On the eve of Cyber Monday we have provided a guest blog commentary on the Infosys Supply Chain Management blog on updating how retailer multi-channel operations (MCO) capabilities will be challenged in the current 2011 holiday buying season.

We had noted previously that while overall holiday shopping sales will not increase significantly overall, the real story will be reflected on how both online and physical retailers capture the interests and buying motivations of far more tech-savvy and mobile empowered consumers. The initial indicators of retail and online activity are indeed reflecting a more empowered consumer and are testing back-end supply chain fulfillment capabilities.

Readers can view the full commentary at this link.

In a series of ongoing commentaries we have noted how some global manufacturers seem to be turning more towards closed vs. open supply chain deployment models.  We noted the evolving concept of closed vs. open supply chain deployment models from a past article published in the Financial Times.  A closed supply chain is described as a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the supply chain. This is a contrast with an open supply chains, where the emphasis is on standardized components that fit together in a modular fashion. In the open concept, suppliers are generally encouraged to be the main innovators and sell the same components to a range of other customers.

The latest clear example of movement toward a closed strategy has some rather interesting modern day parallels to the classic former Ford River Rouge complex.   Ford constructed the Rouge River complex in the late twenties to control the entire supply chain including the production of specialty steel it required. Henry Ford’s strategy was to control all of the key value-chain aspects for manufacturing a motor vehicle, including the control of raw materials.

Hyundai Motor, which operates under the umbrella of a family-owned group of companies consisting of Hyundai Motor, Kia Motors and Hyundai Steel, recently announced a strategic supply agreement for supply of one of the most crucial aspects of its value-chain, the supply of steel.  According to a published article appearing in the Financial Times, (paid subscription required or free metered view) Hyundai is seeking innovation in specialty alloys that can decrease the weight of its new model cars by 10 percent while continuing to enable more innovative vehicle design and fuel economies.

Rather than solely depend on two existing global steel suppliers, Nippon Steel and Posco, Hyundai is leveraging an $8 billion a family capital investment in Hyundai Steel to increase capacity for more innovative and modern blast furnaces. Hyundai Steel currently supplies approximately 30 percent of steel supply for both Hyundai and Kia, and plans to increase that number to as much as 45 percent by 2013. The new blast furnace capacity coming online and dedicated to Hyundai and Kia is designed to allow greater flexibility and speed to forge higher density steel for specific design needs and consequently more fuel efficient vehicles.

The announcement has fueled the classic debate of whether Hyundai Motor, by its increased reliance on its own steel supplier, will have too much of a dependence and exposure to the cyclical up and down market tends of the steel industry.  Then again, having a friendly and stable supplier may serve as an advantage for Hyundai Steel, especially given the current market growth trajectory of Hyundai and Kia Motors.

This is a development worth watching in automotive supply chains. It may produce evidence of whether a closed focused supply chain strategy in automotive provides a competitive advantage over the coming years.

Bob Ferrari

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

It is time to update our readers on Bombardier and its C-Series aircraft program.

Our last Supply Chain Matters and Supply Chain Expert Community update was in October 2010. We noted that Bombardier was taking a huge strategic gamble on the supply chain deployment and market launch of the new C-Series aircraft scheduled for 2013.  The C-Series is a 100-150 single-aisle passenger aircraft that is the cornerstone of the company’s plan to compete head-on with the likes of Boeing’s 737 and the Airbus A380 for advanced, lightweight commercial aircraft that can deliver compelling fuel efficiencies for airlines. This market segment has dominated aerospace headlines throughout the year.

In 2011, airlines were compelled to begin to open their wallets and place large amounts of replacement orders for more fuel efficient, narrow aisle aircraft, and the Airbus A380 Neo has been the prime beneficiary, followed by the 737. At the recent Paris Air Show, Airbus garnered one of the highest order volume rates in its history through customer orders of the planned A380 Neo. Thus far, Bombardier, and its China based rival COMAC, continue to compete for remaining customer orders.

In an interview published in the Wall Street Journal on November 21 (paid subscription or free metered view), Bombardier CEO Pierre Beaudoin remained upbeat, indicating that he was not too worried about uptake in new orders for the C-Series.  Thus far, Bombardier has 133 firm orders, which is supposed to place the manufacturer on-track to its target to have 200 to 300 orders between first maiden flight and first delivery in 2013. Mr. Beaudoin’s statement in the interview indicates that he would rather have his company concentrate on delivering the plane on time while maintaining its stated profitability goals than moving to discounting list price at this point. Further he states that the aircraft manufacturer has turned down prices that it did not like, and that its main market is China where anywhere between 20 to 30 percent of the global fleet could eventually be located.

Our reaction to the interview was of course, slanted toward a supply chain lens.  As more and more airlines weigh in with the current high rate of firm orders, the aerospace supply chain as a whole becomes committed to long-term capacity, and especially to the two current key players, Airbus and Boeing. Some of Bombardier’s C Series suppliers also cater to these current dominants.

Recall that the C series also features an outsourced global supply chain for many of its major components, allowing Bombardier to concentrate solely on innovation, design and final assembly needs.  Major components such as fuselage wings and tail are sourced in China, Ireland, Italy, and other countries.  All of the major components are to be shipped to Bombardier’s final assembly facility outside Montreal’s Mirabel airport for final integration. While profitability is certainly a very important goal, some aspect of volume scale is required to justify overcoming fixed supply chain material and transportation costs. There has always been a debate as to where the break-even point resides with this new outsourced major component and final assembly integration model. A review of Boeing’s 787 Dreamliner’s primarily outsourced supply chain provides ample evidence to this debate.

The second aspect for consideration is the stated goal competing for China’s aircraft business.  Aerospace is one of the key strategic growth industries identified by China’s political leaders in the current five year economic plan. In our November Supply Chain Matters commentary, China Takes Aim at Aerospace, we observed that China based, state-owned aerospace manufacturer COMAC has embarked on its own program of innovation and cost competitiveness for narrow aisle aircraft, and also features a C Series program. (Coincidental, of-course)  In order to insure strategic options are covered, major component aerospace suppliers such as General Electric and United Technologies have jumped-in with strategic development and relationship programs with COMAC and its other China based supplier partners. COMAC has already garnered orders from several of China’s state-owned airlines because of its unique role for contributing to China’s strategic plan for competiveness in aerospace, and continues its declaration that it will provide a compelling alternative offering for the global market.

Bombardier currently faces difficult headwinds with its C Series program, not all of which from its doing.  Aerospace industry events have been dramatic and far-reaching in 2011, and the industry is in both an enviable, and yet challenging situation.  Order volumes have been robust, but supply chains remain even more stressed to deliver capability and commitments for the next 5-10 years. The Bombardier C Series aircraft needs to find its place in this challenging environment, especially while customer buying motivations currently remain biased toward staying competitive in future aircraft operating efficiencies.

A highly uncertain global financial climate and industry that has supplier capacity increasingly being committed and internal dynamics within China’s airline operators may alter the widow of opportunity for Bombardier.

We wish Bombardier well and trust we can look forward to the inaugural flight of the C-Series.

Bob Ferrari

As we transition into the final month of 2011, we are revisiting the Supply Chain Matters 2011 Annual Predictions for Global Supply Chains which were outlined a year ago.  Our annual process is to first re-visit past projections made for the current year, in this case 2011, and declare some projections for the upcoming 2012 year, which will come in a later series of postings before the end of the year. In this Part Four and final posting, we will revisit predictions eight through ten. Our earlier scorecards can be accessed by clicking on the following links:

Part One- Predictions One and Two

Part Two-Predictions Three and Four

Part Three- Predictions Five through Seven

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

Both the B2C retail and pharmaceutical and healthcare industries were significantly impacted by supply chain related process impacts in 2011, making our prediction right on the money.

In the brick-and-mortar and E-Commerce sectors, a more sophisticated consumer has absolutely altered the retail buying landscape. Throughout 2011, consumers are exercising their ability to significantly influence product selection choices, perform real-time price comparisons, and easily place orders via the Internet and smartphones. According to comScore Inc., U.S. online e-Commerce spending is expected to grow to $162 billion in 2011, up from $142 billion in 2010, an increase of 14 percent. This motivated brick-and-mortar, as well as online retailers, to significantly enhance their online shopping, multi-channel commerce and operational capabilities throughout 2011. An article featured in the Wall Street Journal in mid-November (paid subscription or metered free view) noted that the hottest thing on retailers Christmas lists this year are finding experienced directors of e-commerce. Those that are highly experienced with solid track records are commanding total compensation packages upwards of $1 million.

For the online channel, Amazon continues to set the bar for services and price aggressiveness, causing retailers in many sectors to heavily invest in augmenting online capabilities in order to protect market share. Two of the most visible aspects of online impacts were the announcement by Wal-Mart that its CEO of global E-Commerce would retire in July after disappointing results in the online channel. The retailer who continues to have aggressive expansion plans related to online presence promises to announce a replacement in early 2012.  Retailer Best Buy has experienced five consecutive quarters of declining sales growth as consumers visit that retailer’s brick-and-mortar stores to touch and view products but often order goods online from the most price advantaged sites.

Another highly visible impact was that of Target. The retailer had previously outsourced its online site to Amazon, but made a decision to roll out its own internally sourced online site Target.com in August, only to experience a five hour breakdown in September when premiering a highly marketed promotion of Missoni clothing. The after-effects of this incident have motivated that retailer to also seek a new director of online activity.

The massive shift to more online retail capabilities and services is forecasted to have noticeable impacts to retailer margins this year, particularly in the upcoming 2011 holiday buying season.  Most retailers are offering free shipping, and many have considerably expanded the availability of products available for online purchase.  The implications to retailer inventory management and added costs will be interesting to observe when the final year-end results are tallied.

Pharmaceutical and Healthcare

The second significantly impacted industry Supply Chain Matters predicted for 2011 was that of pharmaceutical and healthcare related value-chains. The reason was what we viewed as the cascading effects of the significant changes in strategic business models causing too much leaning toward reduction in supply chain costs, healthcare reform initiatives emanating from multiple countries and desires to grow sales in emerging markets.  We feared all of these forces would cause noticeable supply chain impacts.  What we did not anticipate was the severity, which turned out to be a complete breakdown in certain industry segments.

In July, we posted a Supply Chain Matters commentary, Why are Pharmaceutical and Drug Supply Chains Failing?, noting financial media headlines that a vast majority of U.S. hospitals were facing severe shortages of life-saving chemotherapy and intravenous drugs used in critical care.  We followed up with a commentary in August noting that the ongoing complexities of pharmaceutical global supply chains have become greater than these companies abilities to control them. Critical shortages of life-saving drugs spilled over to areas of pet care, and in September, we noted that 2011 was tracking to be a year with the largest number of severe, life-saving drug shortages causing hospitals and healthcare providers to resort to gray channels to secure supplies. While industry concerns were primarily focused on increased regulation and cost managing costs, value-chains in certain segments have broken down in 2011. Causation points to generic producers and contract manufacturing sources, but that may be symptomatic of other problems. Suffice it to state that this industry remains in supply chain related crisis and that the situation will continue into 2012.

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

The essence of this 2011 prediction was that two fundamental business forces, ongoing fierce competitiveness forces directed at lowest product cost and continued needs for access to booming emerging markets, would compel manufacturers and retailers to pay much more attention to outsourcing strategies and to analyzing all the pertinent factors motivating these strategies.  We anticipated further shifts in component and finished goods product sourcing, particularly in low margin or highly sensitive IP product areas.

This prediction also turned out to be generally correct but the most compelling motivation for re-examining sourcing in 2011 relates to vulnerabilities to natural disaster when product production is too concentrated in a single geographic region.

Significant inflationary pressures brought about by explosive increases in labor costs, along with raw material and commodity costs, forced many manufacturers to revisit their sourcing strategies for China and other emerging economies. The building clouds of currency risk ebbed and subsided in various points in 2011, only to surface again late in the year with the ongoing Eurozone sovereign debt crisis and threats to the Euro. Manufacturers of lower costs and lower margin products continued to shift sourcing strategies away from China in favor of other countries.

Of more lasting impact, one that will continue in 2012 was the reminders that the northern Japan earthquake and severe monsoon floods in Thailand brought in 2011.  The motivations for low cost sourcing may have exposed significant vulnerabilities to strategic capacity and risk.  Having upwards of 30 percent of global hard disk drive manufacturing sourced within one country, along with the hundreds of bill-of-material related component related suppliers is cause for concern.

In the area of market access, intellectual property protection and increased concerns among senior executives regarding increased barriers for doing continued business within China have cast a less aggressive perspective for sourcing within China, and those companies that are compelled to stay the course, are constantly revising or modifying sourcing and value-chain strategies.

We believe that the landscape for global outsourcing of components and finished goods shifted in 2011, and will spillover again into 2012, perhaps at a much more aggressive rate.

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

Entering 2011, supply chain wide green and sustainability initiatives had been primarily directed at achieving reductions in resource use as well as in saving costs. Saving energy, water consumption or packaging resources all related to the bottom line and at the same time, provided customers and consumers a positive persona of a green and sustainable brand and company.

While a positive sustainability profile often makes good business sense, we had predicted a slowdown in green and sustainability program momentum during 2011. Our prediction was predicated on the continued effects of global recession and that consumer buying decisions would not in the end, favor a green or sustainable product over a lower-cost product.

That did not turn out to be the fact since consumers continued believe that companies can provide green and sustainable products at competitive prices. Rather than a slower pace, many companies, especially those with a B2C presence, increased their investments in green initiatives. The efforts and initiatives of multi-industry supply chain dominants such as Wal-Mart, Procter & Gamble, Kraft Foods, Nike and others no doubt kept momentum moving and expectations high. In one example, Wal-Mart is deploying its Supplier Energy Efficiency Program (SEEP) to improve the energy efficiency of its suppliers by passing along learning the global retailer has gained from its own internal initiatives.

The standards for green and sustainable supply chain are high, and we are pleased that our 2011 prediction in this area turned out to be more positive.

This concludes our complete series of scorecard updates related to the Supply Chain Matters 2011 Predictions for Global Supply Chains published at the beginning of this year.

Of the original ten predictions, by our count, five were on the money, three came about partially, and two were a miss.  We rate our 2011 predictions good, but readers are certainly welcomed to chime in and share their observations of global supply chain events in 2011.

Predictions aside, 2011 was a significantly challenging year for global supply chain teams and it does not get any easier in 2012. In December, we will declare and publish our 2012 Predictions for global supply chains so keep your browser favorites pointed toward Supply Chain Matters.

Bob Ferrari

©2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

Tomorrow is the Thanksgiving holiday that is traditionally celebrated annually in the United States. The holiday is meant to be a time to pause from day-to-day work and leisure activities and give thanks for the blessings of life and family. The tradition calls for extended families and friends coming together, some traveling long distances, to celebrate the holiday over turkey dinner and other group activities.

We would like to share a few thoughts on the eve of Thanksgiving 2011.

This has been a rather challenging year in terms of tragedy across our global community.  We all witnessed by the instantaneous power of media and the Internet, the powerful images of suffering and sheer devastation caused by the earthquake and subsequent tsunami that occurred in northern Japan.  I can still recall the video images of this horrific event. Families in Japan are still adjusting to the after effects, both personal and physical.

We should recall the severe floods that impacted Australia, the floods and tornadoes that struck the U.S.; the other devastating earthquakes that struck Turkey and other countries along with the other extraordinary occurrences of natural disaster that have impacted people and families. The latest reminder has been the monsoon related floods in Thailand that have taken over 600 lives and impacted countless of people.

The “Arab Spring and Autumn” have caused some to lose their lives because of the belief in freedom and human rights.  Members of the military and public safety continue to risk their lives on a daily basis while their families always live in a state of anxiety.

The unemployed have found their lives suddenly changed with a stigma that is not of their doing, and others face hardship.

Sometimes we get too caught-up in our day-to-day lives and lose focus on how much we should be thankful.

We give thanks for our small blessings, family and friends.  We remember those who experienced tragedy and trust that they will come to eventually give thanks.

Happy Thanksgiving to all of our readers and extended community.