The following commentary can also be viewed and commented on the Supply Chain Expert Community web site.

Last week, Supply Chain Matters commented on what is turning out to be one of the most troublesome supply chain challenges in 2011, namely the challenge of exploding inbound material costs. This challenge often points to the need for companies to either raise product prices, which could jeopardize momentum of product demand, or undertake further cost reductions to offset material costs increases.  Recent polls of supply chain professionals indicate that volatility of demand and rapidly changing business demand patterns are also a dominant challenge.  If reports of Q4 earnings are an indicator, both challenges are occurring simultaneously in multiple industry sectors, and the proper balancing of both will be the differentiator for those companies that succeed in this ‘new normal’ of business in 2011.

The challenge of rising input costs was specifically noted in both B2C and B2B industry sectors.  Procter and Gamble indicated that higher inbound costs will lower its annual earnings by about $1 billion, noting that commodity prices were 20 percent higher than a year ago.  As a result, P&G initiated a new round of internal cost cutting including the elimination of some manufacturing lines, and has not ruled out selective price increases for certain products.  Kimberly Clark, under pressure in rising commodity costs and also competition from private brands,  plans to sell, close or streamline six manufacturing facilities. Yet, the company admitted it may have cut production too deeply in Q4, giving up an estimated $20 million in profits. Industrials maker 3M is actually building inventories in expectation of continued booming export demand and a robust Q1.

The CFO of Ford Motor Company noted that the company expected to see additional pressure on commodity costs in 2011.  Ford reported that its average profit margin on each of its cars and trucks produced in North America was $1730, while profit margin per vehicle in Asia was a mere $97 on roughly 40% of North America’s output volume.  The implication is that while Asia demand is booming, in a market of high price sensitivity, the challenge to increase margins in the midst of such challenges will be a prime concern.  Meanwhile Volkswagen warned that a shortage of certain electronic components within its engines will force the company to halt production at two German factories this week.  German automakers have experienced extraordinary order rates primarily driven by demand in emerging markets.  The CEO of Daimler noted that suppliers are under quite a strain to keep up with demand, and everyone is struggling.  In December, the Vice President of Procurement for BMW North America noted that some of BMW’s suppliers cut too deeply during the recession, and now cannot keep pace with current demand.  Corning who had slashed inventories during the recession, struggled in 2010 to keep-up with auto maker demands for emission control filters, having to ship parts by air to China factories.

Caterpillar experienced a blowout Q4 due in part to the fact that exploding commodity costs have fueled mining companies to invest in additional equipment, while the increased boom in building and construction in emerging markets fuels the need for additional equipment.  While acknowledging that higher prices for metals and other materials were evident, the company did not see them as a significant challenge in 2011, primarily because of the increased efficiency of its internal manufacturing plants and external suppliers.  Last year, Caterpillar’s internal plants boosted shipments at the fastest rate in more than three decades. However the company has been shifting the sourcing of complex parts away from more costly regions, such as Japan, into China.

While Apple has done an extraordinary job in being able to respond to and sustain explosive shipping volumes for iPhones and iPads, other consumer electronics providers continue to struggle with the combined challenges of select component shortages brought about by explosive demand, and now, the threat of increased material and component costs impacting margins.

These combined challenges have not gone unnoticed, and the financial media and Wall Street have taken notice to both challenges, but in our view, haven’t connected the dots as yet.  Rising raw material and component costs prompt fears for maintaining rather healthy margins and healthy balance sheets.  Wall Street enjoys the benefits of exploding productivity as companies continue to get more done with less.  On the other hand, the visibility to the constraints of today’s extraordinarily lean supply chains continued to be noted. Unplanned or exception events, can cause either a lost opportunity on securing new business, or pay a penalty in increased costs to satisfy demands.

The real victims in 2011 may well be smaller suppliers who are caught in the vise of larger customers demanding additional cost and productivity concessions, or increased agility to respond to exploding growth opportunities in the emerging markets.  These same suppliers are squeezed by challenges to access additional capital financing and to invest in the business process and advanced technology tools that can provide broader supply chain visibility and responsiveness.

The two significant supply chain management challenges in 2011 of offsetting exploding material costs, while insuring the ability to be agile and responsive to more explosive demand coming from certain geographic regions, will no doubt cause some firms additional setbacks.  Cutting more costs internally while demanding a more agile and faster responding supply chain are mutually exclusive and conflicting goals.  This does not bode well for either North American based supply chains or smaller suppliers caught in the current squeeze.

Tough decisions are in store for the remainder of 2011.  Organizations that most need to invest in value-chain agility and responsiveness may find themselves prohibited from doing so by cost pressures.  The need for closer communication and coordinated strategy among procurement and broader supply chain management teams will be a fundamental challenge in 2011.

How is your organization addressing these two challenges?

Bob Ferrari

© Copyright 2011 The Ferrari Consulting and Research Group LLC

In our Part One posting, we shared the initial three areas of interview discussions with John Sells, incoming chairperson of the board of directors for the Supply Chain Council. This part two posting will present the commentary from the remaining three areas of our interview discussions.

Question: How do you foresee the vision and mission of SCC changing within the next period of board leadership in terms of education, supply chain framework models, or other services that can be provided?

John was quick to point out that he does not view the vision and mission of SCC changing per se, but rather more depth to the vision of competitive supply chains.  He anticipates that member volunteer activities will drill down deeper to for instance include levels two and three of the current SCOR methodology, as well more broad based training needs that are tailored specifically for SCC member companies.  A noted success these past months has been the ability to deliver member training in either local, regional, or company-specific training venues.

Beyond the SCOR framework, John feels that members seek more assistance in their planning of post-recessionary recovery.  John noted: “We are not going to have a robust recovery unless you have robust supply chains.  It is going to be the supply chain that leads the way to a robust recovery.”

One other important example that John noted is that the U.S. Department of Labor does not currently recognize supply chain as a formal job category.  “Let’s help acknowledge that supply chain is a bona fide skills category that government and labor agencies can track.”

Often discussed is the shortage of supply chain management skills in the emerging market regions of the globe and John feels that a more consistent categorization of SCM skills across the globe can go a long way in helping to identify member companies, academia and governmental agencies to help identify required supply chain skill areas

Question: Can you comment on any ongoing or upcoming programs and/or major initiatives to which Council members can anticipate?

The council is a non-profit organization. One important initiative that John touched upon was the council’s efforts to establish a foundation within the SCC structure to support and fund further research and development activities centered on supply chain process excellence. These efforts would possibly involve the development or sponsorship of grants that would bring together academia and other institutions to further develop more practioner models needed for organizations to keep pace with the supply chain management process and management skills required to support and keep pace with business recovery.

John and the board want to insure that this supply chain related foundation is initiated and becomes sustainable. ‘While SIG’s (special interest groups) have their own unique contribution, more can be accomplished through foundational activities, rationalized across all global regions. It is a rather compelling story.”

Final Question: Lately, SCC has been expanding its outreach to other supply chain management oriented professional organizations such as APICS.  Do you foresee this activity continuing in the coming months?

John noted that these broadened relationships have increased and that the board anticipates further activity in the coming months. As other supply chain oriented organizations approach SCC, there will be openness toward discussion of mutual activity that can benefit members.

John specifically noted that the Reverse Logistics Association has already approached the council.  As DOD related supply chain organizations continue to embrace SCOR, there may be other broadened opportunities related to training and professional advancement in these organizations as well.

We would like to sincerely thank John Sells for taking the time to speak with Supply Chain Matters and wish the SCC great success in its future initiatives.

Bob Ferrari

Disclosure:  The author of this posting, Bob Ferrari, serves as a volunteer on the SCC North America Leadership team.

As the Q4 earnings announcement period continues to ramp-up, there is rather positive news coming from the U.S. railroad sector, news that bodes well for an uptick in North American supply chain activity. The Wall Street Journal noted that the largest North American railroads hauled more of most everything in the fourth quarter, generating more optimism, hiring and previously idled equipment resource deployment.

CSX Corp. and Union Pacific indicated that business is so good that they are rehiring more previous idled workers. Union Pacific recorded a 31 percent increase in operating income and noted that 2010 was the most profitable year in the company’s 150 year history. Business volumes were up 9 percent with all 6 business groups reporting shipment volume growth.  CSX recoded a 46 percent increase in Q4 profit and noted growth across nearly all markets.  The railroad plans to invest $2 billion in its business operations in 2011.

Norfolk Southern recoded a 14 percent increase in revues and a 31 percent increase in year-on-year profits.  Coalrevenues increased 18 percent, intermodal was up 16 percent and general merchandise was up 10 percent.

Canadian National Railway reported a 19 percent increase in Q4 profits with strong growth noted in all freight segments.  For 2011, CN predicts continued increased freight activity in overseas container, metal products and iron ore, along with export demand in lumber, petroleum and chemicals. Canadian Pacific Railway reported a 34% increase in Q4 operating income and also noted strong demand across all lines of business.  CP has allocated up to $1 billion for capital improvement programs in 2011.

Good news indeed and hopefully, 2011 will bring more momentum for North American supply chains.

Bob Ferrari

Supply Chain Matters had the opportunity to chat with John Sells who is the recently elected Chairman, board of directors for the Supply Chain Council (SCC).

John’s day-to-day responsibilities involve his role as Senior Manager, Logistics and Sustainment at Lockheed Martin Corporation, focusing on corporate engineering, technology and performance based logistics.  We have had the opportunity to interview the chairs of SCC in the past, and wanted to also check-in with John regarding the thrust of SCC in the coming months.

For those readers unfamiliar with SCC, it is a global nonprofit organization whose methodology, diagnostic, and benchmarking tools help nearly a thousand organizations make dramatic and rapid improvements in their supply chain processes.  SCC is most associated with the creation and ongoing maturity of the Supply Chain Operations Reference (SCOR®) model which helps organizations determine and compare the performance of supply chain and related operations within their company or against other organizations.

In our interview, we touched upon a number of different areas. Because of the length of content, we divided the output of this interview into two separate postings.  This part one posting will share our interview exchange covering the first three questions.  Part two will share the remaing three questions.

Question: Could you briefly describe your past history with the Council and what led you to seek a board leadership role?

John’s involvement started some time ago and was specifically focused on the unique supply chain process challenges that are prevalent in aerospace and defense-oriented supply chain processes.  John joined with others to form a special interest group focused specifically on these unique industry needs, and worked with the team to develop a SCOR curriculum that was tailored to this industry.  An important consideration was incorporating concepts of performance based logistics within the SCOR framework.

John later became a SCOR certified instructor and remains focused and actively involved in Aerospace and Department of Defense (DOD) oriented supply chain process environmental frameworks.  John is quick to note how the SCOR framework can crack the code toward understanding certain industry unique needs of supply chain process as well as helping to uncover unnecessary complexity. These special interest group efforts have now been instrumental in shaping DOD policy and guidance to shape the concepts of performance based logistics contract metrics.

In his SCC tenure, John became more involved in SCC board level activities and is now the elected Board chairperson.  In our interview, John noted that his appointment is an indication that SCC is broadening to include a broader industry perspective beyond manufacturing focused supply chains.

Readers should also note that John’s appointment represents the first DOD industry representative to assume the chair position of SCC.

Question: What benefits and services will the Council continue to provide for its members?

John noted that the SCOR methodology continues to evolve and be improved upon through broader training, benchmarking and added process perspectives.  The SCOR model has recently been broadened to incorporate product design, product lifecycle and customer chain processes.  SCC is also finding ongoing success with more geographic focused training and events which allow each geography to incorporate unique supply chain process needs of the particular region.  Europe and Asia based chapters conduct their own unique events and the North America chapter will be hosting both its annual SCOR Users meeting in February, as well as the Supply Chain World North America conference in May of this year.

Beyond the SCOR methodology itself, John noted that SCC is broadening its perspective into other supply chain related needs.

Question: What role will the geographical regional chapters play in carrying out the mission of the Council?

John noted that it has become all too apparent that council members exist in a global economy, and that the fundamental baseline is what supply chain management looks like across the globe.  The board is of the belief that as more global efforts are supported, the more the benefits will accrue to all. John expressed this as a “force multiplier effect”.  Along with this comes a high reliance on the local regional chapters to identify the unique needs for their region.

Feedback among the various geographic regions has been generally positive and the regional chapters are growing.  There are more activities now being sponsored within regions and the pride of ownership is increasing.

One metric noted was the level of SCOR model awareness across the globe. And that SCOR-P certification is catching on internationally. The geographic chapters of SCC  have further increased their efforts to provide more localized awareness and training opportunities.  Today, the SCOR methodology, along with training related to the model, is delivered in multiple languages.

The SCC board is also facilitating more local feedback by scheduling ongoing board meetings in conjunction with local regional events. With this board meeting schedule, local member companies now have the opportunity to be able to directly meet and interact with SCC board members on overall needs of the council.  John feels that this has allowed feedback to bubble-up more quickly and is working out quite well.

This concludes this part one posting.

Bob Ferrari

Disclosure:  The author of this posting, Bob Ferrari, serves as a volunteer on the SCC North America Leadership team.

The following posting can also be viewed on the Supply Chain Expert Community web site.

A Monday can sometimes be a slow day for business and financial news, but yesterday, on the eve of the meeting of the World Economic Forum in Davos, it seemed that a common headline for print and video outlets revolved around the challenge of exploding inbound material costs and mounting concerns of inflation. In economic circles, these trends will often point to the need for companies to eventually raise product prices, which fuels the fears of inflation or, perhaps, another slowdown in consumer spending.  There is, however, even more at stake in terms of supply chain capabilities.

The latest poll displayed on the Supply Chain Expert Community web site seeks an opinion as to what will be the biggest supply chain challenge in 2011. Thus far, the majority of respondents have responded that demand volatility and collaboration with customers and suppliers seems to be the prevailing opinion.  It may well turn out that the current trend of explosively rising inbound material costs will present the most difficult supply chain related organizational challenges for 2011.

The trend of exploding inbound material costs should be of little surprise to the community of supply chain management professionals.  This trend started months ago and the pace is now accelerating.  The statistics are troublesome.  In food commodities, the price of corn has already risen by 84 percent, , wheat 61 percent, soybeans 48 percent, and sugar 18%.  Within industrial and discrete sectors, the price of steel is expected to double sometime this year.  We have all read of the exploding prices in precious metals and rare earth materials, and the price of oil and associated energy related products is again on the rise.

One of our Supply Chain Matters Top Ten Predictions for Global Supply Chains in 2011, addressed this specific challenge.  Prediction Two noted that in the year 2011, supply chain cost reduction pressures will run into a stone wall as rising inbound material costs provide difficult roadblocks for supply chain teams in their ability to deliver any offsetting aggressive cost reduction objectives. We noted how the CEO of global auto parts supplier Bosch had indicated that this rebound in commodity prices would put intense strain on industrial companies, as well as their suppliers, and there could well be more supplier casualties.   The dilemma is that the previous toll of multiple years of cost reduction efforts evokes a concern that any current increased reductions risk cutting into ‘the bone’ of supply chain performance capabilities.

The counter argument is that by raising prices for products, companies will be able to offset rising inbound material costs.  In fact, the wave of announcements may be about to begin.  Other long-time industry observers, however, are quick to caution that companies remain under pressure to keep delivering healthy levels of margins, profitability and cash.

It seems to me that now, more than ever, is the time for supply chain management teams to step-up their communication and education to senior management regarding the specific trade-offs of cost reduction objectives.  The risks are rather high, along with the consequences.  Leaning too much toward further offsetting supply chain cost reduction may well harm the ability for agility and responsiveness in these very uncertain business times.  Passing this cost reduction burden on to suppliers also risks more disruption and harm.

Conversely, aggressive price increases could negatively impact demand for products, and if a wave of companies join the stampede, the risks of another economic slowdown seem to me to be very real.

While supply chain management teams may not have the final say, now is the time to insure that open and unfiltered communication exists with senior management, and that supply chain cross-functional teams come to some consensus on the impacts of various cost reduction or supply chain restructuring options. Planning and mitigation now can avert a potentially serious business impact later.

How is your organization viewing the current challenge of  exploding input costs?

Bob Ferrari