Readers may recall that during the month of December, Supply Chain Matters outlined our ten predictions for global supply chains in 2013. These predictions are now available in a comprehensive research report that is available for no-cost downloading. The report itself adds additional updated content that we were not able to provide in the series of blog commentaries. We merely ask that you provide us some basic name, position and email information. Again we reiterate that it is the policy of Supply Chain Matters to not sell, disclose or distribute our subscriber email data to third parties. A sign-up for a no-cost research report will also place you on the distribution for our Supply Chain Matters Newsletter that is published throughout the year.
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Today’s Wall Street Journal article reflecting on General Electric and its GE Aviation division (paid subscription required or free metered view) is impeccably timed.
The article opens with the following introduction: “As Boeing pays a price for having farmed out crucial parts on its new Dreamliner, General Electric Co.’s aviation division is busy bringing work on its engines back in-house.”
That statement uncovers a rather important consideration for today’s senior supply chain executives who’s supply chains support market innovative products, namely whether the needs of intellectual property protection, more intimate access to product development and the all-important protection of intellectual property assets (IT) outweigh savings garnered in supply chain outsourcing. These past months, this author has been leaning more toward vertical integration of the supply chain, as we continue to comment on companies who have elected to change course and pursue this strategy.
The WSJ notes that GE Aviation must fulfill a delivery rate of more than 4,000 engines per year for the next two years amid increasing customer orders for its new GE90, GEnx and CFM56 engine models. A backlog of orders for 15,000 new generation aircraft engines between now and 2020 is a compelling motivation for the supply chain to focus on risk avoidance and resiliency, which GE Aviation is in the process of doing. GE Aviation’s supply chain executive Colleen Athans is quoted by WSJ; “We want more under our control. Rather than pay a supplier to do it, we would protect our intellectual property,”
The WSJ article describes how acquisitions of Italian parts supplier Avio, additive manufacturing company Morris Technologies, and a joint venture with supplier SeaCast Inc. to secure access to key raw materials as recent evidence of this supply chain vertical integration strategy.
Within Supply Chain Matters, we have featured supply chain vertical integration strategies practiced by Hon Hai Precision, Hyundai and Delta Airlines. Readers are welcomed to review each. Each of these instances had either specific business goals to support, a key commodity or product innovation strategy to enhance or protect. There are probably other examples which readers are welcomed to share here.
The takeaway is that a blind follower strategy regarding supply chain outsourcing is not always the best decision. Supply chain strategy needs to be tailored to certain business needs and outcomes. A singular business focus to positively impact Return on Assets (ROA) by wholesale outsourcing of strategic supply chain product components is one dimensional, and needs to be balanced with other measures of supply chain risk and resiliency. Having the industry leading benchmark in ROA may not be all that wise if the ability to consistently deliver industry breakthrough products is compromised. Today’s supply chain executive should practice broader-based general management skills that provide the analysis and insights to the tradeoffs of outsourcing vs. insourcing.
Being an analyst and observer of the enterprise and B2B supply chain technology market for many years, I have observed that certain software companies often develop their own personalities and mannerisms. Some are market innovators, some are very in-tune to customer pain points and some just do not get it when it comes to the needs of you, the customer. In the latter category, unfortunately, is SAP, which continues to deploy product strategies that are sometimes good for SAP, perhaps not so for its universe of customers.
This week, the blogosphere of enterprise software bloggers are abuzz with SAP’s latest indications of a price increase in standard maintenance services. The enterprise software provider has intentions to raise its standard support maintenance fee from 18 percent to 19 percent, effective July 15, 2013.
SAP installed base customers might recall that the standard support option was reintroduced in January of 2010 after the global customer base rebelled against SAP’s introduction of more expensive annual software agreements. Many speculate that the customer rebellion was the downfall of former CEO Leo Apoteker. Once again, SAP comes to the well demanding an increase in support fees.
In essence, the latest announced hike amounts to an effective 5.5 percent increase. Customers however, have the option to either renew an existing, or place a new standard maintenance contract before July 15 to avoid the price increase. While SAP’s probable intent is to allow customers a six month window to make a decision on annual maintenance, the blowback is just beginning. Keep in mind that annual maintenance often provides the most profitable margins for enterprise software providers and in-turn, either fuel other activities or add to free cash to make acquisitions.
The timing of this price increase announcement once again comes in challenging budget times, given the ongoing economic conditions across the Eurozone and other countries. Operating budgets demand the abilities to respond to any upside business opportunities and not to pay increased costs to maintain existing software. Rather than recreate various perspectives related to this SAP announcement, we provide some references to noteworthy insights.
On the Software Insider blog, Ray Wang penned a commentary noting that SAP appears to be harmonizing the price increases for both new and existing maintenance customers. While this rate hike comes under the guise of maintaining high quality of support, Ray argues that the current support tools do not offer much in value. ZD Net enterprise software blogger and longtime SAP mentor Dennis Howlett questions why now? Dennis provides strong arguments that any increased revenues garnered by this price increase are marginal at best, and that the announcement opens the door yet again for third party maintenance providers to come swooping in and make a cost saving play. Howlett concludes: “Add it all up and you get a powerful cocktail that can only drive animosity between SAP and some customers at a time when a price reduction, however small, would have had a much more positive impact. Put another way, if you pass on cost savings than the chances of selling more product later are vastly improved”
Functional supply chain teams normally would not be concerned about such developments over annual software maintenance, but they had better pay close attention. SAP continues to message on helping to deploy a more responsive supply network for its customers, but the components continue to be a work-in-process, especially those related to SAP Business Suite Powered by HANA. SAP Supply Chain Management customers are therefore compelled to be in constant update mode. A very real consideration that needs to be factored is added integration services from a competent third party systems integrator as well as overall total cost of ownership related to a collection of SAP applications. A supply chain automation initiative built on SAP components therefore takes on multiple cost dimensions, and senior management does not want surprises. Potentially excessive annual maintenance costs for both old and newer applications add up to be an overhead burden that is sure to catch added pushback from the CFO. As has also been noted, there are some real questions as to the value delivered for this maintenance, and that opens the door to explore other alternatives, including non-SAP components.
In his blog commentary, Frank Scavo outlines four good questions for SAP:
- What improvements in SAP support will be delivered to justify such a price increase?
- What is the gross margin of SAP’s maintenance business today, and how will that change with this price increase?
- How have support costs changed to justify an increase?
- Since SAP uses some of its revenue to fund development for new products or make acquisitions, will SAP provide these new products to customers at no charge?
While it is not likely that SAP will provide definitive answers, if there is enough of a backlash groundswell, there well may be another collective message delivered: Stop abusing customers with your need for added margins, and instead focus on delivering cost competitive solutions to our business needs.
Support your IT teams and add your functional and business voices that enough is enough. No more taxation without benefit justification. The needs of you, the customer, must be balanced with those of the business needs of SAP.
By the way, least we mention, we hold Oracle to these same standards.