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The following Supply Chain Matters commentary is also being dual posted for interest among the Supply Chain Expert Community.


This morning, Supply Chain Matters had the opportunity to attend an Economist Intelligence Unit (EIU) and HSBC Bank sponsored Executive Breakfast Series event titled Business without Borders. Leo Abruzzese, Global Forecasting Director for EIU provided many insightful economic insights regarding the current outlook among global countries and also moderated a panel consisting of:


- Michael Cahill, Managing Director for Marsh’s Global Specialties business unit that includes Trade Credit and Political Risk

- Raj Subramaniam, Senior Vice President, International Marketing at FedEx

- Tarun Khanna, Jorge Paulo Lemann Professor at the Harvard Business School


The title of Mr. Abruzzese’s presentation was quire timely and has pertinence to global supply chain executives: Digging Out- or Digging In for Another Shock? - Preparing for a Riskier World. 

The presentation confirmed what most of us involved in global supply chains already know, that Europe is already in recession.  The open question is how long, and how severe? Also noted was that the Chinese economy is slowing down and that the BRIC countries (Brazil, Russia, India, China) have collectively hit a brick wall in terms of prior economic momentum. The EIU adds the U.S. to that list as well.

In the area of business risk, most risk today resides in the developed world, due to high uncertainties related to Europe’s economy which represents one-third of the overall global economy. A chart indicating the ten countries with the highest current risk scenarios has Syria listed first, Greece listed fourth, Italy listed sixth, and Somalia listed as tenth.


More sobering from a supply chain risk perspective is Mr. Abruzzese’s indication that businesses should be paying very close attention to economic and political events in Europe over the next two weeks. 


To continue with this Supply Chain Matters commentary, please double-click on this link.


Many of our Community have read articles, heard talks and viewed blog commentary related to the ongoing challenge for prospective employers to locate and recruit qualified people. This has especially been noted as a challenge within broad areas of supply chain management and manufacturing. On the Supply Chain Matters blog, we have provided multiple commentaries related to this challenge being raised by executives.  Our latest commentary reflected on the takeaways from a recent MIT sponsored conference: The Future of Manufacturing in the U.S.  Again, many of the corporate conference speakers indicated challenges in filling existing job openings in manufacturing or supply chain related functions. Professional organizations such as the Supply Chain Council, APICS and CSCMP have raised similar alarms and concerns regarding both attracting younger graduates to our profession, as well as keeping experienced professionals qualified as needs for greater efficiency, productivity and advanced technology skills increasingly become a part of the discipline of manufacturing and supply chain management.


We came across a National Public Radio blog commentary that provides somewhat of a contrarian view: Employers Could Fill Jobs if the Trained More and Complained Less. It highlights an interview featuring Professor Peter Cappelli , Director for the Center of Human Resources of the Wharton Business School at the University of Pennsylvania. Professor Wharton argues that employers should stop blaming the educational system and start rethinking hiring practices. He also provides observations that many have perhaps been thinking, namely that employers actually seek the “perfect candidate”. The interview and commentary describe how today’s more prevalent automated human recruitment systems will eliminate candidates from consideration if there is lack of a defined match to listed skill needs.  Many readers who have recently gone through a recruitment and hiring process could also add the challenge of corporate HR recruitment or executive search firms who currently tend to exhibit a “check all of the boxes” approach in the recruitment screening process.


More importantly, and certainly more profound, is a challenge made from Professor Cappelli to prospective employers, namely, stop blaming the applicants and recognize: “You’re just not paying enough”.


That statement struck a chord with this author and perhaps you as well.  On the one hand, across many complex and ever changing supply chain environments, there are certainly skill gaps that need to be addressed in areas of procurement, planning, product management, manufacturing, logistics and service management.  On the other, how much are employers doing their part to support and provide training programs and opportunities.  This issue takes on even broader perspectives for smaller and medium-sized suppliers who require their supply chain talent to be more broad-based in skill levels, but do not necessarily have the training time and budgets of larger scale enterprises. 


And what about the perception of paying enough?  Many Community contributors have often noted the increased recognition of the important contribution that supply chain management teams are making to bottom-line results. Is that translated to valuing supply chain skills at comparable levels with other functions such as sales, marketing or finance? It is no secret that that the wave of outsourcing activity to lower-cost manufacturing regions that began ten years ago had as its primary motivation, lower labor costs.  Since that time, companies have come to recognize other cost factors including a lack of skilled supply chain professionals and lower productivity levels.


The resolution no doubt lies in a balance of all of these forces. One thought however bears reinforcement.  It is time for all of us to stop citing a shortage of skills as an ongoing problem and instead cite programs and initiatives that address both proactive training and compensation for skills acquired.


I’m curious as to reader views.  How do you view the current skills shortages within supply chain management and manufacturing?  Are companies doing their part in addressing both increased training and fair compensation?


Bob Ferrari



Some recent Supply Chain Expert Community commentaries have cited the recently published 2012 BDO RiskFactor Report for Technology Businesses which cited a principal finding that natural disasters and other geo-political issues pose serious threats to supply chain management and operations among the top 1000 technology-oriented companies. A three year perspective of the top concerns of these companies indicates almost a doubling factor of concern in the areas of:


·         Natural disasters, war, conflicts and terrorist attacks- From 55 percent concern in 2010 to 88 percent concern in 2012


·         Inability to maintain operational infrastructure and systems- From 42 percent concern in 2010 to 73 percent concern in 2012


·         Beaches in technology security or privacy- From 44 percent concern in 2010 to 71 percent concern in 2012


·         Credit or financial risk of customers, vendors or suppliers- From 48 percent concern in 2010 to 64 percent concern in 2012


Kerry Zuber able executive at Kinaxis, Lions and Tigers and Bears, Oh My!….Oh Supply! questioned whether these increased concerns are actually materializing into meaningful actions.  Kerry further observes that most risk mitigation activity has the negative consequence of increasing operating costs as supply chain teams attempt to balance risk mitigation with added safety stock or dual sourcing of components, causing a conundrum with the continual pressures of cost control and efficiency. This author echoes these same concerns.


But it also important for senior supply chain and business leaders to take a step back and reflect how many technology companies came into this current situation.  As an industry analyst, I can recall numerous executive surveys up to 10 years ago that all identified high supply chain costs and consequent cost reduction as topping the executive agenda.  We all know what resulted.  Technology and other industry focused firms flocked to low-cost manufacturing regions, initially for component sourcing and consequently major value-chain sourcing. The notion that these regions were located in higher risk areas, whether that amounted to natural disaster, IP protection or security breaches, were secondary to the goals of cost reduction. While access to new and potentially lucrative new markets was an added motivation, cost reduction was the overriding initial motivator.


Here lies the conundrum for today’s supply chain leaders.  C-level executives were initially tuned into the increased profiles of supply chain risk, until these risks became brutally quantified. The recent supply chain disruptive incidents of 2011 and in 2012 have been the wake-up call. Major portions of critical supply were eliminated in days and vulnerabilities of highly lean supply chains have been exposed, with the impact being direct to the bottom line. Many senior executives are still not sensitized to their supply chain profiles.


Throughout this same period, if you asked many business and supply chain executives the question, as I did, who in the organization had primary responsibility to oversee the identification and mitigation of supply chain risk, the answers tended to be vague, ranging from procurement to finance. Notice that I have not mentioned the word “accountability”, since that question is often a non-starter with today’s complex global footprints of supply chain trading partners. That seems to be changing, as well, as C-level executives now must respond to stockholder concerns relative to mitigation of future occurrences.


The point of this commentary is for executive teams to context today’s concerns of increased supply chain risks with the broader perspective that cost is, in reality, a two-edged sword.  Initiatives that continue to reduce cost can all be neutralized with the direct and indirect cost of major business interruption.  Such costs can exceed current insurance coverage in terms of retaining key customers or an erosion in industry competitiveness. Cost concern must also be buffered by investment in business resiliency.


Supply chain teams need the ability and executive support to invest in supply chain risk mitigation capabilities.  These capabilities take on organizational, business process, inventory investment and added advanced technology dimensions.  That is why the concepts of scenario based planning, advanced business intelligence, predictive analytics and supply chain control towers are gaining increased supply chain functional attention. They are an important extension of business continuity strategy and should come under the stewardship of a cross-functional, cross-business steering team tasked with the same.


Bob Ferrari


Supply Chain Expert Community members probably know that this author has spoken and written about the emerging positive benefits in leveraging “systems of engagement”, the social media based systems that bring both people and teams together to solve problems or orchestrate more timely and informed decisions.  Unfortunately, like many things new, there can be a negative side to these systems, one that senior business and supply chain leaders need to consider.


Readers will recall the recent well-publicized incident concerning additives utilized in the production of beef hamburger in the U.S... A company Beef Products Inc. (BPI) developed a food product which makes ground beef leaner.  The product was called “lean finely textured beef” and many restaurant and food chains found the product to be innovative, enough to sustain a growing business and the need for four production facilities to support upstream customer demand.  Customers included very well respected brands to include Burger King, Kroger, McDonalds, Taco Bell and Wal-Mart. A man by the name of Eldon Roth, who founded BPI, has been inducted into the Food Industry Hall of Fame because of his recognized innovation in beef products and positive contributions to this industry.


Then, something went terribly wrong.  Many referred to the product as “pink slime” and that caught the attention of food and socially conscious bloggers. An online petition drive ensued to have the product banned from use by school children, and then traditional media, not to be undone by social media, began to run with the story of a potentially unsafe substance in hamburgers eaten by our children.


For a full account of all the details of this story, I recommend reading the April 16-29, 2012 Bloomberg Businessweek article, Was a Food Innovator Unfairly Targeted? The article points out that at peak production last year, BPI produced over 500 million pounds of its product. Social media bloggers, with a motivated concern relative to what school children were being fed, leveraged the ugly negative connotations of “pink slime” to eventually influence many educational institutions, restaurants and food purveyors to ban the use of the product because of the public outcry relative to food safety.  The Businessweek article quotes Matthew Salganik, a Princeton University sociology professor noting: “Social media is something that adds oxygen to the environment… It increases the chance that a small spark will turn into a big fire.”


BPI however was and remains viewed as an industry innovator. Businessweek states: “BPI has been in the forefront of food safety in the beef industry for a decade or more.” In mid-March of this year, while insisting that the BPI product was safe, the U.S. Department of Agriculture indicated that it would let schools and other food purveyors elect whether to buy meat with or without the BPI textured meat additive. Although BPI began aggressive efforts to tell its side of the story, that being the positive benefits of their product, including initiating the web site, events cascaded beyond control and consumers elected not to allow their families to consume beef containing the BPI lean additive. BPI eventually had to close all but one of its plants and the negative connotations also affected other meat processing producers such as Cargill and AFA Foods. Hundreds of workers have since lost their jobs.


We at Supply Chain Matters submit that there is obvious important learning from this beef industry incident. Senior business and supply chain leaders cannot afford to ignore or dismiss what occurs on social media. Whether you embrace the power of “systems of engagement” or not, what occurs in social media can and will have an impact on either the business, or the way people, and especially your employees, gather and exchange information, and make conclusions. There are both positive as well as negative connotations to this reality. 


In this commentary, we have highlighted the consequences of a negative connotation associated with a product, and how potential good intentions can spiral without offering factual education.  More importantly, it serves as a reminder that firms need to have designated people responsible for monitoring these systems, along with proactive strategies directed at both leveraging or mitigating any business impacts.  The obvious lesson is ignoring social media and “systems of engagement” as a well understood component of business practices is not wise given the highly mobile and social world that exists today. Representation of your product is managed by both traditional and social strategies. That is a new reality for business, and for supply chains that must respond to product management needs.


What is your firm’s strategy related to “systems of engagement”? Does your company view the positive benefits, as well as the potential impacts to business strategies?


Bob Ferrari


About a month ago, Negative Vibes Concerning Apple Should Not Necessarily Translate to its Supply Chainreflecting on how any sort of news, positive or negative, emulating from Apple’s supply chain, can directly impact a company’s stock valuation.  That applies not only to Apple itself, but also its suppliers. The sheer scope and volume of Apple’s value-chain should cause any supplier to covet Apple’s business and volume scale.  Where the phenomenon of a negative market valuation drop was once attributed to a major supply chain disruption or snafu, when it comes to Apple, it can be any negative news deemed significant by equity markets.  Our readers are probably aware that both Apple and Samsung provide a rather unique industry relationship. While they each compete in the same markets for consumer electronics devices, Samsung has been a long-term key supplier of various supply components for Apple.


Thus, in yesterday’s financial media, are reports of the near $10 billion drop in the market valuation of Samsung, after a Taiwan based publication reported that Apple placed a rather large contract order for 12 inch DRAM chips with Japan based Elpida. As was noted in our late April commentary, Elpida, a DRAM chip competitor with Samsung and Hynix Semiconductor, among others, previously filed for bankruptcy protection, and has become a takeover candidate. We cited a Bloomberg Businessweek report characterizing Elpida as “the hottest takeover in tech”, because of the implications of changing the fundamental competitive dynamics of the DRAM market based on supply contracts with Apple.


A Reuter’s article reporting on the Samsung impact quotes an Asia based equity analyst indicating that the shift in supply contract implies that Apple does not want Samsung or Hynix to dominate this market segment.  Reuters also reports that U.S. based Micron Technology Corp. are in talks to acquire Elpida, and the prize has just become more valuable.


In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base.  Visibility to Apple Provides Clear Evidence for Active Supply Chain Mitigation, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.


Here’s another evidence point. Financial media is today reporting that Apple is sourcing a bigger screen for the upcoming new release of the iPhone. This 4 inch diagonal screen (contrasted with the current 3.5 inch screen) is reported to be sourced at suppliers LG Display Co., Sharp Corp. and Japan Display Inc. Consider that in March, Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn, invested $800 million to take a 46.5 percent stake in Sharp’s LCD production facility in Sakai, western Japan. Japan Display was previously formed from the merged LCD production entities of Sony, Toshiba and Hitachi, that each decided to consolidate as one to garner more volume scale. If sourcing reports turn out to be accurate, Apple would, in essence, be balancing geographic related risk (Korea and Japan sourcing), and supplier and scale risk in having LCD supply alternatives beyond Samsung.


Being the goliath in terms of volume and scale of the consumer electronics value-chain comes with tremendous influence for long-term revenue and capacity planning.  At the same time, such influence must include a balance of risk and influence.  We should all take notice of Apple since it continues as a benchmark in these practices.


Bob Ferrari


The automotive industry continues to encounter some significant learning regarding major supply chain disruption and mitigating global supply chain risk.  In 2011, the effects of the massive earthquake and tsunami that impacted northern Japan, followed by the massive flooding in Thailand brought about by an unusually strong monsoon event led to a new awareness of supply risk that extended to critical components at the lowest tiers of the value-chain. In March of this year, Supply Chain Matters provided updated commentary regarding this learning, along with efforts being taken by major Japan based Automotive OEM’s to mitigate such risks in the future.


Last week, major automotive manufacturers in Japan reported results from their March ending fiscal year closings, collectively forecasting record production volumes and increased profits for the coming fiscal year.  Toyota and Honda, both severely impacted by supply disruption, reported optimistic forecasts for the upcoming 2013 fiscal year, but not without the need for aggressive sales campaigns. The Financial Times reported that Toyota produced 2.5 million vehicles in its March ending fiscal year, surpassing both Volkswagen and General Motors annual output. The company however incurred a 2.2 percent decrease in annual revenues and a 24 percent decrease in operating income. According to its annual reporting, Honda produced slightly under one million units (988 thousand), noting increased output for the North America market but decreased output in Asia due to the ongoing effects of the Thailand floods. Honda had both of its Thailand car assembly plants totally underwater directly after the floods. Honda’s profitability levels within its automotive group have recovered to just under FY10 levels.


The most significant headline, however, is that of Nissan, which reported robust 7 percent increase in operating income, exceeding the results of its larger Japanese rivals. Both the Financial Times and the Wall Street Journal noted that Nissan was the quickest of Japan’s big three auto makers to recover. With this headline comes the reminder of the two sides of major supply chain disruption, turning disaster into an industry opportunity because of more agile and responsive supply chain capabilities. Two weeks after the quake struck Japan, Nissan indicated that it had assessed all of its suppliers and production facilities and determined that the situation was not as dire as some had originally predicted. Nissan resumed partial production on March 24, 2011 utilizing inventory of components and parts, supplemented by parts from overseas factories. The majority of Nissan’s global production capacity was external to Japan and Thailand. In early April of 2011, Nissan took bold actions in shipping V6 engines from its U.S. based Tennessee engine factory directly to Japan to keep its assembly plants operating. The same agility occurred after the Thai floods struck. In February, Nissan’s COO asked all of its suppliers to disclose details of their component supply network.


After these incidents, Honda has since announced its intention to shift a major portion of its production capacity into North America over the next few years, as a hedge to future major supply disruptions.  Toyota remains committed to a significant manufacturing presence within Japan and has embarked on an aggressive goal aimed to restore any of its manufacturing operations in just two weeks after the occurrence of a major disaster.  Preliminary analysis uncovered that some 300 production and/or supplier locations could be at risk.


One year after the original Japan quake, the financial and operational impacts to supply chains, to the bottom line, and to stock price remain. As noted in our March commentary, we as a supply chain community need to continue to have a more risk aware perspective to the profile of the global value-chain, along with an assessment of what sourcing, analytical assessment and risk response areas need to be shored-up for mitigating such events in the future.


The evolving lessons from the automotive industry continue as an ongoing reminder of the importance of identifying and mitigating risk.


Bob Ferrari


I pen this commentary on a Friday after a very long week involving extended travel and consulting services activity.  Knowing that I’m overdue for my weekly Supply Chain Expert Community commentary, I thought I would come up with something different, a fruit analogy related to supply chain capabilities.


Lately, many commentaries related to global supply chain business process capabilities focus on Apple, which often, and deservedly, lands on every supply chain analyst’s top ranking and many business media related articles. Many in the supply chain expert community can point the finger at this author for often penning commentaries highlighting Apple, but I’m not alone in doing this.  Lately, much of Apple’s supply chain capabilities have come to light, both positive, and not so positive.


An analogy that can come to mind is that of the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Some content of the apple is used to make or blended to make other delicious products such as pies, cakes or juices. Because the apple is so shiny, and because the apple is loved by millions and millions of consumers, sometimes the apple gets attention that it does not necessarily desire.  Sometimes the apple can develop blemishes.


The apple also competes with other fruit for consumer tastes.


Let us turn our attention to another fruit, the orange.  It has a rather complex structure, there are actually embedded layers within the orange, each providing a piece of juicy, and yes, sometimes tart , but fairly enjoyable taste. The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes. You can eat the orange itself, either at breakfast, or as a daytime snack. The orange peel is utilized in baking recipes and sometimes the pulp can is used in other products or snacks.  The orange itself can be converted into delicious juice, a huge market seller. You see, the orange also serves as a multi-purpose fruit, but perhaps more behind the scenes.   Because its peel is pebble-like, its blemishes are more easily ignored.


Can you guess what our orange analogy equates to?


Our analogy points to Samsung.  A global giant, not only in smartphones and tablets, but also in major consumer electronics value-chain components such as semiconductor chips, high-resolution LCD displays and memory components.  Last week, business media began recognizing Samsung as the global market leader in smartphone shipments. According to market forecasting firm Strategy Analytics, Samsung shipped 44.5 million smartphones in the first quarter compared with Apple’s output of 35.1 million units.  Business media has been quick to declare Samsung the market leader, surpassing both Apple and Nokia.  Once more, according to the Financial Times, the company recorded record quarterly profits, with its mobile division accounting for 73 percent of that total operating profit.  Because Samsung is a major supplier to Apple and other brands, this vertically integrated producer also gains additional benefits in overall market unit volume sales.


While Apple seems to top many rankings in supply chain capabilities, Samsung does not. Its unit volumes, supply chain breadth and volume output shine above others with few glitches or supply disruptions. Global consumers have obviously embraced Samsung mobile devices as an alternative to Apple’s iPhone, by witness of these latest results. As our orange analogy notes, Samsung also can play a very influential role in the innovation of future products, since it is positioned as a major value-chain player.


The shiny apple does indeed get lots of visibility in the fruit bowl, but we had better pay attention to the orange as well. That includes ranking of global supply chain capabilities.


Bob Ferrari


Being named the most valuable company in terms of market capitalization, with the ability to rack-up almost $33 billion in annual profit, and being cited by Barclays Capital as “the most disruptive force in tech”, comes with a lot of expectations and visibility to any misstep. However, behind the headlines lies one supply chain savvy company.


Last week, financial news headlines were buzzing with all sorts of potential negatives pertaining to Apple.  Five consecutive days of stock declines has Wall Street scribes speculating as to whether the constant successes of the Steve Jobs era of Apple might have peaked. Stories continue to permeate regarding ongoing intellectual property lawsuits, potential price collusion in e-books, and yes, significant hiccups involving Apple’s supply chain.


Where should we begin. 


Many social media and traditional reporters have been reflecting on the implications of the ongoing labor practices audits occurring at contract manufacturer, Foxconn, which began in February. Last week came news that environmental conformance audits would be conducted at one or many China based major suppliers. In our point-of-view, the company is becoming much more proactive in demonstrating to customers that Apple takes social and environmental responsibility very seriously.  The remainder of the industry will in-turn, have to deal with the same realities.


Also in February, Japan based mobile DRAM chip provider Elpida, which is a supplier for both Apple iPad and iPhone products, filed for bankruptcy protection.  That opened the door for what Bloomberg Businessweek describes last week as “the hottest takeover plays in tech” potentially involving takeover from another DRAM competitor which could leverage volume contracts with Apple. Eipida’s DRAM chip plant in Hiroshima Japan has over 40 percent of output dedicated to Apple. Whomever ends up with Elpida could well change some of the dynamics of competing with LCD industry leader Samsung Electronics.


Last week brought another major development from a supply chain lens. Communications chip provider Qualcomm warned that current supply of wireless chips cannot accommodate existing demand related to 4G network support.  Specifically, Qualcomm has been shifting to a 28 nanometer chip design family to accommodate performance needs of 4G chips for device makers. In its warning, Qualcomm executives specifically cited the supply shortfall to Apple’s transition from predominate 45nm chips in favor of the 28nm design. That is a rather telling indicator that Apple’s plans for its next release of the iPhone will include 4G network support. Qualcomm has increased its overall unit output requirements by 5 million for the current year, and rest assured, Apple will be a beneficiary.


Media and analysts will continue to speculate and make checks across many tiers of the Apple value-chain regarding added bad news or potential setbacks but perhaps that same media should exercise a reality check-in with the greater supply chain community.


For this describes today's current state of dynamic supply chain management, especially when it involves a firm with the significant high volumes of Apple, the great Kahuna of SCM. 


Problems and/or setbacks will arise with current or planned future volumes, and a high volume supply chain requires lots of contingency and back-up plans. New product plans will shift because of highly changing market requirements, and those shifts will be accommodated by strategic suppliers because of the volume clout that Apple represents. Suppliers can encounter financial difficulties, and sourcing and procurement teams will respond with contingency plans and safeguards. Unplanned natural disasters such as the floods that occurred in Thailand impacted available capacity with companies such as Dell, HP suffering consequences, but Apple’s large supply contracts were leveraged at the potential expense of other industry OEM’s.


News concerning Apple’s supply chain should not be of concern since they together involve what we in the supply chain community would term “resiliency”, the ability to overcome and respond to any setback to support business needs and business outcomes.  In the specific case of Apple, the primary competitive differences are in the overall strategy, planning, execution and analytical capabilities directed at having world class resiliency and supply chain clout.


Bob Ferrari


It seems that each passing week brings our community fresh new reminders on the existence of potential risks in the supply chain as well as the upstream and downstream implications on business outcomes. This week alone, there are two additional streaming events that are capturing the interest of business media, and should capture the continued following of supply chain cross-functional teams.


In the automotive sector, a recent fire that occurred at an Evonik Industries AG manufacturing plant in Marl, Germany has 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. The Wall Street Journal reported that Evonik executives estimate that it may take more than six months before repairs can be made and production can resume.  Industry observers and participants estimate that there may be no more than one to two months of available inventory in the pipeline, causing industry wide concern, with the potential of disruption of multiple auto final assembly plants in the coming weeks.  The scope of this disruption rivals the same magnitude of the paint pigment disruption that occurred as a result of the tsunami in Japan, or the disruption of upwards of 30 percent of hard disk drive components capacity caused by the floods in Thailand.


Earlier this week, in a rare move, executives from eight separate auto producers and 50 parts suppliers met in Detroit with the purpose of drafting an alternative specification and sourcing plan in order to seek an interim replacement for nylon-12. In the spirit of six sigma crisis response, six joint membership committees were formed to develop, evaluate and fast track an industry-wide substitute. Any final outcome as to industry-wide mitigation or impacts to business results are yet to play out.


In the pharmaceutical and drug segment, Johnson and Johnson announced its Q1-2012 fiscal operating results this week which included even more stark reminders of the impacts of a combination of quality process breakdowns and supply disruptions.  J&J’s McNeill Consumer Healthcare unit, responsible for the production of brand names such as Tylenol, Motrin and Benadryl, continues to deal with the impacts of cascading quality snafus and product recalls that forced the closing of an entire manufacturing facility. The unit has been operating under an FDA Consent Decree affecting 3 manufacturing plants, including the Fort Washington Pennsylvania facility which was shutdown for a complete overhaul over a year ago.  In its recent briefing to analysts, J&J executives disclosed that Fort Washington, originally planned to resume operations late this year, may not be able to resume production until 2014.


A blog commentary penned by Ed Silverman posted on the Pharmalot blog titled, Gang That Couldn’t Shoot Straight, draws an analogy of completely renovating a gourmet kitchen to produce “a shiny new bistro ready for an Iron Chef showdown “only to discover a conundrum that the homeowner is using the same recipes geared for the older worn down kitchen. Silverman continues: “ (But) rebuilding an entire plant takes a lot of effort and tech transfer can be an imperfect science if the underlying processes were problematic in the first place.”


While all of this is occurring, McNeill sales are estimated as falling over 2 percent during this past quarter as consumers turn to alternate brands for their medication needs. J&J has also be forced to spend additional monies in market education initiatives to restore trust in its OTC brands


On the pharmaceutical side of J&J, the supply of the cancer fighting drug Doxil remains on severe allocation caused by the unexpected shutdown of J&J’s prime contract manufacturer for this drug. The result has been over an 80 percent decline in revenues of this drug.  J&J executives do not anticipate Doxil to be available until late 2012 while restoring a reliable supply of the drug remains “our most urgent priority.” J&J further indicated that it was pursuing both longer-term as well as shorter-term options to restore supply.


So what can readers’ takeaway from these latest reminders of unplanned disruption and impacts on business results. 


·      First, identification and early warning visibility to disruptive and costly supply risk must be extended to multiple tiers of the supply chain. 


·      Efforts of cost control directed at consolidating suppliers must also factor important considerations of sole supply risk.


·      When an incident occurs that has the potential to severely impact upstream and downstream supply and/or demand, marshal required cross functional and cross-business resources and get all pertinent information into the process of mitigation response. Physically rebuilding or overhauling a plant or contract manufacturing facility or production line must also include a re-visit of underlying process, technology, people and decision-making processes that are attached.


Supply chain risk mitigation is not a singular supply chain process, it is rather an enterprise-wide response to a significant business problem.


Bob Ferrari


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


This author recently had the opportunity to view a promotional webcast featuring Gartner analysts, that set the framework for the upcoming designation of Gartner’s Top 25 Supply Chains in 2012. Some community readers may have viewed this webcast and had reactions to the messages delivered.  We would like to share ours.


According to Gartner, the overall criteria, among others, for being designated on this prestigious listing are supply chains that are:


  • ·        Predictable and reliable


  • ·         Flexible to changing business conditions


  • ·         Exhibit a profitable response to product demand


  • ·         Exhibit sustainable growth and satisfied customers


  • ·         Move from words on a PowerPoint slide to attitudes and demonstrated practices


Readers might recall last year’s the top ten listing, which included:


1. Apple

2. Dell

3. Procter & Gamble

4. Research In Motion

5. Amazon

6.  Cisco

7.  Wal-Mart

8.  McDonalds

9.  Pepsico

10. Samsung


The year 2011 was very challenging for these supply chains, not only from the perspective of a rapidly changing and dynamic global economy but also major incidents of supply chain disruption. My first reaction was to take note of the listed supply chains and reflect on how many of them had a reported stumble during the year.  I came up with at least four.  Even Apple has had to deal with the challenge of heightened visibility to labor practices. Community readers may come up with the same or a different number. That triggered a pointed reminder that even the top supply chains are not immune to vulnerabilities. The real criteria are how each responds to such challenges.


Another theme brought forward by the Gartner presenters was the possibility of changed ranking or new names appearing in the 2012 ranking. That brought forward a reminder that no supply can rest in the satisfaction that it has reached the pinnacle of capabilities. The global economy and events move far too quickly, and there will always be next objective to address. One supply chain stumbles and another takes advantage. One supply chain is mandated to reduce costs to the detriment of certain capabilities while another aligns to business needs and business outcomes.  The result is the shifts that we continually observe.


If this listing included mid-market supply chains, those that included the challenge of far more limited resources and higher stakes, perhaps the listing would further reveal how wide the gap in capabilities has become. Many mid-market companies were severely impacted by either the global recession, or the disruptive consequences of the tsunami in Japan, and the floods in Thailand.  Their influence over suppliers was morphed by larger supply chain dominants, perhaps some of those listed in the Top 25. Perhaps they who have successfully overcome these challenges and maintained an objective for responsiveness and resiliency should have recognition as well.


The takeaway from this commentary is that we as a community sometimes place too much emphasis on a singular tenet or goal.  In one year it may be lean, another demand-driven, resilient or agile.  Perhaps the reality is that the top supply chains must have the ability to respond to many challenges, along with multiple objectives. They must have a lens that extends well beyond the current quarter, or current fiscal year.


Finally, Supply Chain Matters would like to provide a helpful suggestion to those of you that have volunteered to be Peer voters for the 2012 Gartner rankings. It might be helpful for all in the supply chain community if your lens of ranking included multi-dimensional, multi-geographical and multi supply chain tried perspectives of the top supply chains. The reality is perhaps that the entire value-chain eco-system of partners really determines which supply chains are top ranked. Perhaps the lens of ranking is really weighted toward attitudes and consistent demonstrated practices in spite of the realities of constant change.


Bob Ferrari


This author just returned from the Supply Chain World North America 2012 conference, sponsored by the Supply Chain Council, which was held this week in Miami. The theme for this year’s gathering was Taking Supply Chains to the Next Level, and as was the case last year, the speakers were extraordinary and the messages fairly consistent.


I had the distinct opportunity to moderate a panel consisting of various well noted supply chain thought leaders and influencers. The panelists included:


Steven A. Melnyk, Professor of Operations and Supply Chain Management, Michigan State University


Roddy Martin, Senior Vice President, Global Supply Chain Practice, Competitive Capabilities International (Former Vice President at AMR Research/Gartner)


Matthew Davis, Research Director, Supply Chain, Gartner Inc.


Bob Parker, Group Vice President, IDC Manufacturing Insights and IDC Retail Insights


One particular question that I posed to the panel was on the topic of S&OP and included the following:


Many companies are now embracing sales and operations planning (S&OP) processes as a key mechanism to align anticipated product demand with supply and operations requirements.


What do you believe are the logical next steps for organizations in their S&OP journey?


Do you believe that the benefits of S&OP are being overhyped?


In the spirit of education and continual learning, I wanted to highlight with this broader supply chain community some insightful responses from our panelists regarding this important topic. Too often, as a community, we tend to get wrapped up in project management thinking, viewing an existing process in the lens of sequential steps.  Sometimes it helps to take pause and instead reflect on the overall business and supply chain outcomes required from an important process such as S&OP.


All the panelists were in agreement that S&OP is not a short-lived, vendor-hyped process and is not going away anytime soon. They characterized S&OP as a journey toward multiple outcomes and benefits. What is most important is knowing what the current and required maturity level should be.


Matthew Davis observed that S&OP can be positioned as a means to determine where decisions and what decisions need to be made regarding the need to represent the one face of the firm to customers.  It brings together teams that directly touch and/or influence product demand and supply, along with those responsible for influencing resources or making decisions as to options. The activities incorporated are generally focused on demand shaping or the ability to influence and respond to changing customer needs.  In terms of future needs, with more and more manufacturing and service firms positioning product offerings as “solutions-centric”, the process will need to synchronize a combination of product, technology and coordinated services needs. As an example, in the high tech industry, a product could involve a combination of hardware, software and services coordination.  All of this implies that the planning process changes from that of materials and physical needs to further include a broader context of project management based synchronization.


Technology’s role in the process is to help overcome time latency and aide in the ability to integrate information with the capabilities needed to influence and respond to customers. A broader scope of product solutions adds a project management dimension to the process.


Bob Parker added the need to incorporate portfolio, situational and scenario based analysis to manage products, tradeoff decisions, as well as to mitigate risk, with an overall goal of continuous planning. He cited as an example, Procter and Gamble’s circles of cadence, involving strategic, tactical and operational decisions that need to be coordinated.  The S&OP process never ends, it is continuous.


Professor Melnyk added the need to focus the process on required business outcomes, not so much in the sense of hard metrics, but on the required outcomes needed to satisfy customer and business needs.


Roddy Martin added that the future of S&OP is framing the process differently, as a journey toward integrative decision-making. Too often, S&OP teams rush to include senior executives in the process without the process maturity, and the right level of information that can context business impact or business options. Having arguments as to the accuracy of information or the meaning and implications of information, chases senior executives away and can derail efforts. That is perhaps, the worst mistake. Executive S&OP is the summarization of all business planning and execution across various time horizons, along with the business decision implications related to resource plans. 


What I took away from these combined insights is that we as a community may be framing the question of the future of S&OP in an improper context.  The future is a given, the opportunities are enormous, but our context and lens needs to broaden.


Waht is your view?


Bob Ferrari


Earlier this month, the Wall Street Journal’s Theory and Practice series published an article, The New GE Way: Go Deep, Not Wide.  (paid subscription required or free metered view) For many of us who are familiar with General Electric’s previous tenets of management education, this article notes that the company that once prided itself on a curriculum of grooming  broad industry and functional generalists has instead shifted its management training focus in favor of deeper expertise. The WSJ points out that like all companies, GE requires both horizontal and vertical traits in its leaders, but the balance has tipped toward deeper expertise. Instead of purposely relocating senior leaders often to expose them to more of the company’s diverse businesses, GE now assigns these future leaders with longer assignments to develop a deeper understanding of products and the specific customer needs within an industry segment.


The reasons for this shift are those that many in our community have likely observed.  The pace of global business requires a much more intimate knowledge of the aspects of customer needs, product development, supply chain tradeoffs and go-to-market strategies. In the article, Anders Wold, head of GE’s ultrasound business is quoted: “Customers tell us exactly what they want. If you are very generic, if you don’t have the domain understanding, you will develop products that will be average and not successful.” GE’s aviation business unit, one of the fastest growing businesses, is headed by David Joyce who has devoted his entire career to aviation engine platforms.  Previous leaders of this GE business unit came from outside of aviation.


In our view, this trend is also a reflection on accountability, staying in a leadership position for the time to make longer-term initiatives successful and avoiding the constant “parachuting” into and out of programs without a consistency in leadership and follow-through to initially targeted results. Broad initiatives directed at implementing a company-wide S&OP process, implementing advanced technology or shepherding a multi-year supply chain transformation effort can often lose momentum or perspective from frequent changes in leadership.


The point of this commentary is for our supply chain community to reflect on the functional and leadership skills that are required in this new era of dynamic business change, globally extended supply chains and risk exposures.  Supply Chain Matters offers a point-of-view that required skills should reflect broad functional supply chain skills and deep business and program management skills.


Regarding functional knowledge, not everyone can effectively contribute within this new and faster clock speed of business without broader supply chain functional knowledge. That is why current certification programs offered by either APICS or CSCMP test on broad based functional knowledge in areas such as customer relationship management, procurement, planning, transportation and logistics, among other areas.  The goal of certification is to reflect a fundamental baseline knowledge of the processes involved in the supply chain, and we would add, the newest price of admission into the function.  Beyond acquiring certification are years of actual experience working within and across many supply chain functional areas in implementing business and functional program needs.  Thus, broad supply chain horizontal skills and practical knowledge remain extremely pertinent to success.


Conversely, at the management level, we submit that deep understanding of the business, effective communication to senior management, coupled with demonstrated leadership at implementing needed strategic, tactical and operational change are clearly new stakes for global supply chain leadership.


It may be no secret that some current managers within individual functional domains have risen to leadership roles because of their deeper functional and tactical leadership skills vs. broader understanding of either supply chain multi-functional requirements or needs to directly integrate supply chain business process and information technology initiatives with required longer-term business outcomes.  This is often where initiatives for ‘taking cost out of the supply chain’ conflict with ‘providing enhanced services’ for innovative new products.


Tomorrow’s supply chains require leaders who can articulate how supply chain capabilities impact a required business outcome or desired metric of performance.  They are leaders who build their resume on facilitating timely strategic and tactical change vs. multiple assignments implementing short-term objectives.


What about your supply chain organization? 


Are functional and management training or mentoring programs addressing the unique needs of broad supply chain functional and deeper business and management skill knowledge?


What are other thoughts to this important area of management skills development?


Bob Ferrari


The one year anniversary of the tragic earthquake and tsunami that impacted northern Japan was by many accounts a game changing event for global supply chains. In a recent Supply Chain Expert Community blog posting, blogger Jim Fulcher makes mention of recent research findings from the Business Continuity Institute indicating that one year after, 82 percent of companies that reported supply chain disruption have confirmed some changes to their supply chain strategy, with 12 percent indicating significant changes implement. 


The notion that no company is immune to such risks, even one that has incredible influence and buying power was brought forward last week in conjunction with the announcement from Apple of its latest generation iPad tablet computer. The Wall Street Journal featured an article that extracted from two individual teardown analysis of the new iPad performed by firms UBM TechInsights and IHS iSuppli. The UBM analysis “found components with the same functions made by at least three manufacturers in different tablets.” Specifically, Apple has multiple tablet production sources for device memory and high-resolution display. NAND flash memory came from Micron Technology, Hynix Semiconductor along with Toshiba Corporation, a previous high volume supplier of memory for Apple iPhones. The new highly touted iPad high resolution displays were determined to be sourced from Samsung Electronics, LG Display and another company not conclusively identified.


While the strategy may not be a surprise for those who may know of Apple’s internal supply chain practices, the fact that a diversified sourcing strategy is expanding is another indication of the new importance of active supply chain mitigation has become. UBM and the WSJ both noted that the breath of suppliers is one of the most notable elements of the recent teardown of the next generation iPad and further speculate that the reason may be a sign that Apple is more actively practicing supply risk mitigation because of the past Japan and other disruptive incidents.  A glance at the suppliers of mention also triggers the thought that each supplier’s main operations are located in different geographic regions.


On Supply Chain Matters we recently dwelled on the one year anniversary and noted specific actions that automotive manufacturers Toyota and Nissan have implemented as a result of learning from the recent quake. Toyota alone discovered that approximately 300 production locations could be at risk and has now asked these specific suppliers to implement risk mitigation measures. Last week, Automotive lessons learned from the Japan quake apply to other sectors, too! that if often takes a significant event to make all of the organization sensitized to the importance of assessing supply chain risk and developing risk mitigation strategies.  Jim also argues that supply chain risk management should be integrated under the umbrella of the Sales and Operations (S&OP) planning process because of its current scope, process frequency and data utilized to make decisions.   This author happens to agree with Jim and encourages our community to have a dialogue of its own regarding this important topic.


What we are now beginning to understand is that even Apple, the largest global supply chain influencer, who managed to come through the Japan tsunami and later Thailand floods incidents relatively unscathed, has implemented discernable supply chain risk mitigation.  The takeaway for all others is that like other areas of supply chain capability, the gap among leaders and laggards continues to widen, and supply chain risk mitigation is another critical capability within this gap.


Once again, are you educating and influencing your senior management to the need for more active risk management identification and mitigation strategies? 


Do you believe that this responsibility falls under the umbrella of supply chain management, as opposed to finance or enterprise risk management?


Do you view the S&OP process as a natural extension to inclusion of supply chain risk mitigation?


One year is a long time in the current dynamic clock speed of business.


Bob Ferrari


Last week, Apple again captured traditional and social media mindshare with the introduction of the newest version of the iPad, which is scheduled for customer availability later this week. Consumer frenzy for having the latest and greatest Apple device is again building and already the company is warning that initial supplies may not be able to satisfy pre-order demand expected for the planned March 16 availability date.


Beyond the headlines and the consumer frenzy to be the first to get one’s hands on this latest new device is speculation as to whether the post Steve Jobs era of Apple also implies shifting and added challenges to supply chain strategies for Apple.


If you believe that supply chain strategies must support business outcomes, then Apple will have to adjust some of its supply chain strategies.


In terms of sheer capabilities, the existing scope of supply chain fulfillment is staggering. The company boasts that it sold 176 million iPod, iPhones and iPad devices in 2011, accounting for 76 percent of total revenues. This represents over a half million of these devices shipped every day if you do not count Sundays. That is not a lot of room to allow for capacity or supply shortages. The continued shipments of all of these devices also led to the company’s recent announcement of surpassing 25 billion ‘Apps’ downloads from the Apple App Store. The leveraging of recurring electronic content sales is another key strategic component of Apple’s business plan.


It is no wonder that Apple surpassed Exxon as the most valued company. With market capitalization exceeding 500 billion, stockholders respond to every move or any setback, particularly when it relates to supply chain.


The open question for speculation, however, is whether Apple has reached a crossroads concerning its strategic supply chain strategies and future capabilities.  Visibility to the company has clearly escalated given the numbers cited above, along with more visibility to the company’s high profit margins. Our recent commentary on Supply Chain Matters pointed to two recent watershed events as triggering a new phase. Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, a revealing New York Times article revealing current production and supply chain practices, and a corresponding ABC News Nightline visit to Foxconn facilities in China have added considerably more visibility to the inner workings of Apple’s supply chain. There have also been reported rumors coming from Apple’s supply base that indicate testing of a subsequent tablet computer with a screen size of about 8 inches with a potentially lower cost market entry. Our Supply Chain Matters belief is that Apple is positioning the next generation of capabilities to penetrate broader, perhaps more cost sensitive geographic markets.


All of these current signs point to the need for changing supply chain strategies for Apple, some of which may be conflicting. Reuters columnist Richard Beales argues on his blog that needs good, not just better, supply chain. The title is a bit of a misnomer since this columnist’s argument is that with $500 billion in market capitalization and $100 billion in cash, Apple needs to shift its supply chain strategy to a higher cost model to fund more social responsibility. The sheer visibility and brand image of Apple has placed the company supply chain practices under the looking glass, and Beale’s argument is that just as Nike encountered in the 1990’s, consumers will demand a more socially responsible Apple supply chain.


Last week in the Opinion section of the Wall Street Journal, Holman Jenkins Jr. column, The End of Apple’s Roach Motel, (paid subscription or free metered view) speculates that if Apple continues to be successful in its content and cloud services models, its devices will become cheaper and more disposable. His argument is that Apple’s margins will start coming down sharply and the “Roach Motel” will prove less formidable than assumed. That seems to argue for a lower-cost supply chain driven model.


A recent Reuters article points out that for retailers other than Apple, the profit margins for stocking products are thinner than other consumer electronics products.  From a customer foot traffic and interest perspective, retailers like Best Buy have no choice but to stock Apple products, but must in-turn upsell the customer to other products to uphold margins. While Apple remains ‘the’ channel master, pressure will increase for higher margins or shared profits for retail partners.


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.


What about your views? Do you believe that Apple has to shift its supply chain strategies to respond to both business strategy and consumer sentiment requirements?


Bob Ferrari


Technology and services provider Hewlett Packard remains in crisis and the challenges that have led up to the current crisis, have in this author’s point of view, much to do about supply chain strategy decisions that now span three different CEO’s. 


In October 2011, the Supply Chain Matters blog featured two separate commentaries, The Need for C-Level Grounding in Supply Chain Strategy, and HP Finally Reverses its PC Spinoff Decision-What needs to Come Next, which were penned just after the ouster of previous HP CEO Leo Apotheker and the entrance of new CEO, Meg Whitman.  It reflected on the botched decision to jettison HP’s personal systems business and the potential implications that the decision had not only on HP’s future PC revenues, but also on diluting HP’s supply buying leverage.  The takeaways related to this 2011 commentary were our observations that CEO Meg Whitman needed to quickly look at HP from a broad supply chain strategy lens.  Under the former leadership of CEO Mark Hurd, HP elected to de-centralize its supply chain strategy voice in favor of de-centralizing supply chain capabilities among each of HP’s existing business units.


During these past two weeks, HP has once again made financial news headlines that raise cautions for existing stockholders and supply chain stakeholders.  In the latest fiscal quarter, HP’s overall profitability among all HP businesses declined a whopping 44 percent. Revenues within its personal computing business unit fell by 15 percent, printing and imaging revenues fell by 7 percent, while server and data storage declined by 10 percent.


In her public remarks to stockholders and Wall Street analysts, Ms. Whitman pointed directly to supply chain concerns as causes to the current performance, directly indicating that years of underinvestment in processes and systems made these problems worse.  In an Associated Press syndicated article published in the online Wall Street Journal titled HP CEO pleads patience as earnings fall 44 percent, Whitman is quoted: “ We were not as effective as we needed to be in matching that supply with that demand, ..”. Ms. Whitman is further quoted: “ I’m not sure I’d say we were world class in terms of how we think end to end about supply chain.” Members of the supply chain community are more than cognizant to the reality that when the CEO makes these types of statements reflecting on a company’s supply chain capabilities, then change must inevitably occur. 


The effects of the flooding in Thailand were directly attributed to more than half of the company’s revenue drop.  Yet shortly after the potential magnitude Thailand flooding crisis on hard disk supply began to become more visible in the Fall, CEO Whitman indicated that HP’s buying influence and supply chain capabilities would be able to successfully manage the crisis.


In the specific case of HP, those of us who have followed supply chain developments for many years can well remember the days when HP’s supply chain capabilities were clearly viewed as a world class benchmark.  Strategies related to segmented supply chain strategy across diverse product segments, risk management practices among volatile and rapidly changing high tech businesses, the first implementation of multi-echelon inventory and extended supply chain trading partner collaboration, and leading edge aspects of sales and operations planning were all attributed to HP’s supply chain teams. 


Something obviously changed, and we argue that change can be traced to the former decision to organizationally de-centralize supply chain among the various business units and then expose supply chain capabilities to needs for individual business cost cutting and profitability mandates.


We know all too well, however, that the past is past, and HP’s lens needs to quickly focus towards its current dilemmas.  Thus, we have elected to re-iterate our past commentary in the belief that HP, more than ever, needs the voice of supply chain strategy and execution at the senior executive table.


Many of the latest business media articles related to HP speculate that even after the Hurd era of extreme cost cutting, HP senior management may be facing yet another long, tough turnaround path that may call for yet additional headcount and cost reductions. More across-the-board cuts would, in our view, be the obvious simplistic approach.  HP would be better served with consideration of two key decisions.  The first is appointing a senior executive with the responsibility and authority for leading HP’s overall supply chain strategies and resource requirements.  The second would be a reassessment of the current and, more importantly, required future supply chain capabilities needed to support HP’s revenue growth and profitability needs.  Such a plan may involve re-investments or re-assessments of the three key areas we all know are so important: processes, technology and people. The context is improving execution, more timely supply chain global visibility and decision-making, as well as making HP’s supply chain once again a competitive advantage. To perhaps use a simple medical analogy, HP’s supply chain may is in need of a complete physical and new health regimen.


What about further community viewpoints?  Is the voice of supply chain strategy and execution at the senior executive table a mandatory requirement for high tech focused supply chains? 


Bob Ferrari, Founder and Executive Editor, Supply Chain Matters


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