Were you out and about, or shopping from home, last weekend? Black Friday, the day after Thanksgiving in the U.S., is, for many, the unofficial start for holiday shopping. In recent years, Cyber Monday, the following Monday, has come to equal Black Friday in significance.

 

Leading up to Thanksgiving, there was some concern about potential sales. USA Today had previously reported that, according to a National Retail Federation survey, 81 percent of the participating consumers said they will spend less this holiday due to the continued economic downturn. Consequently, retailers were busy making changes to lure shoppers into stores. One of those approaches was to extend store hours. For example, Target, Macy’s, Kohl’s, and Best Buy all planned midnight openings after Thanksgiving. On the other hand, Kmart and Sears were open for limited hours on Thanksgiving day.

 

I was interested then this weekend to see a Money article reporting that many retailers may have seen their strongest sales ever for Black Friday. The article notes that according to ShopperTrak, which tracks foot traffic at malls and stores, retail sales on Black Friday climbed 6.6 percent this year, to an estimated $11.4 billion. Last year, sales reached $10.7 billion, which was a record one-day sales amount, according to the company.

 

Opening stores at midnight on Friday seems to have been a successful tactic. According to the results of a National Retail Federation survey conducted by BIGresearch, nearly 25 percent of Black Friday shoppers were at the stores by midnight, either waiting for stores to open or visiting retailers who opened on Thanksgiving evening. More than half of those shoppers bought clothing and clothing accessories, according to the survey results, and nearly 40 percent of them purchased electronics and computer-related accessories.

 

Leading up to Thanksgiving, as brick-and-mortar retailers announced their Black Friday discounts earlier this year—and also announced plans to open stores late on Thanksgiving for the first time—some analysts began to wonder whether online retailers may lose some sales as a result. However, according to a Reuters story I saw in the Chicago Tribune, that didn’t happen. The story notes that according to comScore, a tracker of Internet activity, online retail sales in the U.S. on Black Friday jumped 26 percent this year, led by Amazon.com, Wal-Mart, Best Buy, Target, and Apple. Indeed, the firm announced that 50 million Americans visited online retail sites on Black Friday. Furthermore, online sales reached $816 million, making it the heaviest spending day on the Internet so far in 2011, according to comScore.

 

Sales continued well all weekend, and in to Cyber Monday as well. According to a Wall Street Journal report, Cyber Monday was lucrative for online retailers, with early estimates showing sales up 18 percent over the previous year. That article also notes that according to IBM’s Smarter Commerce arm, websites run by department stores were among the day’s most prominent leaders, as sales at Macy’s Inc., Nordstrom Inc., and similar retailers were up 39 percent.

 

How the rest of the season plays out remains to be seen, especially since some consumers will likely wait to see if better deals come later. In the meantime, consumers are spending and retailers’ sales are up, which also is good for logistics partners. If retailers had better than expected sales, they most likely now have low inventory, and consequently need to replenish merchandise to keep consumers returning to stores throughout the season. That should keep carriers moving through the season, and well into next year as consumers continue to redeem gift cards.

Black Friday—the day after Thanksgiving in the U.S.—is, for many, the unofficial start for holiday shopping. In recent years, this shopping has come to take one of two approaches. One camp favors the now-traditional early morning trip to a brick-and-mortar location searching for so-called “early-bird” or “door-buster” specials. The other approach, on-line shopping, appeals to consumers who couldn’t be dragged into that shopping frenzy, those who don’t like to wake up early, and those who generally prefer on-line shopping. Some consumers favor a hybrid approach mixing the two methods, hence the rise of so-called “Cyber Monday,” the Monday following Black Friday.

 

It has been an interesting lead up to the day this year, and, ultimately, retailers approach to supply and demand will effect all shoppers.

 

For instance, a USA Today story reports that of the consumers surveyed by the National Retail Federation, 81 percent said they will spend less this holiday due to the continued economic downturn. Consequently, retailers are making changes this year to lure shoppers into stores. One of these approaches is to open stores earlier.

 

In recent years, retailers have begun pushing their store openings back earlier and earlier—in some cases to as early as 4:00am or 5:00am on Friday. But in news that has been widely reported, Target, Macy’s, Kohl’s, and Best Buy have all planned midnight openings after Thanksgiving. In a story I saw on The Wall Street Journal, Best Buy Chief Executive Brian Dunn, said he felt forced to “make a very difficult decision” and open at midnight because rival retailers were doing so, even though the decision was controversial inside the company.

 

On the other hand, there are those on-line shoppers, who, apparently, have already begun their shopping. Chase Paymentech, an acquirer and payment processor, creates a Cyber Holiday Pulse Index to deliver an inside look at consumer on-line shopping trends for Black Friday and Cyber Monday. The 2011 Pulse Index actually begins with on-line shopping statistics for the first two weeks of November. So far, significant transaction volume is driving on-line sales up over 25 percent vs. the same period last year. However, average ticket value appears to be continuing a downward trend for the fourth straight year.

 

That’s not to say, however, that it’ll be easy to find items, either in person or on-line. For example, an article I saw on SupplyChainBrain reports that according to data from trade intelligence provider Panjiva, only a few of the items on this year’s hot holiday toy lists experienced shipment spikes in the months leading up to the holiday, and the total number of shipments was far lower than in previous years.

 

August through October is typically the timeframe for holiday shipments to arrive at U.S. ports so they can reach stores in time for the holidays. During this period, the “it” holiday toys generally receive at least 300 shipments. In 2009, the article reports, shipments of toys associated with the popular Toy Story franchise surpassed 500 shipments. Likewise, in 2010, shipments of hot toys Squinkies, Paper Jamz, and Zoobles, experienced 305, 312, and 312 shipments, respectively. Shipments of popular toys have yet to reach that level this year.

 

Shipments of the most-talked-about toys are unusually low, which not only means that eager parents may have trouble finding the goods, but also that retailers may be playing it safe by putting the majority of their investment into proven toys they know will sell, Panjiva CEO Josh Green said in the SupplyChainBrain article.

 

So in the end, whether consumers are in brick-and-mortar stores at midnight searching for hot toys or the ever-elusive $200 laptop, they will likely be faced with the inevitable “supplies are limited to those on-hand.” It also now appears on-line shoppers looking for “Angry Birds” toys and other hot new items will face the same situation.

Several articles this week about laptops, tablet PCs, and smartphones caught my eye. For instance, Samsung Electronics announced it will start selling its Galaxy Tab 10.1N tablet PC, which has been modified to bypass a sales ban in Germany. Secondly, an Apple Insider article reports that according to a new Nielsen survey, Apple’s iPad is the most-wanted gift among U.S. kids ages 6 through 12—with the iPod coming in second place followed quickly by Apple’s iPhone. In fact, according to the article, demand for Apple’s offerings is expected to be so high that the research firm has dubbed the 2011 holiday season “iHoliday.”

 

The article I was most interested in, however, wasn’t about individual products, but instead, was about operations and supply chain management. While looking around on  SupplyChainBrain, I ran across a link that took me to an article running on Businessweek. That article reports that it’s fairly well documented that Apple has built a closed ecosystem where it exerts control over nearly every aspect of its supply chain--from design to retail store. In fact, in that article, Mike Fawkes, former supply-chain chief at Hewlett-Packard, and now a venture capitalist with VantagePoint Capital Partners, says Apple has taken operational excellence to a level never seen before.

 

That approach begins at the design stage, where Apple’s designers frequently work with suppliers to create new tooling equipment. I’ve heard some complaints before about the company’s decision to focus on a few product lines, and to do little in the way of customization. However, the approach offers a significant advantage, and it certainly is difficult to argue with the results. Indeed, Matthew Davis, who as a supply-chain analyst with Gartner (IT) has ranked Apple as the world’s best supply chain for the last four years, said in the Businessweek article that Apple has a very unified strategy, and every part of their business is aligned around that strategy.

 

A second of Apple’s strengths is its cash reserves. I’ve posted before, and it’s no secret, that Apple uses its cash and investments to strategic advantage. The company already has said it plans to substantially increase its capital expenditures on its supply chain in the next year, including increasing its prepayments to key suppliers. The tactic ensures availability and low prices for Apple—and sometimes limits the options for everyone else. When manufacturers are busy filling Apple orders for touch screens, for example, there just aren’t enough for other companies.

 

It’s also worth noting Apple’s approach to introducing new products, a practice which the company has refined over the years. As the Businessweek article notes, factories work overtime to build hundreds of thousands of devices for weeks in advance of the launch. What’s more, to track efficiency and ensure pre-launch secrecy, Apple places electronic monitors in some boxes of parts that allow observers in Cupertino to track them through Chinese factories. According to the article, at least once, the company shipped products in tomato boxes to avoid detection. When the iPad 2 debuted, the finished devices were packed in plain boxes and Apple employees monitored every handoff point—loading dock, airport, truck depot, and distribution center—to make sure each unit was accounted for, the article explains.

 

The result has also been well documented. Hundreds of customers camp outside in front of Apple’s retail stores to buy new products when they launch. Additionally, they’ll wait for purchased items to be delivered. Another Apple Insider piece notes that more than a month after the iPhone 4S first went on sale, customers are still waiting two to three weeks for their purchase to arrive. And that doesn't seem to slow demand either.

 

Considering customer demand, a winning supply chain strategy, and enough cash reserve to lock key suppliers in place, it’s no wonder that Apple leads the market and is forecast to continue that dominance in coming years.

It appears some of the flooding in Thailand is starting to recede and manufacturing will ramp back up again soon. In some cases, it has already begun. However, the long term impact to various companies’ operations and profitability, their supply chains, and future supply chain investments remains to be seen.

 

Much has already been written about the flooding in Thailand, and rightly so. The flooding, which is the worst the country has seen in more than 50 years, is responsible for the deaths of at least 562 people. It also has caused nearly 900 factories to close. Consequently, there has been a significant impact on both automotive and high-tech supply chains.

 

Some companies are prepared to resume production. IndustryWeek reported last week that Toyota Motor announced it will resume production on November 21st at its three Thai plants that had been forced to halt operations last month due to the flooding. The company also announced that while it had adjusted production at its Japanese assemblies to account for the stalled shipments of auto parts coming from Thailand, its domestic operations would return to normal later this month as well.

 

However, other companies have already started work again. Bloomberg reports that Nissan Motor Co., Japan’s second-largest automaker, resumed some production in Thailand after parts supply recovered. Furthermore, Honda Motor Co.--Japan’s third-largest automaker--has restarted production of “some motorcycle and power products” in Thailand, while Mazda Motor Corp. resumed production of passenger cars at its factory in Thailand.

 

The larger issue may be the long-term effect. By that, I don’t mean the effect on individual facilities or even companies, but rather whether or not companies will now rethink their supply chain strategies with the risk of future flooding in mind. So while Prime Minister Yingluck Shinawatra has proposed spending 130 billion baht ($4.2 billion) on reconstruction and steps to prevent future floods in an attempt to reassure investors that Thailand is a safe place for business, some insiders and analysts wonder if that message will be well-received.

 

A recent BusinessWeek article notes that in light of the flooding, some Japanese companies, which are Thailand’s largest foreign investors, may spend more to build factories in neighboring countries such as Indonesia and Vietnam. Indeed, the article reports that Takahiro Sekido, chief Japan economist at Credit Agricole CIB in Tokyo, explains that Japanese executives recognize the concentration risk after the floods. Furthermore, the recent trend of accelerating investment into Thailand will cool despite the fact that Thailand was such an ideal destination, he says in the article.

 

Indeed, Indonesia and Vietnam, both of which attracted more foreign direct investment than Thailand last year, seem poised to attract even more Japanese investment. That makes sense considering Indonesia, for instance, has a large population and its domestic demand is quite strong: the country imports as many as 200,000 vehicles from Thailand annually. Vietnam’s population is also growing.

 

Nevertheless, Thailand’s infrastructure and industrial clusters make it a smart location for Japanese companies to operate. By most accounts, if Indonesia is to attract additional investors, significant improvements must be made to roads, electricity, ports, and airports. What’s more, if large Japanese companies such as Toyota, Nissan, Honda, Toshiba, and Hitachi maintain operations in Thailand, their suppliers will be likely to maintain—and increase--operations there as well. Toyota, for instance, has already publicly stated that the company has no plans to reduce its investment in Thailand. So it certainly seems that while investments will continue to be made in neighboring countries, Thailand will remain home to a significant number of operations.

 

What do you think? Will we see a noticeable shift in automotive or high-tech operations in Southeast Asia?

Prescription drug shortages and opportunistic price gouging continue to garner attention, especially in recent weeks. But despite that increasing attention, and scores of stories concerning gravely ill patients facing delayed medical treatment because they are unable to get the drugs their physicians prescribe, one must then wonder what—if anything—can be done.

 

The problem is that some generic drugmakers have decided to stop making certain drugs because they offer little profit. When the maker of a particular generic drug stops producing it, other companies don’t have enough capacity or time to make up the shortfall before the stoppage begins to effect patients. There also always is the possibility of manufacturing-quality problems that cause drugmakers to shut down production while they make improvements. When either of those situations occur, middle-men quick to take advantage of the shortage, buy the available supply and then raise the price by staggering amounts.

 

Last August Premier, a performance improvement alliance of more than 2,500 U.S. hospitals and more than 78,000 other healthcare sites, released the results of recent research. Of 1,745 unsolicited sales offers collected from “gray market” vendors, the average offer for drugs needed to treat critically ill patients was marked up 650 percent. The research also shows that of the mark-ups offered:

 

 

·         96 percent (611) were at least double (100 percent) normal price;

·         45 percent (288) were at least 10 times (1,000 percent) normal price; and

·         27 percent (171) were at least 20 times (2,000 percent) normal price.

 

Although price gouging is a significant issue, drugs offered on the gray market also pose a safety concern. That’s because the gray market operates outside the tightly controlled pharmaceutical distribution channel, where strict standards for storage and handling are enforced, as well as requirements to record the product’s chain of custody. Furthermore, there typically are narrow ranges of temperature and climate conditions required to maintain drug efficacy, and only a tightly controlled supply chain channel can meet these requirements. Failure to handle and store drugs properly may cause them to become inadequate or even harmful.

 

To address the escalating shortage of life-saving medicines, in widely reported news which I saw reported by Reuters, President Barack Obama signed an executive order a couple of weeks ago. The order instructs the Food and Drug Administration to increase staff dedicated to addressing drug shortages—increasing staff from five people to 11-13 people--and to press drug manufacturers to be more forthcoming about expected production delays that may lead to drug shortages. It also requires the agency to give the Department of Justice information so it can investigate claims of price gouging for short-supply drugs.

 

But as Pharmaceutical Commerce reports, the announcement was mostly met with a shrug. That article notes that there currently are both House and Senate bills on the topic, which seek to mandate industry reporting and provide civil penalties if the reporting is not performed, but there really is no energized push to move these bills out of committee.

 

Erin Fox of the University of Utah, who monitors drug shortages for the American Society of Health-System Pharmacists, explains in an article that ran on The Washington Post, that the executive order is good because it does raise awareness, but, unfortunately, it doesn’t target anything that could help prevent shortages. Asking FDA to post more shortages won’t get the industry to improve their manufacturing or help secure a market for much-needed drugs, she says.

 

So in the end, I don’t really see a solution. It doesn’t appear—to me, anyway—that anybody else has a valid solution either. What do you think? Will federally mandated requirements improve prescription drug availability?

The introduction of counterfeit parts or goods can happen in just about any supply chain. In some supply chains, however, such as Aerospace & Defense, the use of counterfeit parts could lead to fatal consequences.

 

That’s the message coming from a U.S. Senate Armed Services Committee hearing. A Businessweek article yesterday reports that dozens of suspected counterfeit parts have been installed in U.S. defense equipment from Raytheon Co., L-3 Communications Holdings Inc., and Boeing Co., including aircraft deployed to Afghanistan. The Senate Armed Services Committee found counterfeit parts—usually from China—on at least seven aircraft, including the Lockheed Martin Corp. C-130J transport plane, Boeing P-8A Poseidon maritime patrol, and L-3 27J Spartan transport.

 

None of the examples were connected to instances of lives lost or dramatic failures causing an aircraft crash, Michigan Senator Carl Levin, Senate Armed Services Committee Chairman, said. Still, the committee staff has identified numerous places where, unless corrections are made, there is real fear that those kind of disastrous consequences could take place, Levin said in the article.

 

The problem is widespread, and even more troubling, is growing quickly. Last spring, the Aerospace Industries Association released a white paper titled “Counterfeit Parts: Increasing Awareness and Developing Countermeasures,” which reported on research from the Department of Commerce’s Bureau of Industry and Security (BIS) that studied the infiltration of counterfeit electronic parts into U.S. defense supply chains. The study documented a growth in incidents of counterfeit parts across the electronics industry from 3,300 incidents in 2005 to more than 8,000 incidents in 2008. This sharp increase in incidents, in only three years, clearly indicates that the volume of counterfeit parts is increasing, and that mitigation plans must be developed and implemented, the paper notes.

 

Indeed, Committee Chairman Levin said committee investigators identified about 1,800 cases involving one million counterfeit parts since 2009. What’s more, those numbers are “just the tip of the iceberg,” Levin said in the Businessweek article.

 

A Reuters story running earlier this week reports that Senator John McCain, the top Republican on the committee, said the issue was serious and needed to be addressed urgently because counterfeit parts pose real dangers to the U.S. troops and contributed to the high costs of weapons systems. Senator McCain went on to add that the U.S. can’t tolerate the risk of a ballistic missile interceptor failing to hit its target, a helicopter pilot unable to fire missiles, or any other mission failure because of a counterfeit part.

 

Obviously then, something needs to be done. Toward that end, the committee plans to introduce measures to force defense contractors and the Pentagon to purge the counterfeit parts from the supply chain, Levin told reporters Monday. McCain and Levin said various measures were being considered to address the issue, including amendments that would clearly spell out that contractors should be held responsible for the cost of replacing any counterfeit parts.

 

The Reuters story also reports that Levin went on to add that if the onus is placed on contractors to make sure that the parts that are being supplied are legitimate parts, they’ll get that message back to their suppliers as well.

 

What do you think? Would those measures eliminate—or at least slow, the introduction of counterfeit parts into the defense equipment supply chain?

The likelihood for a manufacturing shift away from China continues to be a hot topic. Some of that manufacturing may return to the U.S., although a case can be made for shifting at least some of those operations to Mexico.

 

The main concern about China is that wages are growing quickly. Last summer, Harold L. Sirkin, a senior partner at the Boston Consulting Group (BCG), said that as a result, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be only about 30 percent cheaper than rates in low-cost U.S. states. Since wage rates account for 20 percent to 30 percent of a product’s total cost, manufacturing in China will only come out to around 10 percent to 15 percent cheaper than is possible in the U.S.—and that’s before inventory and shipping costs are considered, Sirkin says. After those costs are factored in, the total cost advantage will drop to single digits, or it may even be erased entirely, he says.

 

Furthering that position, BCG announced last month that according to its analysis, some industry clusters will most likely reach a “tipping point” by around 2015, which is when China’s shrinking cost advantage should prompt companies to rethink where they produce certain goods meant for sale in North America. In many cases, according to BCG, companies will shift production from China to the U.S. or choose to locate new investments in the U.S. The firm predicts transportation goods such as vehicles and auto parts, electrical equipment including household appliances, and furniture are among seven sectors that could create two million to three million jobs as a result of manufacturing returning to the U.S.

 

Chris Kuehl, economic analyst for Rockford, Ill.-based Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence, agrees about manufacturing leaving China, but he also is bullish on Mexico. In an IndustryWeek article that ran yesterday, Kuehl notes that while wages have increased dramatically in China, their growth hasn’t been so quick in Mexico. What’s more, it’s projected that wages in Mexico will continue to rise in the next 10 years, albeit at a rate about one-third as fast as those in China, he says.

 

Mexico offers another significant advantage over China and other Asian nations: low cost of transportation. It’s 80 percent cheaper to bring goods over the border from Mexico to the U.S. than it is to import them from Asia, Kuehl says. This benefit becomes more advantageous when considering issues of speed, reliability, insurance, and security, he adds.

 

There is another interesting aspect to all this, and that’s labor. I’ve posted before about manufacturers’ struggles to find skilled labor. For example, according to ManpowerGroup’s Talent Shortage Survey, here in the U.S., the number of employers struggling to fill roles has jumped 38 percentage points to the largest percentage in the history of the survey—52 percent of the companies surveyed. With that in mind, I was interested to see Kuehl write that the U.S. is rapidly coming to a crisis as its labor pool decreases and the necessary skills in the workplace start to vanish as an older, skilled workforce approaches retirement. Consequently, there will be a greater emphasis on production outside the U.S., and Mexico is the most logical location, Kuehl says.

 

I do think that increasing wages, production costs, and transportation costs will combine to make China less competitive in the years to come. Does that mean manufacturing will then shift to Mexico? Considering continued resistance to increased truck traffic between Mexico and the U.S., economic incentives such as tax breaks in many U.S. states, continued efforts to develop 21st century manufacturing skills among U.S. workers, and even lower costs to deliver goods within the U.S., I’m not sure that moving operations to Mexico seems more appealing than a shift back to the U.S.

 

What do you think? Will manufacturing shift away from China? If so, where will it go?

As has been previously reported, the people of Thailand have been suffering through the worst flooding to hit the country in more than 50 years. As the weeks pass, the situation seems to be getting worse. The Wall Street Journal, for example, reported that some 350 people have sought refuge at the old Don Muang airport, ignoring a government order to evacuate the airport. More continue to arrive, and brave chest-high floodwaters to cross what used to be a six-lane highway.

 

There is naturally, a supply chain element to this as well. That’s because Thailand has become a major production and export hub for global auto makers. The floods—stemming from a combination of mudslides, unusually high tides, and monsoon rains—have heavily damaged the country’s main rice-producing areas and several key industrial areas that are home to a large number of international auto component suppliers as well as other export-oriented factories. Many of those companies have been forced to suspend production.

 

Indeed, according to an IHS report last month, almost all automotive plants in Thailand are now closed during what the prime minister declared a “national crisis.” The analyst firm notes that with a near complete shutdown of the Thai auto industry, the country’s annual vehicle production target of 1.8 million units for 2011 will now almost certainly be missed. Consequently, major automakers’ output in Japan and other Association of Southeast Asian Nations (ASEAN) countries will most likely be effected as well.

 

As the flooding spread across Thailand, Mitsubishi, Nissan, Aisin Seiki, Toyota, Honda, Isuzu, and Hino were all forced to close, and in some cases, evacuate, plants. Honda, however, appears to have been hit the hardest. According to an Agence France-Presse article on IndustryWeek, Honda announced its net profit for the fiscal first half fell 77.4 percent year-on-year, as the company struggles with effects from the March earthquake in Japan, a strong yen, and now the flooding in Thailand.

 

Having seen that news, it wasn’t really surprising to see a follow-up Agence France-Presse story on IndustryWeek yesterday noting that Honda will reduce production at its North America plants by 50 percent because the suppliers in Thailand are unable to deliver parts. In making the announcement, Honda released a statement that a number of Honda suppliers in Asia currently are unable to maintain parts production, which is disrupting the flow of parts to production operations in North America. While most of the parts for Honda and Acura vehicles are sourced from North American suppliers, “a few critical electronic parts” do come from Thailand, the automaker said.

 

That statement about electronics raises an interesting point. It isn’t just the automotive supply chain that has felt an impact, because Thailand is lso home to a number of electronics factories. Indeed, a Reuters story that recently ran on MSNBC notes Thailand is the No. 2 maker of hard drives used in laptops, servers, and TV set-top boxes. Damage caused by flooding could also keep those factories closed or constrained for months. If that happens, the result may be a shortage of hard drives that potentially could disrupt computer manufacturers and those in the high-tech market as early as next month. The story additionally notes that world output of hard drives could fall as much as 30 percent in the final three months of 2011, and manufacturers that need them are now scrambling to purchase existing inventories, according to market research firm IHS iSuppli.

 

What’s interesting is how events half a world away can have a profound impact on the supply chain. What’s more interesting, however, will be how companies in the automotive and electronics supply chain react. Will a temporary slowdown and use of existing inventory be enough for the short term? Will they, in the long term, make sourcing and other supply chain strategy changes? What do you think?

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