Supply Chain Matters has been continuously alerting our readers to the ongoing labor disruption incidents occurring at Amazon’s customer fulfillment centers located across Germany, with implications to other global regions. The last reported work stoppage involving German based fulfillment centers occurred at the height of the 2013 holiday buying period, obviously strategically timed to capture the attention of Amazon management. Labor union officials vowed to continue with protest efforts.
The Wall Street Journal reported that yesterday, hundreds of German workers again walked off the job and staged an all-day strike at the Amazon fulfillment centers in Liepzig and Bad Hersfeld. According to this report, at day’s end, Amazon estimated that less than 650 workers among both locations took part in this work stoppage and customers were not affected. This was reported to be the second work stoppage incident thus far in 2014.
The issue involves an ongoing dispute as to whether temporary or full-time workers at Amazon’s German facilities should be classified as retail and catalog workers, which garners a higher pay scale in Germany. German labor union Verdi has been targeting Amazon, and had previously organized a number of other work stoppages in 2013 which included four continuous weeks of work stoppages that occurred in mid-June. Verdi has since garnered solidarity support from a number of U.S. labor unions in this ongoing protest effort.
In early January, the first-ever union election was held among technical workers at an Amazon warehouse in Middletown Delaware, but was unsuccessful when election ballots were counted.
As we have previously opined, labor unions continue to target high visibility global B2C retail customer fulfillment firms such as Amazon or Wal-Mart. During the highly promoted 2013 Thanksgiving and Black Friday shopping days, workers at a number of U.S. based Wal-Mart retail stores staged an organized protest.
Because these firms operate within high volume, dynamic and seasonality driven environments labor requirements are often flexed based on volume, while a core group of workers is retained to support defined steady-state fulfillment needs. Supply chain operations and fulfillment teams in these B2C environments seek maximum flexibility in labor costs and workers are increasingly becoming more interested in seeking a more influential voice in such compensation and hiring practices. At the same time, Amazon’s reported initiatives in developing and deploying advanced robotics within fulfillment centers along with drones for delivery does not help in calming such agitation. That continues to attract the attention of organized labor and these types of incidents targeted to the most visible industry players will obviously continue. At some point, there will have to be a meeting of minds since a pure anti-union stance does not bode well in today’s era of social media amplification of headlines.
The “Amazon effect” has many faceted dimensions.
As we approach the close of the first calendar quarter of 2014, it is time to take a brief snapshot of inbound commodity prices across industry supply chains. Prediction Two of our Supply Chain Matters 2014 Predictions for Global Supply Chains called for stable or moderating industrial commodity prices, with specific exceptions being agricultural commodities impacted by the effects of global climate change and other disruptions. Energy prices at the start of the year were forecasted to stabilize at 2013 levels.
As the first three months wind down, these predictions are for the most part, holding true.
The ongoing economic slowdown involving China based supply chains has driven down industrial commodity prices. According to year-to-date analysis provided by Macquarie Bank, the Wall Street Journal and other sources, iron ore prices are down over 19 percent, copper is down 12 percent, the lowest level since June 2010. Aluminum, lead and zinc prices have declined as well. Analysts continue to predict that global demand for industrial commodities will continue to moderate for the rest of the year.
Agriculture commodities present a far different picture. Crop setbacks brought about from drought conditions across Brazil have driven prices of coffee to new highs. The price of high grade Arabica coffee beans originating from Brazil has risen over 70 percent since the end of 2013. Year to date pricing of sugar is up slightly at .37 percent. A major virus affecting pig populations has limiting supply coupled with increased demand from China and other emerging market economies is driving up prices of pork related products including bacon. Prices of cocoa beans, wheat and milk products are also on the rise.
The severe winter that has occurred across the U.S. coupled with operational disruptions in the placement and logistics of tank and bulk commodity railcars have led to reported disruptions in supply contracts of inbound bulk commodities as commodity producers have had to shift to more expensive trucking options to accommodate food production line scheduling.
According to data compiled by the U.S. Energy Administration (EIA), international crude oil prices in January and February were nearly unchanged compared with the last two months of 2013. Global petroleum and other liquids consumption averaged 90.6 million barrels per day during January and February, 1.1 million barrels per day higher than the same period in 2013. However, severe cold winter conditions across the U.S. have strained distribution networks and provided upward pressure on prices of heating related fuels. The greatest effect has been on the availability and higher pricing of propane gas, as well as continuing large withdrawals of natural gas. EIA is currently forecasting that natural gas spot prices will average 7.5 percent higher in 2014 as a result of the impacts of severe winter this quarter.
Thus, procurement teams in food related supply chains, and to some extent, asset or energy intensive supply chains will continue to deal with inbound commodity price challenges along with challenges to reduce costs in other value-chain areas.
We encourage readers to share their observations of commodity price trends impacting their supply chain in the Comments section associated to this posting.
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.
Members of the supply chain management and B2B community are literally bombarded every day by user survey results. The reasons are many and unfortunate, since by our view, surveys have become too excessive. They are driving survey fatigue and more importantly, drowning out the surveys that provide the most insightful information.
Industry analysts and technology providers leverage quantitative and qualitative surveys to gain perspectives on the current challenges and viewpoints across multiple supply chain environments. Industry trade publications and conference producing firms utilize surveys to attract attendance at various conferences or utilize conference attendees as sounding boards. Academics utilize surveys to identify areas for advanced research or academic based thought leadership.
The reasons are many and in this commentary, we will not dwell deeper into motivations.
For you, our readers, it is important to not just dwell on the executive summaries or conclusions of such surveys, but to pay particular attention to the demographics, statistical survey base, and lineage of such surveys. Look for statistical valid sampling, clear statements of the surveyed demographics, and more importantly, look for surveys that are consistently performed in a pre-prescribed basis, since they provide the most insights into shifting patterns of challenges and needs.
We view our role at Supply Chain Matters as not pitching endless summaries of our own research (we do conduct and produce such research), but more importantly to point out to readers various surveys that are grounded in discipline and believe warrant your attention.
We were recently alerted to a 2013 ISM Survey of Procurement Executives (complimentary report requiring reader registration) sponsored jointly by the Institute of Supply Management (ISM) and supply management technology provider, BravoSolutions. This report captured our interest because of both its demographics and its implied conclusions regarding the current priorities from procurement executives from mostly mid-market firms. The survey itself yielded over 500 responses, which is fairly good by today’s standards. The demographics included the majority of respondents, 64 percent, from non-manufacturing industries such as agriculture, energy, mining, professional services, transportation, retail and other services segments. Firm size was weighted toward 45 percent with revenues under $500 million and 56 percent with annual direct spend in the range of under $50 million to $249 million. Thus, this survey can serve as a representation of current challenges and viewpoints among mid-market service providers, an area we normally do not come across.
In terms of our key takeaways from this survey, we noted that improving cost reduction and savings was by far (60 percent of respondents) the top business priority in 2013 for these mid-market procurement executives. Yet, these same respondents indicate they have only been able to deliver 10 percent or less in savings during 2013. The remaining top five priorities were rated as:
2. Revenue growth and profit improvements
3. Risk management
4. Procurement transformation
5. Supplier performance and sustainability management
By our view, while we were pleased to see that risk management has finally reached a top-three weighting of priority. Half of the respondents’ firms were prepared to mitigate what were described as reasonable levels of supply, supplier or operational risk.
Far lower in 2013 priorities, according to this survey were areas such as employee retention and training, improving regulatory compliance, improving the strategic nature of customer priorities and technology implementation. Merely 19 percent indicated that supplier collaboration and innovation was a stated priority. The latter noted lowered rated priorities can clearly be considered important enablers to the top three priorities. These lower-ranked priorities are another symptom of the need for broader influence skills for procurement.
This author had the opportunity to speak with Mickey North Rizza, Vice President of Strategic Services at BravoSolutions about the implications and messages embedded within this survey. Readers may recall that Mickey was a very able and insightful supply management industry analyst at AMR Research and Gartner, before joining Bravo. We hope to feature Mickey in a future guest posting on Supply Chain Matters.
Mickey pointed to the continuing challenges of business process alignment among procurement teams, including more direct links to a firm’s sales and operations planning (S&OP) process, actively working towards broader cross-functional business alignments in joint initiatives along with a renewed emphasis on change management. Deeper partnerships and dialogue with IT regarding goal prioritization and technology’s enablement of these business goals, including options in today’s cloud-based computing applications certainly plays an important part.
There is a considerable amount of detail included in this ISM survey and we encourage our strategic sourcing and procurement readers to take the time to scan each of the highlighted areas. We especially call attention to a Table noted on page 16 of the report that describes the following: “To have world class suppliers we need our suppliers to ….”
In the important challenge of overall procurement transformation, respondents of the latest ISM survey report that while good progress has been made, many challenges remains. While mid-market firms often operate in lean environments and often do not have deep investment budgets, they can benefit from the learnings and insights from other transformation successes across industries including manufacturing-centric. Today, more than ever, the barriers to driving successful organizational change management and more affordable options in the ability to leverage advanced technology towards deeper procurement intelligence and insights have come down. Reach out and learn.
Prediction Five of our Supply Chain Matters 2014 Predictions for Global Supply Chains outlined three industry-specific supply chain challenges. One was Consumer Product Goods (CPG) sector challenges, specifically the heightened appearance of activist investors who actively advocate measures of either financial engineering or added cost controls on one or more CPG companies to extract more perceived investor value. These efforts will place added cost reduction burdens on the targeted company supply chain, burdens that could possibly impact operations.
This week provided yet another dynamic update on this trend. Business media reported yesterday that Nelson Peltz of Trian Fund Management has won a board seat at Mondelez International. However, Peltz has agreed to relinquish his active efforts to seek the merger of Mondelez with the snacks division of PepsiCo but reserves the right to continue to advocate that PepsiCo split out its snacks business as a separate entity.
The Wall Street Journal characterized this development as a qualified victory for Mr. Peltz who has lobbied for months that Mondelez improve its profit margins, specifically improving profit margins to 18 percent from the current 12 percent. The WSJ reported that Mondelez management agreed to this move to quell public criticism of the company as well as avoid a public proxy fight. Now having a board seat, Peltz can escalate his calls for added profit margins.
Mondelez was formed with the split of the cookies and snacks businesses of Kraft Foods, and was preceded by Kraft’s controversial acquisition of global snacks provider Cadbury. The cumulative effect of all these moves was to extract hundreds of millions of cost savings from supply chain operations, including capacity consolidation and facility closings. The savings garnered from supply chain cost reduction were channeled to fund new sales and marketing initiatives as well as stock buyback. Late last year, Mondelez management called for a 5 percent margin improvement by 2016 which amounted to $3 billion in savings. That initiative may now be the subject of further board discussion as to amount and timetable.
Peltz has previously accumulated a large stake in DuPont, which in October announced that it would split-off its performance-chemicals business.
Meanwhile, activist investor Daniel Loeb is pressuring Dow Chemical to split itself into two companies, one bring petrochemicals and the other specialty chemicals. Dow management had laid out a plan in December to exit some low-margin chemical businesses amounting to about $5 billion in current revenues, but Loeb is advocating that the entire petrochemicals business is hindering margin performance.
The chemicals business has high exposure to supply chain costs and efficiencies since transportation and logistics are higher cost components.
Thus, not only are certain CPG supply chains under activist pressure, we should consider adding certain chemical industry supply chains as well.
Supply Chain Matters kicks off our 2014 commentaries with an update on Boeing’s newly announced 777x aircraft sourcing plans. When we last updated readers before the Christmas holiday, Boeing was in the midst of wide scale RFP efforts among prospective U.S. states to secure the most lucrative incentives to locate 777x production facilities in those states. Meanwhile the company had lobbied hard for both the State of Washington and the International Association of Machinists labor union to grant concessions to continue production of the new 777x family in the greater Seattle area.
Just after the New Year, an election was held among Seattle based union membership and by the narrowest of margins, 600 votes out of nearly 24,000 cast amounting to a 51 percent to 49 percent margin, the proposed eight year labor pact extension was ratified by the union. In its reporting, the Wall Street Journal characterized the ratification as a reflection of a deep divide within the machinists union when all the concessions are tallied. Boeing also secured close to $9 billion in tax incentives from the State of Washington, literally a 16 year extension of incentives first granted in 2003 to source aircraft production in the state. The incentives package itself was described as the largest of its kind in U.S. history and assures that new generation 777 production will remain in the Seattle area.
The WSJ further reported that Boeing pressured potential 777x suppliers for cost savings as well under the umbrella of its Partnership for Success program which was an offshoot of the troubled 787 program. Canada based Heroux-Devtek Inc. was reported to have won a contract to supply landing gears over United Technologies which had been at odds with Boeing’s quest for cost savings. The company had been the previous sole source supplier for the current 777 landing gear. There are probably similar supplier developments occurring or about to occur in the coming months.
There is little doubt that Boeing has and is taking a hard negotiation stance in its efforts to deploy the new generation 777 supply chain. The objectives would seem to be cost and margin led.
The learning of the troubled 787 Dreamliner program that included overly aggressive global sourcing and too much value-chain dependence on suppliers has led to a strategy of more in-house sourcing by extracting considerable cost, labor and productivity concessions. Strategic sourcing and procurement executives would recognize this as hardball negotiations similar to what occurred in automotive supply chains in the not too distant past. The result in the automotive sector was a near collapse of the supplier ecosystem as suppliers suffered the burdens of the cost and technology development savings of OEM’s.
In the wake of this strategy remains a deeply divided labor union, a collection of U.S. states who had to scramble to put together and pass concessions that now are passing memory, and a more troubled group of strategic suppliers who once again can sense a my way or the highway collaboration model.
The new generation 777 promises even more technological breakthroughs and aircraft innovation yet the supply chain strategy thus far has been labor, overhead and cost component led. The question of how successful these tactics ultimately will be is certainly the topic of many future conversations formal and informal.
This is collaboration of the Boeing style and many months will unfold before we as a B2B and supply chain community can ascertain whether it leads to ultimate 777x program success for the company. Suffice that the Boeing 777x value-chain tactics initiated in early 2014 will be the guidepost in the many months to come.