Have you begun to notice how quickly the price of oil has been rising of late?  Here in the U.S., the price of gasoline and diesel has been on a rapid climb for the past four to six weeks.

Do you think it’s a positive sign of pending recovery in the global economy?  Not so fast!

An article penned by Time and featured in Yahoo News (Oil Is Plentiful, Demand Weak: Why are Gas prices Going Up?) leads us to the potential root cause- speculation.  Yes, OPEC and those gosh darn investment speculators are at it again.

This article points out that demand for oil in the so-called rich countries is at its lowest level since 1981, and interesting enough, U.S. oil inventories (stored surplus) has also reached its highest level since the 1980′s.  But alas, 2.6 million barrels of this surplus is being stored in idle floating tankers around the world.  In the classic supply and demand equation, supply is inaccessible, so price goes up. And then we have the statistic that financial investors have once again plowed billions into oil futures, betting on the timing of a world recovery.

The overall message is clear.  Oil markets are not driven by normal demand and supply forces.  We should all take note.  We cannot waiver from collective commitments toward alternative energy and sustainability initiatives. The U.S. Energy Information Administration predicts that oil prices will rise to $110 a barrel by 2015.  That’s about double of what it is today in the U.S.

The world economy has been fortunate to have a hiatus in cheaper oil during this damaging recession. Unless someone brings those ships ashore, our respite of cheap energy is a past memory.

 Bob Ferrari

My former employer, AMR Research, is wrapping up its supply chain executive conference in Phoenix this week.  One of the highlights of this conference is the annual announcement of AMR’s Top 25 Supply Chains.  Consultants and industry bloggers are precluded from the voting, so penning this entry is my way of weighing in.

Well-known and respected IT blogger Vinnie Mirchandani offered his observations of this year’s listing on his Deal Architect blog, and I must admit that I, too was scratching my head when I read of some of the 2009 selections.

First, I echo Vinnie’s observation that AMR has made a name for itself with consistently good supply chain research.  Much of this began with some of the original and gifted analysts such as my former mentor, Dr. Larry Lapide, along with the late John Fontanella, and others.  But having been in the industry analyst world for five years, I sometimes understand how research methodologies can go astray.

Vinnie’s observations note that not a single Chinese company, e-tailor, or utility have appeared on the list.  Perhaps the reason lies in the overall selection methodology, which tends to eliminate these companies from ever entering the selection process. 

AMR appropriately places higher weighting criteria on consistent financial performance metrics, one of which is a three year moving average of Return-On-Assets. In my view, high ROA can be a bias toward companies that have outsourced major supply chain inventory and operations, or reside in less asset intensive industries. Case in point, IBM is rated number 4, but has outsourced a vast majority of its manufacturing, including laptop production to Lenovo, and is quickly transforming itself to a services company. 

We further don’t see the presence of major contract manufacturers like Foxcon, probably because these companies have to monetize global manufacturing assets for their OEM customers.  Companies like Dow Chemical, BASF, or even TSMC are also hindered because of their asset intensity. Yet these same companies are constantly required to be more agile and responsive to their upstream customers, many appearing on the Top 25 list. Does this preclude organizations that reside downstream in the value-chain from ever being considered?

How can Dell move from the number three position last year, to number two this year, ahead of rival HP in the number 17 position?  What’s up with that! I’ve posted a number of commentaries, the latest being Reflection on Dell’s Latest Reorganization, that pointed to Dell’s decision to move from a previous centralized supply chain structure, to one of de-centralized supply chain functions residing within global business units, which is how HP currently manages supply chain.  Dell’s recent announcement of 63% drop in profits, continued flat demand, and restructuring charges doesn’t seem to fit with a number two rating.  AMR’s Supply Chain Reaction blog praises HP for building a more distinctive brand operational excellence and comprehensive risk management.

On a slightly more positive note, I was however really pleased to see Intel finally appear on the Top 25 after so many years of non-appearance.  AMR points to Intel’s efforts of being more demand-driven, moving beyond its former notions of technology push.  Unmentioned, but probably contributing to this recognition is a movement toward a more centralized supply chain management structure, corporate-wide efforts toward standardization on SAP ERP and supply chain applications, as well as leveraged use of some best-of-breed supply chain analytics, visibility and intelligence tools.

It seems that win at all costs is becoming our new form of competitive culture.  Television programs like American Idol, Dancing with the Stars and others play upon the influence of viewers who have the ultimate power to influence the final vote.  I sincerely hope that recognition of the Top 25 Supply Chains does not adopt this model.

What’s your reaction to this year’s Top 25?

 Bob Ferrari

In penning entries for Supply Chain Matters, I do not generally comment on product announcements from supply chain technology providers unless I feel there is some significance for my readers.  In 2001, I was one of the first industry analysts to introduce the term of a hosted supply chain software delivery model because of what I felt was its long-term significance. 

Today, Amitive, Inc., is announcing its Unity 5.0 release of what this vendor terms as Community Supply Chain Management (C-SCM). While the press release is a bit lengthy,  readers should take note of the fact that nest generation cloud computing technology is beginning to appear in applications related to supporting extended collaboration among global supply chain processes.

The analogy that I believe best describes the potential of this technology relates to that of outsourcing of certain supply chain or production processes.  True cloud computing can provide the capability of flexibly outsourcing your supply chain collaboration software and infrastructure needs in a much more efficient manner.  Rather than paying and maintaining for peak use, this technology offers the flexibility to add on the fly, based on overall business process and supply chain network model. Supply chain collaboration and visibility vendors such as Kinaxis were some of the original pioneers for on-demand hosted software.

For those readers not familiar with Amitive, this technology vendor was first conceived in 2003 under the name of Mitrix. As sometimes happens with technology start-ups, the original technology spawned by Mitrix encountered some market challenges and its senior management and investors wisely decided to return to the R&D lab in order to re-engineer a product that could be made available to mid-market manufacturers and service providers that would truly leverage recent breakthroughs in cloud computing technology.

Amitive Unity 5.0 is designed and delivered on a Software as a Service (SaaS) model. Of more significance, this new platform offers more flexible deployment options in terms of hosting models, IT infrastructure configuration on the fly, multi-tenant as well as upgrades release options. A prospective customer also has more options as to deployment, either hosting within the customer’s firewall, with a multi-tenant ASP such as Amazon or Google, or with Amitive itself. Vice President of Technology, Sean Rollings, whom I spoke with last week, has had previous experience in SaaS application marketing, and smartly leverages the term Infrastructure-as-a-Service (IaaS) to describe Unity 5.0.  Pricing is flexible with a pricing model that supports functionality modules and an unlimited amount of network users for a monthly price that can supported by an overall monthly operating budget vs. a large capitalized expense.

I trust that buyers will positively respond to these new iterations of cloud computing tailored to supply-chain wide collaboration and visibility. Beyond the usual technology hype, the significance of cloud computing I believe is that it can be an appropriate technology for managing and supporting a dynamic and constantly changing network, which is exactly what supply chain collaboration and visibility needs have become.  While traditional ERP systems tend to be monolithic in operation and scale, cloud-based models have the opportunity to be much more flexible in terms of implementation and network scaling, which impact overall total cost of ownership. Armitive’s current 10 customers had their implementations up and running in an average eight weeks, which is fairly typical of this technology.

The timing of this technology is good, since many supply chain planning systems adopted during the B2B dot com era are running close to eight years of service and maintenance support, and their may be economic benefits toward shifting to a cheaper IT service and platform.  There were also many mid-market companies that chose to stay with home-grown, customized applications, or just Excel spreadsheets. With the global-based recession now bottoming, companies may well want to leapfrog their industry in more innovative business models.  One customer, Ortherea, is providing consumers the ability to order custom sized orthotics, with the Amitive platform utilized to send custom configurations to a global network of contract manufacturers who ship the product direct to the consumer or retailer. I found  this particular deployment  to be a cool application of leveraging both product and supply chain innovation.

You can anticipate more announcements of next generation cloud computing over the coming months, with a particular emphasis on supporting global supply chain network processes with a more thought compelling cost-of ownership model.

Bob Ferrari

Full Disclosure Statement; The current CEO of Amitive, Amar Singh, was a former boss of mine at SAP. Amar however has not spoken or briefed me on this new product release.

Many consultants continue to make the observation that it was in times of acute economic crisis, such as the previous Great Depression, when in the aftermath new industries or global competitors emerged from the fray.  These players anticipated demand or supply side structural changes that were brought on as a result of the economic crisis.  As a supply chain professionals, we have the opportunity to observe opportunistic companies that may emerge from the current global recession with a far different industry model that leverages structural supply chain change.  In the automotive industry, my lens is focused toward Fiat Group and its chairmen, Sergio Marchionne.

If you want an insightful perspective of Fiat’s evolving strategy, I recommend a reading of a recent article in The Economist, The Italian Solution.  While Fiat is not one of the larger global players in the industry, the strategy now being played out on the world stage demonstrates a vision of what tomorrow’s global automotive players will need in order to sustain both a competitive and truly efficient global value-chain.  Mr. Machionne has a vision of an end state, where the surviving global automotive OEM’s will need to have sufficient volumes of production in each of the major world markets, about one million for each platform, to drive global production cost efficiency and sustained profitability.

We have all taken in the previous headlines and media stories related to the crisis that engulfed the U.S. automotive OEM’s and Fiat’s bold white knight approach to rescue U.S. automaker Chrysler.  Fiat in essence offered Chrysler what it did not have, a small car technology platform and a high volume value-chain capability in small engines and fuel efficient vehicles.  Fiat shrewdly gets additional volume scalability in its platforms, a deeper leverage of suppliers, and immediate access to a U.S. distribution network for Fiat Group’s other products. In addition to a 35% equity ownership in Chrysler, and responsibility for managing all operations, Fiat also leveraged the U.S. government to run interference with Chrysler’s stock and bond holders, as well as unions, to gain additional financial concessions.

No sooner had the ink dried in the U.S.deal, Fiat moved to seize an opportunity brought on by the crisis of General Motors, and its needs to find a buyer for German based Opel brand in Europe, along with some other European brands.  Similar to the U.S. scenario, if Fiat turns out to be successful in its negotiations with the federal government of Germany, it could add more volume and distribution capability for Europe.

The latest chapter in this unfolding story comes this week from China, where it was reported that the company is in talks with China’s Guangzhou Automotive Group Ltd. to setup a joint venture to manufacture up to 1.3 million vehicles in China by 2010.  According to media sources, Fiat earlier courted China’s Chery Automobile Company Ltd., but that plan was delayed due to local market conditions. Fiat is obviously on a mission, and chose not to wait.

There will certainly continue to be debates on whether Fiat can ultimately manage all of these acquisitions and corporate cultural changes simultaneously. Supply Chain Matters readers are always welcomed to add their own commentary.  Fiat’s ability to foster continued product innovation in battery and other fuel efficient technologies are certainly an open question. But whether Fiat is, or is not totally successful, we have the opportunity to observe a visionary company that truly understands the overall importance of a leveraged global value-chain.

 Bob Ferrari

If you have been following recent news related to Sony Corporation, it should be evident that this company is embarking on a number of significant challenges, one of which includes a re-structuring of its global supply chain. A recent Business Week article.  reports that Sony recently announced its first annual loss in 14 years ($1 billion) with a forecast of another losing year.  Upwards of 16,000 people are in the process of losing their jobs at Sony, which is a shock to a company that prides itself on lifetime employment.

The backdrop leading-up to the current situation is a rather long one, one which will probably play out in a number of existing and future business case studies.  In consumer electronics, the company was slow to respond to the vastly popular digital music product entries from Apple, such as the iPod and iPhone. In televisions, Sony has a stellar reputation for innovation and quality, but has lost volume market leadership to Samsung Electronics Company. A New York Times article indicates that Sony has lost money in its television manufacturing unit for the last five consecutive years.  In gaming devices, Nintendo‘s Wii and the Xbox360 from Microsoft have been outselling the Playstation 3.  As an industry analyst, I penned a number of research insights that pointed to Sony’s decision to initially include the newer BluRay disc technology as a key distracter in gaining initial market and volume producer acceptance.  And the list goes on, leading to today’s current situation.

Chairmen and CEO Howard Stringer, who was brought on four years ago to transform the company, has now taken more direct day-to-day control.  In late February, Sony announced a massive management re-structuring with Mr. Stringer taking on operational CEO responsibilities, along with a revised management team tasked with turnaround profitability.  While Business Week reports that Stringer has promoted four relatively young Japanese executives into his managerial team, the situation for supply chain is slightly different.

Included in this restructuring was the announcement of Yutaka Nakagawa, Executive Deputy President, to lead a combined manufacturing, logistics, and procurement organization. Mr. Nakagawa joined Sony in 1968, and has had a number of senior and executive management responsibilities primarily in Sony’s product businesses.  His former tenure at Semiconductor and Component Group, along with other businesses provides a well-grounded understanding of supply-chain strategy and operational needs.  But Sony’s supply chain challenge remains daunting.

Business Week reports that Sony is closing three plants in Japan by the end of December, and the number of plants around the world will be reduced to 49 from a current 57. A posting in The Deal indicates that the company will slash material costs by 20% ($5.3 billion USD), and cut total suppliers to 1200 from the current 2500 by March of 2011.

Taking on a challenge to reduce overall material costs by 20% in two years has proven to be challenge for companies in profitable times, let alone in crisis situations.  But perhaps Sony’s current crisis can drive change at a faster pace.  With competitors such as Apple positioned in a virtual supply chain, with enormous flexibilities, Sony will have no choice but to move quickly.  Soft demand and a declining yen have had their toll.  But there is a positive aspect to this pending change.  Sony’s existing supply chin management team has the benefit of learning what has and has not worked well in high tech value-chains. Advanced technology will certainly help if applied smartly.  The Sony brand also has enormous power within the market, something which other companies have failed to learn in wholesale slashing of supply chain costs.

We certainly wish Sony the best in their supply chain transformation challenge.  It will be interesting to observe in the coming months how Sony approaches its supply chain transformation  challenge.

Bob Ferrari