subscribe: Posts | Comments | Email

Major Move by Boeing to Secure Service Parts Revenue Control

0 comments

Equipment and capital goods manufacturers have increasingly re-discovered new and growing revenue opportunities that reside in added services and service parts sectors related to in-service equipment. Such opportunities are especially pertinent across commercial or defense focused aircraft which have operational service that spans many years of service. However, when an industry dominant such as Boeing decides that it wants to take more control as well as revenue cut of all service parts, the financial implications and subsequent impacts will reverberate among all key suppliers.

Today’s edition of The Wall Street Journal reports such an implication as Boeing elects to secure a new source of revenue beyond building aircraft. (Paid subscription required) The report indicates that whereas in the past, Boeing’s largest suppliers such as Spirit AeroSystems or Rockwell Collins could sell respective manufactured parts directly to airline and aircraft operators for in-service service replacement needs, the OEM elected in late February to prohibit suppliers from directly selling proprietary service parts, along with suspending licenses to suppliers to sell any such proprietary parts to its customers. The WSJ characterizes this development:

It is the most aggressive move to-date in Boeing’s year-long effort to assert control over distribution-and the resulting revenue- of parts.”

According to the report, Boeing is looking to nearly triple revenues associated with commercial and defense aviation parts and services business by 2025.

Supply chain teams in these sectors know all too well that margins on service parts can far exceed those for original equipment production needs. According to the WSJ, it can be upwards of 4X more than what Boeing pays for the part to support initial production. Suppliers will often forego margins on supply contracts to a customer such as Boeing with the expectation that multi-year margins can be garnered in service parts needs over the operating life of an aircraft model.

In a highly regulated industry such as commercial or defense focused aircraft, certain structural or key operating parts have designated service-life provisions which must be adhered to, thus assuring ongoing component stocking and service part demand needs.

The WSJ report further links these moves to Boeing’s ongoing Partnering for Success initiative addressing added cost control opportunities among existing suppliers. According to the report:

Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised (supply) contracts were complete.

The report cites a Credit Suisse aerospace industry analyst as indicating:

The economics of being a Boeing supplier could be facing their greatest challenge yet.”

While airlines themselves have become increasingly concerned by the rising prices of service parts charged by suppliers, by our Supply Chain Matters lens, this revised strategy by Boeing does not necessarily address nor mitigate that trend. It obviously takes away profitability opportunities for suppliers while adding yet another intermediary in the service parts supply chain.

One of the most promising service management opportunities related to commercial and defense focused aircraft resides in the leveraging of Internet of Things (IoT) focused technologies that would allow operating equipment the ability to communicate service and replacement needs based on operating environmental conditions. Rather that static, fixed maintenance schedules, the opportunity is for the equipment itself to self-diagnose its parts replacement needs.

Many original equipment manufacturers are thus positioning to take advantage of such technologies in new service focused business models.  That includes aircraft engine producers such as General Electric and CFM International. With this latest move by Boeing, a new participant is added to the overall business model, a participant that must share the same technology tenets being promoted in automated performance monitoring and service dispatch. Add the notion of IoT platform providers positing for their portion of the overall business model via platform adoption and subsequent dominance, and the picture begins to turn to one we have witnessed before with breakthrough technology.  Every participant attempting to position for leveraged control of a promising new business model while target customers have to determine what all of this implies for added efficiencies or cost savings.

The dilemma of commercial aircraft supply chains that presented multi-year order backlogs and insatiable demand for more fuel-efficient technology-laden new aircraft has met the reality of more educated and aggressive airline customers, coupled with rapidly changing economic times.  These forces are inserting their influence on aircraft pricing, delivery expectations and operating service needs.

Boeing is now responding to these needs by aggressive supply chain cost and headcount reductions, and now, demanding its proportional cut of service parts revenues. In essence, like too many supply chain dominants, the picture is again moving the need of cost reduction or added revenue needs down the supply chain.

More and more, the notion of we are all in this to share industry growth opportunities together reverts back to the supply chain dominant as the ultimate long-term benefactor.

Respective suppliers will obviously have to determine their own response strategies. Larger suppliers will be able to find means to remain resilient to such changes while smaller suppliers may feel the bulk of the pain. In the long-run, the party that ultimately controls the customer relationship along with product and process design ends up to be the eventual winner.

Bob Ferrari


Boeing Announces Specific Job Cuts and Cost Reduction Efforts

0 comments

In mid-February we alerted Supply Chain Matters readers that Boeing’s Commercial Aircraft business was planning job cuts as part of a cost-cutting drive. The party line for this action was a response to rising competition from Airbus along with pressure from customers for lower pricing on new aircraft. In February, the aerospace firm indicated that it would utilize a combination of attrition and voluntary layoffs to primarily trim its executive ranks.

Today, The Wall Street Journal and other business media are reporting the announcement by Boeing that it plans to cut more than 4500 positions by June. Boeing is acknowledging to media outlets that in its commercial aircraft business segment the firm expects to initiate about 2400 of these cuts via attrition and approximately 1600 through voluntary layoffs. The cuts include “hundreds” of managers and executives which would indicate a trimming of organizational hierarchy. When considering previous reductions of 1200 positions, the overall reductions are expected to reduce Boeing’s overall employment by roughly 5 percent. The company has further indicated that any involuntary separations of unionized workers “would only be utilized as a last resort.”

Further included in expected cost cuts are reductions in inventory levels, improved productivity and significant cutbacks in business related travel. How these forthcoming cuts will impact the broader supply chain is yet to be determined.

Regarding our last update, there still appears to be no word concerning a U.S. Securities and Exchange Commission (SEC) has launching of a probe of Boeing’s accounting methods related to both the 787 Dreamliner and 747 programs.

 


The Future of International Freight Procurement- A Supply Chain Matters Guest Commentary

0 comments

The following is a supply Chain Matters guest commentary contributed by Cory Margand, Founder and CEO of SimpliShip an international freight marketplace created out of the frustration of today’s outdated shipping processes and underutilization of technology. We recently spoke with Cory Margand and Keegan O’Brien of SimpliShip and invited this guest blog contribution.

 

“Insanity: doing the same thing over and over again and expecting different results”

  • Albert Einstein

 

Is anyone else sick of hearing about the doom and gloom of the ocean carriers?

The freight landscape has shifted and businesses are operating in new ways. Yet, our industry is making the same choices without considering the impact of this new landscape and expecting different results. Given the oversupply of vessels we are currently experiencing, there has been a lot of talk about the state of the industry due to some of these choices. Shippers must now wait and see how their rates will be affected by things like carrier consolidation. If we are ever going to see a change; the focus needs to shift to the process itself. Shippers must position themselves to have more control over their fate;   rather than just the carriers. So, what should your business be doing differently?  Gantry_Load_4

STOP LOCKING ALL YOUR VOLUME INTO CONTRACTS

How it works today:

  1. Beneficial Cargo Owners (BCO’s) go out with a tender annually with volume by lane
  2. Carriers/NVOCC’s provide their bids
  3. BCO’s select their carrier portfolio based on price, capabilities, and performance

 

So what’s the problem? Quite simply no one can tell the future, especially in today’s highly volatile and changing global logistics environment. So, why would you lock all of your volume into a contract? As an example, in 2015, rates in certain lanes dropped roughly 50 percent after longer-term contracts were awarded. I wouldn’t want to have been the person responsible for negotiating contracts on behalf of the BCO (although they probably bragged to their boss how much they saved year on year). We are talking upwards of millions of dollars depending on volume! In other words, it’s never a zero sum game; either the carrier or the shipper loses out and loses out big!

START MAKING SPOT RATES PART OF YOUR STRATEGY

How the shipment tendering process can work:

  1. Non Vessel Owning Common Carrier’s (NVOCC’s) & Forwarders negotiate contracts with carriers
  2. Some of the larger shippers will enter into contract negotiations but still have a huge need for spot rates in order to fill-out required capacity.
  3. Small businesses procure spot rates continuously throughout their sell in cycle

Typically, small businesses rely on 1 or 2 Forwarders and rates are provided after multiple emails or phone calls. Unfortunately, that means there’s no leverage for the shippers, there are limited negotiations and it’s done in a total vacuum. The worst part is that once the rates are received, they hardly ever compared apples to apples; the shipper must now spend even more time figuring out which is the best combination of rates and service. Not to mention, this means more time required to track such information in spreadsheets or other applications. On the flip side, NVO’s & Forwarders are cold calling all day long in hopes they get an in- person meeting with a shipper at some point. I can speak from personal experience that the odds are stacked against the Forwarder from the beginning.

Now, I’m certainly not impartial, but I want to make it clear that it’s time for everyone in the industry to embrace technology to drive efficiencies and risk management for both shipper and carriers. Processes that create a losing situation for supply chain partners need to be eradicated immediately. With SimpliShip, shippers enter their air or ocean shipment information, post it and instantly connect with a network of pre-screened NVOCC’s and freight forwarders eager to earn their business. The marketplace is mutually beneficial, providing a centralized location for shippers to reduce costs and time; while NVO’s and forwarders benefit by gaining a new sales channel, low customer acquisition cost, and significantly reduced lead times to secure new business.

Visit www.SimpliShip.com to sign up or learn more.

 

Disclosure: Neither The Ferrari Consulting and Research Group nor the Supply Chain Matters® blog have a current business relationship with SimpliShip.com. We share this guest commentary for purposes of market education.


Boeing Commercial Aircraft to Initiate Job Cuts

1 comment

The month of February has not necessarily been one of positive news emanating from commercial aircraft producer Boeing.

The Wall Street Journal reported this week (Paid subscription required) that Boeing’s Commercial Aircraft business is planning job cuts as part of a cost-cutting drive in response to rising competition from Airbus.

This news comes shortly after Boeing’s prior stunning announcement that it will actually deliver less commercial aircraft this year that was delivered in 2015.  Whereas Boeing delivered a total of 762 commercial aircraft in 2015 while declaring a year of outstanding operational performance, the current forecast is to deliver a range of from 740-745 commercial aircraft in 2016.   Boeing 787 production line

Commercial aircraft CEO Ray Connor reportedly announced in an internal webcast that the aircraft manufacturing was losing market share, and that the company will utilize attrition and voluntary layoffs to primarily trim its executive ranks. A Boeing spokesperson confirmed to the WSJ that the company would start reducing employment levels with executives and managers first. The overall impact of the layoff is described as dependent on reduction in cost structures.

According to the WSJ report, Mr. Connor communicated to employees that Airbus had been undercutting on pricing of certain aircraft models while customer feedback had identified executive management as a source of cuts to reduce costs. Boeing’s unionized work force has reportedly already agreed to voluntary layoffs. An executive for Airbus indicated to the WSJ that he disagreed with the notion that the European aircraft manufacturer was offering models at lower prices.

One could suppose that the above statements could be interpreted in different ways.

For the Boeing supply chain network, it is a continued sign of continued emphasis for added efficiencies, throughput and cost reduction.

As we penned this commentary, there was further breaking news that the U.S. Securities and Exchange Commission (SEC) has launched a probe of Boeing’s accounting methods related to both the 787 Dreamliner and 747 programs. A widely cited report from Bloomberg News, citing people with knowledge of the matter indicates that SEC enforcement officials haven’t reached any conclusions and could decide against bringing a case. According to the Bloomberg report, the investigation comes after a “whistleblower” contacted the agency regarding accounting methods. Boeing utilizes a cost tracking method called program accounting that enables the spread of development costs for new airplanes over the program’s expected production life. In the case of the 787, that is a long window while the 787 program itself has recorded upwards of $30 billion in deferred production costs that have yet to be logged against the income statement. While Boeing’s program accounting method is compliant with Generally Accepted Accounting Principles (GAAP), Airbus utilizes a different international accounting standard that requires program costs to be booked earlier in product production lifecycle.

The news of the SEC investigation and a warning that Boeing might face upwards of $9.7 billion in charges for both the 787 and 747 programs if additional sales cannot be generated, sent Boeing stock down nearly 7 percent on Thursday erasing about $7.8 billion in market value.

The broader takeaway from our Supply Chain Matters lens is that business-as-usual is no longer a norm for any industry, especially one that continues to experience multi-year backlogs of booked customer orders. In Boeing’s case, an estimated $432 billion in orders booked overall. The uniqueness of commercial aircraft is in its engineer-to-order environment with multi-year program engineering, production and accounting windows.

Time-to-market, business agility, continuous innovation and supply chain responsiveness our indeed the new norm.


Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains in Detail- Part One

Comments Off on Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains in Detail- Part One

Once a year, just before the start of the New Year, our parent, the Ferrari Consulting and Research Group along with Supply Chain Matters provide a series of predictions for the coming year. These predictions are provided in the spirit of assisting industry supply chain teams in setting management objectives for the year ahead as well as Supply Chain Matters Blog- Independent analysis and insights on supply chain managementhelping our readers and clients to prepare supply chain management and line-of-business teams in establishing meaningful programs, initiatives and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and service management.

Our predictions series includes a re-look at all that occurred in the current year, a reflection of future implications, and soliciting input from clients and other supply chain and blogosphere observers. Unlike others, we incorporate a lot of thought and perspective into our annual predictions and take the time to actually scorecard our annual predictions at the end of the year. Readers are welcomed to review our scorecard series related to 2015 predictions that occurred in late November.

In our introductory posting, we unveiled our complete listing of ten 2016 predictions for industry and global supply chains.

In this Part One posting, we dive into the first two predictions.

2016 Prediction One: A Year of Uncertainty and Continuous Challenges Related to Global Supply Chain Activity

Our first prediction related to global activity is that industry and global supply chains should anticipate another year of uncertainty in planning product demand and supply needs on an individual geographic region or country basis.  From our lens, there will be a need for lots of contingency and various scenario planning options, and sales and operations planning will be very engaged and challenged throughout the year to meet expected business outcomes.  Even more production overcapacity across China’s industry sectors will add to downward global pricing pressures affecting specific industry supply chains.

As industry supply chains approach 2016, there are many global economic and other signs pointing to a slow or declining growth environment. A stronger U.S. dollar and depressed commodity prices have sown caution among a broader group of manufacturers. Wide uncertainty regarding the global economy, increased stock buybacks, declining capital investment have led to industry consolidation over investment-led business expansion. The current unprecedented lower cost levels of crude oil have negatively impacted the oil and gas and alternative energy sectors.

Even more production overcapacity across China’s industry sectors will add to downward global pricing pressures affecting specific industry supply chains. China’s industrial production continues to grow at faster-than-expected pace adding more negative influences for multiple industry supply chains in 2016. We predict added production overcapacity will continue to effect global markets as produced goods flood industry supply chains. The country’s National Bureau of Statistics reported that industrial production rose 6.2 percent in November prompted by the latest round of government economic stimulus. Fixed asset investment has grown 10.2 percent year-over-year in the first 11 months of 2015 amid declining exports and domestic retail sales. While global economists predict that overall GDP growth will drop below 7 percent in 2015, the current economic stimulus hopes to hold the 7 percent threshold. That we believe will lead to more troublesome global overcapacity. Added to concerns for China are growing incidents of labor unrest as more and more Chinese manufacturers become financially strained. According to a business-sentiment index from China’s Caixin business magazine, factory employment has fallen for 25 consecutive months.

Added to this environment are pronounced merger and acquisition developments that can reap havoc on supply chain business processes, systems and organizations. To cite one example, the very high profile mega-merger of Kraft Foods by H.J. Heinz, announced in March of 2015, has led to a plan to cut $1.5 billion in costs, including an announcement to close seven North American plants because of perceived operational redundancy. At the same time, the combined company intends to increase its quarterly dividend by 4.5 percent. Similarly, mega-mergers sweeping the pharmaceutical industry will prompt challenges in consolidation of backbone systems and supply chain processes.

The above stated, the International Monetary Fund (IMF) in its October World Economic Outlook has predicted 2016 global output growth of 3.6 percent, compared to a somewhat revised number of 3.1 percent for 2015. Keep in-mind that the IMF originally forecasted 3.8 percent growth for 2015, but steadily revised that number downward during the year. Current concerns center on modest growth among advanced economies, particularly the Eurozone and the United States, along with severe economic distress within Brazil, Russia and certain other Middle East countries. China is obviously the biggest concern, with a forecasted growth of 6.3 percent compared to an estimated 6.8 percent in 2015.

The J.P. Morgan Global Manufacturing PMI Index, a composite index and recognized benchmark of composite global supply chain and production activity provided concerning signals by the end of 2015. Global production was described as the slowest pace in almost two-and-a-half years and has been trending downward throughout 2015. The index dropped to a low of 50.6 in September and as of November the index recorded at 51.2 reading. By November, the ISM PMI reflecting U.S. activity, and the Caixin China PMI both recorded values below the 50 mark, both together representing the bulk of global manufacturing and supply chain output.

The most important capability for 2016 will be the ability to control supply chain costs, clearly understand such costs across various fulfillment channels, and be able to contribute to expected business financial and operational outcomes.

Indeed, industry and global supply chains should anticipate another challenging year and resiliency, adaptability and risk mitigation will be key themes.

 

2016 Prediction Two: Favorable Outlook for Inbound Component and Commodity Costs but Procurement Teams Need to Step-up Supplier Management

Global commodity prices, the raw-material of industry supply chains, declined sharply during 2015.  The World Bank’s Commodity Markets Outlook published in October 2015 generally called for slightly higher non-energy commodity prices in 2016 including categories of Agriculture, Raw Materials, Fertilizers Metals and Minerals. We believe that may be too optimistic and that continued overcapacity will drive inbound prices generally lower.

The World Bank has additionally cited the weather-related risk of El Nino which typically has adverse effects in Latin America, East Asia and Australia. Recent weather forecasts indicate that the current 2015-2016 El Nino wave could be one of the strongest on-record, affecting wide portions of the United States as well. According to the report, the effects could have a significant impact on country-specific agricultural prices.

The most significant commodity price trend remains that of oil, as the price of crude oil has reached seven year lows amidst of global glut of supply and little demand growth.As our reading audience is well aware, one of the most influential cost factors for industry supply chains, beyond labor is oil and energy prices.  But, this can be a double-edged sword since the current historically low energy prices will provide attractive cost-saving opportunities but does have a profound impact on the demand for any energy related products and services such as oil exploration, refining or alternative energy related products.

The cost of crude oil fell below $50 per barrel at the beginning of August 2015, and dropped below $40 per barrel by early December, plunging to near seven-year lows. Prices have been driven lower by a global glut in worldwide crude inventories, expectations of slowing global economic growth, particularly in China and other emerging markets. Industry watchers broadly expect prices to stay low throughout 2016 due to the current global supply and demand imbalance.

Due to the uncertainty and the heightened supply risks expected in 2016, procurement teams will need to re-double their efforts focused on supplier assessment and monitoring.  Joint collaboration with suppliers on product innovation and risk assessments will be essential. More than ever, more information needs to be shared and trusted relationships must be nurtured.  We further predict that procurement can no longer unilaterally shift the burden of required cost reduction “over the wall” to suppliers. Instead, teams will need to effectively balance cost control with joint collaboration and opportunistic innovation. While CFO’s will likely mandate added cost controls or manadates, they will be even more attentive to supporting the firm’s top-line revenue and profitability growth as well as the financial viability of strategic suppliers. Value-chain innovation and timelier introduction of new and innovative products and services will be expected, along with little tolerance for surprises in 2016.

 

Keep your browser pointed to Supply Chain Matters as we continue dive into each of the above 2016 predictions in more detail. In our Part Two posting we will explore Prediction Three- continued turbulence in global transportation and logistics, and Prediction Four- the widening of supply chain talent and skills gaps.

In the meantime, share your own predictions over and above those that we have outlined. Utilize the Comments section associated with this posting or email us directly with your predictions at: feedback <at> supply-chain-matters <dot> com.  We will share all contributed predictions in a final predictions of this 2016 series.

Bob Ferrari, Founder and Executive Editor

 ©2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.

Content appearing on Supply Chain Matters® may not be used by any third party without the permission of the The Ferrari Consulting and Research Group.


« Previous Entries