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2011

Jim Fulcher's Blog

August 2011 Previous month Next month

Apple’s iPad tablet computer has been in the news a lot in the past few days. For example, it’s been widely reported that the NFL’s Tampa Bay Buccaneers team has given every one of its 90 players an iPad 2 to view playbooks and watch videos. That’s pretty cool because rather than carry around a playbook the size of a telephone book, players can simply carry the iPad instead.

 

But it’s a second news item really caught my eye—one about competition and a potential market shift. An Agence France-Presse story picked up and run by IndustryWeek explains that while Amazon has not publicly announced plans to produce a tablet, numerous press reports have said the company will introduce a tablet this fall. According to the story, The Wall Street Journal reported last month that Amazon plans to unveil a tablet computer powered by Google’s Android operating system before October. The New York Post, citing a “a source with knowledge of the plans,” said last week that Amazon will enter the tablet market in late September or October with a device that costs “hundreds less than the entry-point $499 iPad.” The article also notes that like the low-priced Kindle, Amazon would not be looking to make a profit on the hardware but instead from digital content such as books, music, movies, games, and applications sold for the device.

 

Tablets, which, let’s face it, so far really means the iPad, are hot. According to a report from IHS, global media tablet shipments now are expected to rise to 60 million units in 2011, up 245.9 percent from 17.4 million in 2010. These figures drive the firm’s forecast of media tablet shipments to be 275.3 million units in 2015. Apple, of course, has the lion’s share of the market, and will ship 44.2 million iPads in 2011, according to the IHS forecast.

 

All the momentum in the media tablet market is with Apple right now, says Rhoda Alexander, senior manager, tablet and monitor research for IHS. Competitors can’t seem to field a product with the right combination of hardware, marketing, applications, and content to match up with the iPad, she says.

 

That all could change, however, with Amazon’s entry into the marketplace. In her blog post, Sarah Rotman Epps, senior analyst at Forrester Research, notes that Amazon is capable of disrupting not only Apple’s product strategy, but that of other tablet manufacturers’ as well. What stands out, Rotman Epps says, is that Amazon’s willingness to sell hardware at a loss--combined with the strength of its brand, content, cloud infrastructure, and commerce assets—could position it as the only credible iPad competitor. Indeed, if Amazon launches a tablet at a sub-$300 price point, assuming it has enough supply to meet demand, Forrester can see Amazon selling 3-5 million tablets in the fourth quarter alone, she says.

 

The operative word here, however, is “supply.” Sure, there clearly is market demand, and sooner or later, somebody is bound to emerge as a significant competitor with Apple. However, that doesn’t mean it will be easy for them. Apple has a winning combination of hardware, marketing, applications, and content, but equally important, it also has a strong and clearly established supply chain.

 

As has been previously noted, Apple Chief Operating Officer Tim Cook has said Apple invested $3.9 billion of its cash reserves in long-term supply contracts. And while 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. If so, the investment could secure as many as 136 million iPhone displays, or 60 million iPad touch panels.

 

It certainly is an interesting market to watch.

Does your company have tools in place that allow you to adapt and prepare for potential risks? I ask that because, according to a report from consulting firm PwC, many companies don’t know who their high-risk suppliers are, and they also don’t know where the weak links are in their supply chains.

 

Barry Misthal, who leads PwC’s global Industrial Manufacturing group, says supply chains and the manufacturing industry have lately been on a “rollercoaster ride” of rising oil and commodity prices, high levels of debt, weak demand, and tight credit. Considering the current volatility of geopolitical, economic, and financial markets, businesses need to research their risk areas and mitigate where they can, he says.

 

According to the report, “Achieving excellence in production and supply,” several issues can play an important part in determining the difference between whether a company achieves manufacturing excellence or mediocrity. They are: identify and prevent supply chain risk, link demand planning with the whole value chain, make customer and supplier collaboration real, address lifecycle opportunities and demonstrate sustainable value, and attract people with the right skills. Companies that fail to recognize or address those issues will miss opportunities to achieve excellence or, worse, face the danger of so-called “ticking time bombs” that could dramatically disrupt production and supply, PwC believes. The flip side of the coin is that those companies which do address these issues stand to gain gain significant competitive advantage.

 

What really caught my eye was a section on mitigating supply chain risks. The PwC report recommends three areas of improvement. The first is to work to connect the supply chain using real-time data. Events such as the tsunami and earthquake in Japan last spring show how important it is to be able to rearrange sourcing and orders in real-time rather than face the time-lag of periodic reports. To do that, companies need to use hand-held mobile communications and IT systems that make it easier to connect with partners and suppliers electronically, PwC believes. Additionally, having sensors in place throughout the supply chain enables manufacturers to know what is going on at that moment, as well as to trigger alerts in the event of any unforeseen developments.

 

Secondly, the scope of potential risk needs to match the nature of the supply chain. That means risk parameters should include factors such as a concentration on one product, supplier, or site that can heighten the vulnerability of that part of the supply chain. Similarly, the report explains that if a supply chain includes locations that are susceptible to natural disasters, civil and political unrest, or factors such as labor strike, these risks should be as much a part of risk management as factors such as currency risk.

 

The final area to focus on is equally troublesome. That is to consider the financial stability of all the companies in the supply chain. As the report notes, the banking crisis has made the economic downturn and subsequent recovery different from previous economic cycles. Lenders and banks are under great scrutiny and they have held on to very large portfolios of marginal businesses that—in the past--they would have tried to take action on earlier. If interest rates rise, PwC believes it will be more difficult for these businesses to service loans and banks will have to pay more attention to them. Alternatively, a renewed downturn would put pressures on marginal companies and banks alike.

 

Do you know who your high-risk suppliers are? Has your company taken some of these steps to mitigate risk in the supply chain?

Volatility in the supply chain leaves some companies caught in the middle, so to speak. That is, on the one hand, demand from their customers is volatile and difficult to forecast. However, it also may now be difficult to quickly receive shipments from suppliers, many of whom have scaled back operations or may be slow to receive shipments from their own suppliers. As a result, to ensure they can quickly respond to customer demand, many companies carry excess inventory.

 

However, given today’s business climate and the ensuing need to reduce costs, many companies are targeting that excess inventory as well as the associated warehouse and storage costs. Depending on the company, those costs can be surprising. For example, according to the results of APQC’s Open Standards Benchmarking in logistics report, at the midpoint (median), organizations spend 10 percent of the annual value of their inventory to carry it. The situation is worse for bottom performers, who spend more than twice what top performers spend to carry inventory--16.4 percent compared to 7.3 percent of annual inventory value.

 

The challenge then for many organizations is to determine how to tread the fine line between being able to meet customer demand and also reduce inventory carrying costs. In an article that ran in Supply Chain Management Review, Marisa Brown, director, Knowledge Center, APQC, explains that there are a number of factors to focus on when striving to strike an optimal balance between inventory levels and customer service.

 

While Brown makes several points, there were a few that I was most interested in. The first is to focus on accountability, which encompasses making decisions with respect to the organization as a whole, not simply optimizing one function or sub-process, Brown says. For example, consider what happens all too frequently when manufacturing receives incentives for high utilization and productivity without regard to the space needed--or cost--to store those items. Instead, manufacturing must be accountable and work with other operations such as warehousing to optimize inventory so the business as a whole improves.

 

You’d also expect to see “technology as an enabler of optimization” listed as a key factor because automating inventory optimization and embedding technology into the planning process enables organizations to maintain an optimal inventory mix. Although inventory optimization has a strategic component, the dynamic nature of the marketplace requires tying inventory optimization technology to an organization’s operational processes and systems, Brown says. That means companies must continually look for events that will quickly render a strategic view of inventory optimization obsolete. Indeed, events such as new product introductions, changing demand patterns, and evolving sourcing alternatives can have a substantial impact on the initiative.

 

That leads me to the final point I was particularly interested in, which is to focus on measurement and continuous improvement. It’s critical to establish key performance indicators using adaptable metrics to enforce the processes, measure and benchmark progress, and raise expectations to improve capabilities and performance, Brown says. For example, most successful organizations monitor inventory optimization via adaptable metrics on supplier performance, customer service, and internal assets. However, as your organization reaches desired goals--or when performance falls short of expectations—it’s also necessary to revise the programs and associated metrics so the company can continue to improve performance.

 

Is your company working to optimize inventory? If so, how has the initiative gone so far?

While there is some speculation that prices for oil, grains, and other commodities may fall in coming months, their prices have nonetheless been rising this year. Those increases already have had an impact on the supply chain, and some analysts expect companies to experience a significant impact on profitability.

 

For instance, according to research from The Hackett Group, the combination of rising commodity prices as well as labor and services cost inflation could potentially reduce corporate profits by as much as nine percent in 2011 and 2012. So, for a company with $27.8 billion in revenue, Hackett’s research estimates that the loss could amount to a $150 million per year hit to the bottom line. The group has conducted a survey, and respondents reported that their companies will pass half of these growing costs on to their buyers but the other half of these costs will be absorbed by the organization.

 

Neither of those methods is truly effective since global markets are increasingly competitive and customers remain price sensitive. What companies must do instead, is search for ways to offset those costs. One example, given that transportation and fuel costs account for more than half of the cost of getting goods to market, is to review—and, most likely—change sourcing and distribution plans to lower transportation costs.

 

This entails more than simply streamlining routes, however. For example, I was interested in a recent SupplyChainBrain Q & A, in which Tim Feemster, senior vice president of global logistics with Grubb & Ellis Co., notes that while the trend in recent years has been for companies to consolidate the number of distribution centers and improve efficiencies, the trend is likely to now reverse. Indeed, as oil reaches a price point in the $125 to $150 a barrel range, it will have an impact on network design, he says. Companies will shift from the regionalization that has taken place over the past 20 years or so, back to a more market-centered approach using more distribution centers. Consequently, the overall cost of the supply chain—more than 50 percent in transportation, 22 percent in inventory carrying costs, 17 percent in labor, and four to five percent in rent--will be less. That will still hold true, he explains, even if a company is paying more for rent, labor, and inventory, because the cost of transportation will have increased so much.

 

Another approach, explained in a second SupplyChainBrain piece by Greg Holt of CombineNet, is for companies to collaborate with suppliers to reduce costs to balance commodity price increases, but more importantly, to improve efficiency and innovation in the supply chain. Holt offers the example of a manufacturer working with its steel supplier to examine issues around fuel, transportation, and freight costs.

 

Traditionally, the steel supplier provided freight to the manufacturer, but the manufacturer is a large company, and has extensive freight contracts with potentially better transportation rates, says Holt. The company identified several transportation lanes where it could further reduce costs by leveraging existing transportation contracts. While these steps didn’t completely offset the rising cost of steel, they did help significantly, he says.

 

What about your company? Are you—or your suppliers—working to lower costs to combat the rising cost of fuel and other commodities? I’d like to hear about those strategies.

Most of you have probably been following news of Google’s intention to purchase Motorola Mobility for $12.5 billion. Google, which makes the market-leading Android mobile operating system, could as a result of the acquisition, enter the smartphone hardware market—a move that has the potential to significantly change the smartphone market landscape.

 

But there’s also another story unfolding about a different company, and it ultimately has many of the same implications. That is, as reported in a BusinessWeek article, Eastman Kodak may hold patents worth five times more than the business itself. The problem is that demand for film photography has declined, and smartphones equipped to take pictures have drawn market share away from digital cameras. Consequently, Kodak has reported losses in five of the past six years and has less than $600 million in equity value, according to data compiled by Bloomberg.

 

The digital-imaging patents owned by Kodak may now be worth $3 billion in a sale, MDB Capital Group said in the BusinessWeek article. What’s more, while Kodak has a $1.2 billion pension shortfall, potential buyers such as Microsoft Corp. and Samsung Electronics Co. stand to profit from Kodak technologies used in 85 percent of digital cameras and smartphones, according to Rafferty Capital Markets LLC.

 

Last month, Kodak said in a statement that it’s exploring “strategic alternatives” for the more than 1,100 digital-imaging patents it owns, including those for processing, editing, and storing digital images. Furthermore, The Wall Street Journal reported yesterday afternoon that investment bank Lazard Ltd. began marketing Kodak’s portfolio this week, reaching out to companies that may be interested. According to the article’s sources, one company interested in buying Kodak’s digital-imaging patents is a large, strategic buyer in the wireless industry.

 

What the Kodak and Google news—as well as the previous large scale purchase of Nortel Networks’ patents by Apple, Microsoft, and others—illustrate is the value companies place on innovative technology, but also out of necessity, on the patent itself. Indeed, the smartphone industry, is rife with suits and countersuits, showing just how critical patents have become in the industry. 

 

Some of that may be about to change, however. A recent New York Times article explains that some handset makers and mobile carriers hope that Google’s purchase of Motorola will ease tensions in the smartphone market—in other words, it may create a patent armistice of sorts. In a statement earlier this week, which was also carried in the article, John Thorne, senior vice president and deputy general counsel at Verizon, said the company welcomed the deal as a move that might bring some stability to the on-going smartphone patent disputes. It should be noted that Verizon Wireless, owned by the Vodafone Group and Verizon Communications, sells both Android-powered phones and Apple’s iPhones.

 

Even so, it’ll be interesting to watch as the situation develops, especially given that Samsung, Sony Ericsson, HTC Corp. and LG Electronics, all of which produce devices that use Google’s Android, have announced that they support the deal. That’s because the Motorola acquisition will give Google a portfolio of more than 17,000 patents on phone technology that can be used to defend Android device makers from patent infringement litigation. However, despite their statements, one must wonder how executives at Samsung, HTC and others really feel about the news, and how it will impact their business. They still are partners, of course, with Google. But on the other hand, that relationship is about to change. While they will remain partners, they also will--most likely—become competitors as well to a certain extent as Google takes over Motorola Mobility.

Most companies are under growing pressure to reduce costs, protect intellectual property, and increase market share. However, at the same time, companies in the pharmaceutical, medical device, and biotech industries also face rapidly changing regulatory requirements and the demand for innovation as patents expire. With that landscape in mind, it’s interesting to see that according to the results of a new survey, supply chain and logistics executives from companies in those industries in the U.S., Europe, and Asia look to the future as one with both growing risks and opportunities.

 

According to the UPS “Pain in the (Supply) Chain” survey, as the use of extended supply chains grows due to globalization and the introduction of more specialized products, concerns over regulatory compliance, product integrity, and security all remain at the top of supply chain concerns. For instance, regulatory compliance is the top supply chain concern—as was cited by 73 percent of respondents. Managing supply chain costs came in second overall, with 64 percent of the executives citing it as a top supply chain concern. Next was product security, cited by 61 percent of the respondents, followed by product damage/spoilage.

 

Companies in these industries remain focused on global expansion, and the top five markets for growth cited by the respondents were the U.S., China, India, Japan, and Brazil. But there are interesting differences too. For example, companies in Asia are more focused on global expansion than those in the U.S., with 75 percent of the executives in Asia noting that their companies recently expanded into new global markets to increase their competitiveness. On the other hand, 58 percent of the executives from companies in the U.S. noted recent global expansion.

 

There were other key differences in supply chain concerns as well. Executives in Asia are more concerned about product security as a supply chain issue, with 71 percent reporting high concern, compared to 53 percent of the U.S. executives and 51 percent of those from Europe. Product damage and spoilage also is a larger source of concern in Asia (70 percent of respondents) and the U.S. (67 percent of respondents) than in Europe (27 percent of the respondents).

 

What these findings show, says Bill Hook, vice president, global strategy, UPS Healthcare Logistics, is that change is the only constant in healthcare today—and it’s happening on a global scale, driven by factors such as cost, regulatory pressures, and global expansion. Going forward, companies have to find new ways to innovate and adapt to rapid market changes and this is where the supply chain plays a pivotal role, he says.

 

So what are these companies doing? Companies in the pharmaceutical, medical device, and biotech industries are focused on investing in their supply chains to increase their competitiveness. Technology investments ranked as the top strategy, with 86 percent of the respondents reporting that their companies will invest in new technologies over the next three to five years. Entering new global markets was the second key strategy for increasing competitiveness, with 81 percent of the respondents reporting plans to expand in new areas in the next three to five years.

 

What about you? Whether your company is in the pharmaceutical, medical device, and biotech industries or not, is it currently investing in new technologies to improve competitiveness?

It’s always interesting to see what executives think they do better than their competitors—especially in these challenging times. That’s why I was interested to see that, according to the results of a new survey, market leading companies consistently do three things better than their competition. That is, they focus, simplify, and adapt better than others.

 

The research, released by global consultancy Bain & Company, and conducted in collaboration with the Economist Intelligence Unit, surveyed 377 executives from the U.S., Europe, and Asia from a cross-section of industries. More than two-thirds of the respondents held either board seats or C-level positions in companies with annual sales ranging from less than $100 million to more than $10 billion.

 

 

The results show that according to the respondents, their strategies are to:

·       Focus on a highly-differentiated core business whose capabilities can be reapplied consistently,

·       Simplify communication between the boardroom and the “front lines,”

·       Constantly adapt the business model to meet key challenges and turn constant improvement into a strategic weapon.

 

The findings show a fundamental shift in the nature of strategy and competitive advantage, says James Allen, senior partner and fellow co-head of Bain’s global strategy practice. For instance, nearly three-quarters of executives say that strategy is now more about their ability to sense and adapt, and more than half of them expect to have a different key competitor in five years.

 

There were a couple of findings that really stand out regarding each strategy. For example, “top performers focus on a highly-differentiated core business” falls within what you’d expect to see. However, I was somewhat surprised to see that, compared with their counterparts at bottom-performing companies, twice as many executives at top-performing companies strongly agreed with the statement that nearly three-quarters of the time, “We have strong consensus in our management team around a clear and simple strategy.” What’s more, while respondents from bottom performers strongly agreed about 30 percent of the time, respondents from top performers strongly agreed more than 80 percent of the time with the statement, “Our strategy is built around a repeatable model that we constantly apply with a high success rate to new markets and segments.”

 

Secondly, communication continues to be a problem. Sure, top performers strongly agreed roughly 60 percent of the time with the statement, “Our front line understands our strategy and they are fully in line with top management,” while respondents from bottom performers agreed only 35 percent of the time. But it does stand out that top performers strongly agreed only about 60 percent of the time, and that the number wasn’t higher.

 

Finally, when it comes to innovation and adaptation, there clearly is a difference between top- and bottom-performing companies. Executives at top-performing companies strongly agreed six times more often than bottom performers with the statement, “We are the best in our industry at capturing learning and driving continuous improvement in all key functions. This is a competitive advantage.”

 

Furthermore, top-performing executives strongly agreed more than twice as often as bottom performers with the statement, “We innovate and experiment in the field a lot. This drives our learning and is a competitive advantage.”

 

So, while companies are improving their focus, and market leaders at least, are also focusing on innovation and continuous improvement, market leaders and bottom performers alike can use improvement in communication. This is a necessity if companies truly are to improve supply chain performance. Everyone needs to understand the strategy if it is to be successfully carried out.

 

Let me know what you think. Does your company focus, simplify, and adapt better than your competitors?

In a previous post, I noted that although many companies are posting record quarterly earnings, analysts point out that one reason some corporations are doing well is partly because they slashed costs during the recession, laid off workers and quit spending on plants and equipment--all of which helped boost profit margins. Furthermore, several large companies have recently announced that they plan to layoff approximately 10 percent of their workforce. These moves to streamline operations will then place an increased emphasis on initiatives such as lean and quality improvement. Those initiatives, however, can be challenging, and for many companies, considerable work still needs to be done.

 

For example, in my conversations with manufacturers about the importance of executive sponsorship, I am still surprised to hear that in many cases, the executive sponsor isn’t always actively engaged in the project. Making matters worse, sometimes they just flat out are the wrong person at the company. Obviously, if the executive sponsor isn’t actively engaged or isn’t the right person, there is a significant risk factor for the project.

 

In a similar vein, earlier this summer I saw the results of a survey that asked lean implementers about the progress they have made and the importance of some key factors. Some of the most interesting findings of the survey, conducted by lean consultant Lawrence M. Miller and now posted on his blog, are that most of the respondents believe their companies are only about 25 percent of the way on their lean journey, and that managers still have much to learn about implementing lean.

 

Miller explains that he asked survey participants about what he calls the “technical track” of modifying factory layout, inventory processes, and other technical aspects of the work, as well as the “social track” of engaging, motivating, and managing people. So he first asked participants whether they believe they have made more progress on the technical or social aspects of lean implementation. Thirty one percent reported that they “have made little progress on either.” Interestingly enough, 27 percent said they had made significant progress on the technical side, but little progress on the culture. Almost 30 percent believe they had made equal progress on both the technical and social sides of lean.

 

The survey then asked participants whether they believe the technical or social aspect will be most important in the coming year or two. Forty five percent of the respondents believe that progress on the social side would be most important and 50 percent said they would be equally important. The remaining respondents believe that progress on the technical side would be most important.

 

To a certain extent, that all falls in-line with what I expected. So does the following: Survey respondents identified leadership creating a strong sense of purpose as the most important factor (among the options presented) to driving a lean implementation. However, the lean implementers suggest that in many cases, managers are doing poor jobs of executing factors the respondents believe are important to a successful lean implementation.

 

In an article about the survey that ran in IndustryWeek, Miller says the survey results reinforced many of his own thoughts, namely that most companies have not understood the degree to which the culture, or management’s own behavior, is an absolutely essential component of lean implementation. It’s always easier to change the nuts and bolts of an operation than it is to change one’s own habits and beliefs. Management needs a lot of coaching in many of these companies, Miller says.

 

I’m curious about what you think. Is your company placing an increased emphasis on lean or some other initiative to streamline and improve operations? If so, is there serious executive sponsorship?

A recent article has me thinking about the growing emphasis companies place on Lean and other initiatives aimed at improving performance and reducing costs to improve profitability. In the IndustryWeek article, Ricky Smith, senior reliability advisor at GPAllied, is paraphrased as saying that if a company isn’t using mean time between failure (MTBF) as a performance metric, then it’s time to start. That’s because the metric measures the average length of operating time between an asset’s failures, which, in his opinion, is critical because it measures the reliability of equipment and processes.

 

What’s noteworthy, however, is the continued high level of interest in this type of effort oriented toward continuing to streamline operations. It’s expected when times look rough, but it’s something else altogether when executives are optimistic about the future.

 

That, apparently, is the case. For instance, a recent PRnewswire item reports that, according to the latest edition of the PwC U.S. Manufacturing Barometer, a majority of U.S. industrial manufacturers expect positive own-company revenue growth for 2011 and the next 12 months. While several key factors--including higher costs of raw materials and commodities, oil and energy prices, higher costs of services worldwide, and the economic impact of Japan’s earthquake and tsunami--have contributed to the uncertainty about the world economy over the past 12 months, U.S.-based industrial manufacturers continued to grow international sales in the second quarter of 2011, and they project continued strength for overseas revenues.

 

At the same time, you’ve probably seen that many companies are posting record, or near-record, revenues in second quarter 2011. In fact, another IndustryWeek article points out that companies are notching record profits even as the economy falters, unemployment remains high and the debt-ceiling crisis has shaken confidence in the country. Of the companies in the S&P 500 list of large-cap firms that have reported their quarterly earnings to date, 72 percent have beaten analysts’ forecasts, according to Standard & Poor’s analyst Howard Silverblatt. Furthermore, if the current trend continues, S&P 500 companies are poised to have their most profitable quarter ever, he says.

 

The flip side of the coin is that one reason some corporations are doing well is in part because they slashed costs during the recession, laid off workers and ceased spending on plants and equipment, all of which boosted profit margins, say some analysts. In other words, as Marc Pado, U.S. market strategist for Cantor Fitzgerald, puts it, these companies got lean and mean.

 

These efforts aren’t over, either. For example, while Merck announced last week that its second-quarter profit nearly tripled to $2.02 billion, the pharmaceutical company also warned of impending layoffs. Indeed, the company confirmed that it would cut its workforce by 12 percent to 13 percent by the end of 2015.

 

In other news, Cisco recently announced it will lay off 4,400 workers after an additional 2,100 workers accept early retirement. These combined cuts represent about nine percent of the company’s workforce. BlackBerry maker Research in Motion (RIM) also announced last week that it was cutting 2,000 jobs in a move to “streamline operations.” Those cuts amount to just over 10 percent of the company’s global workforce.

 

These companies aren’t alone, but are just some recent examples. They do, however, illustrate that while executives may be optimistic about the future, that optimism remains balanced by a hard-line pragmaticism. Consequently, I believe we will see continued—and, in many cases, renewed—efforts at initiatives essentially oriented toward doing more with less. It certainly seems to be a necessity in today’s business climate.

 

Is this what you see as well?