I had the opportunity to listen in on the Kraft Foods Q1-2008 earnings results conference call this morning, and there were significant messages reinforced for supply chain management professionals residing in food-related and consumer goods supply chains.Many readers are aware that Kraft is one of the largest global food and beverage companies, with 2007 revenues of more than $37 billion, commanding a strong brand presence in many markets. Kraft has also made continual investments in supply chain process efficiency as well as supporting technology.

From a supply chain strategy, planning, and execution perspective, I heard some significant messages which need to be reinforced for supply chain professionals.  First, the extraordinary high costs of food commodities, or input costs, remain a huge challenge.  I was struck by a chart that reflected the 2008 year-to-date commodity market prices above the average price for the last 10 years (1998-2007):

U.S. Barrel Cheese up 36%

Coffee- NY ‘C’ up 60%

Wheat Chicago up 199%

Soybean Oil up 152%

Paper Packaging up 31%

Resin Packaging up 58%

Crude Oil up 152%

Kraft continues to overcome these price increases with certain price increases to retailers, but at these extraordinary levels, cost reductions must come from other areas of the supply chain, especially continued price hedging of supply, working capital and efficiency gains.

Hearing the breakdown of quarterly performance of individual product sectors further reinforced other supply chain implications:

• Profitable growth today stems from non-U.S. markets- Kraft experienced 9.5% organic revenue, and 47.7% income growth in Europe, with double digit growth rates in coffee, cheese, and chocolate brands. Developing markets also grew revenue by 21.7%, with profits up. Coincidentally, P&G today also cited continued emerging market double-digit growth rates in the high teens.
• In an environment of frequent price increases, and more complex global retail channels, future volume forecasting across product lines will become a more significant challenge. The need for more sophisticated forecasting and demand planning tools will be paramount.
• The management and optimization of both inbound and finished goods inventory remains essential. To Kraft’s credit, they had the foresight to invest in inventory optimization technology in the U.S., and are in early stages of deployment in Europe. While the overall inventory to sales ratio has remained flat, it has not deteriorated in this volatile and challenging environment.
• Manufacturing and quality enhancements were cited by Kraft senior management as positive contributors to working capital improvements, reinforcing the message that we can never take our eye away from lean and six sigma improvement.

If we believe Warren Buffet’s latest predictions, the U.S. economy may well have a longer recessionary period.  For food and consumer goods supply chains, past and current investments in supply chain analytical and intelligence based processes and technology tools will play a more critical role in bottom-line results for consumer goods companies.

Bob Ferrari

In a previous post (Boeing Again Delays the 787- Another Lesson in Supply Chain Risk Management), we pointed to some of various industry views regarding the management of supplier innovation across the extended supply chain being played out within Boeing, and how these circumstances lend themselves to lessons in supply chain risk management.  I pointed out that it was unfortunate that the supplier management teams surrounding the 780 Dreamliner program did not have the opportunity to transfer the learning of Airbus in 2006.  More information and blogsphere commentary continues to be shared regarding this ongoing situation. 

Over on Spend Matters, (Boeing: When Your Suppliers Fail You Buy Them!) Jason Busch references a recent Aviation Week article that describes more detail regarding the need for Boeing to acquire Vought Aircraft Industries’ 50% share of builder Global Aeronautica (GA) in North Charleston, S.C., to apparently mitigate Vought from its de-facto burden as the complex airframe systems integrator. 

In his post, Jason points to lessons learned, that when suppliers fail you in the middle of a complex project, it’s essential to take all actions necessary to control the situation, and a more subtle learning is that when chances of supplier challenges increase by an order of magnitude, sourcing professionals should always be prepared for the worst-case scenarios. 

But the Aviation Week article reveals another important lesson in overall risk management, which is adopting the appropriate management processes to monitor and buffer complex risk within the supplier network.  Consider the two contrasting views. Boeing’s Vice President and 787 General Manager cited the need to work with Alenia to apply proven lean manufacturing expertise in an effort to improve efficiency and productivity.  “One of the lessons they learned is that they haven’t retained talent here to know if that work is being done properly.  They went too lean on their staffing models to even be able to adequately supervise this assembler model” stated Ray Goforth, executive director of the Society of Professional Engineering Employees in Aerospace. 

So let’s add another lesson for Supply Chain Matters readers.  The application of lean methodologies certainly has its applicability when efficiency and cost are the overriding objective. But in matters involving joint supplier innovation as well as complex business model change across the extended supply chain, embracing supplier partnership and risk assessment practices may be a more appropriate objective.  In addition to the learning at Airbus, Boeing can well adopt the learning of supplier collaboration and risk mitigation practiced at Toyota.

Bob Ferrari

Apple announced financial results for its fiscal 2008 second quarter ended March 29, 2008, announcing a blowout revenue and profitability picture (revenues up 43% and profits up 36%),.  In a previous blog entry (Apple’s iPhone Shortage Dilemma), I cite Apple as a great example of a manufacturer who practices all the characteristics for an agile and responsive supply chain, in spite of product supply and/or demand imbalances.The latest quarterly results provide yet more evidence:

• 10.6 million iPods shipped in latest quarter vs. 22.1 million in the previous holiday quarter
• 2.3 million laptops and desktops, virtually the same as the previous holiday quarter, indicating building volumes in this segment
• 1.7 million iPhones vs. 2.3 million in the previous quarter, somewhat reflecting the current shortage dilemma

To put this in some perspective, these shipment volumes represent an overall average of 235,500 shipments per day, from Apple’s direct sales outlets, retail partners, and other channels. Apple has additionally executed long-term supply contracts, in some cases up to the year 2010, for critical NAND memory and other supply.

Apple’s ability to ramp and sustain extraordinary high volumes of shipments, flex with market conditions, while maintaining an edge in truly innovative products is a benchmark for supply chain excellence.

Bob Ferrari

When I started Supply Chain Matters, my goal was to produce a blog that would bring to light the critical importance of overall supply chain process and business strategy in enhancing or detracting from overall corporate strategy.  To that end, I will highlight specific posts that can provide learning for the supply chain community as a whole.  The current developments at Boeing are yet another example of learning in the area of supply chain risk management within the aerospace industry that can be applied within other industries.Last week, Wall Street and the airline industry again reacted to the Boeing’s announcement of the third delay in the much anticipated deliveries of the 787 Dreamliner airplane.  For Boeing’s customers, this delay pushes back original delivery schedules by at least a year, and initial customers such as All Nippon Airways will seek financial compensation from Boeing.

A series of posts on Whisteblower Support from the Seattle Post-Intelligencer site cites that the bulk of the current delays stem from multiple snags involving the 787 outsourced global partners. Pat Shanahan, Vice President in charge of the 787 program, pointed to two major supply chain issues that drove this latest delay.  One is focused on the center wing strengthening box, a structure that supports the attachment of the fuselage to the aircraft wings, which will require more fasteners and clips for strength.  The other more concerning issue involves Boeing’s network of global suppliers that manufacture the composite wings and fuselage, along with wiring and supporting systems. Specific focus has been with Vought Aircraft Industries and its consortium of internal partners.

Shanahan mulls, “Where do I think the inherent risk is? I think it’s in the capabilities of the supply chain to do the things that we need to have done. That’s the untested part of this production model.”

I find this to be an interesting statement in light of all that has been observed from a similar scenario played out with the Airbus 380 program.  In a post on Aerospace Technology, Robin Jackson, chief executive of ADR International is quoted: “Boeing may be guilty of overconfidence with risk management on this project. “  This author tends to agree, and would add that Boeing senior management needs to continue to be focused on supply chain program management and process capabilities.

Customer orders for the Boeing 780 Dreamliner have been driven primarily from the breakthrough technology and fuel efficiency incorporated in the design of this aircraft, but other challenges were also introduced.  As pointed out in the Aerospace Technology article, the 787 supply chain is rather complex, with a array of major suppliers to share the risks as well as the profits.  In an automotive type assemble-to-order strategy, major pre-assembled sections of the aircraft are to be flown in to Boeing’s Everett Washington final assembly plant from Japan, Italy, South Carolina and Kansas. Component suppliers stretch to China and India and beyond. This implies that financial burdens will shift up and down the supply chain, and overall program management and governance of supply chain risk is critical. George T. Haley, director of the Centre for International Industry Competiveness at the University of New Haven is quoted: “The primary thing that Boeing is learning, I think, is that it should not innovate in all areas at once.  It has innovated in product, process, and supply chain all at once, and innovation is messy.”

For Boeing, industry lessons in aerospace-related supply chain risk management were already visible in 2006.  Airbus, Boeing’s prime competitor, suffered costly delays of up to two years in initial deliveries of the rival A380 aircraft to its customers.  An  article in the Seattle Post Intelligencer in September 2006 outlines events after the program experienced a third major delay in expected deliveries to A380 customers. Airbus President and CEO Christian Streiff became actively involved in leadership and stewardship of the program.   Airbus’s problems were identified to be the wiring harnesses used in the forward and aft fuselage, a mismatch between the routings that were designed, vs. what appeared on the physical aircraft.  Finding this problem at such a critical juncture of the program was costly. 

Important steps were taken:

• Blame was not cast on one facility or one group- the CEO described the problem as an Airbus team problem that would be resolved by Airbus and its supplier partners.
• One management and accountability structure was initiated to insure resolution of current as well as any future challenges, with stewardship and visibility driven from the office of the CEO
• Cross-functional and cross-site project management was emphasized, and support was emphasized, as opposed to blame.
• A corporate-wide emphasis was made on required training and technology support tools. Investments were made in electronic design, product management, and other required supply chain tools.
• Finally, a commitment was made for transparent and open communications to customers.

It was unfortunate that the teams surrounding the 780 program did not have the opportunity to transfer the learning of Airbus in 2006 into a framework of overall supply chain risk mitigation strategies.  A supply chain colleague of mine, Jason Busch, in a July 2006 post on his blog Spend Matters indicated: “Even with the deep pockets of the European governments to bail out Airbus, one wonders if the world would be better off letting the current incarnation of Boeing’s chief competitor go the way of the steam engine. If it does, it would probably go down as the single greatest — and most costly — supply chain failure in history. But in the meantime, it’s still a lesson we can all learn from.”

Supply chain failures continue to be costly, and the Airbus and Boeing experiences are continuing commentaries to the importance of balancing risk. As a community, we need to continue to educate senior management on the important considerations and risk tradeoffs of supply chain strategy.

For Boeing, the obvious statement that there is little room for continued supply chain snags goes without saying, and this author trusts that Boeing and its supplier teams will address its supply chain process challenges in a future positive manner.

I look forward to traveling in a new 787 Dreamliner before the next decade.

Bob Ferrari

Since mid-February, Supply Chain Matters has been providing ongoing commentary on the disturbing trend of contamination of imported supply within certain pharmaceutical supply chains, namely the ongoing incident involving the life-saving drug heparin. (Drug Imports from China- Controls Are Mandatory)This contamination incident involving the drug Heparin has now been linked with 62 deaths as well as 800 allergic reactions in the U.S.  Recalls involving six different countries are now in effect, and China’s drug safety agency has belatedly ordered tighter controls on the production of heparin.

According to a story posted by The Canadian Press, when U.S. FDA experts finally inspected the suspect Chinese plant last month, they found scratched holding tanks with “unidentified material” sticking to their insides. Records were also missing to identify sources of raw Heparin, and testing of these sources was incomplete.  The FDA further indicated that a contaminant, identified as oversulphated chondroitin, accounted for up to half of the active ingredient in some batches of heparin from the suspected Chinese factory, but has yet to confirm whether this contaminant caused any allergic reactions.  Chondroitin sulphate is made from animal or shark cartilage, and is more than seven times cheaper than heparin. Its chemical similarity to heparin makes it difficult to detect.  “We (China) have an increasingly globalized supply chain…” wrote James Shen, publisher of the industry newsletter Pharma China, “It is likely we will continue to see the same problems with other drugs”.

In my view, these incidents are cause for serious concern not just in pharmaceutical, but all supply chains involving human sensitive products.  The substitution of melamine for protein and diethylene glycol for glycerin led to previous product recalls involving pet food, toothpaste, and other products. In the most critical of life-sustaining products, heparin, this same trend develops.

A recent PharmaLive article comments on European and WHO officials becoming increasingly concerned of not only fake medicines in the supply chain, but expensive commodity ingredients being targeted by unscrupulous individuals out to make a quick profit, regardless of implication. 

Upon reading a number of articles today on the disturbing short supplies and high commodity prices among corn and soybean products driven by the conflicting needs to supply both booming food and bio-fuel supply chains, this author is very concerned that the next contaminant trend will break out in the food supply chain.

While regulatory agencies can speak to new tools and methods to identify counterfeit supplies, we know that regulation cannot keep up with the current pace of change in global supply chains.  Risk mitigation must stem from internal controls and processes that continuously certify foreign producers. Electronic track and trace technologies, such as RFID, that insure traceability of all supplies should be investigated.

The time to act is now.

Bob Ferrari