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

Within the Supply Chain Expert Community, Supply Chain Matters has posted previous commentary relative to Apple’s Secret Sauce- it’s relentless attention to supply chain strategy and operational capabilities.  Our previous commentary in mid-February noted how Apple was plugging strategic and tactical holes in its long-term supply strategy by placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics, along with back-up supply contracts with strategic vendors such as LG Display. We have also commented on the reality that Apple’s influence and buying power within the industry insures that it will receive preferred status during supply crisis such as the one unfolding as a result of the earthquake in Japan.  Apple has also maintained a strong and collaborative working relationship with its prime contract manufacturer, Foxconn International, and in some cases has help Foxconn to invest in innovative new capabilities.

This week, a blog commentary penned by John Paczkowski on Digital Daily headlines that a glance at Apple’s latest 10-Q SEC filing indicates that Apple has invested more of its available cash resources in long-term supply.  Purchase commitments rose from $7.9 billion in Q4 of 2010 to $11 billion in Q1 of this fiscal year. Paczkowski speculates that there are two reasons motivating this 39 percent increase in long-term supply commitments: the tight supply environment caused by recent calamities in Japan and the expected increases in iPad2 shipments, which is in a backlogged, supply constrained situation.  Our community, especially those residing in the high tech sector can certainly add even more insights to the supply dynamics that occurring right now.

There is however a far more important lesson for global manufacturers, that being a sensitivity and commitment by senior management for strategically investing in long-term supply chain capabilities vs. short-term gains.

I read a recent commentary appearing on the Manufacturing News Blog which makes the observation that in the depths and consequent exit from the global recession, major manufacturers such as Cisco Systems, General Electric, Hewlett Packard, Intel, Pfizer, Texas Instruments and others allocated more cash to stock buyback programs as opposed to product innovation or other strategic business investments.  Stock buybacks can accelerate the appreciation of a stock price when earnings are on the rise, as they have been for many global manufacturers. It seems that financial engineering is alive and well.

Yesterday the Wall Street Journal noted (paid subscription required) that the stock-market rebound from the depths of the financial crisis has been a boon to executives who received grants of stock options at rock bottom prices in late 2008 and early 2009.  The depressed stock prices at the time motivated corporate boards to grant larger numbers of options than usual. The WSJ notes that more than 90 percent of CEOs of companies in the Standard & Poor’s 500-stock index received stock options from October of 2008 through September of 2009, and that consequent CEO equity has risen more than $3 billion above original grant valuations.

Our community would have rather strong arguments that a good portion of the business success since 2008 came from the ability of the supply chain to successfully navigate through many numbers of supply, demand or disruption centered crisis situations.  Conversely, as certain industry sectors are discovering, a crisis such as the Japan earthquake will again reinforce the notion that a highly visible supply chain setback can have a direct negative impact on stock price performance.

A recent Tomkins Supply Chain Consortium survey noted that senior supply chain executives now have a higher level of uncertainty than they did in the past. Nearly 31 percent expect riskier conditions in the future with areas of greatest concern centered on business planning, product sourcing, customer service and transportation. While manufacturers have managed to navigate very turbulent waters by dramatically cutting back on people, costs, and perhaps certain controls, more uncertainty, complexity and risk remains.

If as a community, we accept Apple as one highly visible benchmark for excellence in global –wide supply chain capabilities, we can again note that Apple understands that investing in long-term supply, fulfillment process capabilities, and supply chain resources can result in more rewarding bottom-line results and stockholder performance.  We should at least give Steve Jobs the credit for calling out stock buybacks for what they are, the transfer of cash from one pocket to another.

Over the coming months, we will all observe more evidence of where investments in supply chain vs. investments in financial engineering have the ultimate impact on customers and shareholders.

What’s your view?

As manufacturers transition from the severe recession, do short-term perspectives and goal fulfillment remain the norm?

Are investments in strategic supply, risk mitigation and customer fulfillment capabilities now being supported in your organization?

Bob Ferrari

This posting will address our final Supply Chain Matters summary impressions from the recently held IBM Impact 2011 conference.  Readers can view any of our update commentaries that occurred during the conference at the following web links:

Commentary One- Initial impressions of the conference.

Commentary Two- Highlights of the Smarter Commerce mini-tent session.

Commentary Three- Highlights of Target Stores implementation of online commerce platform in eight weeks.

Commentary Four- Product strategy implications in Smarter Commerce offerings.

Commentary Five- Joint interview with Infosys Ltd. senior executives on supply chain executive top-of-mind topics related to cloud computing and other business processes.

We attended Impact 2011 with mixed anticipation.  IBM is a fairly large, globally based technology provider and conferences of this kind, especially with over 8000 attendees, can tend to be overwhelming with not a lot of clarity in product direction and strategy.  Having previously attended the Sterling Commerce annual customer conference (Sterling has since been acquired by IBM), we were not sure of what to expect in the area of support for B2B/B2C commerce, order fulfillment and other supply chain business analytics and intelligence process needs, other than the fact that IBM has been conducting multiple acquisitions related to these areas.  We were pleasantly surprised by the level of product assimilation that has occurred thus far, as well as the longer-term direction.

We also attended Impact 2011 under the sponsorship of the Infosys Ltd. SCM practice, which has a long history as an implementation partner of Sterling applications.  Under the IBM umbrella, Infosys can possibly be viewed as a competitor for integration services.  During all of one-on-one interview sessions with IBM executives, that did not appear to be an issue and we were provided an openness of information.

Much of the IBM acquisition activity is now being assembled under the Smarter Commerce umbrella of products and services. The highlight of this activity came on the afternoon of day one in a session titled Smarter Commerce Mini Main Tent, which attracted by our unofficial count, over 500 attendees.  The session outlined IBM’s intentions to direct Smarter Commerce around Buy-Market-Sell-Service process support with on-premise and cloud type software and support offerings. (For more detailed overview, please review our Commentary Two posting).  Today, the focus of smarter Commerce lies in Retail, CP and Distribution industry support, but IBM will surely provide specialized support for additional industry sectors.

Another important observation is that even IBM has come to acknowledge that customers, while valuing the broad vision and overall support capabilities of enterprise-class technology providers, demand that deployments be provided in smaller, more manageable increments.  It was rather interesting to observe IBM Services, similar to an SAP or an Oracle, announce and speak to bundled value accelerators offerings designed to get customers up and running in a quicker manner with more manageable portions of technology with each phased increment.

As with many IBM conferences, there was multiple messaging directed at what’s on the mind of senior executives (your boss) and why you should care.  In our view, IBM would be better served in also messaging on how supply chains, and supply chain professionals can be better helped with IBM technology.

As noted in our commentaries, IBM has moved quickly and aggressively to make a renewed presence in software and Smarter Commerce will umbrella B2B/B2C commerce and supply chain intelligence capabilities.  Something big is underway and the stakes are high for existing enterprise software and best-of-breed vendors  Customers will still demand choice and independence in these areas, and IBM will need to move carefully in assuring that customers will have options in technology, database and integration partner services selection.  Then again, having the IBM name behind all of these various capabilities does provide certain comfort for customers.

Moving forward, IBM will need more industry focused offerings and additional acquisitions will follow. Smarter Commerce and supply chain analytical capabilities may well deserve their own dedicated customer conference.

Bottom-line, supply chain professionals should keep an eye toward IBM as being a significant new force in the multi-channel commerce and supply chain analytics area.  The competitive landscape is about to get much more interesting in electronic commerce, customer intelligence and social related technologies.

Bob Ferrari

We continue with Supply Chain Matters commentary relative to the current announcements of Q1 related revenues and earnings by reflecting on the page one headline article in last Thursday’s published Wall Street Journal, World Revs Up U.S. Profits. (paid subscription required) It again reinforces how the sustaining growth in the emerging economies has fueled a new boom in U.S. manufacturing output, and consequent revenues and profits. In the article, the chief U.S. economist for Deutsche Bank noted: “Manufacturing has been growing gangbusters.”

This new boom is being fueled by stronger sales related to the building of new infrastructure in emerging markets, which includes heavy duty trucks, building, farming and mining equipment. Also noted is a quote from an economist at PNC Financial Services Inc. stating: “The economy would be limping along, at best, without the strong manufacturing sector…”   Large global manufacturers such as Caterpillar, Eaton Corp., Honeywell International and United Technologies are each cited as example companies that are benefitting from booming sales outside of the U.S.

However, as in all aspects of this ‘new-normal’ of business recovery, there are many caution signs that could derail the current boom. Growing unrest in the Middle East, the rapid rise in energy and other key commodity products, the growing threat of inflation will all test the resiliency of this U.S. manufacturing boom. The recent earthquake that occurred in Japan has driven home the critical aspects of product sourcing risks. The crisis itself could provide either positive or negative consequences for U.S. manufacturers.

On Thursday and Friday of this week, this author is pleased to be designated as the master of ceremonies for the 2011 OpsInsight Leadership Forum being held at the Hyatt Harborside in Boston.  The conference program features a great line-up of speakers including eight different keynote speakers addressing many operations leadership topics.  Fourteen other speakers will address various topics related to product innovation, lean methods, business process best practices, management and operational leadership.

In the conference opening address, I will be touching upon where we are as operations  and supply chain executives in this ‘new normal’ of ups and downs and how important a role operations management will play in innovation and future growth for manufacturers.

I’m looking forward to the program and hope to run into some of our readers.

If you desire more information on the conference, you can click on the conference icon located on the right-hand panel of this blog.

U.S. manufacturing is on the rise but uncertainty and risk remain for the coming months.

Is your organization prepared?

Bob Ferrari

The latest quarterly earnings reports from the major U.S. railroads again reflect that shipment volumes and profits are on the rise, but behind the scenes, customer service and asset management remain a bit of challenge.

As an example, CSX posted a 13 percent gain in revenues and a 30 percent boost in Q1 profits.  CSX noted higher shipments in autos, auto parts and construction materials. Where the railroad once had 700 idle locomotives at the depths of the global recession, that number is down to 290.

Similarly, Union Pacific reported gains amounting to 13 percent in revenues and 24 percent in profits with a corresponding 5 percent gain in freight volumes.

Last week, an article published in the Wall Street Journal (paid subscription required) noted that U.S. auto makers are struggling to get finished automobiles and trucks to their respective dealers because of a shortage of railcars.  Chrysler, Ford and General Motors have been storing finished vehicles in temporary storage lots awaiting the scheduling and arrival of railcars for shipment.  This shortage of railcars has added days to expected dealer receipts and consequent sales. The article notes that now that U.S. manufacturing volumes are on the rise, the rail carriers do not seem to have enough active rolling stock in circulation to accommodate on-time deliveries.  Interesting enough, CSX acknowledged that the shortage of available railcars has had an impact on the carrier ability to transport finished vehicles from production sites to dealer locations.

We recently penned a guest commentary on the Infosys SCM blog noting how the past global recession has brought forward the critical importance of enterprise asset management (EAM) for asset-intensive industries such as railroads or utilities. As an example, U.S. industry shipments of railcars declined by 64% in 2009.  According to the Association of American Railroads, 2009 was the worst year for freight rail traffic, reaching its lowest levels since 1988.  In that same year, 28 percent of rail fleets were parked in storage, and one estimate noted that there were $43 billion in idle assets representing both leased and owned locomotives and railcars.  The BNSF railroad alone had rail cars that sat idle for up to three years on unused track stretching more than 30 miles in some places.  It seemed like every available rail spur was utilized as a storage location, a virtual real estate warehouse, as it were. As observers, we speculated on how railroads were able to track and account for all of these scattered idle assets.

Now that manufacturing is surging in the U.S. these same railroads are under pressure to accommodate increased service requirements, but that leads to challenges of locating idle assets, checking and inspecting equipment and sequencing locomotives and railcars into normalized train schedules.

While the financial numbers for U.S. railroads are steadily improving, the operational challenges of customer service as back once again.  In the backdrop lies the importance of integrated and timely inventory and scheduling of assets. That may well be the most important lesson for U.S. railroads and other asset-intensive industry.

Bob Ferrari

They did it again! 

Apple, everyone’s top supply chain icon, including ours, yesterday reported yet another blowout quarter of revenues and profits. If you had not read the news in the financial media, the fiscal Q2 (ending March 26) numbers were impressive, to say the least:

• Quarterly profits up 95 percent to $5.99 billion
• Revues up 83 percent to $24.6 billion
• Gross margin increase of 2.9 points to 41.4 percent
• Doubled iPhone sales from a year ago, to a record 18.6 million, including a 15 percent increase from the holiday-laden December quarter
• Increased Macintosh sales by 28 percent to 3.7 million computers

Congratulations to the entire Apple supply chain team and ecosystem partners for a superb effort.

On the slightly concerning side, the supply-demand imbalance situation concerning the newly introduced iPad2 began to show in quantitative numbers.  Apple was only able to ship 4.7 million iPads in the quarter vs. 7.3 million shipped in fiscal Q1.  Apple’s management communicated that it was able to sell every iPad it could make, a clear indicator of a supply constrained situation.

From our perspective, some global supply chain observations and comments related to these results are the following.

Apple’s shipment momentum relative to iPhones clearly benefitted from its new channel partner, Verizon Wireless.  Verizon announced that it had sold close to a half-million iPhones from its introduction on February 10^th.  A $49 promotional price on the iPhone3 from AT&T also helped to increase volumes.

The most anticipated news was whether the recent earthquake in Japan had, or would have any future impact on Apple’s current momentum.  In the earnings conference call, COO Tim Cook declared that the company hasn’t been affected by the disaster, though it continued to caution that the situation was still unpredictable.  Cook also indicated that there was no supply issue that the company viewed as unsolvable, a clear statement of confidence in Apple’s supply chain team.

As we have noted in prior commentary, that statement has cascading implications for other high tech and consumer electronics providers, especially those that do not currently have long-term, higher volume supply agreements in-place.  Apple’s shipment volumes and business potential are such that key suppliers will continue to service Apple’s needs, even if it results in shorting other lower-volume customers.  The question of the impact of the Japan disaster is more pertinent to other industry players who find themselves in the lower tiers of prioritization from key suppliers, especially smaller mid-market companies.

A closing thought reflects on Apple’s continued mind-blowing momentum.  With each successive blowout quarter, the stakes get higher in terms of Wall Street and shareholder expectations.  If Apple were to experience a significant supply chain glitch or even a hiccup, Wall Street would probably respond with a punishing result to Apple’s stock.

Success brings high expectations, especially in supply chain fulfillment capabilities.

Bob Ferrari