Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide a series of predictions for the coming year. We have maintained this tradition since the founding of the blog in 2008.
In our Part One posting, we explored our first two predictions for 2013, the overall economic and business challenges, and our prediction of inbound commodity prices.
In our Part Two posting, we explored predictions #3 and #4, which noted a continued renaissance in U.S, based manufacturing and the very important challenge of supply chain skills development and retention.
In this commentary, we move to #5, our industry specific supply chain 2013 prediction.
Prediction #5: Two industry supply chains, B2C and the Aerospace Industry, will undergo more significant challenges or increased turmoil in 2013.
In 2011, we correctly predicted that two industry sectors, B2C and Pharmaceutical/Healthcare would be especially affected by significant supply chain challenges. In 2012, we added High Tech / Consumer Electronics as a third industry facing significant supply chain challenges as a result of the two disruptive events in 2011, the earthquake and tsunami that struck northern Japan and the monsoon related flooding that devastated Thailand. High tech and consumer electronics supply chains largely recovered in the second-half of 2012 and thus we do not predict significant challenges in 2013, unless of course, another major natural disaster disrupts supply chains across Asia in 2013.
In 2013, we anticipate that B2C and Aerospace industry related chains will experience more significant challenges and increased turmoil in 2013.
B2C Retail Sector Challenges
In 2012, the B2C sector continued to be impacted by the momentum in online multi-channel, or what some refer to as either Omni-Channel or cross_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. According to the numbers from marketing analytics firm comScore, Inc., U.S. retail e-commerce spending was up nearly 16 percent in the first 26 days of November 2012. Cyber Monday online sales were estimated to be nearly $1.5 billion, a corresponding 16 percent increase from last year. It is no surprise that major retail executives such as Rob Walton, the Chairman of Wal-Mart have begun to openly declare that massive transformation is underway in how consumers will shop for goods in a ubiquitous connected world of mobile devices and shopping tools.
During 2012, 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. This has led to another proliferation of planned stockeeping items (SKU’s)
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 current 2012 holiday buying period. As we pen this prediction, there is word that BestBuy’s newly recruited VP of Digital Commerce unexpectedly resigned. JC Penny, which 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. Another final test comes in the six weeks of the 2012 holiday buying surge. According to available data, consumers continue to flock towards online buying preferences. The 2012 report cards will surely be judged by how retailers and online providers were successful in integrating online efforts with physical and information technology enabled supply chain support capabilities.
There should be little doubt that traditional brick and mortar and online retailers will continue to encounter their share of significant challenges in 2013, with more visible fallout. Expect at least one or two failure announcements concerning high visibility retailers. Expect online giant Amazon to have another banner 2013, causing more fallout for the rest of the industry. On the demand side, the state of the global economy throughout 2013 adds particular challenges for planning individual country demand. Reports indicate that shopping patterns within the Eurozone countries, currently challenged with high unemployment and a highly uncertain economic outlook is considerably different than previous years. Tighter consumer budgets have motivated online and traditional retailers to promote lower-priced goods.
We anticipate that the B2C sector in 2013 will feature more significant organizational realignment that addresses singular supply chain wide inventory investment across multiple fulfillment channels, including both actual and drop-ship inventory response programs. Once and for all, there will be a breaking down of the organizational barriers among traditional and online retail organizations among a singular retail firm. We expect a more vocal and balancing voice of the supply chain vs. the current predominant voice of marketing and merchandizing.
Finally, increased information technology investments among the B2C sector in merchandising, online and customer analytics tools will unfortunately outweigh needs for required investments in supply chain wide intelligence based decision-making or more sophisticated supply chain planning and response management tools. The implications of these investments or lack thereof, will again be tested in the 2013 holiday buying surge.
Aerospace Supply Chains Challenges
Aerospace supply chains struggled with very active challenges in 2012, which we predict will continue throughout 2013 as major OEM’s Boeing and Airbus exercise plans to increase overall supply chain volume production by an unprecedented 40 percent level by 2015. Industry executive have publically acknowledged that global aerospace supply chains are stressed. There has been 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. In early July, both Airbus and OEM called for supply chain consolidation in order to protect more vulnerable suppliers, particularly aero-structure related suppliers. 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, similar suppliers support production needs of Airbus, Boeing and other OEM’s such as Bombardier.
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 such as the 747-8. In 2013, the monthly production rate of 787 aircraft is scheduled to double, from the rate of 5 per month to 10 per month. In late 2012, separate incidents involving occurrences of fuel leaks and an electrical generator failure on newly delivered 787 aircraft raised concerns on initial supply chain related quality and component reliability. Both major suppliers of engines for the 787 had unexplained incidents of engine malfunction in July, while other suppliers such as Spirit AeroSystems Holdings, have run into financial challenges as a result of continued product production delays. Boeing must also deal with the ongoing challenges of simultaneously coordinating the final assembly of 787 aircraft among two separate facilities on both the U.S. west and east coasts, as well as increased threats of unionization at its east coast facility. Labor negotiations among a labor union involving engineering employees must also be resolved in 2013. While all of these production delays continue to occur, both customers and suppliers have filed requests for contractual relief, which Boeing must also deal with.
As noted in our Prediction #1 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. We anticipate further aerospace supplier crisis in 2013, more likely involving European based suppliers for both global OEM’s. In 2012, 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. That was a good sign. Ongoing delays and supply chain issues involving the carbon composite A350 program must be resolved in 2013 for that aircraft to remain a viable market alternative for airline customers. A prototype of this aircraft is planned for mid-2013 with first customer ship scheduled for mid-2014. Airbus is also challenged to move production of the widely popular A320 aircraft to production levels of 40 per month in 2013 and 2014.
This concludes Part Three of our 2013 Predictions for Global Supply Chains. Keep your browser pointed to Supply Chain Matters as we dive into our remaining 5 predictions in subsequent postings over the coming days.
As always, readers are encouraged to comment on these predictions as well as add additional thoughts as to what to expect in 2013.
© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Just as industry supply chains continue to recover from an eight day work stoppage involving the west coast ports of Los Angeles and Long Beach, the threat of a work stoppage impacting multiple U.S. Atlantic and Gulf coast ports looms closer.
Talks among the International Longshoremen’s Association (ILA) and the U.S. Maritime Alliance (USMX), representing multiple port owners, broke down on Tuesday. If a work stoppage were to occur, it would present far more supply chain wide physical and economic disruption consequences. Some industry sources note that over 90 percent of containerized shipments destined for the U.S. eastern seaboard would be impacted. The threat of a work stoppage involves 36 major ports including the major container facilities of Charleston / Savannah, New York / New Jersey, Hampton Roads, Baltimore, Miami, Port Everglades, New Orleans and Houston. Multiple industry supply chains would be impacted, not the least of which would be those involving petroleum, agriculture, automotive, retail, industrial equipment, construction and other commodities.
Similar to what occurred with the threat of a west coast port disruption earlier, the National Retail Federation (NRF) issued a letter to President Obama on Monday outlining the retail industry concerns for a work stoppage impact, calling on the President to use all means necessary including invoking the Taft Hartley Act, to keep both sides negotiating. Both sides are currently ad-odds over the issues of container royalties which the union receives at the end of every year, which is applied to benefits. The talks broke down in September, and an agreement was made to extend the current contract until December 29. Both sides have since been negotiating with the assistance of the Federal Mediation and Conciliation Service.
Many industry supply chains have no doubt, initiated some forms of contingency planning. As we inch closer to the deadline date, contingency and response planning efforts will have to be further operationalized with the decisions and actions of designated contingency planning teams that involve procurement, planning, logistics and transportation, suppliers and customers.
By our view, because of the scope and sheer impact of a potential work stoppage involving 34 east and Gulf ports, the likelihood of a total stoppage scenario is not as high as scenarios involving isolated work stoppages or labor slowdowns as governmental influence is brought to bear, forcing continued negotiations. However, supply chain teams need to be prepared for all contingencies at this point, including adequate safety stock levels, contracting capacity for alternative air freight usage, or multi-mode sea/rail/surface routings involving Canadian, Latin American or offshore ports. Consideration should also be made for work slowdowns among U.S. west coast ports as union members demonstrate solidarity with their east coast members.
Unfortunately, some procurement and supply chain teams may not be able to take extended time to totally enjoy the upcoming Christmas and New Year’s holidays. Then again, that has been the case of continuous supply chain disruption that teams have dealt with for the past two years.
For our part, Supply Chain Matters will continue to monitor this situation and provide important updates for readers.