On of the most difficult challenges for supply chain planning professionals is to both gain consensus on product demand forecasts and maintain some degree of flexibility to respond to demand and supply changes that might occur during the year.   This is certainly the case as companies begin to sort out their 2009 sales and operations planning.  Certain business news stories this week bring ample current evidence of industry challenges.

An article in the International Herald Tribune outlines the fact that global automaker Toyota Motor Corporation is not immune to the effects of an uncertain business economy. Toyota is trimming its global sales forecast as a result of anticipated declining sales within global as well as the U.S. market.   This leading auto maker has now targeted 700,000 fewer vehicles in 2009 global sales and a specific 10 percent reduction in U.S. sales.  Toyota invested heavily in trucks and sport utility capacity for the U.S. market, and now it must cut back on expectations.  Keep in mind that Toyota has been the global leader in the development and sales of hybrid vehicles, with sales volumes outpacing available supply.  So in the case of hybrids, it may be a far different plan.

Another evidence point this week was within the computer industry, where Dell Inc. reported its latest earnings.  Dell’s second-quarter net income dropped 17 percent on a sales increase of 11 percent, as that company continues to transform itself to a more retailer oriented sales channel. Dell further indicated that “continued conservatism” has spread from the U.S. to Western Europe and some Asian countries.  “Surging revenue in Brazil, Russia, India and China failed to compensate for slowing growth in Europe, the Middle East and Africa, as well as some parts of Asia”. In contrast, Dell’s prime competitor Hewlett Packard was more optimistic, indicating that new notebook designs and global channels led to better than anticipated revenues and earnings. In specific contrast, HP’s revenues in Brazil, Russia, India and China gained 24 percent, while sales in Europe increased 16 percent.

The planning for customer demand during uncertain global or regional business conditions, changing internal business models, and more demanding customers presents supply chain planning and operations with a constant challenge in managing expected demand with supply, as well as overall inventory levels.  I recommend that the existence of a cross-functional, integrated sales, operations, and inventory planning process will no doubt help in these efforts, and should be supported by senior management.  But conditions of uncertainty will often lead to change throughout the year, and plans can never be expected to remain static.  Planning for 2009 must also be supplemented by responsive processes that can quickly sense demand changes in any region or product segment, coupled with the ability to respond in the most efficient as well as timely manner.

As a Japanese auto analyst points out, in tough times, the stronger get stronger than their competition.  Stronger needs to include more responsive supply chain sensing and response capabilities.

Bob Ferrari

A story listed on Bloomberg indicates that the U.S. Food and Drug Administration (FDA) is planning to deploy up to 15 inspectors in three major cities in China, namely Beijing, Shanghai, and Guangzhou.  This deployment serves as post reaction to the numerous food safety and quality incidents that have been sourced to China.  U.S. Secretary of Health and Human Services Michael Leavitt indicated the following in an interview- “I don’t think they’ve (China) got the problem completely solved, but it was clear to them that the made-in-China brand was affected by product quality problems and they moved aggressively to begin making progress.”

Supply Chain Matters has provided multiple posts highlighting recent food and drug safety incidents where supply chain sourcing originated in China.  In May, in an update on product recall issues related to the life saving drug Heparin, I pointed out that regulatory agencies are ill equipped to keep up with the pace of current outsourcing within these supply chains, and risk mitigation must stem from internal and external controls. In June, I commented on the continuing tide of counterfeit medicines, and the need for food and pharmaceutical manufacturers to identify supply chain risk as a key business initiative.

While deployment of FDA inspectors is a positive step toward addressing concerns, 15 inspectors can hardly keep track of all of the present export volumes.  The responsibility for product quality and safety must always remain with manufacturers and brand owners, and processes that identify, track, and foster collaboration among extended value-chain participates is the more important announcement to anticipate.

Bob Ferrari

Last week I provided initial observations on the acquisition of i2 Technologies by JDA Software Group. In that post I reflected on yet another brand name departing the supply chain technology landscape, and my counsel to existing i2 customers to be cautious, and do your homework.

Since that time, others have provided commentary, to include Dan Gilmore’s End of Supply Chain Era commentary within Supply Chain Digest. Influential industry analyst firms AMR Research, IDC Manufacturing Insights and Gartner have all initially weighed-in on the acquisition, and I would urge readers to especially take note of the combined AMR Research commentary (available to non-clients for a limited time) as well as the August 18^th edition of Manufacturing-Insights Theory and Practice newsletter.. 

(Note of full disclosure- I was previously a contributor to both of these firms).

The consensus view seems to fall around the following observations:

- This acquisition represents the end of an era for both the original innovators and noted icons in the supply chain planning arena, both i2 and former Manugistics.

- Dan Gilmore cited the fact that an industry analyst had written that “When i2 goes off the cliff, there won’t be any skid marks”.  That quote actually came from my former mentor and manager at AMR Research, Larry Lapide, who insightfully observed back in 2000-2001 that while i2 was articulating the real needs for advanced supply chain planning and collaboration, the overall pace of the company was beyond its ability to ground users in the reality of the complexity of the overall process change and technology capability at that time.  A lot of course has changed since that time. Supply chain technology best-of-breed as well as ERP providers are much more grounded today in the capabilities of the technology.

- AMR Research observes that the model of a consolidator such as JDA Software typically leads to lower levels of product innovation in favor of recurring rates of maintenance revenues, but cautions users to wait and make their own individual assessments.  Bob Parker of IDC concludes – “There is some hope that the consolidation of one time market leaders, Manugistics and i2, will provide a viable alternative to the SAP/Oracle duopoly, but JDA will have to show a conviction to spending development dollars to maintain functional advantages, and marketing dollars to stretch beyond its retail comfort zone”.  Keep in mind that industry analyst firms have the both technology firms as clients, as well as end users, so they have to walk a fine line in their published recommendations. It is therefore best to conduct your own individual assessment or speak with a seasoned industry observer.

- Most all of the commentary and conversations that I have since this announcement has further pointed to the fact that i2′s model of shifting more towards a custom supply chain software development and services provider is a more important concern for what remains of existing i2 customers.

- AMR Research’s Bruce Richardson commentary in this week’s First Monday newsletter (sign-up required) raises a broader set of observations as to whether this event presents a new opportunity for custom supply chain software integration firms, especially the India-based firms- Bruce comments- “While employee retention is a concern in every acquisition, it may be a very real concern in terms of keeping the account teams for the Top 30 customers (at i2 Technologies). I’ve spoken at enough i2 events to understand the volatility and mood swings of its largest accounts. It’s not hard to imagine a customer approaching one of the large Indian services firms and suggesting it takes over the i2 work. This could result in a minor bidding war for development and account management talent.

The bottom line for readers and users of supply chain technology is to continue to demand continuous innovation and responsive product support from your existing or future supply chain technology or services provider. There are good examples of technology vendors who can both acquire and continue to add to product innovation.  An example would be Oracle Corporation, with their previous acquisitions of Demantra or G-Log.

Managing global supply chain processes is as complex as ever, and demands even more quality and responsiveness from the community of technology providers. Manufacturers need to continue to do their homework and be diligent. Supply chain technology providers need to first and foremost seize the moment and communicate their ongoing value to enabling supply chain process and information integration needs, while also fulfilling the financial business model.

Bob Ferrari

Of little surprise to supply chain managers, a recent article published by The Financial Times indicates that China is positioned to overtake the US in 2009 as the world’s largest producer of manufactured goods, four years earlier than expected. This article cites forecasts conducted by Global Insight for the Financial Times, and concludes that in 2009, China will account for 17 percent of manufacturing value-added output vs. the forecasted US output of 16 percent.  More revealing though is that Global Insight forecasters had previously predicted that the US would retain the top position until 2013, but a large downward revision and current economic factors has caused the US to slip more quickly than expected. This article’s sobering conclusion that the expected change will end more than a 100 years of US dominance in world manufacturing output.  The question I raise for Supply Chain Matters readers is ‘Should this be a major concern?’

A separate FT article indicates the pessimistic view held by many Americans that the US lost the dominant position years ago. A somewhat informal poll of 326 people selected at random across four major US cities uncovered the general perception that the US ranked far lower in global manufacturing output, with a perceived rank of 20^th. Jim Womack, chairmen of the Lean Enterprise Institute is quoted – “Americans have watched for more than a generation as the US fraction of total world manufacturing has fallen. And it’s easy to confuse the country’s absolute level of domestic output, which has in most cases gone up, with the US’s share of the whole world pie, which was bound to go down no matter how good American-based plants were.” 

I’ll weigh in on these observations from a dual bias, one of supply chain management strategy, and second as a concerned citizen of the US.  First, the fact that the US would ultimately lose its leadership role was inevitable; the question was always in the timing and the economics. Consumer and industrial markets such as China have far larger scope than that of the US, and have economic growth cycles that are far more positive than that of the US. In today’s new era of expensive energy and transportation, the shorter the supply chain, the more opportunity for overall supply chain cost efficiency.  Large US global companies such as IBM, Caterpillar, Hewlett Packard, General Electric and others have already concluded this fact and have expanded their manufacturing capabilities beyond the US.

But on the other hand, as a citizen of the US who is significantly concerned about the prosperity of coming generations, I remain concerned.  If the US is to sustain its position as one of the world’s economic leaders, it must be in the leadership position of innovation.  I often point out that innovation comes from many broad areas- products, emerging technology, as well as process capability. I include overall manufacturing capability and value-added in the innovation category. 

To this point, global economic factors have made US exports and products attractive in foreign markets, but that will eventually change.  This new era of expensive energy adds new realities to supply chain value-added flows.    In my view, leadership is in jeopardy when innovation moves offshore.

So the real concern for Americans should be where does the US stand on the innovation scale.  If the current growth forecasts for China are played out to 2013, than manufacturing innovation leadership is a foregone conclusion.  The concern for and the challenge to US based companies and legislative leaders is the recognition and action plans that insure that US based manufacturing is world-class in terms of innovation and global cost competitiveness. That includes innovative supply chain suppliers that are innovative in products, process, and technology.

 Bob Ferrari

I ran across an interesting article by Thomas Wailgum writing for www.cio.com that poses the interesting question: How did Apple’s Supply Chain Fare during the 3G Rollout?.  What I found interesting is that the article umbrellas Apple’s physical supply chain with its so called digital supply chain, the IT resources and web infrastructure that also needs to support a global product launch of epic proportions.

First, in full disclosure, loyal Supply Chain Matters readers are well aware that I have been a long-time admirer of Apple’s physical supply chain capabilities. This dates back to well before my former employer, AMR Research, placed Apple in the premier top position of its 2008 Supply Chain Top 25 ranking. 

In a previous April post, I observed that there may be a lot of global companies that would enjoy dealing with Apple’s challenges of having to manage limitless global customer demand, volumes in the millions of units, supported by a global supply chain that is for the most part, outsourced.  I also posed the challenge question that we should look forward to how Apple responds to its upcoming product launch.

We can now observe that the launch of Apple’s latest iPhone has exceeded all expectations in terms of consumer hype.  Apple declared on July 14 that it had sold one million iPhones from the Friday launch to Sunday, whereas it took 74 days to sell one million of the original iPhones.  And so I ask, if you were responsible for supply chain planning for Apple, would you be planning supply based on previous history of the iPhone launch, or what the marketing and sales groups were telling you based on constant market sensing?  I therefore concur that Apple’s physical supply chain has done an extraordinary job of supporting this latest product launch.  And even though most Apple stores are running low on current inventory, it’s an enviable problem for any consumer electronics company to have.  My response to those consumers who are griping about 3G iPhones being out of inventory at Apple stores, is that you should have expected the obvious.

But let’s get back to the essence of this article’s observations.  No doubt there were glitches on the digital support side of launch, with the barrage of activation and application download demands placed by new 3G iPhone owners.  I have to agree with the observations made by Kevin O’Marah of AMR Research that there are not too many companies that need to manage the convergence intensity of physical and digital supply chains today.  But with market differentiation moving more and more to consumer mass customization, these combined capabilities will become more of a future consideration for many other companies.  This will also re-fuel organizational turf wars as to what constitutes end-to-end supply chain operations, and who in the organization, the CIO, or the CSO has ultimate accountability for a successful market launch. I plan to dedicate some future posts to this topic.

For the time being, let’s continue to envy Apple’s dilemma, and praise all members of Apple’s extended supply chain team for supporting a successful product launch. 

What do you think?  Has Apple’s supply chain mustered to support a successful launch introduction of 3G iPhone?  Provide your comments by clicking on Comments.

Bob Ferrari