Since our initial alert posting on Friday afternoon, more specifics have come forth regarding suspicious air shipments.  Two different packages air shipped from Yemen, one on a UPS cargo plane seized in the United Kingdom, and one in a FedEx cargo facility in Dubai, were both confirmed as explosive devices.  In the case of the package seized in Dubai, it actually was transported on a civilian airliner before reaching the FedEx facility.

In both packages, an ordinary looking laser printer contained a toner cartridge where explosives and electronics circuitry were placed. Authorities in Yemen reacted quickly and have arrested one woman thus far, suspected of orchestrating the shipments.

U.S. Homeland Security officials continue to classify this incident as a “credible threat” and we can certainly expect more implications as a result of this incident. Carriers UPS, FedEx and the U.S. Postal Service continue to ban all shipment activity originating from Yemen.

White House Anti-Terrorism Advisor John Brennan appeared on many of the major Sunday news shows and provided what I observed as some different accounts of this incident.  At first, he noted that Homeland Security officials believe that packages were addressed to Jewish synagogues located in the Chicago area.  Mr. Brennan later changed this explanation to more align with a statement from U.K. security officials, namely that the explosives were designed to bring down an aircraft.

A Bloomberg News update notes that one of the two intercepted packages was set to be detonated by a cell phone and the other a timer, and security officials have not ruled out that potentially other lethal packages having being shipped.  What should be of more concern to supply chain management professionals, this article notes that authorities are “looking very closely’ at whether the crash of a UPS cargo plane in Dubai in September is related to the cargo-bombs plot.

Supply chain professionals need to prepare for the implications of this incident.  International intelligence officials have now concluded that these incidents have the tenets of al-Qaeda related terrorism.  The explosive substance found in the two seized shipments is noted as similar to the unexploded PETN found on a terrorist flying on a Northwest Airlines flight on December 25.   Authorities are uncertain as to whether there may be more explosive shipments in the transportation network, or whether terrorists are testing security measures for vulnerability.  If as reported, that the previous UPS cargo plane crash in Dubai is linked to a terrorist act, than that is something with long-lasting implications.

The good news regarding this incident is that international security measures and coordinated measures worked well. Terrorist threat warnings are escalated and we can certainly expect heightened inspection activity of air-related cargo shipments both originating from suspected countries, and general in nature.  With the holiday buying season fast approaching and retailers and manufacturers continuing to maintain lean inventories, flexibility to respond to consumer demand through overnight air may suffer from delays.  Also as noted in our previous Supply Chain Matters commentary related to the previous UPS plane crash, authorities were already suspecting that air shipments of lithium-ion batteries were causing aircraft fires, and I believe that these same authorities will leverage this incident to institute revised air shipment policies for such shipments.  Do not rule out that security officials may also mandate that major electronic sub-components such a toner cartridges be mandated to be packaged separately.

Bottom-line, these air-cargo incidents will indeed have important and unfolding implications to future air shipments..

Bob Ferrari

This afternoon, many major news outlets are reporting that cargo destination airports have been placed on high alert after investigators found a suspicious package aboard a UPS cargo plane originating from Yemen to Chicago, with a stop in London.   According to a breaking news CNN report, the suspicious package contained a ‘manipulated’ toner cartridge. Although this cartridge tested negative for explosive material, the incident has triggered heightened security inspections in at least three other U.S. airports where air cargo shipments originating from Yemen are scheduled to arrive.  CNN also notes that the New York City bomb squad was responding to a suspected explosive device inside a package aboard a UPS truck. A White House statement notes that authorities were able to identify and examine two suspicious packages, one in East Midlands, United Kingdom, and one in Dubai.

We will hold any significant commentary until all the facts related to this air cargo security incident get sorted out.

Our two initial observations, however, are that this may lead to increased security measures concerning air cargo in the coming weeks, perhaps adding to transit times. Already, one U.S. Congressman is calling for 100 percent screening of all air cargo shipments. That could be challenging. Package tracking technology will also prove instrumental to authorities in quickly sorting out threat situations.

Stay tuned for any further commentaries.

In previous Supply Chain Matters commentary related to what’s on the mind of senior supply chain executives, we noted that an important management practice that was adopted from the previous challenge of global economic recession was a philosophy to ‘never waste a crisis’ to bring about required structural changes in supply chain structures and needed capabilities.

During 2008/2009, the U.S. automotive industry faced a significant crisis involving the largest OEM’s, and there were legitimate concerns that many key suppliers within the U.S. automotive supply chain would also be the collateral damage to a flawed industry business model.  A lot has changed, and the outcomes remain positive.

Today’s Wall Street Journal notes (paid subscription required) that the current upturn within the U.S. automotive industry is providing more positive outcomes for the industry’s parts suppliers, but more importantly, re-structuring has led to capabilities that can sustain profitability at lower industry output levels.  Suppliers such as BorgWarner Inc., Dana Holding Corp., Federal-Mogul Corp.Johnson Controls Inc. and Lear Corp. have each reported booming third quarter profits.  Lear tripled its profit level on an 11% sales gain, BorgWarner’s profit increased sixfold on a 37% sales gain, and Federal-Mogul’s profit also increased sixfold.

We should point out that a lot of cost cutting, plant closures and other structural changes were required to attain these current profitability levels.  Many of these suppliers have reduced capacity and operate on a lean just-in-time operational model utilizing temporary labor or overtime to respond to upside production needs. The overall U.S. automotive industry is expected to produce close to 12 million in shipments this year vs. a historic industry output average of 16 million units.  Obviously, many suppliers have lowered their break-even points.

Moving forward, however, these same automotive suppliers, that are in a better financial position need to loosen the purse strings and invest in some select supply chain analytical and business intelligence capabilities. The industry storm clouds have not abated.  U.S. consumers, on the whole, remain cautious in spending.  Suppliers can benefit from increased industry sales, but consumers are also holding on to their aging vehicles, which in-turn will require more replacement parts.  These two channels are significantly different and require differing supply chain fulfillment, inventory management and demand intelligence capabilities. Companies operating in such a lean and resource-constrained focus require the ability to better sense and respond to changes in customer or channel needs, along with smarter utilization of inventory and capacity.

We believe that a keener focus on how to better leverage overall inventory management and supply chain analytical and scenario analysis capabilities would be a wise investment for industry suppliers.

Bob Ferrari

Supply chain procurement and operational professionals have yet another cost reduction and control challenge to address for the remainder of 2010 and 2011.  Many are probably already acutely aware that a spike of key commodity prices is now putting increased pressure on profit margins. The challenge over the coming months will be finding means to offset higher inbound material costs, and it will not be easy.

As the calender winds down the September ending earnings reporting phase, many manufacturing and consumer oriented companies are flashing warnings to Wall Street.  The latest, Procter and Gamble, experienced a 6.8% earnings decline and vowed to hold the line on increased prices by offsetting cost reductions.  P&G acknowledged that sharply higher costs for paper, pulp and plastic resins are affecting margins. Overall gross margin fell nearly a percentage point to 51.8%.  Other consumer goods manufacturers are also noted these new cost challenges.  The Hershey Company acknowledged higher inbound costs for cocoa and sugar, but indicated that it will attempt to hold the line on cost increases through offsetting cost reductions.  Kraft Foods indicated that it consider select price increases as an offset to higher supply costs.

In the industrial sector, a recent Wall Street Journal article (paid subscription may be required) noted that major industrial suppliers such as Parker Hannifin Corp. and A.O. Smith are all signaling caution relative to reduced margins, and in some cases, reduced growth. However, Illinois Tool Works, who has 800 businesses ranging from appliances to fasteners, that span many tiers of discrete manufacturing supply chains, experienced a revenue increase of 12% and a profit gain of 39% in the past quarter.  One could speculate whether such gains were a result of riding the wave of price increases.

The causes of these new cost headwinds are, in my view, twofold.  First, they reflect that the spike in inventory buildup that occurred earlier this year emboldened commodity providers or market influencers, such as hedge funds, to initiate waves of price increases to fatten-up their own margins and profitability.  One can ponder whether such increases were actually pegged to overall global demand needs.

The other relates to legitimate supply shortages brought about by natural or political events. As an example, wheat crop failures in key agricultural areas, such as Russia, have driven up the price of wheat, and other crop failures in sugar cane or cocoa also triggered natural supply vs. demand price actions. China’s recent political dispute with Japan caused a ban on shipments of rare earth minerals.

Through my lens, this evolving crisis of increased commodity prices is equivalent to gaming the system.  Legitimate interruptions in supply have caused increased pricing pressures, but also cause speculation from a new breed of market influencers or manipulators.

For supply chain procurement and operations professionals, it adds a significant additional challenge in the coming months. Many supply chains currently operate in a fragile and lean state. Supply Chain Matters has  penned multiple commentaries noting key parts shortages impacting shipment and revenue results for those industries experiencing robust growth, and our recent newsletter notes the specific impact on various industry supply chains. Additional pressures for cost reductions could risk cutting into the muscle of supply chain capabilities at a time when agility and flexibility to changing business requirements places emphasis on the ability to quickly respond to market uptakes.

The open question is whether this new challenge of inbound supply cost increases without offsetting revenue increases, placing supply chains into a more fragile state than they already are.

Has senior management raised too much of a risk for cost reduction burden on supply chain teams?  Will this result in further cross-functional team conflict, and further parts and upside capacity shortages when revenue growth is required?

Only time will tell.

What’s your view?  Has the cost reduction challenge introduced significant added risk to supply chain responsiveness?

Bob Ferrari

This is the final of our Supply Chain Matters blog dispatches coming from the Kinaxis Kinexions conference held these past two days in Phoenix.  Previous commentaries included Dispatches One, Two, Three, Four. And Five.

The conference planning team wanted to establish an overall theme of learn, laugh, and share.  They did not disappoint. From my lens, many of the attendees enjoyed the opportunity to partake of this conference and it seemed to this observer that many attendees were pleased they came.  A large shout-out goes to Kirsten Watson, Carol Watson, Lori Smith and the entire team at Kinaxis for coordinating an enjoyable conference.

Reviewing my notes and conversations, I noted that many of the customer presentations emphasized:

• Continued expansion in internationally sourced demand or supply sourcing
• A far more accelerated pace of business requiring quicker planning and decision-making cycles.  The uncertainty of markets coupled with the complexity of global supply chains often requires teams to be able to evaluate different business scenarios.
• An increased need for supply chain segmentation based on desired business outcomes.
• Supply chain risk remains an important need.
• Sales and operations planning processes involving dynamic and often changing business and supply chain dynamics does require technology augmentation.

I also come away with the following summary impressions from the conference.

In the positive category:

One consistent impression from this and previous year’s presentations and conversations is that Rapid Response customers are generally pleased with their overall relationship and support received from Kinaxis.  Many became engaged with this vendor either because no effective planning automation tool existed, frustration with the capabilities of their existing planning systems, and specifically the inability to keep-up with the current speed of required business decisions. That trend shows signs of increased momentum.

The Kinaxis RapidResponse core industry verticals of high tech, aerospace and pharmaceutical are each individually moving at an incredibly rapid rate of external and internal business change and many of the customer presenters consistently reinforced these themes. RapidResponse is in my view, well positioned to be in the ‘sweet spot’ of supply chain capability needs in this ‘new normal’.

The true story of Kinaxis comes from its collection of satisfied customers who continue to work in a two-way collaborative relationship.  Customers seem generally pleased with their vendor relationships. The energy and enthusiasm of the overall Kinaxis team is discernable, and I state that in honest objectivity. I’m pleased to have Kinaxis as one of other extended Supply sponsors of this blog, and to be deemed one of other contributors to the Supply Chain Expert Community.

Kinaxis is one of very few vendors in the supply chain arena that can demonstrate a culture of combining good natured humor with the stress of business. The Late, Late Supply Chain Show format was well received by attendees.  Another tip-of-the-hat goes to Bill Dubois for serving as show host and effectively combining business and humor segments.

In the needs work category

Kinaxis, like any other technology vendor, listens and respond to ongoing needs of customers, especially large globally based customers. I did discern some needs in overcoming the objections of internal IT in having yet another analytical system, perceived not to be in support of common systems architecture, information integration security and reporting standards.  This problem is not solely a Kinaxis one, but rather a challenge for any mission critical supply chain technology vendor evaluated as an alternative to the ERP supply chain planning option. The Kinaxis technology stack is sound. However, supply chain functional teams want the ability to reassure their respective IT teams on adherence to technology standards, whether such systems are either inside or outside the firewall.

Bottom-line, Kinexions was a great conference.

Bob Ferrari