As I pen this posting on Cyber Monday, there are already lots of predictions in the blogsphere regarding the sales activities for the 2009 holiday buying season.  The headline in today’s Wall Street Journal, More Shoppers Hit Stores, but Spend Less Each, (subscription may be required) summarizes a consensus of industry observers noting that while more shoppers turned out this weekend for the traditional start of the holiday buying season,  they spent less per shopper and tended to favor lower-priced items. The National Retail Federation estimated that 195 million U.S. consumers will have shopped both stores and online over this past weekend, up from 172 million last year.

If this trend continues, there will be revenue and supply chain implications not only for retailers, but also producers.

Last week, a Business Week article, Amazon Paces Holiday Tech Discount Drive, noted that early price cuts on consumer electronics led by Amazon and Wal-Mart may be good for consumers but not so good for profits.  Retailers began planning holiday price promotions for consumer electronics in mid-November, working with various brand suppliers to pre-select specific promotional items. Lowered prices and highly planned and marketed promotional items have definitely drawn the interest of consumers. The Consumer Electronics Association (CEA) estimates that these lower prices will boost unit volumes by 6% for consumer electronics, but cut overall sales by 7.5 %, Consumers are opting for cheaper netbooks instead of traditional laptops, or smaller flat-panel TV’s rather than bigger sizes.

I myself was a participant in Black Friday activity. Spending a few hours on Friday afternoon searching for a good deal on a 32 inch flat panel TV, it was rather interesting to note that while there were deals to be had, it appeared to me that most of the larger volume outlets were doing their homework and working with manufacturers to match price on the same model of TV’s.  

If this weekend’s trends hold for the remainder of this holiday buying period, supply chain and retail managers will be facing even more cost and business planning challenges.  Higher unit volumes with lesser revenue yield mean that previous cost efficiencies in production, logistics and transportation will be tested yet again, particularly if retailers attempt to replenish certain inventory prior to end of the period. Imagine being LG, Panasonic, Samsung or Sony, and being asked to possibly replenish a last minute shipment of hot-selling TV’s, but having to adsorb a lower margin transportation cost.  Since many retailers have already been practicing smarter inventory management to reduce overall inventory exposure prior to this period, their overall ability to make-up potential revenue shortfalls by a last minute buy may present an interesting scenario among seller and buyer.

As the Journal article also points out, if you were hoping to get your hands on that Zhu Zhu pet hamster, electronic reader, or bargain flat panel TV, you may well find yourself on an online auction site outbidding someone.

While others argue that in the past sales on Black Friday weekend have not been an accurate barometer of for the season as a whole, 2009 may well be different as this era of lean inventories across supply chains may dampen the ability to meet or surpass revenue and profitability goals. Having supply chain wide agility and responsiveness capability may be the acid-test for the 2009 holiday selling season.

 Bob Ferrari

In our last Supply Chain Matters commentary on the topic of H1N1 vaccine availability in the U.S. on October 28th, we touched upon the then current imbalance in providing adequate supplies of the H1N1 vaccine.  Since we are now approaching the Thanksgiving holiday weekend in the U.S. where lots of families gather together, I thought it would be an appropriate time to provide an update on what the U.S. government is indicating as availability of the vaccine.  From my perspective, the picture of availability looks far better, but certain logistical challenges remain.

The status update as of November 23, 2009, indicates that close to 59 million cumulative doses of vaccine were available at government distribution depots for shipment to individual states.  Of that number, slightly over 49.5 million doses have been shipped out to state distribution sites.  Compare that to the October 28 status of 16.8 million doses shipped, and we can conclude that the availability picture is getting much better in terms of the ability to administer vaccine to the high priority and broader population. A visual look at the CDC’s allocation vs. shipped availability graph indicates to me that the current challenge is more than likely the logistical challenges of getting these larger amounts of vaccine from government distribution depots into individual health centers for administering the vaccine to candidates. 

My suspicion is that the overall availability of H1N1 vaccine will get a lot better during the month of December as manufacturers continue to complete shipments from production sources and supplies make their way to final destinations.  The U.S. government has purchased a total of 250 million doses of flu vaccine. That may be little comfort to those who are traveling this coming week and weekend, but the message is be patient, the supply situation, from my perspective, looks to be improving.  Perhaps we might be able to look forward to having ample availability of the H1N1flu vaccine by mid to late December, hopefully prior to the December and January holiday periods when families once again travel and congregate.

As for the normal seasonal flu vaccine availability, we will all have to wait until manufacturers shift their attention to distribution of that vaccine to government agencies, which looks to be much later in the upcoming influenza season.

 Bob Ferrari

While searching China’s Xinhua News Agency site to secure references to my previous posting related to the after effects of the tainted milk scandal, I came across a rather interesting article that provides some indication of the changing winds of outsourcing manufacturing within China.

The article, Toy exports slump with higher costs in Southern China, notes that China’s major toy manufacturing province, Guangdong, is experiencing a slump in toy exports to Europe and the U.S. amid rising costs. 

The cost of manufacturing toys in southern China has increased an average of 25 percent, while overall export demand has remained slack due to the effects of the world economy and keen competition. Both the EU and the U.S. have adopted more stringent standards on imported toys, and that has required Chinese producers to spend 15 percent more on higher quality raw materials as well as much more time on product inspection and quality needs. Labor and transportation costs within China have also risen.

In the first ten months of 2009, exports to Europe, Hong Kong and the U.S. have dropped 10.9 percent, 12 percent, and 15.2 percent respectively, which indicates that the bulk of toy purchases have already been consummated to stock for the upcoming holiday buying season and declining export volume for 2009 is a certainty.

 Toy manufacturing represents the most margin sensitive aspect of manufacturing sourcing and in fact it was the toy industry that led the first wave of production outsourcing within China’s Guangdong province.  Since that time, the obvious need for higher quality and safety standards are driving these same brand owners to source their production in more interior regions of China, or within other evolving low-cost manufacturing regions. In essence, the trends noted should not be a total surprise.

This trending in the toy industry is however another indicator of the changing winds for global outsourcing or near shoring.  The singular notion of savings in direct labor costs can no longer justify an outsourcing decision. The added factors of market acceptance of quality, more stringent regulatory compliance, transportation and landed cost factors now play a more significant aspect to the overall sourcing decision.

The latest and most timely reminder of for increased quality and safety concerns stems from this weeks highly publicized product recall of infant cribs, the largest in U.S. history,.  Over 2.1 million drop-side infant cribs, manufactured from January 1993 to October 2009 are being recalled because of potential hardware breakage leading to infant safety concerns or potential death from suffocation.  The affected cribs were noted as being manufactured in Canada, China, and Indonesia.

The takeaway is that sourcing decisions are no longer static, and sourcing professionals need many more strategic skills and information sources to make the most intelligent and timely sourcing decisions.

 Bob Ferrari

In late September of 2008, the incidents of Chinese milk and powdered milk products laced with the chemical melamine became very public, and the outrage within China and other countries was highly charged.  Six infants died and more than 300,000 children were made ill, some seriously, as result of digesting tainted milk and milk powdered products.

At the time of the incident, I penned a Supply Chain Matters commentary expressing my personal outrage and calling for Chinese officials to once and for all crackdown on these scurrilous practices which had a previous history in other product areas as well.  As more and more information began to leak out regarding the incident, it became apparent that Sanlu Group, China’s largest producer of infant formula, was aware of the magnitude of the problem as far back as August, but neglected to make full disclosure due to the sensitivity for the upcoming Olympic games being held in China at the time. Other milk producers were also impacted, and brands such as Fonterra and Nestle were dragged into the effects of the scandal.

It’s a little over a year since these incidents and we can now observe the after effects.  China‘s Xinhua New Agency reported today that two people have been executed for their involvement in the scandal.  One, a Chinese farmer, was convicted of endangering public safety by dangerous means by producing more than 770 tonnes of melamine-laced milk.  Another, a major distributor of milk to Sanlu Group, was convicted of selling more than 900 tonnes of milk tainted with protein powder.  Both were executed.  The former board chairwoman of the Sanlu Group was convicted of manufacturing and selling fake or substandard products and was sentenced to life in prison.  All together, according to Xinghua, three individuals were jailed for life, and 15 were imprisoned for terms ranging from two to fifteen years in prison. One received a suspended death sentence.

I also came across a related news article from July which noted that Chinese dairy farmers in the home province of Sanlu Group were just getting on their feet as a result of the backlash from the incident.  An official of the Hebei Food Industry Association was quoted as indicating that the market has recovered to 70 percent of pre-scandal milk consumption. Market prices of raw milk which plummeted to 1.6 yuan ($0.23 USD) in December of 2008, had bounced back to 2.6 yuan per kg. by July, but diary farmers were still economically suffering. In all, the Hebei provincial government had to provide 40 million yuan in direct subsidies and 60 million yuan in low-interest loans to help diary farmers survive the crisis. Nationwide, the Chinese Ministry of Agriculture found that 3908 of that country’s 20,393 total milk collection stations, roughly 20 percent, to be defective and were shut down.

The consumers of China, the Chinese dairy industry, and the unscrupulous individuals involved have all paid a price as a result of China’s tainted milk scandal. China’s quick actions in response to this unfortunate and tragic incident are commendable. While exercising the death penalty in so short a time can be viewed as extreme, it certainly leaves little doubt of China’s intent to send a message that its tolerance for profit over the safety of consumers is waning.

We trust that China’s producers and governmental oversight agencies have learned from this incident, and will restore consumer trust in Chinese branded products.  Time and continued diligence will provide the real answer.

Bob Ferrari

A posting penned by Anthony Zumpano on the Brandchannel blog does a great job of articulating the latest holiday supply snafu involving Sony.  The consumer electronics producer who recently announced its Reader Daily Edition e-reader device is warning consumers that component shortages will delay shipment of the devices until at least December 18, if not later.

In his posting, Anthony comments that this is nothing new for Sony.  “In 2000, it was the PlayStation 2. In 2005, the PlayStation Portable.  In 2006, the PlayStation 3. This year, it’s the Sony e-Reader that many people want, but few will be able to get in time for the holidays.” He nicely puts to bed the conspiracy theory notion that these shortages are purposely created to create hype among consumers.  While the Barnes and Noble Nook device is experiencing similar supply shortages, Amazon’s revamped Kindle is “in-stock”.

As a supply chain industry analyst in 2005 and 2006, I often commented on the supply chain challenges of Sony, in light of its consumer electronics competitors.  Combinations of a rather complex electronic component design and other missteps fueled the shortages and Sony paid the price in market share loss to both Nintendo and Microsoft. Sony can ill afford to play out this same scenario for the upcoming 2009 holiday season. To Sony’s defense, Supply Chain Matters has previously commented on recent high-tech industry reports that spot component shortages are indeed showing-up in many areas because of previous severe cutbacks in capacity and production levels brought on by the global recession. The ongoing message is that traditional planning and product marketing strategies will not suffice in this new era of post-recession recovery.

Supply chain actions, as always, will tell the final story.  Perhaps Sony’s supply chain team, along with the FedEx and UPS air force will save the day for sales and marketing.  Stay tuned for the results.

Bob Ferrari