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Report Card on Supply Chain Matters 2012 Predictions for Global Supply Chains- Part Two

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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

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