We along with other recognized supply chain thought leaders have been raising awareness to the current talent shortages regarding areas of supply chain management, particularly individuals with experience related to linking the introduction of new products and product management with overall supply chain ramp-up and ramp-down deployment needs.
One of globe’s top-ranked supply chains, Apple, has been under considerable pressure of-late because of the perception that its product innovation cycles have slowed and industry competitors are quickly narrowing the gap in surpassing such capabilities.
A newly published report from the Wall Street Journal (paid subscription or free metered view) places a poignant perspective to Apple’s growing need. The report indicates that Apple is in the midst of hiring hundreds of new engineers and supply chain managers across China and Taiwan in its attempts to speed product development and introduce a wider range of innovative products. The report notes that current victims of this hiring blitz include the likes of HTC Corp. and other Taiwanese technology firms. According to the report: “The total number of engineers and (supply chain) operations staff in China now exceeds 600…”
The report further outlines that while core research and development will remain in Cupertino, engineering and supply chain management talent investments within China pale in comparison to those in the United States, implying an ever more expanded presence in China. Further disclosed is that Apple has added contract manufacturers Wistron Corp. and Compal Communications to help produce upcoming versions of iPhones and iPads.
Supply Chain Matters has often commented how Apple’s purchasing clout and volume scale can lock-out smaller high tech and consumer electronics OEM’s from lowest cost pricing and favored supply agreements. With this latest report regarding the current talent seeking hiring spree centered on China, the industry can probably add talent raiding and talent shortages to the impacts of Apple along with its competitors.
Talented and experienced cross-functional supply chain management professionals with experience in new product ramp-up and time-to-market, along with alleviating supply chain choke points are going to be in the catbird seat across global locations, since the talent war seems to be escalating across high-tech supply chains.
In the industry-specific section of our 2014 Predictions for the current year, (full research report available for complimentary downloading in our Research Center) we specifically addressed consumer product goods supply chains where combinations of external forces are providing unique challenges. That force includes contraction of growth rates and margins from previously expanding emerging markets, a certain group of activist investors demanding more cash value, and now, increases in key commodity costs.
Some CPG supply chains are rising to the task while many continue to deal with challenges on multiple fronts.
Global CPG giants such as Nestle and Unilever have managed to meet investor quarterly earnings expectations yet continue to report growth headwinds concerning emerging markets along with currency challenges. The CEO of Unilever recently told business network CNBC that emerging markets use to be in the range of 6 to 8 percent but now range 5 to 6 percent. Nestle’s organic growth targets of between 5 to 6 percent are currently trending at 4.6 percent. Unilever currently garners 60 percent of its revenues from China, India and other emerging consumer markets. Mondelez International reported its fiscal fourth quarter earnings this week and reported that organic sales rose declined 6.1 percent in the Asia-pacific region while revenues specifically in China declined by the mid-teens. Supply Chain Matters featured a previous commentary regarding the Kellogg Company.
Noted exceptions of late have been Procter & Gamble and Kimberly-Clark. P&G recently reported that demand for its products in emerging markets such as Brazil and China remains strong. However, P&G reported a 16 percent drop in profits largely due to unfavorable exchange rates. Kimberly-Clark reported that its emerging market business continues to grow strongly. Today, Campbell Soup indicated a solid quarterly performance including growth in certain emerging markets.
The U.S. market further presents its own challenges as economically distressed consumers continue to opt for price-sensitive products in their purchases. Today’s edition of the Wall Street Journal reports that many European based consumer goods companies had relied on sales in Brazil, China, Mexico and other Asian countries to maintain revenue and profitability momentum while developed markets remained sluggish. We would add that these same companies made significant investments in supply chain fulfillment networks in these regions as well.
On the activist investor front, PepsiCo indicated this week that it continue to focus on expanding its soft-drink product revenues instead of taking actions to split-up the company, which certain activist investors are demanding. To continue its course, the company indicated it was investing $8.7 billion in stock buybacks, increasing its cash dividends by 35 percent in the current year, and will initiate $1 billion in productivity gains, including job cuts, through 2019.
There is now the additional challenge of increased commodity costs. On the occasion of Valentine’s Day here in the United States, the Wall Street Journal featured a report that growing demand for chocolate products, particularly from emerging consumer markets, has driven commodity prices for cocoa up 9 percent this year, to levels not reached since 2011. Once more, an industry trade group boasts that demand will outstrip limited supply for the next five years, the longest shortfall since 1960. This week, U.S. cocoa futures hovered in the high $2900 a ton range, a 29 month high. The implication is that with these current signposts, chocolate makers such as Hershey Foods, Mars, Mondelez, Nestle and others will face decisions for raising prices, adding more pressure to existing product demand and profitability trends.
Indeed, consumer product goods industry supply chains have extraordinary challenges to overcome. Supporting emerging market growth objectives requires laser-focused investments in channel customer fulfillment and distribution capabilities. Companies such as P&G provide evidence that such a laser focus can provide benefits and continued growth.
Continued relentless pressures for continued productivity and cost reductions are impacting the marrow of people resources, and further require out-of-box thinking. A dependence on past efforts at continuous improvement or past industry productivity benchmarks will not help in the current environment. With added challenges for increased input materials costs for certain key commodities, the challenges become ever more dynamic.
In 2014, CPG supply chains will require bold leadership and innovative thinking. Business-as-usual has long passed, and so has continuous improvement mentalities. Integrated supply chain management, more timely and responsive decision-making and the laser-like investments in productivity and cost management loom large.
We certainly encourage our readers residing in consumer goods supply chains to share learning from the current environment in the Comments section below.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Disclosure: The author of this posting has a modest holding in Unilever stock.
Both the tech world and business media are abuzz this week with the back-to-back news regarding China based Lenovo’s announced acquisitions of both the IBM low-end server hardware business and this yesterday’s revelation regarding the acquisition of Google’s Motorola unit.
From our lens, both moves point to added global brand presence and further leveraging of the current scale of Lenovo’s global supply chain capabilities.
However, both deals are contingent on government scrutiny, and that may present a challenge.
Lenovo’s thrust into low-end servers where product margins have been an ongoing challenge, can complement the firms core manufacturing presence across China. This is rather significant since the server market has rapidly shifted toward commodity plug-and-play hardware options. It also provides further depth to the firm’s server based product lines, not to mention the previously installed base of existing IBM customers. By our lens, it is a parallel to the actual creation of the Lenovo global brand with the acquisition of IBM’s personal computer hardware business.
The Motorola acquisition provides a more interesting backdrop. Google acquired the Motorola unit in 2012 for $12.5 billion amid lots of market speculation as to why the search and mobile operating system giant would want to get into the smartphone hardware business. Since the acquisition, Google has incurred a reported $2 billion in additional operating losses along with creating additional friction among existing Android OS hardware brands including Samsung. With the announcement of this deal, one Silicon Valley outlet was quick to opine that Google’s prior decision to acquire Motorola was a major mistake and with the deal, Google is taking more than a $5 billion loss on its prior investment.
Reports indicate that Google insisted on holding on to a portfolio of key product patents which was more than likely the original motivation to acquire Motorola. Thus Lenovo is buying the brand, product IP licensing and platform to add to existing line-up of smartphone products. If the acquisition is approved, it would thrust Lenovo into the number three position within the global market, along with a credible presence in the U.S. and North America smartphone market.
Motorola was already attempting to transform itself into a lower-cost, higher volume smartphone hardware provider with the launch of its recent Moto X and Moto G product line-up. Lenovo has its own smartphone line-up, pursuing an aggressive strategy to compete within China’s massive but cost-conscious smartphone market It has been competing directly with Samsung, Apple, Huawei and according to one research firm, has assumed the number four position in China.
In its reporting of the deal, the Wall Street Journal astutely concluded that Lenovo’s greater worldwide supply chain scale positions the company well to be able to leverage low-cost Android devices across the global market. It would appear that Lenovo will retain all Motorola employees in the smartphone segment and thus there an incremental plus in product development and distribution.
In a September 2012 commentary, Supply Chain Matterscommented that from what we extracted from a talk given by Lenovo’s Vice President of Procurement, that its hybrid supply chain strategies were well positioned to be able to enable the company’s strategic business and product outcomes. If these two new acquisitions are approved by U.S. regulators, the Lenovo supply chain may well reap more benefits from its ongoing capability efforts.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain matters Blog. All rights reserved.
Supply Chain Matters has featured a number of previous commentaries concerning the prestige, scale and business growth potential for being selected as a supplier within any part of Apple’s supply chain. Being chosen a supplier to Apple can lead to millions of dollars of revenue given the role in Apple’s product value-chain. Unfortunately, such as potential comes with unsavory motivations to secure influence.
In 2011, a former global supply manager at Apple was charged with wire fraud, money laundering and unlawful transactions involving an alleged kickback scheme involving at least $1 million in kickbacks from multiple Apple suppliers. This individual admitted receiving kickbacks from six different Asia based suppliers in exchange for Apple related confidential information and subsequently pleaded guilty to the charges.
This week, after a year of investigation, Taiwan based prosecutors charged several former employees, including a former general manager, of global contract manufacturer Foxconn with allegedly taking kickbacks and bribes from supply chain partners. This case was initially made public in January of 2013 when Foxconn indicated that an internal audit discovered abnormalities and an employee in China was turned over to police authorities. Foxconn issued a statement confirming that an internal investigation found violations related to the procurement of consumables and accessory equipment needs. The contract manufacturer further confirmed that all the employees in question were no longer employed.
A posting on Patently Apple delves far deeper into the alleged incident as indicates: “former senior executives and employees of its surface mount technology (SMT) technology committee, which is responsible for the company’s procurement of related equipment and materials, had engaged in collective corruption.” The authors quote a Chines based publication indicating that: “kickbacks could have topped over NT$1 billion (US$33.1 million) in 2012 given that Foxconn as a whole purchases over several tens of billions worth of equipment and materials a year.” The authors further speculate as to whether this alleged scheme involved the selling of information related to the production processes involving the manufacturing of the Apple iPad.
Obviously, more of the facts will come to light as the individuals in question are given their day in court.
In the meantime, this is yet another reminder that difficult and challenging economic times can sometimes bring out the worst in individuals and thus strong internal controls related to the sourcing and procurement of technology sensitive goods is a continued must.
On the eve of the beginning of the chronological New Year, it is our time to reflect, look back and scorecard our Supply Chain Matters 2013 Predictions for Global Supply Chains which we published nearly a year ago.
Readers are welcomed to review our predictions for 2014 which we outlined previously in a series of detailed commentaries. But now is the time to look back and reflect on what we previously predicted and what actually occurred in 2013.
In our previous Part One posting, we scored our first five predictions for this year. We now move toward the final five of our predictions and how they fared.
As has been our custom, our scoring process will be based 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 on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
2013 Prediction Six: Supply Chain Organizations Must Either Embrace and Augment Resiliency or Deal with the Consequences of Poor Business Outcomes.
This particular prediction was motivated by the constant volatility in product demand, supply, and other unplanned events impacting industry supply chains. Volatility exposes the vulnerabilities of existing planning, execution or S&OP processes. Throughout 2013, there were increased incidents of supply chain disruption including a major port strike, the threats of port strikes on involving the U.S. west and east coast ports, major factory and warehouse fires along with continued incidents of unprecedented natural disasters. Just this weekend, a fire destroyed the workshop of internal movement parts-making supplier to Swatch Group and other competitive watch suppliers. Swatch supplies roughly 60 percent of movements used in all Swiss watches. As we pen this update, it remains unclear as to the extent of the damage or parts disruption.
Throughout 2013, we observed more and more evidence of manufacturers investing in people, process and technology augmentation that would address resiliency and more predictive decision-making capabilities. This was further reflected in robust software sales from vendors and services providers that concentrated in enabling resiliency, risk-mitigation and more responsive supply chain decision-making capabilities.
We predicted that Supply Chain Control Tower (SCCT) initiatives, beyond those in high tech and consumer electronics supply chains, would come more to the forefront this year. That turned out to be not the case. There were various reasons including the need for further education, organizational readiness to take on such as an initiative and technology vendors themselves who moved away from articulation of SCCT concepts in their product marketing. This area was a missed prediction for us but we continue in our efforts to provide broader market education in this area.
2013 Prediction Seven: Chinese based Manufacturing and Service Firms will Markedly Increase Their Presence and Influence within Industry Supply Chains
The essence of this prediction stemmed from China’s leadership which was encouraging more companies to buy assets overseas and to make strategic investments across targeted industry supply chains. Having in excess of $3 trillion of foreign-exchange reserves helped in the bankrolling of such investments. While natural resource and energy continue to be the predominant strategy our belief was that other industry or geographic penetration strategies would play out in 2013, and that indeed turned out to be the case.
Chinese firms indeed turned their attention toward machinery interests across Europe, making select investments in distressed companies. Zoomlion Heavy Industry Science and Technology, a state owned construction equipment producer acquired German equipment maker M-Tec inDecember. Sany Heavy Industries has quietly acquired two German based firms, Putzmeister and Intermix and entered a joint venture with Austria based Palfinger. In the United States, Sany invested in a $60 million office building and adjoining warehouse outside Atlanta in an effort to develop a more significant presence in the U.S. construction equipment market. According to a Wall Street Journal report earlier in the year, Sany has been “scouting for acquisitions and joint ventures to gain a broader product line, more sales and rental outlets.”
Tianjin Pipe has invested in a $1.3 billion manufacturing plant in Texas to produce seamless-steel pipe for the oil and gas industry. That plant is expected to be completed in 2014. Hisense USA, the subsidiary of home-appliance and electronics producer Hisense Electric is branching out to become a stand-alone brand of flat panel TV’s and mobile handsets from a plant in Georgia. A growing number of China based textile producers including Keer Group and JN Fibers have been investing in new production facilities in the U.S. southeast to supply fabric yarn to Central America apparel producers. Energy costs in the U.S. have become far cheaper not to mention transportation cost advantages for shipping yarns and industrial fibers to Central America, an evolving low-cost manufacturing alternative for the Americas market. These strategic investments allow Chinese yarn and fabric producers a means to overcome existing U.S. tariff barriers for fabric composition.
The most visible and noteworthy investment was the acquisition by China’s largest meat producer, Shuanghui Group, of major pork producer Smithfield Foodsfor approximately $4.7 billion. The primary purpose of this acquisition was stated as fostering more export of Smithfield branded pork products towards China’s booming consumer market. The reality however is now the presence of a prominent Chinese based food producer within an important segment of the U.S. pork products supply chain. The deal also won approval from U.S. regulatory bodies. Since the Smithfield acquisition, there has been added speculation about added acquisitions in the dairy sector.
We believe we nailed this prediction and thus provided ourselves a generous rating.
2013 Prediction Eight: The Executive Level Voice and Shared Accountability of Supply Chain will Extend into Three Broader Areas
Rating: 2.0 (see below qualifier)
The basis of this prediction was our belief that evolving needs for product design, customer fulfillment and customer service now umbrella, voluntarily or involuntarily, more accountability for the supply chain leadership executive. Visible incidents of botched new product introductions because of initial quality issues or premature component failures across automotive, aerospace and consumer electronic brands during 2012 led us to this broader prediction. The new era of Service Lifecycle Management where OEM’s or capital equipment manufacturers offer customer pay by use or pay by hour leasing options was yet another motivator for broadening the accountability umbrella of the supply chain organization.
Throughout 2013 there were continued developments of premature quality and component failures among the above mentioned industry groups. While Ford Motor has introduced quite a number of new vehicle models, its quality indicators are slipping precipitously. Business media headlines were consumed with continuous reports of additional component failure incidents involving Boeing’s 787 Dreamliner aircraft. Other incidents that have escaped media visibility continue.
Candidly, our rating of this prediction has been a challenge since we have had difficulty in securing anecdotal or hard evidence of clear increased or broader functional accountabilities among industry supply chain teams. Our intent was to develop a detailed research study to explore this area in 2013 but a lack of time and a specific research sponsor thwarted our efforts. Therefore, we cannot in good conscience provide ourselves an overly positive rating even though our gut belief is that we were on the right track with this prediction. We therefore defer to our readers to add further commentary and perspectives as to whether broader and increased accountability indeed occurred during 2013. Look for flash poll early in the New Year to ascertain if a broader umbrella of accountability is underway.
2013 Prediction Nine: Higher and More Expensive Incidents of Counterfeit Products, Physical and IP Theft or Grey Market Activities Would Motivate Stepped-Up Mitigation Efforts.
The incidents and challenges surrounding the continued existence of counterfeit products, physical and intellectual property theft, and grey market activities unquestionably continued across multiple industry fronts throughout 2013. In 2012, U.S. Customs and Border Protection alone seized over $178 million in counterfeit goods coming into the United States. Among pharmaceutical and healthcare supply chains, the U.S. Food and Drug Administration (FDA) had to once again alert physicians and healthcare providers to yet another batch of the cancer fighting drug Avastin early in 2013. In March, U.S. Customs officials seized $3.6 million in counterfeit Viagra and Cialis in a warehouse in South Carolina. That same raid also uncovered a large quantity of counterfeit golf clubs within the same warehouse. Counterfeit drugs were not just in proprietary but generic versions of drugs as well. Generic manufacturer Teva Pharmaceutical had to step-up quality inspections of its off-patent heartburn drugs across Europe after healthcare providers and patients noticed miss-spellings in the drug labels. The World Health Organization (WHO) disclosed that there is still no accurate estimate of the global scale of counterfeit medicines. Reports by others groups suggest that the size of the global counterfeit drugs industry could run into hundreds of billions of dollars.
The United Nations Office on Drugs and Crime concluded in an April report that counterfeit goods, mainly originating from China, have become as profitable as illegal drug trafficking for Asia based criminal gangs. The UN agency concluded that counterfeit goods traced to China are the direct source of about two-thirds of the world’s counterfeit goods. Many watchdog agencies have concluded that counterfeiters have become far more sophisticated in their methods of production and distribution. China is also the primary area of the most concern regarding intellectual property (IP) protection, and has become a primary motivator for current decisions to near source design and manufacturing to other consuming regions such as the United States.
Despite all the above evidence and incidents, industry supply chains such as the pharmaceutical industry continue to battle a rising tide. While many firms have specific compliance leadership and staff resources, efforts generally were directed at certain controls within current budgetary parameters. They include early detection, audit and product packaging techniques to make it more difficult for counterfeiters to distribute fake goods. Calls from governmental agencies for stricter or mandated tracking, inspections and controls remain muted and subject to political lobbying. Private industry must step-up and come up with enhanced solutions.
Meanwhile, consumers, patients and services providers continue to remain the victims. While we correctly predicted the wide-scale scope of the ongoing problem, stepped-up mitigation efforts apparently lagged.
2013 Prediction Ten: Cloud Computing and Managed Services Options Continue to Gain More Traction Provided that Vendors Resolve Lingering Customer Concerns.
The year 2013 featured the ongoing shift of influence and the ultimate decision in technology buying moving away from IT and towards the business side, with the continued counsel of the CIO and IT teams. The fate of technology investments to enable expected and more timely business outcomes is quickly shifting into the hands of business and supply chain teams. At the same time, huge multi-year technology transformation initiatives were shunned in favor of targeted, tactical business process change initiatives of average 3-6 months duration that phase-in capabilities toward a desired multi-phased end-goal. This fostered a greater attraction toward cloud computing, managed services or best-of-breed selection options that
provided teams managed scope and much quicker time-to-benefit.
During the year, industry analyst and other published surveys pointed to less resistance for certain supply chain mission critical processes moving toward hybrid or public clouds, provided that vendors could ensure strict security standards, less onerous contract language and quicker implementation methodologies. However, the November-December incident involving the security breach of retailer Target’s point-of-sale systems will most likely significantly re-ignite security concerns again in 2014.
In 2013, many supply chain technology vendors continued their wholesale shifts at providing customers broad cloud-based options in planning, B2B collaboration and execution management. Thus far, customers seem to be comfortable with adopting such options, but again, in managed scope. Tight budgets for technology adoption also contributed to the attractiveness for cloud-based options since technology investments can be funded within business operating budgets.
This concludes our 2013 Predictions scorecard. We trust that you, our readers, secured benefit from these predictions as they transpired this year. While we did not hit a home run on every prediction, we were certainly in the game.
Readers are invited to add their observations in the Comments area regarding our predictions for this year and our self-rating.
Sincere thanks for your continued loyal readership throughout 2013 and we extend our wishes for a productive and rewarding 2014.
Bob Ferrari, Executive Editor and Managing Director
© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
After long anticipation, tremendous speculation, endless rumor and the shuttle diplomacy of CEO Tim Cook himself, Apple and China Mobile have finally done the deal. The multiyear deal announced this weekend is huge for Apple in that the company’s iPhone products will have the opportunity to tap a huge market. It opens up a market in excess of 760 million China Mobile subscribers. As the Wall Street Journal pointed out in its coverage that is seven times as many subscribers as that of Verizon Wireless. Apple iPhones will be able to operate on both China Mobile’s brand new 4G network and its existing 3G network.
Added distribution and fulfillment needs include that phones will be available via China Mobile’s nationwide retail network as well as Apple stores located across that country. Availability begins on January 17th.
It will further afford Apple to opportunity to compete with existing in-trenched market players within China which include Lenovo, Huawei, Samsung and Yulong. It is a market where smartphones priced under $100 are plentiful while the Apple iPhone 5c retails unsubsidized for $739 and the iPhone 5s for $871. Because of this situation, many speculated that the new iPhone 5c model would be more competitively priced.
Obviously brand identity, will be an important determinant in the months to come.
Equity and markets differ on the added volume potential for Apple brought about by the China Mobile deal. Added volume from the China Mobile deal range from 10 million to as much as 24 million phones sold in 2014.
Apple has received a huge Christmas present- its coveted presence as an offering among one of China’s largest mobile networks. The coming months will be the new test in how the Apple supply chain responds to greater exposure to China’s dynamic and price competitive smartphone and complex channels market.