On the eve of the Thanksgiving Holiday here in the U.S., a holiday to look back and reflect on the blessings of family and life, it is also our time to reflect and scorecard our Supply Chain Matters 2012 Predictions for Global Supply Chains which we published nearly a year ago. Our annual process is to first scorecard the current year’s predictions before publishing our upcoming 2013 predictions during December.

Our scoring process this year will be on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of; what were we thinking?

In our Part One posting, we reflected on the initial three predictions issued nearly a year ago.

In this Part Two posting, we move on to Predictions Four.

2012 Prediction Four: Three specific industry sectors, B2C, Pharmaceutical and High Tech, will be especially affected by significant supply chain challenges or turmoil in 2012.

Score: 3.7

In 2011, we correctly predicted that two industry sectors, B2C and Pharmaceutical/Healthcare would be especially affected by significant impacts. For 2012, we added High Tech / Consumer Electronics as a third industry facing significant supply chain challenges. We also mentioned a fourth ‘wild card’ industry addition, that being the Aerospace industry, depending on how unplanned events occurred during the year.

The B2C sector continued to be impacted by the momentum in online multi-channel, or what some refer to as Omni-channel commerce. Retailers were impacted as consumers continued to shift their buying preferences to online channels and at the same time, demanded more options on order fulfillment, including both in-store pick-up and same-day delivery.  Brick and mortar retailers began to deploy strategies for stocking unique SKU’s at stores while enhancing customer in-store experiences, all collectively designed to provide more uniqueness to the in-store shopping experience. Retailers have also increased investment in online capabilities by adding more items and attempting to collectively manage inventories across the various multi-channels of fulfillment.  Two retailers have garnered unflattering visibility in 2012. Best Buy, which has struggled with the effects of customer show-rooming and consequent buying online encountered a senior management shake-up and is preparing to meet the challenges of the upcoming 2012 holiday buying period. JC Penny, who brought in the former leader of Apple retail outlets to be their new CEO, reeled from consecutive revenue shortfalls in 2012 as consumers failed to respond to the far different boutique store-within-in-store merchandizing strategy being deployed. Specialty retailer Macy’s on the other hand, seems to have found a successful formula for blending both in-store and online consumer buying preferences. Meanwhile, Amazon marched forward in online fulfillment while Google, thus far, has not established any significant online presence.

There should be little doubt that the B2C sector encountered significant challenges and as noted, the final test comes in the upcoming six weeks of the 2012 holiday buying surge when consumers will again make a statement on buying expectations and preferences.

There should be little doubt as to pharmaceutical and healthcare supply chains continued industry challenges throughout 2012, which involved major supply disruptions, as well as increased concerns for counterfeit and illicit drugs penetrating industry supply channels. Severe and rather publically visible shortages of injectable cancer fighting and other chronic disease treatment medicines dominated all forms of media in the first half of the year.  In the U.S., government agencies instituted higher levels of scrutiny concerning the appearance of fake cancer treating drugs appearing in foreign and U.S. based supply chains. Other U.S. enforcement efforts directed at suspected illegal drug trafficking involving prescription drug abuse, ensnarled supply chain players such as major distributor Cardinal Health, drug retailers CVS and Walgreens.  Last week, Supply Chain Matters commented on what The Wall Street Journal reported that both FedEx and UPS may be cited for improper notification, and also be subject to enforcement implications. This is an industry which will continue to experience major challenges in the months to come.

High tech and consumer electronics supply chains generally raised to the challenges of severe short ages in the supply of hard disk drive components brought about by the Thailand floods in 2011.  Hard disk OEM’s were also adroit in demanding premium pricing for hard products for the majority of 2012, and as a result, were able to demonstrate generally positive financial results toward the latter part of 2012.  High tech OEM’s for the most part, demonstrated high levels of agility in offering and promoting personal computing and other products with components that were in adequate supply vs. short supply. Thus, as predicted, component prices did spike for a good part of the year, but active procurement and supply mitigation efforts buffered any significant revenue shortfalls due to supply constraints.

Finally, our wildcard industry, that being Aerospace, played out as one with very active challenges in 2012, and thus was a good call. There has been public admission that the current backlog of sold new aircraft is “disturbingly healthy”, noting that it is hard to sell more airplanes when potential delivery times extend out in years, almost 8-10 years at this point. There is finally open admission that the industry has a capacity problem that needs to be addressed which implies a need for expanded supplier process capability and increased investments in production output capability. All of these admissions however came in an economically challenged global environment where finding additional working capital funds are an increasing challenge. In many cases, suppliers support production needs of Airbus, Boeing and other OEM’s.  This caused Supply Chain Matters to declare the entire industry in stress.

Regarding individual OEM’s, Boeing continues with efforts to dramatically ramp-up supply chain wide production volumes to overcome continued chronic backlogs with the 787 Dreamliner and other programs. Similarly, Airbus has been dealing with supply chain issues related to the A350 program. For Boeing, both major suppliers of engines for the 787 had unexplained incidents of engine malfunction while other suppliers such as Spirit AeroSystems Holdings, are running into financial challenges as a result of continued product production delays.  As noted in our Prediction One commentary, the ongoing financial crisis involving the Eurozone countries has caused a squeeze in credit availability across Eurozone banks, which has also impacted some major Airbus suppliers. Airbus, announced the intent to open a manufacturing facility in the United States, to help boost output as well as take advantage of U.S. manufacturing efficiencies and technological capabilities.

Readers are again encouraged to share their observations regarding general predictions and what actually occurred among industry supply chains in 2012.

Bob Ferrari

An interesting twist to the upcoming 2012 holiday buying surge are reports that Nintendo Company’s new Wii U gaming device, which was introduced to the market this weekend, is already expected to be in short supply.  Both a Bloomberg published article and a CNET news article indicate that Nintendo’s executives expect supply shortages due to late start in production ramp-up. Bloomberg reports that more than 500,000 worldwide customers are currently on a GameStop waiting list awaiting the device. The Wii U features a tablet controller allowing for more game interaction as well as adding more online interaction in the playing of games. However, this first new video-game console for U.S. homes since 2006, won’t offer the Nintendo TVii service that the Kyoto, Japan-based company has touted as a centerpiece of its capabilities. The feature will be available sometime in December, the company said on Nov. 16, without being specific. According to Bloomberg, Nintendo also delayed the availability of some online services including Amazon.com Inc.’s Instant Video, and Google’s YouTube on the Wii U.

The delays could make it more difficult during the crucial holiday shopping season for Nintendo to position the Wii U as a whole-home entertainment center for parents and kids alike.

As much as a few weeks ago, these same executives had made indications that the new Wii U gaming device may not be ready for this year’s holiday buying period. The supply chain has obviously been pushed to make units available sooner.  In addition to the U.S., reports indicate that the new console is expected to be available in Europe and Australia on November 30 and in Japan on December 8. In late October, Nintendo indicated it expected to sell 5.5 million units by March 31, an indication that the supply chain must anticipate customer interest and order fulfillment efforts that extend into next year. IHS expects Nintendo to sell upwards of 3.5 million units during the upcoming holiday period. The Wii U will be introduced with 23 available game titles, with 29 expected by the end of march.  Similar to shades of 2008, a competitive race among game console providers Microsoft, Sony and Nintendo is underway to capture consumer interest this holiday period. Available game titles will obviously been a determinant. However, tablets and smartphones have gained even more interest for share of consumer wallets, and more and more gamers are turning to online options.

There is a lot at stake for Nintendo, including delivery of some level of respectable profitability for its fiscal year.  No doubt, gaming devices will be one of the supply chain related headlines for all of us to watch unfold in 2012 and early 2013.

Bob Ferrari

As we pen this commentary, we are entering the week of the Thanksgiving Holiday here in the U.S., a holiday to look back and reflect on the blessings of family and life.  It is also our time to reflect and scorecard our Supply Chain Matters 2012 Predictions for Global Supply Chains which we published nearly a year ago. Our annual process is to first scorecard the current year’s predictions before publishing our upcoming 2013 predictions during December.

Our scoring process this year will be on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of; what were we thinking?

Let us therefore revisit our 2012 predictions.

2012 Prediction One: A continued year of high uncertainty of events related to the global economy will provide another year of multiple challenges in global supply chain’s ability to support revenue and profit growth needs.

Score: 3.8

Our prediction was pegged to outlooks provided by the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) which both predicted a high period of uncertainty surrounding the global economy in 2012. At the time, the building financial crisis involving the Eurozone countries portended a gloom scenario among the developed economies, suggesting a financial deterioration of the magnitude experienced in 2008-09. Our assessment was that the predictions felt as though the global economy would slip back into recession in 2012, and the question was, how severe. Many industry supply chains were also focused on emerging markets as their continued engines of top-line revenue and profitability growth, and a marked slowdown in either the developed nations, or the local developing market would have additional adverse effects on supply chains.

One year later, we can note that based on the economic results of the latest quarter, the Eurozone has officially entered recession, one that many economists believe will continue for many months to come.  Politicians across Europe are dealing with the effects of political unrest brought about by high unemployment and dismal prospects for growth.  Major industries such as Europe’s automotive industry are challenged with dramatically declining revenues with very low industry capacity utilization, which leads to speculation of government subsidies or outright closings.

China’s economy has also dramatically slowed, brought about by the effects of the Eurozone contraction, as well as a contraction in China’s domestic markets. Export orders have contracted and in the September period, there were reports of high excess inventories across many industry sectors within China. Similarly, the Latin America economies contracted including that of Brazil, again reflecting the consequences of a slowing global economy.

However, the U.S. economy has fared a bit better, albeit slow but steady growth.  Throughout 2012 there have been more signs of increased foreign investment in U.S. based manufacturing, fueled by the implication of cheaper energy costs and better currency stabilization. Even some U.S. manufacturers elected to bring back previous outsourced manufacturing because of changed economics and concerns for better customer service and intellectual property protection.

2012 Prediction Two: Commodity and component price increases levels experienced in 2011, with some exceptions, will moderate in 2012, and procurement teams need to maintain a key eye on pricing, supplier health, and supply network agility.

Score: 3.5

Explosive growth in commodity costs generally moderated in 2012 with lower tiered raw material suppliers such as metals, chemicals and specialty chemicals now experiencing noticeable slowdowns in business volume.  There are a few exceptions, but overall, commodities have shifted to a demand contraction and supply over abundance, primarily because of the overall slowdown in the global economy.

The one significant exception was food costs.  Severe drought conditions in the U.S. during the summer of 2012 drove dramatically decreased harvests for corn, wheat and other agricultural commodities. Asia’s overall rice crop has been impacted by continued severe weather and floods throughout the monsoon season.

Energy costs in 2012 were primarily driven from political vs. supply and demand factors.  Continued concerns concerning countries in the Middle East, particularly Iran caused the price of oil to remain high, despite efforts by Saudi Arabia to dramatically increase supply levels.  Global transportation carriers were thus able to continue to benefit from across the board fuel surcharges.

Direct labor costs concerning China’s manufacturing sector, as expected, continued to dramatically increase as a result of continued labor unrest. Throughout 2012, there were continued incidents of riots and labor law violations, fueling more demands for increased wages.

Supply Chain Matters has heard numerous reports of supplier distress and some supplier failures during 2012, all leading to needs to active supply chain risk mitigation.  During the year we noted that certain aerospace suppliers in Spain were reeling from the effects of dramatically decreased bank credit. The same trends occurred among European automotive component suppliers as well as other industry sectors.

2012 Prediction Three: Senior management among manufacturing firms will call for a re-visit of supply chain component and finished goods outsourcing strategies in the wake of continued major supply disruptions brought about by natural disaster and other events.

Score: 3.8

In 2011, manufacturers and retailers across many industry supply chains discovered the real sourcing vulnerabilities they had.  In 2012, action strategies were definitely put into place to help mitigate such risks. Industries such as high tech and consumer electronics discovered high concentrations of single sourcing within a single country and have balanced sourcing across other regions.  We recently noted how the country of Thailand has not bounced back to pre-flood levels of supply chain activity because high tech manufacturers elected to change sourcing to other countries across Asia. Similar trends have occurred across automotive.

The notion for including global-wide risk as a new dimension of sourcing decisions has indeed been adopted and is now actively occurring.  These efforts were reinforced by another year of flooding brought about by increased typhoons that impacted Japan, the Philippines, Taiwan, China and other Asian countries. A severe earthquake that struck northern Italy impacted supplies of medical disposables across Europe as well specialty cheeses and other food products.  Finally, global insurers and re-insurers, as we predicted, continue to re-evaluate casualty and business continuity insurance premium rates in the wake of the higher concentrated incidents of losses within specific geographic regions such as certain countries in Asia.

As we continue with this look back, readers are encouraged to share observations as to how global supply chain predictions panned out in 2012.

Bob Ferrari