Our previous Supply Chain Matters commentary noted that Apple is in the process of marshalling its vast supply chain scale in ramping-up for the pending introduction of new iPhone and other products while stoking consumer demand for the upcoming holiday buying surge. Upwards of 110,000 or considerably more additional workers are being marshalled to support production ramp-up while suppliers themselves reap the benefits of orders exceeding 100 million units.
In December 2012, Apple CEO Tim Cook conducted a series of orchestrated media interviews that included an announcement that Apple planned to invest upwards of $100 million to build Mac computers in the U.S. Our Supply Chain matters commentary at that time reflected on one interview conducted by NBC News anchor Brain Williams. Below is an excerpt of that commentary:
“There were statements by Cook that, in our view, were somewhat on the mark and deserve amplification. Brian Williams asked in the Rock Center interview- What would be the financial impact to the product if, for example, the production of iPhones were shifted to the U.S.? Cook’s response was that rather than a price impact, the real issues reflect a skills challenge. Skills were identified as the existence of talented manufacturing process engineers, as well as experienced manufacturing workers. Cook pointed to deficiencies in the U.S. educational system, as well as the ongoing challenge of recruiting skilled manufacturing workers in the U.S. Great answer! But perhaps, there is much more unstated. High tech and consumer electronics firms long ago shifted the core of consumer electronics supply chains to Asia. Foxconn alone represents a production workforce of over a million people, not to mention many more of that number spread across Apple’s Asian based suppliers. Add many other consumer electronics companies and the arguments of existing capabilities in people, process, component product innovation and supply chain across Asia remain compelling.”
We recall that commentary in light of yet another major ramp-up of Asia based consumer electronics supply chain providers. Yet, the open question remains, where or what is the status of Apple’s planned $100 million investment in the U.S. let alone a more far reaching commitment toward renewing a U.S. based consumer electronics component supply chain ?
A posting in All Things Digital in May of 2013 indicated that according to testimony from CEO Tim Cook before a Congressional Subcommittee the Mac facility would be located in Austin Texas and rely on components made in Florida and Illinois and equipment produced in Kentucky and Michigan. Soon after, Apple contract manufacturing partner Foxconn announced that it was looking to source more manufacturing in the U.S.
In June of this year, PC World made note that Cook tweeted a photo of his visit to the Austin Texas facility where Macs are being produced. The snafu was the iMac in the background was running Microsoft Windows.
The problem however is that a Google search to find updated information related to Apple’s investment in U.S. supply chain capability yields scant information. We certainly urge our readers with knowledge of Apple’s U.S. production and supply chain investment efforts to chime in, if they are allowed.
Compare that with the efforts being generated by Wal-Mart in its Made in the U.S.A. initiative, committing upwards of $250 over the next ten years on U.S. produced goods. During the Winter Olympics, Wal-Mart produced a super slick video, I am A Factory, that garnered over a million You Tube views. That has been followed by summit meetings held with would-be suppliers in multiple product categories to encourage U.S. investment and provide assistance in sourcing or skills development training. Wal-Mart is even willing to make multiple year buying commitments to prospective manufacturers to help them invest in U.S. based supply chain resources. Last week, the Wall Street Journal profiled Element Electronics which is currently assembling televisions in a production facility in South Carolina under the Wal-Mart program. Noted is that the Element production line is an exact duplicate of one that exists in China, installed by Chinese engineers. While Element management admits that there are challenges in the sourcing of a U.S. component supply chain, and in required worker skills, it is making efforts to correct that situation over time under the support of Wal-Mart’s longer term buying commitment.
The point is this. There is no question that Apple has the financial resources and the public relations savvy to make a U.S. production and supply chain sourcing effort far more meaningful, impactful and visible. Yet one has to dig real deep to find information let alone acquire any sense of active commitment. Instead, business headlines note massive scale-up and flexibility of Asia based resources as being far more important to Apple’s business goals. Yet Apple has no problem in demanding a premium price for its products from U.S. consumers. We will avoid diving into the debate regarding Apple’s offshore cash strategy.
Supply Chain Matters therefore challenges the top rated supply chain to join Wal-Mart and others in a far more active and impactful multi-year commitment to U.S. manufacturing which includes higher volume products and education of required worker skills.
According to media reports, BMW is expected to announce sometime today that the German luxury automotive producer will invest upwards of $1 billion to build its first auto assembly plant in Mexico. Informed sources are being cited as indicating that the proposed new facility, BMW’s second in North America, will be designed to produce upwards of 150,000 vehicles per year. Speculation is that the plant will be located in San Luis Potosi, about 250 miles northwest of Mexico City. An announcement is expected from a ceremony being planned today with the President of Mexico. The Mexican plant investment follows an earlier announcement to invest $1 billion to increase production capacity by 50 percent at the automaker’s existing production facility in the U.S., raising capacity to upwards of 450,000 vehicles annually.
With this announcement, the automaker will join other global based OEM’s that have announced major investments within Mexico. Last week, Daimler and Nissan jointly announced a $1.4 billion investment in a proposed shared auto assembly plant to produce smaller luxury vehicles. The plant, planned for upwards of 300,000 vehicles per year, will be built nearby an existing Nissan factory. Plans currently call for an initial Nissan Infiniti model to be rolled off the new assembly line by 2017, followed by a yet to be named Mercedes-Benz model in 2018.
The news follows last-year’s announcement by Volkswagen’s Audi division in building a $1.3 billion plant in Mexico. Volkswagen is also working on a design for a new smaller SUV model for the U.S. market, and with that model, will have to make an additional decision regarding augmenting North America based production. The Wall Street Journal further indicates that Hyundai is also expected to unveil plans for its first auto assembly plant in Mexico.
Why the attraction to Mexico as a North America automotive production hub?
The first and foremost answer is direct labor costs. Media is quoting a recent study conducted by KPMG indicating that labor costs are currently 60 percent lower than those in the United States. This week, the Wall Street Journal made reference to a study conducted by automotive industry consultancy AlixPartners indicating that 57 percent of the top 100 Europe based automotive assembly plants are operating at less than 75 percent capacity. This is the obvious overhang from the recent severe recession that impacted Europe, where auto sales declined rapidly. Yet, in the midst of this excess capacity, European OEM’s are augmenting capacity in other lower cost regions.
The second factor involves other costs. Under NAFTA, factories in Mexico have tariff-free access to U.S. and Canadian consumer markets, while having the ability to leverage lower costs in other areas such as domestic transportation. Mexico also provides a considerable currency and labor cost advantage over European based auto plants. That leads to the third factor, global logistics. Mexico has invested in both its Gulf and Pacific west coast ports which provide added opportunities to export auto production to other global markets including Europe, Latin America or even Asia.
From our Supply Chain Matters lens, European automotive OEM’s are exercising the same strategies that major Japanese OEM’s Honda and Toyota had previously embarked on, investing in North America production as a platform to support evolving export markets. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013.
With the new attraction of Mexico, global OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations.
In the end, U.S. manufacturing resurgence is not a lock-in as OEM’s continue to discover other lower-cost options.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain matters blog. All rights reserved.
Within our Supply Chain Matters 2014 Predictions for Global Supply Chains, (full research report available for complimentary downloading in our Research Center) we specifically addressed extraordinary challenges for consumer product goods supply chains during 2014, where combinations of external forces are fueling these challenges. These forces include, among others, an economically stressed global consumer leading to contraction of global growth rates and margins, intense competition from private brands as well as a certain group of activist investors demanding more cash value for their investments in CPG companies.
In our most recent CPG industry supply chain posting in February, we analyzed recent supply chain directional indicators from CPG companies Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We analyzed presentations from each of these firms that were delivered at the Consumer Analyst Group of New York (CAGNY) Annual Conference. It was clear to us that current signs of slowing growth among emerging markets as well as the U.S. have placed a pointed emphasis on improved operating margin and cost savings. Once more, such savings are generally re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand.
More evidence of CPG industry supply chain stress comes from an announcement yesterday from General Mills indicating that that amid a slowdown in U.S. sales and consequent stalled earnings growth that company must initiate more aggressive cost savings specifically directed at North American supply chain operations. Revenues from the company’s latest quarter fell 2.9 percent from the year earlier period. While earnings rose, they reportedly missed analysts’ expectations.
The company indicated that it will initiate a strategic review of manufacturing and distribution to identify potential cuts in capacity and overhead costs. According to various media reports the initiative would likely lead to a series of required cost cutting initiatives directed at North America with a consequence of closing production lines and/or plants, to reduce costs in order to improve margins.
Like others in this industry of-late, the company has made large bets that international growth would improve margins. General Mills CEO Ken Powell has indicated: “Our No.1 objective in the new fiscal year is to accelerate our top-line growth.” He described sales and operating profit results as disappointing while marketing related promotional spending in developed markets has been less effective than planned. Commodity costs were slightly above forecast while one media report indicates that the company’s commodity costs increased 3 percent.
According to reporting from the Wall Street Journal, each year for the past decade, General Mills outlines its Holistic Margin Improvement program. In the new upcoming fiscal year, the company has targeted $400 million in margin savings, and apparently, much of it will come from supply chain related operations.
With the latest developments and evidence concerning General Mills, Supply Chain Matters re-iterates our prior insights regarding the unique challenges occurring across CPG focused supply chains. The notions of “business as usual” striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut with today’s rapidly changing industry dynamic. They are now are a relic of the past.
CPG firms and supply chain leader’s need to quickly come to the realization that the supply chain changes being sought require hands-on leadership, empathy and understanding to the tradeoff of such changes to areas such as supply chain disruption, quality management and morale. There can no longer be a tolerance for supply chain functional stovepipes and pet initiatives. It is now about evidence-based decision-making, smarter and more response-focused capabilities. Monetary incentives to reward required changes cannot be solely limited to the executive suite
We, as thought leaders and/or consultants, need to stop feeding the fallacies of the past CPG industry and deliver more straight talk. The notion of multi-year focused supply chain maturity timetables do not cut it when industry C-level executives are under the gun to deliver short and long-term top and bottom-line results.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.
The 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) was released earlier this week (free for CSCMP members and can be purchased for $295). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals.
The report reflecting 2013 activity again notes a continued trend for increased logistics, transportation and inventory costs. More than ever, this should be of continued concern to manufacturers and retailers and their associated supply chain and product management teams. Similar concerning observations were noted by Supply Chain Matters in last year’s annual report.
Highlights and some observations of the latest report numbers are noted below.
The cost of the U.S. business logistics rose 2.3 percent in 2013 to $1.39 trillion, an increase of $31 billion from 2012. Logistics costs as a percent of nominal GDP were reported to have dropped to 8.2 percent, just about the same 8.3 percentage reported for 2012.
Most concerning from our lens, inventory carrying costs in 2013 rose another 2.8 percent, albeit less than the 4.0 percent increase reported for 2012. While interest costs rose slightly, inventory levels inched up leading to increased costs for taxes, insurance, warehousing, depreciation and obsolescence. By our calculation, the former components rose 9.2 percent or $28 billion from that reported in 2012. According to the report authors, the cost of warehousing was up 5.6 percent in 2013, as rates for warehouse space continue to rise. As a wise sage once exclaimed to this author, “warehouses are monuments to inefficient inventory practices.” That sage advice continues to reflect itself.
Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates. The report includes a chart reflecting Total U.S. Business Inventories that visually indicates that total inventories in 2013 now surpass levels recorded in 2008, the peak before the great recession. With relatively low GDP growth levels, these numbers are alarming. With carrying costs increasing, industry supply chain teams need to seriously analyze why more overall inventory is being maintained. Consider that interest rates remain at historic lows, and what would be the incremental cost if they were not. We suspect that with high levels of global outsourcing and slower global transportation, that larger levels of pipeline inventory are being planned. We further suspect that planning and optimization models are not reflecting up-to-date inventory cost factors.
Another important concern brought out in the report is the current fragile state of the U.S. trucking industry with utilization rates remained close to 100 percent and fleet and driver capacity declining. High costs and regulatory issues are deterring new entrants to the industry. With the U.S. railroad industry operating at near capacity, reflecting building shortages of available specialty railcars, supply chain teams need to remain concerned about this area.
Data compiled in the 2013 report indicates the revenue growth trajectory of U.S. non-asset based services and Third Party Logistics providers continued in 2013 with revenues pegged at $146.4 Billion, an increase of $4.6 billion over 2012. Revenues broken out for 3PL’s rose 3.2 percent in 2013, lower than the 5.9 percent growth recorded in 2012. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 7.2 percent in 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones, funded by a new wave of private equity interest. We believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.
Supply Chain Matters submits that the overall takeaways from the 2013 State of Logistics are once again dependent on the reader frame-of-reference. If you reside anywhere in the transportation and 3PL logistics sector, your reaction may be positive. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding delivery of services. Distribution center operators and real estate interests are included. If your frame of reference involves a constant diligence for controlling overall transportation procurement and supply chain related operating costs, we again submit there are troubling areas that should motivate concern and attention.
Thus far in 2014, U.S. manufacturing activity continues to surge. According to the report authors, freight shipments are up 13.1 percent and so are rates. The global ocean container industry remains in a capacity crisis, and so is the U.S. rail and trucking industry. The State of Logistics, by our view is rather fragile, fueled by private investors looking to cash in on opportunities to make quick money without holding hard assets. That is not a healthy outlook.
Once again we offer the following insights:
- Procurement, supply chain planning, B2B and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost.
- Procurement teams who context transportation spend in the singular dimension of cost reduction remains not wise, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes.
- Similarly, S&OP teams must re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point trade-offs and costs of carrying inventory. With more sophisticated tools available to manage and optimize end-to-end supply chain inventories, the open question may be in the quality of the data that is fed into these tools, especially the realities of increased carrying costs. Teams are not fooling anyone by allowing data to remain static. Today’s global logistics environment is not static, but rather highly dynamic and complex. Decision-making data must reflect this state.
- The recent announcements from both FedEx and UPS regarding the initiation of dimensional pricing on ground shipments in 2015 will have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy. Be watchful of this area.
As was the case in last year’s Supply Chain Matters commentary, the U.S. economy continues to show even more promising signs of manufacturing renewal and export recovery. All of this is dependent on a business logistics infrastructure that demonstrates world-class competitiveness. If there is a clear learning from the past three to four years, it has been on reality that supply chains exist and are now dependent on a global network of business logistics. The major decisions related to supplier and product manufacturing sourcing is now more vested in the tradeoffs of global logistics and transportation costs and the industry coming to grips with troubling capacity constraint trends.
We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication toward shifts in global sourcing, and implication on current operations planning and procurement management processes.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Factory Destruction Across Vietnam: Supply Chain Sourcing Flexibility and Resiliency Has Never Been as Important
In the quest to seek alternative global low-cost manufacturing sourcing across multi-industry supply chains, countries such as Thailand and Vietnam were high on the list. Both offered relatively attractive direct labor wage rates while offering a highly educated and motivated workforce. Up to this point, that has resulted in a steady flow of foreign investment in these countries including internal supply chain ecosystem capabilities.
All of this is now subject to current re-evaluation because of new political and social unrest that is occurring in these countries. The most visible has been Vietnam where this week, anti-China related violence has caused widespread rioting across the country, targeting factories and industrial parks that rioters believe are owned by Chinese interests. This rioting began earlier this week and according to various global media reports has resulted in arson and vandalism involving multitudes of factories and businesses owned by Japanese, Malaysian, South Korean and Taiwanese ownership since rioters have not been precise in targeting.
The protests were apparently prompted by Vietnamese citizen outrage over an oil rig that China placed in a disputed part of the South China Sea. We have read reports of some speculation that the core anger may be more broadly directed at accumulated anger against foreign-based exploitation within the country. The government of China is holding the Vietnamese government responsible for not taking more definitive actions to curb the rioting and damage. A report published by the Wall Street Journal today indicates that upwards of 3000 Taiwanese and 600 Chinese citizens were fleeing the country amid fear of further violence.
While foreign based business people flee Vietnam for fear of personal safety, a large number of factories have halted production because of either damage or lack of workers. Thus, the potential for significant industry supply chain disruption in the automotive, footwear, high tech, consumer goods and other areas is growing each day. It would appear that many brand owners and foreign interests are looking to the government of Vietnam to curb the current building wave of violence and factory destruction and avoid the current situation from quickly moving from the current bad to a far worse situation.
Meanwhile, continued political unrest across Thailand continues to provide an uneasy environment as violent protests continue sporadically across that country. Yesterday, there were reports that at least three anti-government protestors were killed and 22 were injured as government authorities fired guns and lobbed grenades at antigovernment protestors.
Supply Chain Matters has previously noted how significant incidents social unrest has led to a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear. Political tensions involving China and Japan over disputed ownership of islands continue and have both supply and product demand impacts to certain Japan based firms.
From our lens, the notions of global sourcing are beginning to take on a new risk management perspective, that being social, national and political unrest along with the longer-term implications of that unrest. The notions that industry supply chains can continually follow a singular strategy that is solely directed at sourcing in low-cost countries is being challenged, and increasingly requires a re-evaluation. Global sourcing now includes far more considerations beyond the cost of direct labor, and as we have continually noted, are now taking on social, political and employer of choice perception aspects. The ramifications apply not only to product brand owners, but to industry supply ecosystems.
We believe that these incidents are not isolated and business and supply chain teams need to focus on much broader trends and their implications in access to foreign markets and supply chain ecosystems. The need for supply chain sourcing flexibility and resiliency has never been as important as it is now becoming. Insure that your firm and its supply chain strategies are prepared to manage among these new challenges and needs.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Fuel costs are by far, the single biggest expense in any airline’s value chain. In 2012, Supply Chain Matters began a series of commentaries concerning Delta Airlines, specifically its bold supply chain vertical integration move in acquiring its own oil refinery to secure more cost-effective supplies of aviation fuel. At the time, Delta had reached an agreement with Conoco Phillips to purchase a previously idled Trainer Pennsylvania refinery for $150 million with plans to invest an additional $100 million to retrofit the refinery to optimize its ability to refine jet fuel, while securing additional distribution agreements for the gasoline and diesel fuels produced by the refinery. We committed to our readers to periodically update on the results of that bold strategy.
In January of this year we extracted information from Delta’s financial results for period ending in December 2013. At that time, Delta reported that operations at the Trainer refinery produced a $46 million loss for the December quarter and a $116 million loss for the full year. However, the refinery was forecasted to turn a “modest” profit in 2014.
This week, Delta reported its Q1 financial results. Delta was one of very few airlines that demonstrated record quarterly earnings despite the impact of severe winter weather on operations during the quarter. During January and February, Delta was forced to cancel 17,000 flights because of weather conditions, which resulted in $90 million in lost revenue and a $55 million impact on pretax income. Despite these setbacks, Delta was able to report $213 million in earnings, up from $7 million in the year earlier quarter.
Supply Chain Matters reviewed the earnings briefing transcript from Delta executives for any information regarding the refinery. Delta’s CFO noted in the briefing that in the March quarter, operations at the refinery produced a $41 million loss. Production was actually reduced during the quarter because one of the refinery’s crude units was shut down for scheduled modifications. These modifications were described as part of the planned initiative to increase the production of higher value distillates such as jet and diesel fuel. Those two products are expected to account for roughly 50 percent of the production output for the Trainer refinery going forward.
Delta further reported that average jet fuel costs in the quarter amounted to an average of $3.03 and included $107 million in fuel hedge gains, which helped to offset direct losses at the refinery. Delta is projecting a fuel price for the June quarter to be in the range of $2.97 to $3.02 per gallon including refinery benefits and an expected $100 million of hedge gains. To put some perspective on that number, Southwest Airlines has long been noted in the airline industry for conducting a savvy fuel hedging and fuel cost strategy. In its most recent quarter, Southwest indicated that its average fuel cost during the quarter was $3.08 per gallon, and active hedging contracts were in place.
Delta teams were also reported to be hard at work on another major initiative for the Trainer refinery relative to inbound domestic crude oil sourcing which accounted for 50,000 barrels per day of Trainer’s needs during the quarter. Delta expects this input sourcing to continue ramp up to a full year average of 70,000 barrels per day for 2014.
Approaching the two year mark since Delta’s bold supply chain vertical integration move, the airline appears to be managing its investment in a patient and methodical way. Planned investment costs for the refinery appear to be offset by active fuel hedging strategies and although the refinery continues to produce loses, Delta is demonstrating trajectory for a rather competitive or perhaps industry leading fuel cost advantage. The rest of 2014 will obviously add more perspective to the overall strategy.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.