It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following updates:
Google and Barnes and Noble Partner to Take on Amazon
Earlier in the week, the New York Times reported (tiered subscription) that Google and Barnes and Noble are joining forces on for fast, cheap delivery of books. According to the report, buyers in Manhattan, West Los Angeles and San Francisco Bay locales will be able to get same-day delivery of books from local Barnes and Noble retail stores via Google Shopping Express, beginning this week. The effort is billed as a competitive response to Amazon’s same-day delivery services.
Google Shopping Express already allows online shoppers to order products from 19 retailers including Costco, Walgreens, Staples and Target and secure same-day delivery. As noted in a previous Supply Chain Matters News Capsule, the Google Shopping Express strategy is to become an ally and complement a retailer’s local brick and mortar presence, relying on inventory from local retail outlets rather than the deployment of a larger network of fulfillment centers.
Airbus Completes Test Trials of the A350
Airbus completed the route-proving certification phase for operational testing of its new A350-900 model commercial; aircraft, approximately two months after completing the maiden flight of this aircraft. During this completed phase, engineers had to demonstrate to safety and regulatory agencies that the aircraft is ready for commercial service. A Vice president in charge of flight testing for Airbus declared; “The airplane is perfectly fit to go into service tomorrow.” The A350 was designed to compete against the current operational 787 Dreamliner and the 777 aircraft. Bookings for the A350 have surpassed more than 700 aircraft.
It has been noted that 7000 engineers worked on the development of the A350, with roughly half of these engineers stemming from key suppliers. Important learnings have included the need for a singular Product Lifecycle Management (PLM) software system, creating a single electronic rendering of an aircraft that every program engineer can reference or modify when needed.
Administrative reporting to various agencies remains a milestone before this aircraft can be officially certified for commercial use. Meanwhile, the Airbus supply chain ecosystem continues preparations and scaling to support planned production levels of 10 A350’s per month by 2018.
Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain
Supply Chain Matters has posted numerous commentaries related to Boeing’s commercial aircraft focused supply chain ecosystem, faced with a dual challenge of having upwards of 8-10 years of customer order backlogs while continually being challenged to reduce costs.
Boeing’s defense businesses have a far different problem. Cutbacks in military and government spending programs have led to declining business, and a supply chain oriented to engineer-to-order specialized aircraft and spare parts. Early this week the head of Boeing’s defense, space and security business unit called for an additional $2 billion in cost cutting, two-thirds of which is being targeted among suppliers. Boeing has already cut $4 billion in spending related to its defense businesses. The unit chief called on suppliers to note efficiencies that have been gained in Boeing’s commercial aircraft programs.
Hewlett Packard Announces Smaller, Less Costly Cloud Platform
Hewlett Packard announced what it is communicating as a less costly cloud based IT platform under the Helion brand name.
Helion Managed Virtual Private Cloud Lean is being targeted for use by small and medium sized businesses looking to move applications development, software testing and workplace collaboration onto a Infrastructure as a Service platform. According to HP’s announcement, the new service offering can further provide services around SAP’s HANA in-memory systems.
With the new service offering, HP’s goal is to provide the same level of large enterprise services but at a lower-priced alternative. Pricing for this announced service is noted as $168 per month for a small virtual service configuration. A pilot trial service also is available for customers who want to certify an application to run in the cloud with the full support of the HP team.
U.S. Job Openings at a Thirteen Year High
Talent management, retention and skills development has been a constant theme among supply chain management forums and indeed many Supply Chain Matters commentaries. Executives and team leaders constantly lament on how difficult it is to find people with the right level of skills. Current forces of supply and demand in the U.S. labor market are not going to help in overcoming this challenge.
The number of job openings across the U.S. reached a 13-year high in June with U.S. employers announcing 4.7 million job openings. Reports indicate that employers additionally hired 4.8 million workers in June; an indication that the U.S. labor market is showing new momentum. With this increased level of hiring activity, existing workers have showed increasing willingness to seek other opportunities, given the level of new opportunities. A reported 2.53 million U.S. workers quit their jobs in June, up from 2.49 million in May.
Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets.
Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.
If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers. That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.
However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S.
The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace. The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.
While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve. OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.
Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.
If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.
Last week, Supply Chain Matters featured a commentary regarding the blunt business realities that are impacting many consumer product goods focused businesses and supply chains. Multiple corporate earnings reports bring home the compelling reality of an industry undergoing profound external and internal business challenges. Our conclusion was that invariably, CPG supply chains will bear the brunt of changes and needs required for more market adaptability and responsiveness while having to deal with continued pressures to reduce costs.
Another compelling evidence point is the latest announcement from Procter and Gamble which indicates that this CPG icon plans to divest, discontinue or merge more than half of its global brands as it once again, initiates an effort to focus on its most profitable brands.
This is a similar strategy that former CEO A.G. Lafley has initiated in times of profitability challenges and comes almost a year after he was compelled to return from retirement to lead P&G. The announcement comes after P&G reported both fourth quarter and fiscal year earnings. Earnings per share growth were reported as 5 percent in fiscal 2014 while organic sales growth was 3 percent. Net sales for the fiscal year grew by a mere one percent. In the earnings press release, Lafley states: “We met our objectives in a very difficult operating environment, delivered strong constant currency earnings growth, and built on our strong track record of cash returns to shareholders. Still, we have more work to do to deliver the profitable sales growth and strong cash productivity we are capable of delivering.”
From our lens, this is yet another acknowledgement of the short-term focused, external Wall Street and hedge fund pressures being exerted on industry players. It’s a two-fold vice. Consumers have permanently altered their shopping practices and buying choices and larger industry players are struggling to provide business responses. The Wall Street and activist community continues to have a very short-term financial results focus for industry players, viewing CPG companies as cash, dividend or acquisition plays.
According to published reports from both the Wall Street Journal and AdvertisingAge, the latest divestiture announcement implies major consolidation of 90 to 100 current P&G brands in the coming months or years. The company previously divested of its pet care business. P&G will retain 70 to 80 of its most profitable core brands, those reported to be fueling 90 percent of total revenues and the majority of current profits.
According to the WSJ, the brands being shed account for $8 billion in revenues and could prove attractive to private equity firms that specialize in orphaned brands or CPG focused companies in China or Brazil looking for more global presence. The scope of this P&G strategic initiative implies both opportunity and/or added challenges for existing industry chains, especially the commodity supplier community.
The WSJ once again acknowledges that the P&G announcement reflects the reality of a new environment of weak sales growth for consumer products, increased currency fluctuations and inbound commodity costs that are eroding profitability. Meanwhile, activist investor pressures to cut costs, consolidate and merge brands continue to influence industry behavior.
The adage that as P&G goes, such does the industry, is yet another poignant indicator of the current business challenges that are surrounding CPG focused supply chains.
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.