The following commentary is the author’s guest blogger contribution to the Supply Chain Expert Community web site where it can also be viewed and commented upon.

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

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

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

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

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

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

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

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

Bob Ferrari

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This Supply Chain Matters commentary is a follow-up to our earlier breaking news commentary  reflecting on the SAP announcement that its SAP America, Inc. subsidiary has entered into an agreement to acquire procurement technology and cloud vendor Ariba for an estimated value of $4.5 billion.

Where, oh where, should we begin since this is the sort of announcement that drives the juices of industry analysts and pundits such as yours truly.  Plus, this commentary will not cost you a premium subscription or a metered token in speaking with your trusted analyst.

Back in December, at the time that IBM announced its acquisition of Ariba competitor Emptoris, Supply Chain Matters declared that the source to pay procurement technology market was about to become much more dynamic.  Our hidden question was obviously who would eventually acquire Ariba? How true those statements turned out to be five months later.

SAP was willing to pay $4.5 billion, a 20 percent premium over Ariba’s closing stock price on Monday, for a technology vendor that garnered nearly $444 million in revenues in its 2011 fiscal year, but achieved a net loss of $3 million on that revenue base. Ariba’s latest Q2 results reflected a more improved picture with nearly $132 million in quarterly total revenues and operating income of $4.2 million.  Once again, as was the case with recent acquisitions, SAP views upside potential and broader vision, beyond the current financials.

Pending stockholder and regulatory approvals and the closing of the transaction, which is expected by August of this year, Ariba will remain independent and will be eventually named Ariba, an SAP Company.  That is a smart decision, one that IBM and Oracle have opted in their previous acquisitions of specialty supply chain technology vendors.

During the press / analyst /investor briefing regarding this acquisition, both SAP Co-CEO’s described the Ariba acquisition as a game changing opportunity for SAP.  Co-CEO Bill McDermott shared the internal SAP code word regarding the acquisition, which was “angel”, perhaps a very telling moniker of expectations. Ariba claims to have the largest network buyer-seller network consisting of 730,000 customers, which is anticipated to grow to one million this year. There lies the nugget, The Ariba Business Network. The revenue opportunity was described as the potential for $2 billion in cloud based revenues by 2015.  SAP statements indicate that Ariba customers currently only make up a small fraction of SAP’s 190,000 customer base, and thus, there is a perceived huge potential to upsell P2P and B2B collaborative commerce cloud services. The process itself involves both indirect procurement, which umbrella’s a company’s services, general supplies or temporary labor, and direct procurement, which involves all the various parts components that make-up a final product.  Both areas provide proven savings benefits, but it is the latter, the direct side, that leads to more compelling bottom-line savings.

In our view, this marriage implies a lot of joint work over the coming months, especially in addressing functionality overlaps among current SAP and Ariba based applications. Also keep in perspective that buyers and suppliers on the Ariba network also exist on other B2B networks as well, particularly in the indirect area.

SAP has also stated in filing materials that is does not anticipate any major workforce changes involving Ariba employees. The existing management team will continue to lead Ariba and the company will report into the office of SAP’s Co-CEO’s.  Current Chairmen and CEO Bob Calderoni, will be nominated to be a member of the SAP Global Managing Board, subject to the approval of the SAP Supervisory Board.

Once this acquisition is consummated, a lot of work remains.  We briefly highlight the following:

• As noted above, there are significant areas of duplicated functionality which will need to be rationalized.  The appointment of Bob Calderoni to the Global Managing Board to manage the B2B leg of SAP’s Cloud strategies could lead to some uncertainty to the efforts of SAP’s newly appointed senior executive charged with Cloud strategy, Lars Dalgaard to synergize the multiple tenets of SAP’s evolving cloud strategy. We trust that Calderoni will place his immediate priority on helping to rationalize areas of duplication in functionality, services and staffing assignments.
• SAP speaks to the potential of launching the SAP direct sales teams to upsell Ariba, but that implies some form of an alignment strategy with the existing Ariba direct sales team.  SAP would be wise to take a cue from other vendors such as Oracle, that fostered specialty sales teams from the acquired company to shepherd the process from pre-sales customer value education to closing.
• Pricing will be an area of definite concern for combined customers. Ariba’s network fees have been on the increase and have motivated some previous customers to seek other alternatives, including either business process outsourcing or use of another vendor’s technology. SAP also has a history for taking a healthy share of partner revenues, leaving little room for price discounting.
• Existing system integration and consulting partners aligned with either vendor will perceive some impact as a result of the combining of these two entities.  We indicated in our initial commentary the potential impact to SAP procurement and SRM partners Hubwoo and Crossgate who each filled-in existing gaps, but may find current services may be either diluted or enhanced with the addition of Ariba.  Existing Ariba partners such as Accenture, Infosys, Hubspan or Wipro will in turn have to assess if their business development strategies become buffered or enhanced by SAP’s longer-term strategy in this area. Accenture acquired the procurement managed services arm of Ariba in October of 2010.
• Product marketing will be another significant hurdle, one that current SAP teams are having difficulty overcoming with the plethora of cross-purpose strategies related to business process, technology solution or industry marketing alignment and inconsistent messaging and product roadmap articulation for customers.

Overall Supply Chain Matters views this latest SAP acquisition as game changing, but in a different context.  The objective is in responding to the increased attractiveness of cloud computing alternatives surrounding end-to-end supply chain processes as businesses continue to feel pressures for added efficiency and cost control. The major enterprise vendors such as SAP and others are utilizing acquisitions to fill the gaps for reaping the revenue benefits of cloud computing attractiveness among IT and business teams. Their goal is information integration across end-to-end value chain networks, which should umbrella Buy, Sell, Manage and Service process capabilities and differentiation. The foundation needs to include technology enablement of continuous and faster decision-making, supported by robust intelligence and predictive capabilities.  Manufacturers, retailers and service providers should understand that their objective is cross-functional in dimension, beyond procurement processes, involving the end-to-end aspects of supply management and profitable demand fulfillment.  Stay above the current noise levels and pending battle lines of the enterprise vendors and look toward opportunities. The wars among which has the better cloud computing offering are just beginning with bigger, more large-scale skirmishes to follow, with even more big money appropriated for mind share. In the end, each of these vendors will need to fulfill your needs and buying choices.

The SAP and Ariba marriage, when consummated, will take some time to come together. That stated, the potential rewards for added supply chain capabilities and efficiencies are within the realm of possibility if SAP accomplishes the serious work at hand, not only on the Buy side, but other supply chain areas as well.

In light of this perspective, we advise existing SAP and Ariba procurement and network customers to stand pat and not do anything until the dust settles and definitive commitments, recognizable integration and direction come from SAP. Continue to focus on short and longer-term process objectives and desired business outcomes, and exercise a technology buying decision only if your need turns out to be time critical. Keep in mind that SAP has some considerable homework to accomplish before the final exam, and that may be many months away.

This will definitely not be the final commentary related to the marriage of SAP and Ariba.

Bob Ferrari

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

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A labor negotiation dispute involving the Canadian Pacific Railway (CP), Canada’s second-largest railroad provider, threatens to disrupt transportation and export goods movement throughout western Canada. Up to 5000 unionized workers struck the carrier on Wednesday, impacting shipment activities involving Canadian mining, agricultural and other commodity industry players. A report published in The Wall Street Journal quotes a Canada’s Labor Minister as indicating that this strike could cost the Canadian economy up to 500 million Canadian dollars per day. The government is threatening passage of back-to-work legislation if the labor dispute continues.

Interesting enough, this action comes on the heels of a shake-up involving CP senior management.  A elongated proxy battle between U.S. activist investor Bill Ackman and the CP board resulted in the recent exit of CP’s long time CEO, Fred Green.

CP also operates service across 13 U.S. states but thus far, these operations have not been affected by the labor action. However, if this strike continues over an extended period, U.S. grain and other export commodity shipments may have to be re-routed from ports in western Canada.

Bob Ferrari

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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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