When I chose the name of this blog, I had in my mind a strong belief that for many manufacturing, retail, and other service firms, the capabilities of supply chain do matter, especially on the impacts to the business bottom line.  Glancing at a series of June ending earnings results from various corporations, as well as current media stories, we find continual positive and not so positive reinforcement.  Let’s explore a couple of season highlights.

Of a positive note:

Siliconvalley.com reported highlights of a fiscal first quarter 34 percent profit increase from Nintendo, the maker of the Wii gaming console. (user account required)  As an analyst, I often cited the contrasts of consumer electronics and gaming players in terms of supply chain decisions and capability.  Cases in point: Sony continuously delayed its initial launch of the Playstation 3 console because of engineering and production ramp-up delays and Microsoft, while having a fairly competitive product, experienced quality problems with its Xbox 360 consoles.  Nintendo on the other hand introduced Wii on target in market launch and price point. The result has been over 5.2 million Wii consoles shipped in the quarter and a cumulative 29.6 million consoles shipped to date. Playstation 3 on the other hand had cumulative shipments to date of just 14.4 million, half theWii amount, with no so stellar results from Sony.  Nintendo clearly understood the recurring revenue stakes of being first to market and volume leader.

Kraft Foods Inc. reported blowout second quarter 2008 results exceeding financial analyst projections.  While across the board price increases were implemented to offset significantly higher input costs, the results noted an operating income increase of .8 percentage points in Q2 as a result of overhead cost leverage, as well as strong revenue growth. The earnings press release also notes approximately $150 million in gains from certain commodity hedging activities. We featured a previous post outlining Kraft’s supply chain challenges along with its investment in supply chain analytical capabilities.

Southwest Airlines reported second quarter 2008 earnings of $121 million, fairly positive financial results in light of all of the overall negative earnings among the U.S. based airline players.  Fuel and labor are the two biggest expense items for the airline industry, and in spite of unprecedented high fuel prices, Southwest continues to successfully hedge its average fuel costs as a competitive advantage.  While Southwest experienced fuel cost increases of 35.2 percent, it still managed to hedge an average of $2.19 per gallon.   Wouldn’t we all like to have the ability to fill our cars today at that price!  Southwest further states that it has derivative contracts for approximately 80% of upcoming third and fourth quarter estimated fuel consumption needs. Third quarter hedging is at an average crude-equivalent price of $61 per barrel, or the range of $2.50 per gallon, while fourth quarter hedging is at $58 per barrel.  There is also a mention of hedging contracts extending out to 2012.  We should all be that good at hedging.

 On the not so positive note:

Michael Krigsman’s CNET blog, IT Project Failures, had a post which indicated that clothing manufacturer Levi Strauss experienced significant order fulfillment problems during one week of the second quarter, attributed to a  North America implementation of SAP ERP.  The interruption is speculated to have caused shipping problems, and combined with other economic issues, caused the company’s net income to drop a whopping 98% relative to the same quarter in 2007.  Kingman cites the company’s SEC filing which, in a nutshell, indicates that the ERP implementation uncovered the need for the company to correct its internal control systems  A former auditor interpreted the SEC filing to indicate a potential problem area of inventory reporting.

American Airlines is now dealing with a current negative customer public relations backlash, as a result of a failure of its baggage handling system at New York’s JFK airport.  A news item on Bloomberg this morning indicates that American has repaired the system, but is still working to deliver hundreds of stranded bags to customers.  The carrier’s 67 JFK departures were delayed anywhere from 30 minutes to 2 hours during this snafu.  Oh, and American was gracious enough to waive its $15 baggage handling fee. Perhaps some passengers will get their bags before their trip ends!  Readers may recall an incident in April where British Airways had to literally shut its new London Heathrow facility due to a major glitch in the baggage handling system.  Two senior managers were ousted as a result of the incident.

And finally, I highlight another Bloomberg News item that indicated that apparel retailer J Crew Group Inc. apologized to its customers because the J Crew web site wasn’t accessible, hindering the ability to receive Internet and phone orders from its customers.  A statement from the company’s CEO states in part: “We’ve made some mistakes (too many in our mind). Please bear with us as we work through these issues.”  This author applauds J Crew management for its open communications to its customers, but this type of incident does tend to point to forthcoming upstream problems as the supply network attempts to respond to a potential imbalance of orders.

The summation of just a few news items taken from various media and Web 2.0 sources clearly reinforces the theme of supply chain matters.

If you have other stories to share for reader education, please send them in comments below, or email me directly at bob.ferrari@theferrarigroup.com.

Bob Ferrari

I’ve been catching up on my reading this past week and noted a Supply Chain Digest article that highlighted recent research from Patrick Connaughton, the analyst at Forrester Research (subscription required) who’s primary coverage is supply chain execution systems.  In this post, I will offer readers my views on some of the important observations that were brought out.

The SC Digest article summarizes Patrick’s current take on the need for many companies to re-architect supply chain application portfolios, since supply chain operations are urgently in need of a large-scale transformation or modernization.  But, according to a recent Forrester survey, only about 11% of companies are planning any major supply chain technology upgrades in 2008, bringing innovation to a standstill. In the current recessionary and exploding commodity cost business environment, senior management obsession impulsively turns toward  reducing overall supply chain costs.

According to SC Digest- “Connaughton says he lately has seen more projects moving forward when the focus is on market differentiation and revenue generation, rather than traditional cost cutting.”  That is very encouraging, and I urge readers to influence their supply chain organizations to adopt this same perspective.  Connaughton further provides advice for helping to gain approval for specific supply chain IT projects:

Look for initiatives that can deliver a short-term ROI, and self-fund later stages of the project.   I have been long been counseling clients to do this very thing, regardless of the economic environment. A self-funding project is the easiest way to prove to senior management that the technology has value, and that mega-dollar spending is not the end result

Look beyond the immediate challenges into the big-picture, and ascertain how the pieces will really fit together to deliver total process capability.  In today’s vastly more complex world of supply chain complexity and risk, the big-picture for most companies should focus on highly refined sensing and response processes.  Manufacturers and retailers must be able to ascertain what exceptions are occurring in the supply chain at any given point in time, and couple tools with supply chain wide capabilities to rapidly respond and resolve unplanned events or exceptions.

Don’t start with newer, more risky technology investments but rather look for proven technology that has stood the test of reliability, value, and scalability.  Amen to this recommendation! I would further add that this is not a blanket condemnation of a stand alone or best-of-breed application, since there are certain best-of-breed applications that have clearly proven themselves in reliability, scalability and value. The same could be stated for certain supply chain applications offered by the major ERP players.  The test is reliability and consistency of value.

Forrester further indicates that applications that fill the criteria for laying the groundwork and quick ROI are mobile asset tracking, fleet management, global trade management, and supply chain intelligence.  I would not hesitate to add supply chain network analysis, collaboration and response management to your investment list.

 Bob Ferrari

Yesterday, a  post within the China Supply Chain Council site (China’s High-Tech Companies Go Global) highlights a research study, conducted in conjunction with Tsinghua University in Beijing, involving 43,000 Chinese based companies (state-owned, private-sector and foreign owned) across 10 technology sectors that include many from high tech.  High tech industry participants should take note of this research study since I believe it provides indicators of what competitive forces to expect in the coming months and years as recessionary-driven declining demands and higher inflation play out on the global scene.

One of the conclusions to this research was noted as follows::

“Our research suggests that productivity gains, together with quality improvements and an emphasis on midrange product segments will continue to propel the growth of Chinese technology companies.  Productivity measured against unit labor costs remains competitively high compared with that of other low-cost countries, to say nothing of developed ones.  As long as productivity grows more than labor costs, China should remain an attractive location for technology manufacturing.”

The research summary additionally points out that scale has helped to spur productivity gains and Chinese high tech companies must push into overseas markets to secure continued overall growth.  There is a prediction that Chinese companies will raise their share of China’s domestic market from 60% in 2002 to a 75% share by 2012, and that “private-sector Chinese technology companies are reaching- and at times surpassing- the productivity levels of their foreign-owned rivals in China.” 

The research interestingly indicates that Chinese companies with annual revenues of more than 10 billion renminbi ($1.5B USD) have average profit margins of 2.6%, compared with 4% for smaller companies with revenues from 1 billion ($146M USD) to 10 billion renminbi.  The implication is that expansion will invariably lead to higher costs and initial lower profitability, but margins can improve when global scale and higher volumes buffer these increased costs.  The researchers further point out that global expansion for Chinese based companies will involve increased R&D, brand recognition and supporting marketing costs, and that strong management skills will be required to buffer the shock.  They rightfully conclude with the obvious statement:

 ”A strong domestic position, capable talent management, and a detailed understanding of target markets are elements of a thoughtful globalization strategy”.

Not obviously stated is the fact that if one steps back and views the total overall global high tech market, even with the most optimistic forecasts, one has to question whether 43,000 manufacturers within China can all compete on a global scale, with less than 10% current profit margins.  In my view, pending consolidation among Chinese high tech manufacturers is an obvious conclusion, the question being how much and how quickly in time.  In the end, this may come down to the ultimate survivors of the clash between private-owned vs. foreign owned companies within China’s high tech sector.

 Bob Ferrari

The July 15^th edition of CIO Magazine had a career strategy article entitled: Is Supply Chain Leadership a Good Move for CIO’s?  The article points out that many Chief Information Officers (CIO’s) view their career path toward Chief Operations Officer (COO), and that would involve a dual role of managing the supply chain as well as all of IT.  The article additionally points to CIO’s having transferable management skills in managing complex projects, globally dispersed groups, a slew of vendors, and negotiating a complex set of contracts. Also, with more and more IT services being outsourced to third parties, a move toward management of supply chain operations insures the CIO’s connection to the P&L and managing mission critical operations.

My observations of supply chain management structure for the past decade indicate to me that in certain organizational situations, the combination of the CIO and supply chain management role can produce effective results, but opportunities are driven more by a specific or opportunistic business need, and not a broad organizational trend. So, to eliminate more needless turf battles, I will provide some specific examples.

One successful example of this was Hewlett Packard.  Giles Bouchard, a former CIO, was appointed Executive Vice President for global operations in 2005, including a $50 billion supply chain, and all customer-facing operations.  During that time, Giles was appointed to be a member of HP’s Executive Committee, a direct report to newly appointed CEO, Mark Hurd.  Mr. Bouchard’s previous history in HP management included GM of HP’s Pavilion Home PC Business in 1989, VP of Business Customer Operations, and Sr. VP of Operations for the Imaging and Printing Group.  During the merger of Compaq with HP, Bouchard was responsible for merging the two supply chains together, and Giles was more than able to successfully accomplish this task, saving HP a slew of money.   In this particular situation, the primary business need called for elimination of redundancies in operations and multiple supporting applications.  I had the opportunity to speak with Giles on several occasions, and we touched upon the fact that a model where one senior manager could be accountable for synchronizing supply chain operations changes with required IT changes helped immensely in cutting through organizational silos and foot dragging.  Giles departed HP, when the global supply chain organization was decentralized in early 2007, the newest phase of HP supply chain management structure.

Other examples include manufacturers such as Honeywell International, Owens Corning, RPM International and Sara Lee, where a combination of IT and supply chain leadership can prove to be successful. An implementation of a major ERP or SCM system, high activity in mergers and acquisitions or when the bulk of supply chain services are outsourced to third party service companies such as 3PL’s or 4PL’s also lend themselves to this organizational model.

Manufacturing and retail firms should be open to innovative senior organizational management models, including the combining of CIO and supply chain, when the business strategy needs warrant such a move.  These models are opportunistic and based on matching organizational need with available senior management skill sets.

 Bob Ferrari

The highlights of the Supply Chain Management (SCM) software market forecast results compiled by analyst firm Gartner Inc. (subscription required or purchase opportunity) have been shared by various media outlets, including Manufacturing Business Technology and Industry Week among others. Thru this venue, I would like to share some of my personal high level observations regarding this technology market.

First, in full disclosure, I have intimate familiarity, as well as bias with the history of the SCM software market.   I have been a supply chain technology industry analyst at two different research firms, where I provided background commentary and analysis of the market going back to the year 2000.  I have also had SCM product marketing leadership and ERP consulting roles with various software companies including SAP and Oracle, where strategic product planning was predicated on accurate analysis of customer buying patterns and needs. 

According to Gartner, spending on SCM software reached $6 billion in 2007, increasing an eye-popping 17.6% over 2006.  As was the case in 2005 and 2006, SAP remains the market leader with 22.4% market share, but Oracle and JDA Software have made significant gains as well. Market consolidation continues with 25 acquisitions and mergers reported for 2007, but certain best-of-breed vendors who continually deliver customer value in their applications remain as market participants, or market entrants.

Since 2005, many of the analyst firms providing market forecasts pegged a relatively conservative market growth forecast to the SCM space, roughly a conservative growth rate of 5-6%, in line with the overall projected growth of IT software applications. Other market areas such as CRM, business intelligence, and Web 2.0 based applications were forecasted at much higher market growth rates, the notion being that these investments were more attractive for customers.  In my view, the fact that the 2007 SCM market grew an eye-popping 18% in 2007 is a reflection of the fact that supply chain process investment needs have reached the top-tier of various company IT investment priority lists.  With more and more supply chains being stretched in global complexity, coupled with the continuing needs for delivering bottom-line cost savings in light of unprecedented raw material cost increases, it should be no surprise that technology is seen as an enabler of innovation and change. Supply chain processes are often business mission-critical, and when the environment is super challenged, investment money is appropriated over other process areas.  In 2001, many of the SAP or Oracle ERP customers remained on the sidelines, inserting select best-of-breed applications, waiting for the respective SCM suites to mature.  That has obviously changed.

 A final observation for this post relates to some of the market dynamics behind these numbers.  SAP’s SCM revenues grew by almost 32% in 2007 according to Gartner; SAP has not had any significant suite functionality releases for the past two years, due to the overall continued transition to the core applications of SAP Business Suite 2008.  In my view, this is an indication that SAP SCM customers are weighting enterprise integration and the 80% is good enough rule over superior functionality.  Oracle and JDA on the other hand present a different scenario in their 26% and 67% respective market growth rates.  Both of these companies have turned to acquisitions to fill-in gaps for best-of breed technology in planning, transportation, trade compliance and other areas.  Their strategy of offering ala-carte best-of-breed with certain levels of integration are apparently equally attracted for the market.  I will go out on a limb and predict that when the 2008 market actuals are released one year from today, SCM will remain a robust area of investment, and there may be even more surprises in the ranking of the top three.

Bob Ferrari