A posting within the  21^st Century Supply Chain blog peaked my interest to a rather interesting Business Week article, What’s Holding Back Tech, penned by Steve Hamm.. The article points out that spot shortages are showing up in a wide range of components within high tech related supply chains. The products impacted include digital camera modules, LCD screens and memory chips.  The reasons are common with other industry settings, namely that capacity and production levels have been dramatically lowered as the result of the ongoing economic downturn.

The article rightfully predicts that the coming months will prove to be rather tricky as procurement and supply chain planning professionals try to figure out when and how to ramp-up value-chain activities to take advantage of the pending recovery. Nobody seems all that sure of when a sustained momentum will occur in light of the very high unemployment levels that still exist in Europe and the U.S. Many suppliers are in survival mode, and they will be very reluctant to expand production without some form of longer-term assurances as to volume commitments.

I tend to also concur with the conclusion that when the economy gains more sustained momentum, it may take months to bring dormant factories to life since many workers have been let go, and need to be brought back.  Many factories in China have also either closed, or have dramatically cut-back in production activity that can support both expanding domestic as well as export production needs.

As many in our community have pointed out, the old ways of planning production based on historic sales forecasts or classic MRP planning cycles are not going to suffice in this “new normal”.  Instead, a reliance on demand sensing coupled with more rapid planning capabilities that are linked to various business or order planning scenarios will be more important tools for firms.  We may well be entering an era where worst case, best case, and prudent scenarios become the dominant means of planning.  Sales and operations planning (S&OP) processes will have to move toward an analysis of various business scenarios for achieving certain revenue, profitability or resource management needs.  Planning cycles that take weeks to gain answers or provide options will not suffice in this new era.

If there is one clear lesson that came from this past global recession is that changes in markets, and reactions to those changes come at unprecedented speeds.  Just one year ago, planners in multiple industries had no choice but to dramatically reduce inventory, and a global inventory backflush ensued at remarkable speed. 

Constant change, scenario analysis, agility in planning production and capacity planning processes are the skills and capabilities that firms will need to navigate in the  ”new normal”.

if you need some assistance in getting a broader understanding of these needs, send me an email: bferrari at blog1 dot com.

Bob Ferrari

The highlight of news in the retail industry this week focused on Wal-Mart’s announcement that the company had posted better than expected profits of 3.2%, even though same store sales declined slightly in the U.S..  In the October quarter, Wal-Mart earned $3.24 billion, up from $3.14 billion in the year ago quarter.  Overall sales came in at $99.4 billion from $98.3 billion a year ago.

According to a New York Times article, the company attributed the slight decline in U.S. same store sales solely to falling prices across categories of food as well as electronics. Company officials were quick to point out that consumers remain quite worried about the economy and the uncertain job market, and continue to cut-back on their discretionary purchases.

Continuing the theme expressed by other companies in this global economy, profit increases were facilitated by productivity and cost control improvements including fuel savings.  Wal-Mart reduced inventory in its U.S. stores by $1.8 billion, which is quite a significant amount.  The company’s internal green and sustainability initiatives have no doubt had some impact on reduced fuel savings in private and store facilities. It was also noted that the company would focus on continued expense control as it moved into the critical holiday season.

Readers may well recall Wal-Mart’s prior multi-year high profile initiatives focused on RFID enablement, the key benefits of which were to improve on-shelf availability and improve overall inventory levels.  It appears that Wal-Mart has obviously found a way to reduce inventory without RFID. The company’s “Project Impact” initiative that focuses on less cluttered store layouts and higher-volume merchandise, coupled with the firm’s typical hard nose relationships with suppliers have had some impact on reduction of overall inventory.

The statement of deflationary pricing pressure in consumer goods surprised me.  From what I’ve been observing, major CPG companies such as Kraft and Kellogg’s have been raising their prices during these past few months, in order to maintain their own levels of profitability.  The obvious conclusion then is that consumers are either opting toward buying lower cost generic or lesser-known brands, or have a keen focus on price and coupon promotion.

In consumer electronics, particularly televisions, the march of the technology curve has facilitated the ability to offer lower priced units with adequate features. That should be no surprise since that has been the product lifecycle characteristic of this industry for many months. A Wal-Mart executive noted that the average unit price for flat-panel TV’s is down more than 20 percent in just a year. Wal-Mart’s “Project Impact” initiative calls for merchandising and selling more higher volume consumer electronics, including flat-panel TV’s.

Wal-Mart is the obvious giant in the retail industry, and as Wal-Mart responds to the market, the effects on the entire industry are a consequence.  This latest summary of financial performance points to supply chain cost and productivity savings as the facilitator of continued profitability levels.  The open question is where does Wal-Mart go from here to continue its profitability performance?

It would be interesting for Supply Chain Matters readers to get the inside perspective of Wal-Mart’s ongoing initiatives toward sales and profitability growth.  If you reside in an organization that is a major supplier to Wal-Mart, what types of pressures have been initiated to reduce inventory but insure on-the-shelf availability? What forms of overall pricing pressures have Wal-Mart buyers exhibited of late?

Share your observations in the comments section below this posting.

 Bob Ferrari

If you have been following recent news regarding the U.S. automotive industry, than you may have noted that Ford Motor Company has been shopping for some months for a prospective buyer of its Volvo auto unit.  A recent article appearing in the Wall Street Journal (subscription may be required) outlines some of the plans for Ford’s preferred bidder, Geely Holding Group Company, parent of Geely Automotive Holdings Ltd., one of China’s largest privately owned auto producers. Geeley has been preparing a $2 billion bid to acquire Volvo, and the proposal has been months in the making.

According to the article, Geely has developed a turnaround plan for Volvo that targets the selling of one million Volvo vehicles globally in five years, including the selling of 200,000 cars a year in China. The plan also sets ambitious plans for selling vehicles in Volvo’s traditional European and U.S. markets.  Geely, one of China’s top ten passenger car brands, is a relatively small producer by volume, but has managed to market and produce autos for the Chinese market without leveraging an alliance with other global brands.

Plans call for high volume production to be established in China, but engineering and development would remain in Sweden.  The article cautions however that negotiation talks could still drag on, and issues of intellectual property protection remain to be overcome.

I see this proposed acquisition as a very shrewd move by Geely, for a number of business, marketing and supply-chain related perspectives. 

First and foremost, Geely stands to gain a highly recognized global brand in the premium category, one with a stellar reputation for building solid and very safe automobiles.  It’s been amazing to observe how Ford has encouraged Volvo’s safety engineering expertise to be applied to the broader offering of Ford’s vehicles.  The fact that Ford can now boast about its advanced safety features in its product promotions comes from the direct influence of Volvo engineers.  Geely stands to benefit from this same engineering expertise, and would be wise to allow Volvo engineers to apply their expertise to the entire Geely line-up. Geeley can also benefit from the global management and marketing skills that both Volvo and Ford have invested in the brand.

Second, since Volvo’s are still sold from independent dealers in Europe and the U.S., Geely stands to inherit an existing distribution channel for not only Volvo, but other Geeley vehicles in the future.  Volvo, in-turn, can gain the benefit of Geely’s knowledge of the Chinese automotive market and channels of distribution. Premium brands are becoming much more attractive in China, by evidence of the fact that brands such as Audi, BMW, General Motors Buick, and Mercedes are experiencing double-digit sales growth rates.  Audi expects to sell over 130,000 vehicles, and Buick has sold in excess of 300,000 vehicles this year. Geely has ambitious plans to make Volvo’s more appealing to the most discriminating and wealthy Chinese buyers. The acquisition of Volvo can place Geeley directly into this competitive race for attracting evolving upscale auto buyers in China.

The third benefit lies in deployment of a high-volume global production and efficiency value-chain for producing Volvo vehicles.  Geely’s initial plans call for building a new Volvo plant in China capable of producing 300,000 vehicles per year, and also leverage China’s advantages in material and labor costs.  That also implies the development of new Chinese-based suppliers. The company further indicates that it will maintain Volvo’s current manufacturing capacity in Europe to distribute to both European and U.S. markets.  My speculation is that once Geely’s Chinese manufacturing and Chinese value-chain capabilities are ramped-up and matured, that facility can be the focal point for exporting Volvo’s to other countries.

Finally, if Geely is successful in its bid, it will acquire an outlet to introduce and market autos in the U.S. without having to overcome U.S. government or consumer perceptions regarding Chinese auto companies taking over from U.S. based companies.  Consumers tend to have short memories, and Volvo buyers are a loyal group.  If Geely can maintain Volvo’s engineering and safety standards, build in additional quality, and produce in a far more efficient manner, than consumers will overcome their political objections.  That’s exactly what happened with every other foreign based brand that successfully entered the U.S. market.

Geely’s plans are both bold and shrewd, and could provide strategic advantages from a business and value-chain perspective.  But the potential for slip-ups also exist.  Future developments will tell the complete story of whether all of the strategy and operational execution will fall into place.

 Bob Ferrari