Just over three years ago, Supply Chain Matters declared outsourcing services provider Li & Fung Ltd. a supply chain competency success story. This company was on a roll exercising a successful supply chain outsourcing strategy for firms in need of supplier sourcing of apparel and toys. Its customer base included many well-known retailer labels with customer value built on providing clients a one-stop presence for supplier sourcing and moving finished goods to retailers. Their detailed knowledge of the particular supply segment, coupled with amassing economies of scale in production and distribution needs, all integrated into a holistic fulfillment model, set this firm apart.
During the major 2008-2009 economic crisis, when global economies started to tank, it was the apparel and toys segment in China and other regions that experienced the most severe blows in terms of supplier bankruptcies. Li & Fung managed to sustain earnings growth during this difficult period on the basis of cost-cutting and greater efficiencies. To no surprise, many supply chain thought leaders often mentioned Li & Fung as a supply chain competency success story.
In our commentary three years ago, we noted that Li & Fung communicated that its growth strategy would be driven by acquisitions, in essence expanding its one-stop supply chain services capability to other supply segments. We stated our Supply Chain Matters hope that the same knowledge and supply chain competency traits that led to prior success would be carried forward.
Earlier this month, Li & Fung stock drew a string of downgrades on news of a 22 percent drop in profits. Stockholders punished the stock with a 19 percent pricing drop, where the stock essentially sits as we pen this latest commentary. According to a published report in the Financial Times, market analysts are now questioning the company’s growth by acquisition strategy which has been primarily built on a strategy that pays the acquired company in three years of payments, typically 30 percent in the first year of the acquisition. FT quotes Li & Fung’s CEO as indicating that 42 of its 59 acquisitions since 2004 were based on this delayed payment strategy. The problem, however, is that Li & Fung’s recent operating earnings have been offset by accounting changes related to previous acquisitions not meeting designated performance targets. In the latest case, a $198 million write-down. Company leaders on the other hand insist that the ongoing growth by acquisition strategy is sound, and that once again, as in 2008-2009, the declining global economy may well provide more attractive acquisition targets for the company.
We are not stock analysts and will not comment on the stock prospects of Li & Fung. That is not our place. We do, however, serve as an independent observer of global supply business process and technology capabilities. There comes a time when any firm can encounter a situation where growth by acquisition can compromise previous supply chain fulfillment capabilities. On the one hand, the ability to offer its retailer customers sourcing of an entire product line is extraordinary. On the other hand, added processes, complexities, supply chain software applications and people needs can each provide additional challenges. Today’s rather dynamic and shifting global sourcing landscape adds far more additional challenges. As an example, apparel and toys sourcing has already experienced sourcing shifts to other countries, away from the mature supply chain infrastructure capabilities within China. As Li & Fung expands its supply chain presence beyond apparel, toys, leather and beauty product supply, the need for a keen sense of seamless execution gets more difficult.
We suppose that August 2012 is an important checkpoint for Li & Fung, and the open question is whether growth by acquisition vs. growth in additional services are now in conflict. No doubt, the coming months will reveal the real answer.
Readers are certainly welcomed to comment either directly to this posting or via email to info <at> supply-chain-matters <dot> com.
On the eve of Hurricane Isaac’s predicted strike on the shores of Louisiana and the city of New Orleans, along with numerous typhoons that have also struck parts of China, japan, Korea , the Philippines and other Asian countries during these past two months, comes the disturbing news that Artic sea ice has reached record lows. The year 2012 is certainly turning out to be one of extraordinary climatic news, and now comes another disturbing item.
According to published reports, scientists at the University of Colorado’s National Snow and Ice Data Center and NASA report that as of this past Sunday, the Artic sea ice cover had been reduced by a whopping 1.58 million square miles, the lowest value in 22 years. Scientists attribute this huge melting to long-term warming trends and unusual weather conditions. According to a Washington Post article (paid subscription or free metered view), the Artic summer sea reaches a usual low point in mid-September, but the existing ice melted at an unprecedented 38,600 square miles per day during the month of August.
As always, such developments open doors, some of which may not be popular among world citizens.
From a global supply chain opportunity perspective, Supply Chain Matters just noted that a Chinese ice breaker recently sailed the Artic route confirming little ice, while opening the possibility to a new shipping lane for goods traveling from eastern Asia to European and North America ports. As the Post and others have pointed out, the large melting of Artic sea ice has the potential to open up new, unexplored areas for oil and gas exploration, which is no doubt pleasing news to the big oil companies.
The news of the Artic melting is obviously very concerning, and certainly adds more evidence to the increasing threats of global warming and potential effects to our planet. In all things related to business, crisis leads to some other opportunity and certain oil exploration, ocean carrier and other firms will no doubt be positioning to take advantage of such opportunities.
Perhaps it is time for all of us living near major coastlines to invest in our own personal, solar and wind powered dinghies.
In the wake of Apple’s highly publicized $1 billion plus victory over Samsung in their recent patent infringement lawsuit encounter, the open question for supply chain management communities is how, if at all, the aftermath of this lawsuit will impact the ongoing relationship of Samsung in being a major strategic component supplier for Apple. Supply Chain Matters is of the viewpoint that the impact will not be immediate, but will change to some degree over time.
The best traditional business media reporting we have run across that reflects on the supply chain implications of the recent verdict comes from a syndicated published report by Reuters which clearly opines that Samsung and Apple will not damage their long-term component supplier agreements. Correctly noted is that the current agreements are too valuable and too important for either company to place at-risk. The article quotes a Samsung executive who took part in a high-level strategy session on Sunday as indicating: “(The) supply contract remains a separate issue from the litigation and there’ll be no change to it going forward.”
Samsung is the prime supplier for ARM microprocessor chips that power iPhones and iPads. The company also supplies DRAM memory chips along with LCD displays, but as Supply Chain Matters has commented previously, Apple has been actively sourcing other suppliers to provide more secondary sources of volume suppliers. Recent announcements from Samsung include multi-billion dollar investments to boost output at both its U.S. and South Korean chip production facilities as well as investment its next generation display technologies.
Financial industry analysts speculate that Samsung has the ability to leverage its importance as a leading-edge technology supplier and can leverage that capability by diversifying its current customer base beyond Apple. The Reuters article points out that only a select few suppliers can scale to the volume output requirements of Apple, and yield decent margins and profitability. We can collectively concur with that conclusion.
Legal experts speculate that the appeals process from last week’s patent infringement verdict could drag-on for another year. Apple will continue its efforts to be made whole both in financial damages and in pursuit of injunctions associated with the continued sale of certain Samsung smartphones and tablets.
The best analogy we can share is one of a marital relationship, where one partner is discovered to have been cheating. Both partners feel compelled to continue the marriage because of important family or economic factors, but relationship is forever changed in terms of trust.
The next major turning point will likely be when certain Samsung supply agreements reach multi-year contract renewal status. Lawyers may well earn another hefty set of fees.
What about your views? Do you believe that the relationship of Samsung as a strategic supplier to Apple will change?
As a highlight of our continued deeper focus on specific industry supply chain challenges and learning, Supply Chain Matters has featured an ongoing series of specific commentaries titled the home improvement retailer wars. Our stream of commentary began in early 2010 with Home Depot and its efforts to overcome recognized supply chain fulfillment capabilities gaps with its prime rival, Lowe’s. Our initial commentary, Can Home Depot Close Its Supply Chain Gap?, was followed by a subsequent commentary in September 2010, Home Depot Making Progress in Closing the Supply Chain Gap.
During the bulk of 2010, the Depot embarked on a $250 million investment in improved supply chain capabilities on both supply chain operations and planning. There was a rather large effort to shift inventory replenishment strategies toward more centralized planning, which included the majority of inbound inventory activity moving through 19 regionalized flow-through deployment centers. Additional investments were made in mobile customer service devices for sales associates, inventory optimization, supply chain network design and inventory forecasting technology which were all part of a three year effort focused on supply chain transformation. The essence of these ongoing initiatives from Home Depot were an avoidance of a previous ‘big IT’ approach in favor of concerted investments in specific supply chain related process enablement capabilities.
In the midst of severe winter conditions that occurred in the U.S. in the latter half of 2010, Lowe’s had run out of key inventory while Home Depot was able to capitalize on strong sales of snow blowers, shovels and other storm-related needs by more responsive inventory replenishment strategies. Business media began to recognize that Home Depot was better prepared to either take advantage of market opportunities or adjust more quickly to changing market conditions.
A year later in the autumn of 2011, our commentaries noted that the efforts from these two giant home improvement retailers had taken on a slanted perspective. Highlights for Home Depot included a 4.2 percent increase in same store sales and a nearly 12 percent increase in profits. Chairmen and CEO Frank Blake again specifically stated in the earnings briefing that supply chain investments had continued to provide significant benefits for the business, contributing 26 basis points of margin expansion, while improving delivery, service and transportation cost savings to U.S. stores.
By contrast, Lowe’s Q3-2011 earnings report was somewhat somber. Same store sales grew less than one percent (.7 percent) while year-to-year earnings fell 44 percent. Store closings and a large-scale restructuring of store operations called for closing 27 underperforming stores and 50 percent cutback on previous planned store openings for 2012. Lowe’s senior management acknowledged that performance was not at levels expected and that a renewed emphasis was identified for looking at the business from fresh perspectives. Such perspectives included the implementation of an Integrated Planning and Execution (IP&E) initiative to enable a more market-driven approach for merchandising, a pairing down of 40,000 SKU’s stocked at stores, while supporting efforts for some local region uniqueness.
Approaching the latter half of 2012, the gap between these two retailers has totally reversed with Home Depot now discernibly in the lead spot in terms of supply chain enablement of business results. The Depot’s fiscal Q2 earnings increased 12 percent while revenues rose 2.1 percent. Interestingly enough, transactions with a value exceeding $900 grew 3.4 percent as demand for appliances, kitchen and bath remodeling, flooring and other big-ticket items increased, no doubt from robust direct ship fulfillment programs jointly implemented with manufacturers. In other areas, a renewed focus and concentration directed at online sales contributed 2 percent to total revenues. In the testimonial that supply chain capabilities do matter, the stock market has driven Home Depot stock to its highest levels since 2010.
Lowe’s on the other hand reported a 10 percent decline in Q2 quarterly earnings on top of a 0.4 percent decline in revenues. Over the past year, Lowe’s has followed through with the closing of non-performing stores while attempting to pare down its bloated overhead structure. Management has lowered earnings and sales projections for the remainder of the fiscal year raising Wall Street concerns regarding the increasing gap with its prime competitor. Lowe’s senior management now concedes that the retailer’s turnaround strategy will take additional time. A published Wall Street Journal article noted that: “Analysts remain skeptical, noting the retailer’s restructuring plans mirror those embraced by Home Depot more than three years ago.” To add more distraction, Lowe’s is pursuing an acquisition of Canadian home improvement retailer RONA which operates 800 stores across Canada, which if consummated, will add even more operational challenges.
In our roughly two years of ongoing commentaries regarding the major home improvement retailers, we have highlighted Home Depot’ s effective turnaround, driven from a sound belief that select investments in supply chain process capabilities, coupled with a strategy that favors surgical IT improvements over a “big bang” improvement, can pay discernible benefits to the bottom line. Today, those results have rewarded Home Depot with a substantial lead in industry capabilities and results.
The following is this author’s weekly guest commentary appearing on the Supply Chain Expert Community web site.
Last week, a Twitter alert from Steve Keifer, Vice President of Global Marketing at GXS made reference to a New York Times published article, China Confronts Mounting Piles of Unsold Goods. (paid online subscription or free metered view). Supply Chain Matters also alerts Community members to this article because of the important implications to global supply chain sales and operations planning (S&OP) strategies in the coming months.
The Times article reports that a potentially severe inventory overhang is occurring across many of China’s manufacturing industries. According to the Times, the severity of this inventory problem has been apparently masked by the previous government reported data in order to prop up confidence in China’s economy. It cites situations where Chinese suppliers and end-item manufacturers have refused to cut back production while demand for goods has been steadily declining. Many cross-industry products are mentioned in the Times, and particular mention is made of the automotive sector, a known bellwether of a vibrant economy. It describes situations where auto dealers have run out of physical space to store unsold autos even as OEM manufacturers continue to insist on shipping product. Reinforcing evidence comes from the most recent HSBC Purchasing Managers’ Index (PMI) which indicates that China’s output dropped to a nine-month low in August, but also pointed to increased idle capacity and building inventory.
This situation should be a concern for S&OP teams managing either their firm’s product demand fulfillment within China or outsourced activities involving suppliers, because it is an indication of an environment that currently will mask the real data to protect other interests. In our view, it also points to lack of fundamental supply chain inventory management and other principles that can only lead to more severe problems in the not too distant future. A glut of inventory and the consequent building of idle excess capacity across many industry sectors can often lead to desperate measures which harm the market. They further imply a harder landing for China’s economy, and that could well involve other supply chains.
Traditional business media has provided reminders of China’s previous hard landing of late 2008, when export orders collapsed and thousands of smaller factories were forced into bankruptcy. S&OP teams may recall that this situation led to a collapse of export orders into China as well as a scrambling to find alternative qualified suppliers. More importantly though, another major cutback of direct labor workers could provide a shock to China’s consumer markets.
Our advice to S&OP and supply chain planning teams is to pay much closer attention to the numbers and data coming from China. Closely monitor inventory data and push-back with any indication of irregularity or inconsistency. Augment data with on-the-ground observations and experienced insights. We all know that an inventory glut for one company is challenge enough, but when it involves many companies and many industries, it is a prelude to much broader implications not only to the China supply chain, but across global dimensions as well.