The year 2010 has turned out to be rather significant for Hon Hai Precision Industry and its major contract manufacturing arm Foxconn Technology Group.  The news was both positive and not so positive.  Certainly, having Apple as your prime customer insures global-wide visibility to any major events involving this now dominant player on the high tech and consumer electronics scene.  In the not so positive category were the incidents of multiple worker suicides that occurred earlier in the year, which have since led to a series of worker wage hikes and other mitigation programs.

The most positive publicity however came in September, when this Asia based provider was featured as a prime Bloomberg BusinessWeek cover story which noted that Foxconn had the tenets of a disruptive strategy that will change the landscape of high tech and consumer electronics competitive strategy in the months to come. The article cited a twofold strategy that was unfolding.  The first is a multi-year strategy for moving certain production to more interior regions of mainland China.  It is within the interior regions where the migrant workforce actually resides and also where social and family support systems are present.  The second strategy involves Hon Hai as an eventual OEM itself, targeting China’s emerging middle class with a series of in-country selections. That strategy could include the leveraging of a channels business formation where former Foxconn factory employees could manage their own small retail outlets to sell Hon Hai products.

This week brought news that Hon Hai is in talks to acquire a major stake in Hitachi’s flat-panel display business. The deal, if successful, could bring this contract manufacturer to the very top tier of producers of small and medium-sized LCD display panels used in mobile devices and tablet computers. Hitachi’s IPS screens are known for producing clear and bright images, even when viewed from unique angles. Hon Hai had previously acquired Chi Mei Optoelectronics and TPO Displays, two display providers based in Taiwan. The deal also will provide Hon Hai direct onshore presence in high tech manufacturing in Japan, where a second Hitachi LCD panel plant is scheduled to be built north of Tokyo. Access to the manufacturing volumes of Hon Hai would also be a needed shot in the arm for the Japan based high tech component industry.

Supply Chain Matters believes that this deal, if successful, will propel Hon Hai toward another significant step in supply and value-chain vertical integration.  It is one that existing consumer electronics OEM’s should pay close attention.

Having just published our Supply Chain Matters Top Ten Predictions for Global Supply Chains in 2011, perhaps we were remiss in not including a specific mention of Hon Hai.  The year 2011 may well provide more recognition of Hon Hai as being included with one of the top twenty-five supply chains capabilities in consumer electronics value-chain integration.

Bob Ferrari

We extend to all of the readers of Supply Chain Matters warm wishes for the holiday season, with peace and joy for the coming New Year.

Thank you so much for your loyal readership and continued interest.

Happy Holidays…Feliz Navidad….Buon Natale…Joyeuses Fetes…Frohe Weihnachten…

This is the third posting outlining each of the Supply Chain Matters ten predictions for global chains in 2011.  Part One commented on predictions one through three, and Part Two provided commentary on predictions four through seven.

In this posting, we complete our predictions commentary with a look at predictions eight though through ten..

Prediction Eight: Two industry sectors, B2C and healthcare, will be especially effected by significant supply chain process impacts in 2011.

In the retail, wholesale and E-Commerce sectors, the advent of the more economically stressed, sophisticated and demanding consumer, now equipped with computer savvy, smartphones and mobile applications, will alter the retail buying landscape for years to come.  Consumers have found and demonstrated powerful new weapons in smartphones and leveraged use of the Internet.  They also know that the influence pendulum has shifted in favor of the buyer.

The ability to significantly influence product selection choices, shop and easily place orders via the Internet, and the increased ability to actually perform real-time price comparisons while in a retail store are capabilities that consumers will embrace even more.  The implications for retailers are significant, and throughout 2011, retailers and B2C commerce providers will need to be ‘fast-a-foot’ in staying ahead of this trend.  The most important indicator of the implications came when electronics retailer Best Buy announced a quarterly sales shortfall in December. When post 2010 holiday shopping volumes are all tabulated, we may well see which retailers and e-commerce providers were the overall winners and losers, and how consumer buying patterns played out.

Retailers will be faced with critical decisions on areas to invest in accommodating multi-channel commerce or multi-channel operational process integration needs.   Consumers who want to be engaged in the buying experience will expect the same supply chain wide visibility as manufacturers and suppliers expect from their internal processes. As an example, think of the Dominos Pizza buying experience.  Inform me, the consumer, when my purchased product is going to be made, when it ships from the factory, and the exact time it will arrive.  Similarly, if I am shopping in a store, inform me if an out-of-stock item can be found in another nearby store, and reserve that item for me.  Think item level visibility.

The second significantly impacted industry in 2011 will be pharmaceutical and healthcare related value-chains. Significant changes in strategic business models, healthcare reform initiatives emanating from multiple countries and desires to grow sales in emerging markets have brought home a renewed sensitivity to supply chain agility and consistency in operational excellence.  The healthcare supply chain was already highly segmented and non-aligned to joint stakeholder value-chain performance, but as the Bob Dylan tune laments, “Times, They Are A- Changing”.  Aggregate inventory levels are excessive, over five months of days inventory outstanding on average.

We along with others have commented on a more demanding healthcare consumer, a more acute competitive landscape, and the need to introduce modern supply chain practices within life science, vaccine and healthcare related supply chains.  Healthcare supply chains face similar challenges as high tech or consumer products and many best practices can be transferred.

For pharmaceutical and healthcare value-chains, the year 2011 should hopefully bring new opportunities for stakeholder alignment, along with advanced practices in planning, inventory optimization, supplier and customer collaboration.

Prediction Nine: The landscape for the global outsourcing of components and finished goods production will shift again in 2011.

Recent trends in supply chain global outsourcing were motivated by two fundamental business forces. The first relates to competitiveness in product cost, where outsourcing activities were driven by needs for securing the lowest cost producer of components and finished goods while conforming to specific specification of design and quality. The second was driven by market access, the need to have a supply chain or value-transformation presence in a promising emerging market such as China or India.  It is the former that has driven the bulk of outsourcing activity.  Access to emerging markets has become more of a challenge as some countries continue to initiate barriers to market entry among perceived foreign manufacturers or as issues of  copying of product design continue to occur.

In 2011, industry observers point to more shifting sands as labor costs continue to explode in China and other regions and as issues of IP protection become more of a concern.  There are also building storm clouds in global currency risks which manufacturers must also factor in their strategies for 2011. Some industry observers are already pointing toward countries such as Vietnam or Indonesia as the new opportunities for low-cost sourcing, while others note that having a  combination of balanced in and out sourcing options can be the best hedge for intellectual property protection and shifting currency trends.

We predict that in 2011 there will be much more attention paid to outsourcing strategies and to analyzing all the pertinent factors motivating these strategies.  We also expect further shifts, particularly in low margin or highly sensitive IP product areas.

While on this subject, do not be surprised to see one or another of the aircraft, high tech or telecommunications manufacturers having to modify or alter their component sourcing strategies in 2011.

Prediction Ten: Supply chain related green and sustainability programs will continue in 2011 and beyond, but at a slower pace.

In our report card of 2010, we noted that while sustainability and carbon tracking were not as robust as we had earlier predicted, supply chain carbon tracking and sustainability efforts will remain on corporate agendas for some years to come. While a positive sustainability profile often makes good business sense, there has been a noticeable slowdown in momentum. The perceived failures in motivating global wide sustainability milestones and the effects of global recession in changed consumer buying decisions have made business cases for accelerating green and sustainability programs somewhat problematic.

To date, the unspoken aspects to supply chain wide sustainability efforts have been directed at achieving cost reduction as well as sustainability goals. Saving energy, water consumption or packaging costs can all relate to the bottom line,.  As long as supply chain related green and sustainability efforts can be directly associated with either cost reduction or positive impressions on the brand, than these initiatives will continue to be supported in 2011.  Progress, however, will come in multi-year scope and dimensions.

This concludes our listing of what you can expect to see within global supply chains in 2011.  The year 2010 brought many challenges and 2011 will bring similar challenges. Periods of uncertainty tend to separate the industry leaders from the followers, and 2011 will provide another backdrop for industry competition among supply chains.

Please feel free to comment on any of these predictions, as well as offering any that we may have neglected to mention. Readers are also welcomed to participate in our polling question (placed in the lower right-hand panel) regarding the key business priorities for your organization in 2011.

We will also be producing a complimentary research report which outlines each of these predictions in detail.  If you would like a copy, please provide your name, company or affiliation, and return email address. Requests should be sent to: info <at> supply-chain-matters <dot> com.

We extend to all of our readers our best wishes for the holidays, along with a period of rest and renewal with family and friends.

The Supply Chain Matters Team.

The aftereffects of intense scrutiny given to Johnson and Johnson’s efforts to address and mitigate its significant manufacturing quality problems have had some new twists in December.  Earlier this month the company promoted two senior executives in what is being termed as a race to succeed William Weldon, the current Chairman and CEO of the company. Sheri McCoy, who headed J&J’s pharmaceutical business unit, and Alex Gorsky, who headed the medical devices and diagnostics division, were both named vice-chair in the office of the Chairmen. Appointment of potential successors is not new in J&J corporate culture, and at face value, provides a means of proactive successor management.

The implications for addressing and mitigating quality breakdowns, however, lie within the new responsibilities given to each of these elevated executives.  Mr. Gorsky is reported to be given responsibility of the new company-wide manufacturing and supply chain group tasked with addressing and mitigating all manufacturing quality issues. Ms McCoy gains oversight of the consumer business unit that includes the McNeill Consumer Healthcare division, the center of previous problems and plant shutdown.

We trust that both of the elevated executives have the motivation to put personal competitive instincts aside and come together with a unified plan of action and executive commitment to address significant manufacturing issues. Some could argue that having a single executive in-charge of both process remediation and the implications for business decision-making makes for clearer action and accountability. That role apparently remains with chairmen and CEO Weldon who must continue to directly answer for any further incidents.

There was a further development in the most recent recall of certain Rolaids antacid  products due to suspected foreign materials in the product.  The incoming chairman of a U.S. congressional committee probing J&J’s series of product recalls has called for regulators to expand inspections to the contract manufacturer involved in manufacturing the Rolaids product.  The contract manufacturer was identified as BestSweet Inc. of Mooresville North Carolina.  J&J’s McNeill Consumer unit had previously declined to publically name this contract manufacturer. BestSweet is noted as a supplier of cough drops and soft chew tablets for various private store brands, including CVS Caremark Corp. and Walgreens, and the congressional committee wants to determine if the FDA has any history of citings or incidents concerning BestSweet.

As we often observe in product recall incidents, the downstream supply chain implications are often the ones initially overlooked by regulators and the traditional media.

More news concerning J&J will surely come in 2011, and we trust it will be more positive in nature.

Bob Ferrari

This is the second posting outlining each of the Supply Chain Matters ten predictions for global chains in 2011.  Part one can be reviewed at the following link.

In this posting, we comment on predictions four through seven.

Prediction Four: Supply chain technology deployment will remain tactically focused and buyers will remain in a favored position for negotiating technology acquisitionsSimilarly as in 2010, cost and profitability pressures will cause any investments in supply chain technology to continue to be tactically focused and highly scrutinized.  Technology vendors should anticipate continued elongated sales cycles, touch points and reference checks.

We believe that the business process and technology enablement priorities in 2011 will be in needs of deeper and broader supply chain visibility / intelligence and more rapid planning and synchronization of supply chain fulfillment processes. We anticipate popular investment areas to be in improving inventory management, a more responsive and more extended sales and operations planning process, and adaptability to sensing and responding to changes in product demand.

Manufacturing and service firms located in the emerging economic regions of China, Korea, India, greater Asia and Latin America will continue to open the purse strings for investments in supply chain operational, quality management and fulfillment synchronization processes.

We anticipate some slowdown in technology acquisition for sourcing and P2P procurement because of shifting technology enablement priorities towards the more operational sides of the supply chain process needs.  We believe that 2011 will bring a renewed emphasis on quality oversight and process improvement needs, coupled with improved asset management. We further predict that technology directed at supply chain risk mitigation will gain more attention and uptick, especially technology related to the tracking and identification of products throughout the extended supply chain.

Prediction Five: The year will bring a new wave of turmoil, acquisition and market consolidation in certain supply chain and enterprise technology areas.

The year 2010 brought a wave of consolidation and acquisition in the supply chain technology area and we expect that trend to continue in 2011. Acquisitions were motivated by acquirer needs to tap emerging growth markets, adjust strategic focus in market coverage, add geographic presence or take advantage of available opportunities. Some headlines in 2010 included:

B2B and Industry Procurement Processes

The Ariba acquisition of Quadrem

Reardon Commerce acquisition of Ketera

Accenture acquisition of Ariba’s direct sourcing services group

B2B Connectivity

IBM acquisition of Sterling Commerce

High Jump acquisition of TrueCommerce

Growth by Acquisition

RedPrairie acquisition of SmartTurn (SaaS based warehouse and inventory management)

Logility acquisition of Optiant (multi-echelon inventory optimization)

As noted, this trend should continue in 2011, and we predict more concentrated activity among procurement technology providers and specialized best-of-breed providers with interesting cloud computing offerings.   I also echo the Logistics Viewpoint prediction that more technology providers will embrace the importance of B2B process connectivity and look to acquisitions to augment end-to-end process enablement capabilities.

We anticipate some ERP and specialty vendor turmoil as customers continue to push-back on annual maintenance fee burdens, which may impact revenue streams in 2011. Enterprise software, B2B process, database and IT infrastructure vendors are all converging on cloud platforms as the new strategic wave, and we would not be very surprised if there were some major acquisition plays in cloud computing in 2011 as major players such as IBM, HP, Google, Microsoft, Oracle and others jockey for strategic advantage.

Going again out on a limb, we would also not be surprised to observe some major acquisition announcements concerning SAP in 2011. These announcements may either be those concerning select SAP acquisitions or dare we whisper, an acquisition attempt of SAP by another global high tech provider.

Prediction Six: Cloud computing options directed at supply chain business process enhancement will explode in popularity and adoption.

Supply chain process areas are often on the leading edge of new technology adoption and application, and the area of cloud computing is no exception. A wave of cloud computing options directed at tactical supply chain process needs occurred these past two years and we have commented on a number of interesting areas and vendor capabilities in this blog.  We have also touched upon specific process areas of global trade, warehouse management, direct ship and supply-chain wide synchronization fulfillment and demand forecasting in the blog.  Smaller vendor with innovative offerings are making their presence.

The adoption wave of cloud computing will most likely continue into 2011, and the largest benefactors will be small and medium sized businesses. They have the opportunity to garner some rather sophisticated technology capabilities for reasonable, non-capitalized investment.  The largest interest area appears to be supply chain visibility and business intelligence, but areas of planning and S&OP process support should fare well in 2011. Larger companies will also benefit from cloud adoption in 2011.

Like others, we also predict mixed buying signals relative to options for deploying private vs. public clouds.  We believe that private clouds will be favored by larger companies with sensitivities to unique process needs or data security, while SME’s will be inclined toward public clouds.  We do not anticipate a rationalization of forces within 2011.

Prediction Seven: Wider scale leverage and adoption of in-memory computing, coupled with broader application of information discovery platforms could be game changing influences on supply chain wide business analytics.

In our 2010 report card, we noted the just-in-time consumer reflected in today’s B2C sector, and the more demanding and last-minute just-in-time order customer within B2B supply chain environments.  These customer traits will continue to drive sensitivity toward more forward-oriented, response based planning that will need to be grounded in deeper and broader supply chain predictive capabilities.   Two important technology developments stand to have greater impact on predictive analytical capabilities in 2011.  The first is  incorporation of newer in-memory technology hardware appliances within analytical applications that will significantly enhance scenario analysis. The second is the wider adoption of Google-like information discovery tools that can mine hidden data.  If technology providers are agile enough in 2011 to incorporate these technologies not as tool sets, but rather incorporated into turnkey supply chain planning and analysis application appliances, we could see some dramatic uptake in customer interest levels in the second half of the year. If however vendors drag their feet, a market opportunity may be delayed.

Within the tactical areas of procurement, production process controls, logistics and distribution, technology buyers will also seek broader analytical and process intelligence capabilities.

In our upcoming Part Three posting, we will comment on the remaining predictions eight through ten.

Please feel free to comment on any of these predictions, as well as offering any that we may have neglected to mention. Readers are also welcomed to participate in our polling question (placed in the lower right-hand panel) regarding the key business priorities for your organization in 2011.

The Supply Chain Matters Team