Supply Chain Matters will be again out on the road this week.  Tomorrow we are off to Baltimore to attend the Supply Chain Council’s annual conference, Supply Chain World North America which is being held on Wednesday and Thursday.

This particular conference was on a bit of a hiatus during the global recession years of 2009-2010, and is now back.  This year’s theme of Building Supply Chain Capabilities for Future Success was designed to help attendees to focus and discuss the appropriate global supply chain business process strategies in this post-recessionary economy.  There is a great line-up of supply chain executive and other speakers speaking on very timely topics, with lots of opportunities for networking.

This author will be facilitating the Pundits and Influencers Panel Discussion being held on Thursday.  This year, the conference planning committee elected to alter the traditional industry analyst panel to include a broader lens on global supply chains.  We have assembled a panel consisting of influential industry analysts, consultants, influencers and of course, bloggers.

Readers can look forward to subsequent Supply Chain Matters commentaries reflecting on the conference as well as our panel discussion, so please keep this destination on your browser favorites listing.

Bob Ferrari- Executive Editor

Despite media hype, the Doomsday prediction of Harold Camping did not occur Saturday evening in the United States, as was predicted.  Thank goodness, since we still have conferences to attend and reports to generate.

There was however some activity of concern to global supply chains.

We just posted news that a fire and explosion occurred at the Foxconn Chengdu China production facility on Friday evening, a facility that produces Apple iPad2 tablets.  Reports indicate that two workers were killed and 16 were injured, three seriously.  Apple fans may be concerned about that news.

There are reports yesterday and today of earthquakes hitting the Taiwan region, the heart of semiconductor fab and high tech electronics for global supply chains.  Focus Taiwan reports today that four earthquakes have hit the Hualien region this weekend, ranging from 3.5 to 4.8 magnitudes.

And if you are so inclined to add even more to your nervousness, in the United States Geological Society web site report of earthquakes that occurred in the last 7 days, namely greater than 2.5 magnitude in the U.S., or 4.5 magnitude worldwide, 42 earthquakes occurred on Saturday and 23 thus far on Sunday, bringing the weekend total to over 50.  The names of impacted regions include Alaska, California, Chile, China, Japan, Oregon, Puerto Rico, Alaska, all with some global supply chain potential impact.

In Iceland, a volcano eruption at Grimsvotn, is now spewing large ash clouds, has closed air traffic in that country, while enroute flights are being re-routed around Iceland.  With shades of last year, the spread of ash clouds could impact air travel within Europe later this week.

While the world did not end, the earth is indeed restless and supply chain disruption and risk events should always be on our minds, and in our continuity planning.

On Friday, a significant explosion rocked the Foxconn Technology Group production facility located in Chengdu, China.  The facility manufactures Apple’s iPad tablets, among other products.  Initial news reports are indicating that two workers were killed and sixteen were injured, three seriously, as a result of the explosion.

A news report appearing on the International Business Times web site indicates that the explosion and fire, which occurred around 7pm Friday evening, was suspected to be caused by accumulation of aluminum dust in the ventilation pipe of the central air conditioning unit, which may have triggered a spark, leading to the fire and explosion. This IBTimes posting features an amateur video apparently captured by a Foxconn worker fleeing the immediate scene, and the video features clearly evident smoke billowing from the factory and worker panic directly after the incident.

At this point, it is very unclear as to whether this incident will have any immediate or short-term impact on production of Apple iPad2 or other products produced at the Chengdu facility.  According to a Wall Street Journal report, the explosion occurred in the “polishing plant”, which is a cleaning and finishing step after devices are assembled.

This incident unfortunately occurs as Apple continues to catch-up with overwhelming demand for the iPad2.

As this rather busy week draws to a close, SAP has concluded yet another annual Sapphire Now and ASUG conference. Supply Chain Matters has provided four separate commentaries direct from the conference and readers can reference each at the following links;

Commentary One

Commentary Two

Commentary Three

Commentary Four

In this final posting, we share our summary thoughts and impressions regarding 2011 Sapphire Now.

General observations and positive notes:

• As was last year, SAP obviously invested lots of production support money into Sapphire.  There was video coverage broadcasted live via the Internet, lavish production sets, live bands and talk show formats all expertly designed to present SAP as a world class, enterprise ready company.  That is an obvious positive since on the whole, there really was not a lot of hard news or product announcements generated by the 2011 Sapphire.
• As in the past, SAP’s blogger relations team (Mike Prosceno, Stacy Fish, Andrea Kaufmann, Craig Cmehil and others) performed admirably in providing each of us unfettered access to SAP executives and customers.  Most all of my requested interview requests were accommodated.  This is a world class team, setting the standard for all other technology providers.
• More than other years, supply chain messages, topics and implications were threaded in many of the talks, panels and keynotes.  We noted Hasso Plattner’s declaration that he believes that all of SAP’s business planning applications should be the primary target for rewrite on the HANA platform, and his specific mention of SAP APO as the number one priority. Steve Lucas addressed supply chain business intelligence requirements in his overview of SAP Business Analytics strategic direction.
• While on the subject of HANA, we continue to believe that if successful, conversion of SAP applications and software infrastructure to take maximum advantage of in-memory technology is game changing.  With this year’s Sapphire came a more detailed understanding of extensive and far-reaching this objective really is, as well as the difficult technical challenges that remain for SAP.  That for us is the real takeaway from 2011 Sapphire, what is going on behind the scenes. While SAP often declares itself as an innovative company, the true test of that statement really occurs in the coming months and years.
• Where 2010 was a focus on business reporting business intelligence, 2011-2012 has been characterized with a focus on operational focused business intelligence.  We trust that SAP will follow-through on that objective.
• The few supply chain related presentations seemed well attended indicating heightened interest by SAP customers.
• This year’s Sapphire included a novel micro-discussion format which we tended to like.  Attendees who are interested in the featured topic can attend, and the designated SAP facilitator can not use any PowerPoint or canned presentation.  The facilitator has to know his subject matter and be able to interact with attendees in responding to their questions.  These sessions were planned to accommodate 10-15 attendees, but those in the supply chain area were largely swamped. In one session, a hand count noted over 90 attendees.  We observed a session focused on the new RDS in SAP Procurement having a similar headcount, where two facilitators had their hands full.  The concept of a focus group discussion is great but perhaps the planning and execution will be improved for future Sapphires.
• It was good to note that the SAP SRM applications area has been granted a strategic priority by SAP senior management.  It seems that SAP will no longer tolerate penetration from various other best-of-breed providers in this space.  Expect more aggressive product initiatives as well as a potential acquisition in this area.

In the needs work or concern category:

• The technology gaps among where existing SAP customers are in their systems landscape and where SAP is headed is widening even more, and customers face difficult decisions as to strategic direction and budgets.  Keeping current with SAP NetWeaver, Business Objects and other technologies could be an expensive proposition and as noted, SAP has now put on-demand HANA on the table for long-term consideration. Now, more than ever, supply chain functional and IT teams within SAP shops need to insure close communication and collaboration with the office of the CIO.
• As noted, SAP’s move toward HANA has far-reaching implications particularly in the areas of supply chain planning, execution, response and business intelligence.  The big open question remains the overall timetable, which is, of course, multi-year in nature.  Also announced was SAP’s intention to move HANA to the cloud which has all forms of implications related to data security, response time, and the long-term presence of Business Warehouse (BW). SAP management acknowledges that more concise communication and timetable roadmaps are required to assist customers in their technology and applications upgrade timetables, and we trust that this area will be on particular focus for the remainder of 2011.
• We were disappointed in the continued lack of clarity regarding SAP’s efforts to develop an sales and operations planning (S&OP) support application that leverages HANA capabilities. In the interim, SAP customers are left with an existing sub-standard S&OP support application that requires far too many dependencies on other applications to manage an overall process.
• We remain concerned relative to ongoing synergies among SAP SCM, PLM, Manufacturing  and SRM solution development teams.  After being previously unified, SAP SRM is once again independent with its own set of priorities and strategic deliverables.
• We were somewhat disappointed in customer adoption numbers of SAP Business by Design, SAP’s thrust to support small and mid-market company needs. Accumulating just 500 customers to date, we would have anticipated that this application suite would have far more numbers of adoption.  This is another obvious area of emphasis for SAP in the coming months.

During their keynote presentation, SAP Co-CEO’s Bill McDermott and Jim Hagemann Snabe stressed that SAP continues with the belief that customers have the right to have trusted partners, and that SAP must constantly earn its seat at the table.  In the past, SAP had sometimes embarked on initiatives that were better for SAP’s bottom line. With the declared objective of in-memory computing and HANA, SAP is embarking on a massive objective with far reaching implications.  The open question remains whether customers and supply chains will discover compelling value in these efforts.

Bob Ferrari

There is a rather timely debate and discussion occurring within our community that reflects on the S&OP (sales and operations planning) process and its interaction with IBP (integrated business planning).  In a recent posting on The 21^st Century Supply Chain blog, Trevor Miles of Kinaxis puts forth an argument that for many manufacturers, the annual budgeting process is broken, and rather than a static mechanism, should rather be a continuous process driven by a consensus operations forecast, namely the S&OP process. Trevor brings forward a number of evidence points to support his argument, which readers can review and comment upon.

I thought I would take a slightly different perspective and reflect on what has been occurring across North American and global supply chains thus far in 2011, and reflect on whether a static annual budget would still serve as a barometer as we reach the half way mark of 2011.

To begin, we should set some context among supply chain operations and financial teams.  As we began 2011, Supply Chain Matters noted that the two significant global supply chain management challenges in 2011:

1. Exploding inbound material costs which could prove difficult to offset by higher prices of further cost reductions.
2. Rapidly changing markets and market dynamics forcing many supply chains to be more agile and responsive to explosive demand coming from emerging regions or hot product sectors.

On the financial side, many global manufacturers, while experiencing fatter profit margins, declared top-line revenue and market share growth as a key 2011 objective.  Annual budgets were set accordingly.

To provide a contrast of what can happen in just four months, we can reflect on two reports: The Institute of Supply Management (ISM) Semiannual Economic Report released this month, and the HSBC Purchasing Managers Index for China released in April.

The ISM economic outlook predicts that manufacturing growth among U.S. manufacturers is much better than expected.  The majority of respondents predicted revenues will be 13.2 percent higher in 2011.  In December, these same respondents predicted a 5.6 percent increase in 2011 revenues.  In four months, revenue expectations have more than doubled.  In terms of capacity, purchasing and supply managers report a current level at 83.2 percent of normal capacity, 3 percentage points higher than December, and coming close to capacity levels achieved in December 2006. In December, manufacturers were planning a 5.2 increase in capacity for 2011, but that capacity is now expected to increase to 8.1 percent for the remainder of this year.  Significant changes in a matter of months.

Turning to China, the manufacturing engine of the global economy, respondents note a lackluster growth in new business, a decrease in export orders, and a slower expansion of manufacturing production. Further noted is that manufacturers are cutting back on purchases and inventory noting a subdued rate of new order growth. Manufacturers in China and the U.S. are managing different business needs as well as different operating assumptions that are changing by the month.

Other key changes noted on both the U.S. and China reports are indeed rapidly increasing inbound prices and mounting parts shortages.  With the U.S., purchasing managers anticipated a 2.7 percent increase in prices in December, and have now noted that actual price increases have doubled to reflect on average, 6.1 percent increases. The majority of purchasing respondents now expect prices to increase 9.1 percent compared to end of 2010 levels.  Similar price increase concern is also reflected in the China. report. ISM specifically asked respondents what percentage of inbound material costs increases could be realistically passed along in higher prices.  The response was an average 34 percent, meaning the remaining portion would have to be offset by other factors. Earlier this year, senior managers might have been more optimistic regarding a strategy of offsetting costs with price increases.

At the beginning of this year’s budgeting cycle, nobody could have predicted a major earthquake and tsunami hitting Japan, and its subsequent impact on industry supply chains.  Both the U.S. and China reports make mention of initial indicators of impact and consequent parts shortages occurring.  ISM noted 23 percent of manufacturers anticipating that they will experience some supply chain related delays as a result of the Japan impact.

Our point in highlighting just these two examples of data is that business assumptions are indeed changing at a much more rapid rate.  The data and assumptions made just four months ago regarding key aspects of production, capacity, costs and availability are changing constantly, along with unforeseen events such as the earthquake in Japan, floods in the U.S. Midwest, or other natural catastrophes to come.  They all, at least in our view, reinforce thinking that budgets and operating plans will never be static and will always be changing.

Ultimately, the rapidly changed clock speed of business has impacted the iterations of the business planning and S&OP processes, and the sooner senior management and cross-functional teams acknowledge this, the better we can all move on toward determining the best means to manage needs for a much more flexible business planning and supply chain response management process.

Bob Ferrari