meaningful external benchmarks and associated indications of best practices. They help in challenging inward focused thinking, keeping organizational perspectives focused on best-in-class capabilities for their industry and as a means of setting appropriate stretch goals.  If this author provides any sampling, my email inbox is constantly peppered with survey participation requests.  These surveys come from industry analyst firms, business media, academic institutions, technology providers and others.  There is unfortunately no limit to surveys and the conclusions drawn from such surveys. It is, however, very important for teams to be very diligent on interpreting the design parameters of such surveys, the sampling population, along with the depth of the conclusions and/or recommendations.


Let’s point to some succinct examples. 


Perhaps you have noticed some recent quantitative surveys that continue to indicate responses that seem to indicate that increasing demand forecast accuracy is the prominent tactic for improving supply chain responsiveness.  Yet, Community readers will hear numerous industry speakers and read commentaries from thought leaders and executives from best-in-class companies who continue to conclude that efforts directed at becoming a more demand and response management driven supply chain have provided a far more productive use of organizational direction-setting. The forecast will never be accurate, period!


In the increasingly important area of global supply chain risk identification, mitigation and supplier innovation, recent surveys indicate responses pointing toward increased supply chain visibility or supplier based collaboration as dominant practices.  Then again, take the time to tune-in to organizations that have gained significant rewards and benefits toward establishing supply chain resiliency, and the roadmap is far more granular and action-oriented.


We offer succinct examples. On the Procurement Leaders site, Sammy Rashed, Global Head of Productivity and Sourcing at Novartis, identifies five specific initiative areas where procurement teams can expand the “breadth and depth” of contribution to supply chain resiliency. In a recent Supply Chain Digest Newsletter, Pier Luigi Sigismondi, Chief Supply Chain Officer at Unilever, outlines that organization's “Partner to Win” program, currently involving 30 strategic suppliers. He points out how he is moving the Unilever supplier network away from a previous lowest cost, opportunistic transactional “procurement of the past” perspective to one where suppliers are encouraged toward “co-creating” innovations in product and processes that can impact both the top and bottom line. At Supply Chain Matters this week, we had the opportunity to catch-up with Mickey North Rizza the highly visible and respected sourcing and procurement industry analyst at AMR Research, now Gartner, who recently joined a sourcing and procurement provider. Our discussion reflected on Making a Bigger Impact in Times of Business Challenge, namely that a highly uncertain and potentially volatile business environment requires more strategic management skills and acumen, and the ability to have supply chain capabilities support both your company’s top and bottom-line objectives as opposed to a singular focus on cost reduction.


The takeaway from this commentary is that while the Internet and social media allows for an increased personal voice and more means to sample opinion, teams need to remain very discerning in separating group or biased thinking techniques vs. discernible views from well recognized experts, as well as those organizations that have embarked on the journey toward process and practice improvements, and have the important learning that matters.


Bob Ferrari


On the Gartner blogging site, various supply chain analysts such as Matt Davis pen blog commentary. Matt is a very talented industry analyst and I have enjoyed participating with Matt in past industry analyst panel discussions.  Matt recently posted a commentary titled: Supply Chain Risk Management in 2012, which makes some observations that I tend to disagree with. 


Matt’s premise seems to be that the term “Black Swan Events” , large scale, unpredictable disruptions in global supply chains is perhaps overhyped in business media and supply chain circles.  He notes that globalization and the Internet have extended supply chains to far reaches of the globe, and thus added more vulnerability to global events. This author agrees.


The term “Black Swan” was described in a New York Times bestseller book by Naissim Nicholas Taleb titled “The Black Swan”.  In that book, Taleb described a “black swan” as an event, positive or negative, that is deemed improbable yet causes massive consequences to either society or businesses.  Thus, you could classify the term as one of a threshold event that leads to significant change.


What I do take issue to in Matt’s blog commentary is the statement: “I don’t think there are more black swan risk events than there were in the past, we can just see them now.”  I suppose the implication is that technology and a 24 hour news cycle via the Internet has added more visibility to events that often occur.  That is not the message that senior executives need to hear. I believe that it takes away from the fundamental evidence that indeed, something is happening in the frequency of highly unusual climate and natural disaster patterns, which is causing what experts previously described as “one hundred year milestones” to suddenly be much more frequent and much more impactful to supply chains.


Some select examples:


  • The 2011 massive tsunami that impacted northern Japan


  • The monsoon floods in Thailand


  • The incredible 2011-2012 winter storms that impacted Europe along with past volcanic eruption in Iceland that forced a halt to air traffic.


  • The shattering of records and economic destruction caused by increased tornados and now severe drought conditions in the U.S. Midwest.


The list can certainly be longer, and the point is obvious.  Something unusual and unprecedented is happening across the globe and the frequency is accelerating.  Whether we term it “black swan” or any other term, the point is that these events are causing major consequences of human, economic, corporate balance sheet and risk protection consequences. Readers can scam multiple blog commentaries posted in this community for any further evidence.


For supply chain management, the real message regarding supply chain risk management in 2012 should be that today, every supply chain needs to have a supply chain risk mitigation and management plan. No exceptions!


That plan should consist of some analysis as well as needs for any revised strategy.  The analysis reflects a message that every supply chain needs to be analyzed for potential vulnerabilities.  Case in point, 30 percent of the global supply chain capability in hard disk drive manufacturing was clustered in Thailand.  Certain companies found the majority of their supply of certain components eliminated by the Japan tsunami, requiring months of recovery and herculean efforts by supply chain teams. The suspension of air traffic in Europe pointed to the importance of back-up transportation or alternate air hubs. Analysis also leads to the ability to identify specific components in the entire bill of materials that are most vulnerable to revenue achievement as well as the ability to practice scenario-based planning techniques.  Analysis leads to the data that drives revised strategy in sourcing and risk mitigation so that a supply chain has some basis of resiliency.


As these events continue to occur, teams should be able to immediately identify if the situation presents moderate risk and initiate a pre-defined mitigation and response plan. The message to senior management is that occurrences of major climatic and natural disaster events are rising, and are not one-time events, and that the supply chain has to have some form of risk identification and mitigation planning.


Bob Ferrari


In a previous Latest Indices Point to Increased Challenges for S&OP, Supply Chain Planning and Procurement Teams in early July, we highlighted impressions from the reported June indices reflecting on global supply chain activities. 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 were surfaced. We cautioned supply chain planning, procurement and sales and operations planning (S&OP) teams to pay close attention to these indices in the coming months since the 2008-2009 global recession provided stark lessons on how quickly the global can change in a matter of weeks and months.


As we move into August, financial media is again featuring headlines reflecting growing global headwinds. Media slants headlines to garner more readers, supply chain sales and operations planning teams, on the other hand, need to ascertain the on the ground realities.


Today’s Financial Times features a headline article (paid subscription or free metered view) commenting on the latest purchasing manager indices from key Asian countries.  It features a quote from Chinese premier Wen Jiabao, warning against underestimating the risks posed by the current global economy and that “downward pressure is still relatively big”. The article also features a trending chart of U.S., China and Eurozone PMI indices since 2008 and it is striking to view the finite differences of the last few months to that of the 2008-2009 contraction.  The differences are in major geographies, with the U.S. showing more resiliency, at least through July.


A second FT article on the same topic points to an ongoing period of inventory adjustment.  As manufacturers, retailers and global logistics providers wind down their reporting of June-ending results, a very uncertain outlook seems to be developing, depending on specific industry, tiered presence in the industry supply chain, and geographic region. Yesterday, the Institute of Supply Management (ISM) released July PMI data for the U.S., and it was noteworthy to read the selective quotes from various industry segments.  While global activities are clearly contracting, some industries, and some regions such as the U.S., reflect counter activity. As we concluded in our early July commentary, planning the global supply chain for the remainder of 2012 and 2013 will be somewhat challenging and will require high levels of analytical precision along with various planning scenarios.


A snapshot of the latest July data provides noteworthy trend. First, Europe is clearly moving toward a recessionary period.  The Markit Eurozone PMI Index was down for the 11th straight month falling to 44.0, from 45.1 in June.  The Eurozone manufacturing growth engines of France and Germany are contracting at a rapid pace and the U.K is showing clear signs of contraction as well. New orders reflect a continuing downward trend.  While teams need to make their own conclusion, it seems apparent that one significant sector of the global economy is clearly contracting, and the fallout is impacting other global regions such as China and South Korea.


China’s official manufacturing PMI index fell only one tenth of a percentage point in July, from 50.2 in June to 50.1 in July. Output, new orders and backlog however trended lower indicating the effects of reduced business activity.  South Korea experienced its sharpest fall in exports this year and Taiwan also reported its first contraction.  Since August represents the beginning of supply planning for the upcoming 2012 holiday buying season, all eyes must be turned toward the mood of individual country consumers.


In the U.S., the ISM Manufacturing PMI for July was up a tenth of a point, recording 49.8 in July compared with 49.7 in June, indicating some leveling off in the past three months. New orders and production indices were slightly up, while order backlog was down by one and half points. What should be of most concern to planning teams is that inventories are once again growing, with a significant five point increase in just one month. Prices are also on the rise.


Again, it is our view that now is not the time for generalized or historic based planning. Rather, analytical rigor, consensus and scenario based planning methods are most appropriate.  S&OP teams should keep a clear focus on what’s happening in individualized geographic markets, tapping local, on the ground field teams for frequent information updates and be prepared for planning the supply chain according to individualized regions. Precision inventory planning is essential.


The coming months will again be yet another test of the resiliency and response capabilities of individual supply chains.


Bob Ferrari


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


Kinaxis thought leadership VP Trevor Miles posted a recent Expert Community blog commentary, Dynamic supply chain alignment: A theory ready for practical application sharing highlights of a recent Global Supply Chain Business Summit hosted by noted supply chain management practices author John Gattorna.


In his commentary, Trevor highlights Gottorna’s thinking on the need to both segment your business market and supply structures, and then design the appropriate supply chain to meet the business objectives of that business segment.  While Trevor touched upon the organizational and business process impacts of this concept, I was triggered to the information systems impacts.


Too often today, businesses try to force fit the supply chain to meet all ranges of business needs. Hence the term “more agile supply chain” tends to be all encompassing.  Hewlett Packard was one of the first companies to embrace the need for segmented supply chains only to lose some of that focus in subsequent business unit and management restructurings, not to mention an enterprise software upgrade. Kraft Foods has made a decision to split into two separate companies, one focused on its traditional food business and one focused on snacks and convenience foods.  In planning for the split, two separate supply chain organizations were created, hopefully with different expected business support outcomes.


For the vast majority of larger companies however, are supply chain teams trying to make existing enterprise software applications support multiple supply chains, each with different fulfillment criteria.  In some cases, teams have been able to come-up with tailored solutions, but not without a lot of hard work and innovative thinking.  This is especially the case in supply chains that require high service response to customers. In other situations, teams had no choice but to seek out different technology more appropriate or more customized to support the needs of the specific supply chain model. Smaller firms may have more flexible options and less scope, but the same principles apply.


It seems to me that the IT perspective that the resident enterprise software, developed on business process principles of the past, can support 60 or 80 percent of today’s needed segmented solution does not make the mark to today’s far different B2B networks environment. The need to plan across the entire supply and multi-channel demand fulfillment network for a segmented business requires a different set of business and decision-support capabilities. Does it not make sense that teams elect technology that can support most all of the segment’s needs from the get-go?


Several years ago, such an argument would be heresy because of the excessive time and high cost of initially implementing, updating and supporting enterprise software.  Today, with the advent of cloud computing and SaaS/service options within the supply chain management software landscape, the option has become far more attractive, and perhaps less expensive over the long-term.


Bob Ferrari


Community readers have probably already aware of the newest entry in the tablet computer market segment, that being Microsoft. On Monday, the czar of Windows and Office software announced its first ever computer, a tablet to be named Surface. Beyond the product’s late market entry comes another interesting challenge, namely Microsoft’s deepening of its hardware supply chain planning and operational fulfillment capabilities.


On the product side, announced features and functions appear rather interesting in contrast to the obvious industry dominant, the Apple iPad.  The company’s colorful CEO, Steve Ballmer, was reported to repeatedly utilize the words “no compromises” to describe planned features. The Surface will feature a larger screen area (10.6 inches vs. 9.7 inches for the iPad), a built-in kickstand and magnetic cover which acts as a touch keyboard, and will be based on a mobile version of the company’s upcoming Windows 8 and Windows RT release. Speculation is that Surface users will be able to leverage Office applications such as Word and Excel on their tablets. Not stated was the actual timing of market availability, which business media speculates will be the second half of the year, prior to the 2012 holiday buying season.  The critical question of pricing was not disclosed as well.


The supply chain aspects for Surface are even more interesting, and open for speculation.  Microsoft declined to identify which contract manufacturer will produce the Surface, probably to avoid supplier information leaks regarding volume production numbers and component identities.  That is wise strategy given the increasing information leaks coming out of the Apple supply chain.  Supply Chain Matters speculates that Microsoft will leverage certain existing contract suppliers associated with its Xbox gaming and other accessory hardware devices. Speaking of speculation, one also has to ponder whether “no comprises” applies to individual component choices and overall material costs related to the Surface.


Even more of interest, The Wall Street Journal in its reporting, noted that Microsoft plans to sell the Surface at its current handful of retail stores and through some unnamed online channels, thus initially restricting a broad based distribution channel. That may limit the initial volume focused breakeven profitability threshold, but then again, Microsoft may be opting for more initial control of distribution and pricing as well as avoiding obvious channel conflicts with the company’s existing PC and mobile device hardware suppliers such as Acer, Dell, HP, Lenovo or Nokia. There is some reported speculation from Silicon Valley which indicates that with a limited volume distribution strategy, Microsoft can prove the value of its new tablet software, declare victory, and leave the market open for other hardware partners to exploit with Microsoft licensing royalties.


The notion of ultimate pricing also relates to the supply chain strategy supporting Surface. Microsoft’s plunge into this market segment is obviously geared to leverage more of its software and content revenue sales. Similar to Amazon’s Kindle Fire, will pricing of the hardware be pegged to either forgo initial profitability or achieve razor thin margins, in favor of a volume distribution strategy that places more number of devices in consumer hands. The limited distribution noted earlier seems to negate that argument.


Finally, a comment related to supply chain software technology. With this announcement, Microsoft was the added opportunity to demonstrate leveraged use of its own technology geared toward managing supply chain business processes. Leveraged use of Microsoft Dynamics AX, Windows Azure, SharePoint and other technologies should provide a testimonial that the company is willing to demonstrate use of its own products for achieving agile and efficient supply chain capabilities.


From our perspective, we look forward to Microsoft providing our community some interesting supply chain related commentary in the weeks and months to come.


Bob Ferrari