Not to be undone in a week filled with supply chain technology news, SAP announced this afternoon that its SAP America, Inc. subsidiary has entered into an agreement to acquire Ariba for an estimated value of $4.5 billion, or $45 per share.  The transaction represents a 20 percent premium over Ariba’s closing stock price yesterday. Ariba’s board of directors has already approved the this deal and the transaction is expected to close in the third quarter of calendar year 2012, subject to Ariba stockholder approval, clearances by relevant regulatory authorities and other customary closing conditions. According to SAP, the transaction is expected to be accretive to SAP’s non-IFRS earnings per share in 2013.

The announcement itself will provide some shock to the procurement technology market, especially on the heels of IBM’s December acquisition of principal Ariba competitor Emptoris.  The interesting aspect at the closing of the transaction is the likes of SAP, IBM and Oracle competing in the area of sourcing, procurement technology and supplier networks.

With the addition of Ariba, there will be considerable overlap among existing SAP procurement and SRM functionality which will have to rationalized for customers in addition to value-added procurement technology and services provided by SAP SRM partner’s, Hubwoo and Crossgate. In our Supply Chain Matters commentary related to SAP’s recent Sapphire conference, we noted bold vision but confusing messaging and execution.  The Ariba acquisition, at face value, obviously adds to those internal challenges, not to mention that some Ariba customers are also SAP customers who passed on SAP SRM.

Stay tuned for further Supply Chain Matters commentary and insights as more definitive information becomes available.

A final thought relates to Oracle, who may have to consider beefing-up its procurement capabilities for customers in the light of these two significant moves from both IBM, and now SAP.   One wonders if Oracle was also involved in Ariba’s courting dance.

Bob Ferrari

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In conjunction with its Supply Chain Executive Conference being held this week, Gartner announced its often touted Top 25 Supply Chain Rankings for 2012. Supply Chain Matters provides readers an easy reference, not only to the 2012 rankings, but to previous ranking history:

To probably no reader’s surprise, Apple again tops the list for the third year in a row, despite some negative publicity this year. Another interesting side note, yesterday, The Wall Street Journal published a listing of the 20 highest-paid CEO’s in 2011.  Apple CEO Tim Cook tops that list with total 2011 compensation at close to $378 million. Mr. Cook, who is a highly experienced supply chain and operations executive, is obviously reaping the rewards of a supply chain completely aligned with business outcomes.  Congratulations to the entire Apple supply chain organization for their #1 recognition for the third straight year.

In terms of overall headlines for the 2012 rankings, Supply Chain Matters shares some of our observations.

We were pleased to note the addition of Caterpillar, Cummins and Kimberly-Clark to the 2012 ranking.  We were also pleased to note that Cisco was cited for its supply chain risk mitigation capabilities along with network collaboration and overall response management. All are well-deserved. Six major retailers were included in the 2012 rankings, up from four in the 2011 rankings. The supply chains with the most positive upward movement were Intel, McDonalds and Coca-Cola. Largest decliner was Research in Motion, slipping to #19 from #4 in 2011. The challenges of RIM in product innovation and management leadership have become highly visible.  Many in the Top 25 ranking have made leveraged investments in supply chain software technology to augment key process capabilities, collaboration and decision support.

Our biggest disappointment, as was the case last year, was noting that Johnson & Johnson would again appear in a top 25 ranking.  Readers of this blog can attest to our view that a litany of quality process breakdowns, multiple product recalls, and failure to have backup production plans for critical life-saving cancer drugs do not portend to meet the criteria best practices or cross-fertilization of ideas in process innovation.  We question how peer and analyst rankings can continue to place J&J above so many other well qualified supply chains. Another continued disappointment is the omission of the automotive group at Hyundai who has made remarkable strides in product innovation and industry market share gains, supported by a vertically integrated supply chain strategy. On the subject of automotive, Nissan demonstrated noticeable supply chain resiliency post Japan earthquake, gaining market share from both Toyota and Honda. In the category of remarkable turnaround should be Lenovo. We again note the absence of major contract manufacturer Hon Hai Precision Industries and its Foxconn contract manufacturing arm.  Perhaps Gartner’s Asia Pacific regional rankings will finally recognize this extraordinary supply chain that demonstrates scale and resiliency.

Dropped from the Top 25 ranking this year was IBM, Microsoft, Kraft Foods and Tesco.  Nokia which was once number one many years ago was dropped in 2011.  Electronics retailer Best Buy, currently dealing with significant business and senior management leadership challenges was dropped in 2010.

The unfortunate aspect of the Gartner Top 25 rankings is the high threshold of corporate revenues, which was set at $10 billion for the 2012 rankings.  Small and mid-market manufacturers, retailers and major distributors can also demonstrate world class supply chain process capabilities but often are lost in the tendency to focus on large enterprises with healthy budgets.

Bob Ferrari

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In conjunction with its Supply Chain Executive Conference being held this week, Gartner indicated that the worldwide supply chain management software market grew a healthy 12.3 percent in 2011, reflecting two years of double digit growth.  This author has been involved in quantitative SCM software forecasting for many years and I can share with Supply Chain Matters readers that this growth in investment is the highest since the boom times of Y2K.  It also provides ample evidence of the fact that many companies are investing in advanced supply chain technology in multiple areas. Another significant takeaway is the uptake in SaaS (software-as-a-service) revenues, which Gartner pegged at a 21 growth rate, contrasted with 15 percent growth associated with perpetual license sales. That implies a higher uptick in SCM cloud growth, in-line with our Supply Chain Matters 2012 prediction related to technology adoption.

According to Gartner, 79 percent of software revenues were generated in Europe and the U.S., however European growth slowed in 2011. Asia/Pacific experienced robust growth, outpacing the market average. We would anticipate that given the current business climate, European based SCM investment will continue to decline in 2012.

Gartner also declared the top five SCM technology vendors by revenue, with SAP leading the list, followed by Oracle, JDA Software, Ariba and Manhattan Associates. We caution our readers to not place significant attention to which vendor is the top revenue generator.  The reason is that many of the enterprise software vendors such as SAP and Oracle do not formally breakout revenue reporting by application type, such as SCM.  Thus, industry analyst firms such as Gartner must estimate actual revenues based on any vendor input, internal analysis and estimates.  Categories of SCM software are also categorized differently, especially in areas of overlap with ERP related software, along with software associated with sourcing, procurement and contract management.

Suffice to state that supply chain software technology vendors for the most part, celebrated a healthy year of growth in 2011.  Many manufacturers and retailers also recognized the importance of augmenting supply chain business processes with advanced technology.

Bob Ferrari

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Supply Chain Matters has often pointed out increasing occurrences where the impacts of supply chain strategy and initiatives contribute to either positive or not-so-positive financial media news stories influencing a company’s value to shareholders. The significance of efforts to simplify a supply chain supporting unusually large assortment of products with a corresponding complex global supply chain is indeed newsworthy.

Last Thursday, The Wall Street Journal headlined a rather positive story related to industrial manufacturer 3M Company, and its efforts to untangle “hairballs” across its global product supply chains (paid subscription or free metered view).  The 3M supply chain has responsibility to plan, produce and distribute over 65,000 products ranging from tape, solar energy panels, dental braces and dog chews.  The company has 214 plants located in 41 countries with nearly two-thirds of current sales originating outside of the U.S… With a continued challenged global economic climate and overall sales growth at just over 2.4 percent, 3M had no choice but to focus on cost control and efficiency as a continued source of profitability.

In the article the 3M corporate culture is described as risk-averse, leading to a philosophy of “make a little, sell a little”, meaning do not make hard commitments to capital and capacity until a product has proved itself to be a market winner. That philosophy drove product developers to seek out any available supplier expertise and capacity, regardless of ultimate product distribution strategy, even if certain sub-component suppliers were hundreds of miles distant from other upstream value-chain suppliers.  The result was what 3M ex-CEO described as “hairballs”, value-chains that extended across multiple suppliers in multiple geographic areas, all adding to transportation and logistics costs.

Sound familiar?

3M has now embarked on a three-pronged supply chain strategy addressing simplification.  The first is to have production located closer to customers.  With two-thirds of revenue outside of the U.S. the implication is for a more international based production capability.

Second is the need for fewer, larger, more efficient “super-hubs”, plants capable of making large numbers of products. These hubs can also customize products to the needs of local markets. Ten of these hubs have been implemented with six additional planned.  Ten of the total sixteen “super hubs’ will be outside of the U.S.

The third area of focus is overall efficiency which includes reduction in cycle times from order of raw materials to delivery of finished goods.  As an example, the production of 3M brand Command Hooks was reported to be reduced from 100 days to 35, which is a considerable impact. Similarly, the cycle time for 3M’s Littmann stethoscopes will be reduced to 50 days from 165.

Between the lines, readers can discern that 3M shifted its supply chain strategy from one of total focus on efficiency and cost to that of time-to-market balanced with an overall supply chain flexibility and efficiency.

In the Gartner 2011 last listing of Top Twenty Five supply chains, 3M was listed at number 24.  Perhaps at this week’s unveiling of the 2012 listing, 3M will advance.  In any case, 3M provides another example of supply chain strategy and response that has a positive impact on business outcomes and performance.  Perhaps the next emphasis will be on a reduction of overall product portfolio.

Bob Ferrari

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On early Sunday morning an earthquake struck Northern Italy. The initial 6.0 magnitude tremor struck 36 kilometers (21 miles) north of the city of Bologna invoking wide scale damage. The quake occurred at shallow depth, estimated to be 5 kilometers, which adds to the magnitude of the destruction.  The quake was felt throughout Northern Italy. The region has suffered various damaging aftershocks including two on Sunday and another this morning. The area itself has had rare occurrences of major seismic activities, the last earthquake of similar magnitude being recorded in the 14^th century.

Thus far, five persons have been reported killed with thousands displaced.  Our hearts and prayers extend to all of the victims of this tragedy.

The impacted Finale Emilia region is an area known as an industrial heartland as well as the production of Parmesan and Grana Padano aged cheese. There is already one report indicating over $320 million in cheese inventory destroyed by the quake. Reports also indicate damaged factories and warehouses including the death of two workers at a ceramics factory.  A statement from Titan Europe indicates that work at its agricultural wheel factory located in Sermide and Finale Emilia has been suspended pending assessment of damage, but the plant appears repairable. According to the Titan web site, the company claims to be the leading manufacturer of high speed wheels for agricultural tractors. Production is in the process of being shifted to other facilities in France and Turkey.

Supply chains teams with value-chains extending to Northern Italy should already be assessing potential impacts to supply and supplier facilities. Insure that your suppliers are doing the same, since it many of the 2011 incidents of disaster, smaller suppliers took additional time to sense the magnitude of supply disruption. Industries impacted could range from food, industrial, aerospace, as well as retail businesses.

Supply Chain Matters will continue to monitor and feature additional commentary when other assessment information becomes available.

Bob Ferrari

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The following commentary also appears on the Supply Chain Expert Community web site.

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

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

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

In essence, Apple continues to practice smart supply management, insuring a competitive dynamic and balanced supply risk exists across its supplier base. In a March Expert Community commentary, we highlighted how Apple had sourced multiple suppliers for device memory, high-resolution display and NAND flash memory for the company’s iPad products.

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

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

Bob Ferrari

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