Over these past weeks, Supply Chain Matters has been providing specific commentary noting that recent corporate profitability has been attributed directly to specific cost savings initiatives in and across supply chain areas.  The latest of these notations were our posts reflecting on recent profitability results for Wal-Mart and The Hershey Company.

In today’s Wall Street Journal, a rather insightful Abreast of the Market article by Tom Lauricella, Earning Are Strong, Sales Are Another Story (subscription required), validates the notion that a record number of U.S. companies have indeed beat earnings expectations in the third quarter,  and a big portion of these profits have come from cost-cutting vs. any substantial revenue growth. Thus far, revenues are on track to fall 10% overall, and without an upturn in U.S. sales, cost-cutting can only boost profits for so long.  A further notion from Wall Street is that companies are running so lean that should revenue growth pick-up in the coming months, operating margins would likely surge, giving an ever higher boost to profits.

Another key observation came from a Goldman Sachs analyst noting that most revenue surprises were heavily concentrated among health-care and technology companies, and more broadly among “intermediary” companies that make products such as semiconductors, rather than companies that sell finished goods.  If I paraphrase that statement, any revenue growth thus far has been concentrated in the lower tiers of value-chains, where inventory re-stocking has driven the bulk of incremental business activity vs. end-customers. An UBS analyst takes the opposite view, noting that a 3.8 percent rise in revenues measured against the second quarter is positive: “People have been unduly negative about the profit picture“.

I would caution certain Wall Street players not to be so optimistic about the potential for surging operating margins when sales do increase. All the evidence that I see leads me to believe that overall, supply and value-chains are at a very critical point in terms of their ability to support any rapid ramp-ups in revenue growth.  Similar to our commentary last Friday about the current warning signs in high-tech supply chains, many companies in manufacturing industries may have cut back too much in headcount and resources, and it make take months for dormant factories or fragile suppliers to be able to ramp-up and support any sustained sales growth. Instead of financial headlines praising increased margins and profitability, there may well be those that point to a breaking point in the ability of supply and value chains ability to support revenue growth.  Certainly there will be individual exception, but I suspect that on the whole, there have been too many cutbacks among industry supply chains to be able to quickly respond to a sudden upturn in revenues.

What’s the situation in your environment?

Have cutbacks in supply chain activities gone too far and cut too deep?

Please share your specific observations in the Comments section below this post, or participate in an interactive survey regarding 2010 supply chain budgets.

 Bob Ferrari

Last week, we called attention to a Business Week article that noted that business changes occurring in high tech and possibly other industry supply chains.  Supply Chain Matters commented that traditional planning based on historic trending, forecasting and traditionally longer planning cycles may not be sufficient to plan supply chain needs in the ‘new normal’ of business recovery.

Certain Oracle customers have already recognized this need, and Oracle has responded by announcing today the general availability of the Oracle Rapid Planning.

Interesting enough, this application sits on top of Oracle’s or other existing supply chain applications allowing planners to respond quickly to changes that may be required across the supply chain. 

I was briefed on Friday by Oracle executives Roger Goossens and John Bermudez last week about the features of this new application.  They indicated that feedback provided from an Oracle supply chain customer council indicated the need to respond to events that occur within inter-planning cycles, where the need for immediate answers to business opportunities or business change becomes critical.  An example would be if a customer wants to move-up and existing order or a new prospective customer wants to place an opportunistic order for goods.

The basis of this application is to snapshot the entire planning database at any given point in time, store that information in a totally memory resident architecture, and be able to run super-fast simulations of a planning scenario.  The application itself is stand-alone, and can be utilized in either an Oracle, or other ERP or APS environment, for instance SAP.  The technology leverages Oracle’s latest Fusion middleware which comes bundled in the licensing of the application. Software deployment is flexible, either from a traditional behind the firewall licensed version, or hosted options. The user interface also takes advantage of Oracle’s latest simplified, spreadsheet-like user and graphical interfaces. Another interesting note for this application is that it leverages simulation capabilities from Demantra’s sales and operations planning (S&OP) technology.

This application may be especially of interest to Oracle’s former JD Edwards’s customers with older versions of supply chain planning that may want to take advantage of Oracle’s newer planning technology without having to take the drink of Oracle’s full suite of supply chain applications, including templates for supply review, allocation decisions or capacity review.

Oracle was somewhat vague on the pricing aspects of the overall application except to indicate that the pricing is based on Oracle’s current pricing model that pegs size of the organization or supply chain as a reference.  Current customer references are limited to existing beta customers, and may increase over time.  At Oracle’s recent user’s conference, one customer who indicated use of this application was Amway.

As industry supply chains enter post recession recovery, the need for more rapid, event-driven planning will become more apparent.  For that alone, Oracle’s timing on the release of rapid planning is opportunistic.  How attractive this application becomes will be based on Oracle’s customer education and pricing of Rapid Planning.

 Bob Ferrari

Disclaimer: This author has received no compensation or consideration for neither authoring nor publishing this blog posting.