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2011

According to the results of a recent survey conducted by Prime Advantage, a purchasing consortium, increasing costs are a significant concern for midsize manufacturers. Specifically, the cost of commodities is a vexing concern.

 

 

 

As identified by participants in the Prime Advantage Group Outlook (GO) survey, the main cost pressure for midsize manufacturing companies is the cost of raw materials, which was cited by 96 participants as one of the top three concerns, and by 76 percent of them as the key. Inflation was named as the second most-pressing concern, followed by the cost of healthcare.

 

 

 

But it isn’t just midsize manufacturers that now feel the pressure of rising commodity costs. Earlier this year, as the cost of many commodities began to rise, most companies chose not to raise prices, citing fears of driving customers away. That widely held approach seems about to change. For instance, Procter & Gamble announced today, as reported in an IndustryWeek item, that its net profits rose 11 percent this quarter. That growth was driven by a five percent net sales growth in developing countries. It’s worth noting, however, that as P&G’s Chief Financial Officer Jon Moeller says in an item picked up by BusinessWeek, the company expects its costs to increase roughly $1.8 billion this fiscal year, or about triple what P&G planned. Although the company is concentrating on trimming operational costs, it’s probably safe to assume P&G will raise it’s prices soon.

 

 

 

Some companies in other industries have already raised prices. For example, General Motors, Toyota and Ford have all announced price hikes to counter their rising costs. Higher steel and aluminum prices are an issue, but so are increasing, or at least holding steady, prices for rubber and copper. The effects of the earthquake and tsunami in Japan are already complicating matters as well.

 

 

 

Nevertheless, this doesn’t all imply that the horizon is necessarily gloomy. The results of the Prime Advantage survey show that the percentage of executives at midsize companies who anticipate revenue increases in 2011 has doubled compared to just six months ago. Last August, 36 percent of those executives expected revenue increases, but by February of this year, the number had doubled to 72 percent. That would seem to indicate a prevailing sense of optimism about the economy among survey participants.

 

 

 

Perhaps even more telling, not only did 41 percent of the survey participants report that they expect their companies to increase capital spending over 2010 levels, 65 percent of the respondents said they planned to invest in manufacturing equipment this year. Furthermore, 40 percent of the respondents whose companies source products from off-shore vendors cited plans to bring sourcing back to North America in the near future. That itself indicates a rebalancing in sourcing strategy.

 

 

 

One other concern caught my eye. That is, when asked about potential obstacles that would prevent their companies from achieving purchasing goals, survey respondents overwhelmingly cited an in ability to maintain forecast accuracy and demand variability. In fact, it was cited by 76 percent of the respondents. The next two concerns are predictable as well. First, an inability for suppliers to keep pace for predictable demand was cited by 41 percent of the respondents. The third potential obstacle, cited by 39 percent of the survey respondents, is the ability to manage understaffed purchasing departments.

 

 

 

So while the future does look promising, there certainly are challenges ahead. Dealing with rising commodity costs can be tricky because while customers may tolerate some price increases, there is a limit to just how much they’ll accept. An ability to improve forecast accuracy and manage fluctuating demand can be tricky too, but use of S&OP has proven to bring about significant improvement.

 

 

 

What do you see? Is your company struggling with rising materials cost as well?

I ask the question because, I confess, I’m surprised by the results of a recent survey. An SDCExec.com article reported that, according to the results of PricewaterhouseCooper’s 14th annual CEO survey, managing talent has become CEOs’ key priority, overtaking risk management.

 

According to the survey results, 83 percent of the 1,200 CEOs surveyed globally plan to change their firm’s talent management strategy over the next 12 months, and for 31 percent of those companies, the changes will be major. Nevertheless, risk management and investment certainly remain key priorities, and were cited by 77 percent and 76 percent of the surveyed CEOs. Interestingly enough, in last year’s survey, risk management was the number one priority (cited by 84 percent of the participants), investment was second (cited by 81 percent of the participants) and talent management was a close-ranking third priority (cited by 79 percent of the CEOs).

 

One way of retaining employees—and also of recruiting new hires—is to increase salaries and bonuses. For instance, in news widely circulated last week, Microsoft’s 90,000 employees are to receive a company-wide pay increase. The move is widely considered to be a sign of just how intense the competition has become for tech companies. The pay increases, announced in an internal e-mail by Steve Ballmer, chief executive, are aimed particularly at software engineers at the early stage of their careers, but also at mid-level employees with expertise that is in short supply.

 

The Financial Times reported last week that Ballmer wrote that Microsoft will make important increases in compensation for specific populations where the market has moved the most--early and mid-level R&D, mid-level company-wide and certain geographies. The article also noted that in a further boost to compensation, the company will give bigger bonuses to more employees. While only about half of the employees receive their full bonus each year, based on performance, that proportion would rise to 80 percent as the company changes how it calculates the payments.

 

Recognizing that while money clearly pays the mortgage, car payments and kids’ tuitions, it doesn’t necessarily buy happiness, CEOs participating in the PwC survey noted that they also plan to use non-financial rewards in their efforts to recruit and maintain staff. Indeed, 65 percent of the CEOs anticipate the main change to talent management will be the use of more non-financial rewards to motivate staff.

 

Labor markets are more buoyant now, so firms need to make sure employees are engaged both financially and emotionally, says Michael Rendell, global human resource services practice leader at PwC, in the SDCExec article. Non-financial rewards can include increased responsibility and developmental opportunities, which can help people reach their full potential, and in turn, help improve the organization’s workforce skills, he says.

 

In the end, employers increasingly recognize that to remain competitive in today’s global market, the right people with the right skills—and even the right people who can be taught the right skills--are a much sought-after resource. That places a growing importance on recruitment, workforce management, performance and compensation management and succession management. In other words, there’s more to talent management than simply filling an open position.

 

Is this what you see as well?

Much has been made lately about the recent disasters in Japan, and for good reason. Most importantly, they caused a catastrophic level of destruction and, sadly, loss of human life. But they also have had a profound impact on global supply chains for industries that include automotive and high tech.

 

However, the earthquake and tsunami in Japan are also the latest in a string of disasters that compromised supply chain activities. As The Wall Street Journal reported earlier this year, some people have taken to calling 2010 “the year of the catastrophe.” Considering the numerous earthquakes, a volcanic eruption that interrupted European air traffic, raging forest fires and resulting smog over Russia and a catastrophic oil spill off the U.S. coast, 2010 certainly does seem to have been plagued by a host of natural and man-made disasters responsible for billions of dollars of economic loss.

 

The lesson in all this, Kelly Thomas, a senior vice president at JDA Software, said recently, is that while it’s impossible to predict every natural disaster, act of terrorism or other supply chain disruption, a consideration of such events must be part of the foundational strategic planning process spanning from manufacturing all the way to the store shelf. Predefining the right set of responses for supply chain disruptions helps prepare businesses to manage supply chain contingencies based on long-term strategic priorities instead of scrambling to make hasty, ill-informed decisions, Thomas adds.

 

With that in mind, I was interested to see JDA’s risk-mitigation guidelines for both manufacturers and retailers, especially given that, as JDA points out, supply chain disruption is a reality for today’s 10,000-mile global--as well as the 200-mile local—supply chain.

 

The first step in those guidelines is to complete a systematic analysis of the total landed cost related to various procurement strategies to realistically assess the potential value delivered by a global supply network and also enable making informed decisions regarding risk versus reward. This assessment should be an on-going process that allows for frequent plan updates as factors such as political conditions, fuel prices, tariffs, currency exchange rates and labor costs change.

 

Next, create contingency plans driven by detailed business simulations and what-if scenario analysis. Risk exposure can be minimized by creating backup production and distribution plans that include second- and even third-tier material sources, component vendors, substitute parts and transportation carriers.

 

Also, work to ensure contingency rules and policies are in place at the strategic level as well as at the operations or tactical level. Running what-if scenarios in advance at the tactical level can help companies operate through short-term supply contingencies without significant interruption or a long-term business impact.

 

It’s important to monitor daily operating conditions on an on-going basis so demand spikes, local weather events, labor strikes and other short-term performance threats can be anticipated and managed as effectively as possible. Furthermore, supply chain activity should be monitored regularly as well so when disaster does strike, the company can quickly adapt preplanned promotional and marketing campaigns as product availability changes.

 

Finally, it’s vital to collaborate to achieve greater visibility from manufacturing to the store shelf. By building these relationships, companies can ensure that business plans are aligned and all parties are better positioned to respond quickly with a goal of keeping products on the shelf even when operations are interrupted.

 

In the end, as you are well aware, it’s impossible to plan for every emergency. However, it can be argued that the key to long-term success lies in being prepared for deviation—regardless of its cause. Furthermore, regardless of whether the supply chain is local or global, identifying and managing risk is critical if companies are to position themselves to weather supply chain disruptions.

The Wall Street Journal reported yesterday that Apple has sued Samsung Electronics, claiming Samsung’s Galaxy cellphones and tablet have copied Apple’s iPhone and iPad. The article notes that Apple’s lawsuit, actually filed last Friday, alleges that Samsung copied not only the look, but also the product design, packaging and user interface of Apple’s products, consequently violating Apple’s patents and trademarks.

 

While the lawsuit certainly is of consequence, the news also has me thinking about the growing tablet market in general, and, more specifically, the challenges all players in the market face as they race to meet growing demand.

 

In 2011, the Gartner forecast is for iPad sales to reach 48 million, which will give Apple a 69 percent share of the tablet market. However, in 2012, Apple’s share will slip slightly to 63.5 percent--even though it will sell over 68 million iPads--as other tablet makers garner more market share. But how big is the market? Businessweek reports that, according to research from Strategy Analytics, Apple and other electronics makers including Samsung, Motorola, Hewlett-Packard and Dell will generate $49 billion in sales of tablet computers by 2015, driven by consumers’ demand for devices able to bridge the gap between smartphones and laptops.

 

Given such projected demand, the challenge for Apple as well as other tablet makers, is to ensure they have an adequate supply of various tablet components—especially in light of the recent disaster in Japan and resulting ripple effect felt throughout the global electronics supply chain. Consumers may be willing to wait for new tablets to be launched—and, eventually, literally wait outside stores for hours—but ensuring there are ample components and that suppliers can deliver when needed and in sufficient quantities remains an obstacle nonetheless.

 

That’s why I’m equally interested in other recent news. According to a story running on Apple Insider, Brian White, an analyst with Ticonderoga Securities, said in a recent note to investors that Apple began “aggressively attacking” the component situation in Japan following the earthquake and tsunami. Apple reportedly sent executives to suppliers immediately to ensure adequate supply of components, and also began offering upfront cash payments. This move would effectively both ensure supply and block out competitors.

 

The article also explained that in the company’s last quarterly earnings call, Apple Chief Operating Officer Tim Cook revealed that Apple had invested $3.9 billion of its nearly $60 billion in cash reserves in long-term supply contracts. Although, citing competitive concerns, he declined to say which components Apple had put its money toward, Cook did say that it was a strategic move that would position the company well in the future. Some analysts believe the investment is related to touch panel displays that are the centerpiece of devices like the iPhone and iPad, and that the investment could secure as many as 136 million iPhone displays, or 60 million iPad touch panels.

 

What this demonstrates is that it’s good to be Apple and it’s tough to be its competitors—at least for now anyway. It is enlightening, however, to learn how Apple itself is balancing supply and demand, particularly given the competitive nature of the market as well as market constraints stemming from the disaster in Japan.

As you may have noticed, either personally as a consumer or professionally as a supplier, Walmart has in recent years taken thousands of SKUs off its shelves. In some cases, the move was to focus on fast-moving products while in other cases, it was an attempt to reduce clutter on shelves and in aisles to attract so-called “upscale” shoppers. Whether the SKU reduction, the economy or both contributed, Walmart’s sales have dropped over the past several quarters.

 

So perhaps it’s a logical consequence to see news last week that Walmart is taking steps to change its approach. As Duncan Mac Naughton, chief merchandising officer, Walmart U.S., explains, the company is determined to create the best one-stop shopping experience for customers and also offer low prices on the right products backed by a clear, consistent ad match policy.

 

While on the one hand, the company is enhancing efforts to offer low prices every day, it is also, more noticeably, broadening product assortment by adding SKUs. Specifically, Walmart is adding approximately 8,500 items or 11 percent in an average store. These changes are aimed at bringing back customers’ favorite local food and consumables, among other products.

 

This is an on-going process, so additions to the dry grocery aisles for products including pasta, beverages and snacks have been in progress and will continue, according to Walmart. In the next few months, additions will be made to fresh grocery and consumables, such as paper towels, toilet paper and laundry detergent--as well as health and wellness products. General merchandise categories such as electronics, sporting goods, apparel, fabrics/crafts and outdoor living will expand later this year.

 

What’s not spelled out is whether the additional SKUs will come from current suppliers or from vendors that had been previously dropped. Secondly, Walmart has announced that the company will partner more closely with suppliers to lower the cost per item and pass those savings on to customers. It will be interesting to see just how those prices are lowered, considering that speculation currently runs the gamut from increasing supply chain efficiencies to forcing vendors to lower their prices.

 

I am most intrigued by the broadening of SKUs and recognition of possible shopping behavior. For instance, sometimes a consumer goes to Walmart looking for a particular brand and specific product, such as shampoo, and sometimes they go shopping for a product like an alarm clock and the particular brand isn’t that important. But if a consumer does have a specific list, and a particular item on that list isn’t on the shelf, will they buy a competitor’s product instead or nothing at all? That’s a question of brand loyalty, but also of economics involving a number of factors. So, for instance, the consumer may buy nothing and plan to drive to another store, which entails spending more time and money in the process. However, given the rising price of gasoline, one must wonder if having gone through the experience, some consumers have simply opted to shop at another retailer that they know carries the products they demand. Either way, Walmart execs seem to be addressing the possibility given the renewed focus on creating the one-stop shopping experience.

 

What do you think? Will Walmart’s changes improve both traffic in stores and sales? Also, how will those changes effect manufacturers of everything from consumer products to electronics?

Everybody looks for ways to simplify business processes, improve service and reduce costs. There’s even more reward when doing so additionally offers the environmental benefit of eliminating—or at least minimizing—the use of paper-based forms.

 

Those benefits are on the minds of many in the air cargo industry. In fact, a recent article that ran in American Shipper explains that while the air cargo industry has been slow to move toward automated documentation exchanges among air carriers, customers, ground-handling agents, truckers and customs authorities, that may be about to change as companies begin to feel pressure to conduct business transactions electronically.

 

The push behind this evolution is lead mainly by the International Air Transport Association (IATA), which represents about 230 international airlines. According to the association’s estimates, the air cargo supply chain as a whole could save $4.9 billion annually if all parties sent electronic messages for trade, transportation and customs documents. That’s due in part, because if documents arrive ahead of the cargo, customs clearance and airline processing time may be cut by an average of 24 hours. Furthermore, not only could delays stemming from lost documents be eliminated, accuracy can also be improved because data would not need to be re-entered into various IT systems.

 

IATA has replaced 20 paper documents with electronic forms, including the master air waybill, packing list, dangerous goods declaration and import/export cargo declarations. The article notes that first, the organization must determine whether countries have the legal and regulatory framework, technical capabilities and willingness to implement e-freight, and then it must coordinate efforts between the private sector and government to make any necessary changes. Electronic document exchanges begin once e-freight operational procedures are defined and validated by local customs for accepting inbound and outbound shipments. So far, IATA has launched e-freight pilot projects with volunteer airlines and forwarders in 44 countries, and 32 airlines and 1,465 forwarders now have e-freight capabilities in at least one country.

 

Nevertheless, adoption has been slow, which is partly due to a lack of industry awareness and partly due to sizable obstacles. For example, the electronic process still results in a great deal of paper being printed because U.S. law requires airlines and forwarders to maintain hard copy records for five years--even if companies electronically store records. The problem is worse on the outbound end, the article notes, because Customs and Border Protection doesn’t have an electronic system for processing exports, which means airlines and forwarders must present paper manifests and all other associated documentation. Furthermore, although IATA has worked with CBP to develop an alternative process that allows participating e-freight companies to print records on demand when needed instead of attaching paper documents to the manifest, not all companies have the ability to electronically store and maintain the resulting records.

 

Even so, progress is being made. For instance, John F. Kennedy Airport in New York, O’Hare International in Chicago and Miami International Airport are all e-freight approved for general cargo imports and exports to other airports with e-freight capability. Eleven other U.S. airports are open to import consignments using electronic documents.

 

Additionally, all three of Switzerland’s airports--Basel, Zurich and Geneva—are now e-freight capable. What’s more, as the American Shipper article reports, the first e-freight compliant transaction took place earlier this year. That shipment, from Basel to Hong Kong, was conducted by Swiss WorldCargo and Kuehne + Nagel. That’s important, because it demonstrates the capabilities of Switzerland, which serves as a manufacturing and export center for numerous pharmaceuticals and watch companies.

 

In the end, while obstacles still remain, the benefits are fairly clear. Reducing costs while improving performance are, of course, key among most companies’ objectives. The other issue, however, is security. With most governments striving to improve security and increase cargo screening capabilities, it may just be a matter of time before e-freight becomes mandated.

In thinking about the continuing troubles in Japan, our thoughts are foremost with the people of Japan—especially upon learning that the country was shaken by another earthquake and subsequent tsunami warning today.

 

However, our thoughts also naturally turn to the supply chain as well as the implications and ramifications of the disaster. Indeed, there continues to be a far-reaching ripple effect across many industries. Obviously, the automotive industry continues to be effected. While a Toyota spokesman announced earlier this week that some U.S. shutdowns are inevitable, Ford and Chrysler are now restricting orders of vehicles with some black and red paint because the pigments used in the paint are made in Japan—and production of that pigment has been halted.

 

Other industries are, or most likely, will be, effected as well. Production at some of the world’s largest makers of silicon wafers has been halted, raising concerns about future semiconductor production. While chip makers have been able to continue shipments because they had inventory on-hand, there may be future shortages, which would impact production of computers and electronic devices that range from tablets and smart phones to automobile components.

 

What this illustrates, is how the focus of electronics manufacturing in a single country can significantly effect the increasingly interconnected global technology industry, explained Dale Ford, a senior vice president with market research firm iSuppli, earlier this week. The implication is that the major disruption to the global electronics supply chain caused by the earthquake in Japan could recur in other regions of Asia due to the high concentration of technology industries in certain countries, he says.

 

Consequently, it’s worthwhile to consider what could happen if a production disruption were to strike other key electronics production regions where manufacturing is highly concentrated, such as Taiwan, South Korea and certain areas of China. As the global electronic industry moves forward, leaders will need to learn how to manage potential disruptions in various regions, Ford says.

 

For example, while Taiwan supplies 58 percent of the small/medium-sized liquid crystal display (LCD) panels used globally, the country more significantly is the world’s leading location for semiconductor foundries. These companies conduct the outsourced manufacturing of chips, and, collectively account for 67 percent of global production, Ford says. Taiwanese foundries Taiwan Semiconductor Manufacturing and United Microelectronics, for instance, serve the manufacturing needs of semiconductor companies all over the world, and as such, they play a crucial role in the global chip supply chain.

 

It’s also worth noting that much of South Korea’s manufacturing takes place near Seoul, and that companies located there supply nearly 40 percent of the DRAM and 49 percent of data flash memory (NAND flash) used in the electronics industry. Since nearly half of all global production of DRAM occurs in the Seoul area, the impact on the global electronics supply chain would be devastating if manufacturing were to be disrupted by some event, says Mike Howard, principal analyst for DRAM and memory at research firm IHS.

  

Finally, as Ford at iSupply notes, China is home to most of the world’s original design manufacturing--the production of electronic equipment on behalf of major electronic brand owners. Much of this manufacturing is concentrated in the Shanghai and Shenzhen metropolitan areas. So for example, one-quarter of the world’s cell phones are made in Shenzhen.

 

The lesson in all this is to recognize the importance of risk mitigation and alternate sourcing strategies. Nevertheless, the issue certainly becomes more complex when all, or nearly all, of a component or material come from one geographic region. Even so, it will be interesting to see how sourcing strategies change in the electronics and other industries.

In recent years, many manufacturers have outsourced manufacturing and some supply chain operations to low-cost countries to improve competitiveness. However, new research and some recent news articles seem to indicate that as companies strive to get closer to the customer, such an approach may not necessarily be the best strategy.

 

For instance, a recent Fortune story, which ran on CNNMoney.com, featured a Q&A with Auret van Heerden, CEO of the Fair Labor Association (FLA). When asked whether or not outsourcing to China is still a viable option for global manufacturers seeking to lower production costs, van Heerden said labor markets that were previously considered to be inexhaustible—such as China and India--have now tightened up. Additionally, he explained, not only are employers unable to find workers, but wages and energy costs are increasing as well. Consequently, contract manufacturers feel the pressure.

 

More importantly, the results of recent research from Accenture show that for many companies, past offshoring decisions may not have taken all relevant factors into consideration. What’s more, evolving market dynamics and growth of an increasingly demanding customer base now encourage locating supply close to the source of demand. While offshoring most likely will continue to play a role in companies’ supply-location strategies, it will more commonly be evaluated in the context of aligning supply to demand location, Accenture says.

 

The firm conducted a survey, and, tellingly, 61 percent of the respondents are considering shifting their manufacturing operations closer to customers to deliver better service and enable accelerated growth. Those considerations are driven in part by two central concerns. When asked to name core issues facing North American companies regarding offshoring, 49 percent of the respondents cited cycle/delivery time, and product quality was also cited by 49 percent of the respondents. Additionally, logistics—cited by 57 percent of the respondents--and supplier/component prices—cited by 73 percent of the respondents—were identified as the factors with the highest percentage increases during 2007 to 2010.

 

Survey respondents recognize that to compete effectively, they must rebalance their supply footprint. Efforts to get closer to the customer will improve companies’ flexibility so they are able to respond to uncertain demand and unknown customer requests in an agile way, with fast delivery times, while maintaining high quality and optimized costs, says the Accenture report. While this may not always be the lowest-cost approach, in today’s business climate, other customer-centric value drivers, such as being able to supply customized product or customer-specific SKUs quickly, may indeed come to be considered more important.

 

That certainly is the case for Volvo Construction Equipment. The company, as reported in a recent IndustryWeek article, plans to spend $100 million to expand its Shippensburg, Pa., manufacturing facility and start production of Volvo wheel loaders, excavators and articulated haulers in North America.

 

In explaining the shift in locations, Olof Persson, president and CEO of Volvo Construction Equipment, says it makes sense, when possible, to manufacture products close to the customers. Producing Volvo wheel loaders, articulated haulers and excavators in Shippensburg will decrease lead times for customers, Persson says.

  

Are you, or leaders at your company, considering shifting operations so they are closer to your customers? Have agility and customer responsiveness become more important than low-cost production?