Last week, the Wall Street Journal provided yet more of the reality for the new world of online customer and Omni-channel fulfillment in an article focused on Home Depot (paid subscription required).
Supply Chain Matters has featured a number of prior continuous commentaries reflecting on home improvement retailing and specifically Home Depot’s investment in supply chain capabilities that have made a discernable contribution to revenue and profitability growth. Previous Home Depot major investments were related to directly to the retail store experience and included modernized store replenishment centers and online mobile terminals for store associates. The strategy must now focus in a new direction.
The specific WSJ article opens with the following introduction: “Home Depot Inc.’s newest location is 10 times bigger than its average store, stocks three times more items and has no customers. It’s an online distribution center, for a company that seems the unlikeliest of Internet retailers.” It goes on to report that in 2014, Home Depot will open two customer fulfillment centers and just one U.S. store, a stark signal of the retail industry’s drop in retail store traffic in favor of online shopping, including home improvement items.
While online sales accounted for 3.5 percent of Home Depot’s total retail sales in 2013, online sales are growing much faster. There are upwards of 6000 items offered online vs. 35,000 in a typical store. According to the WSJ, in 2014, the home improvement retailer is investing upwards of $1.5 billion for supply chain and technology related investments to link its stores and online fulfillment centers. That includes methods for assisting customers in the pickup or direct delivery of heavy bulk items such as appliances and fixtures, along with re-vamping store space for online order pickup and return centers.
Contrast that to reports from major retailers that invest solely on online web site capabilities without considerations for supply chain needs. Too many retailers still believe that physical brick and mortar and online sales can be supported by two different inventory pools and separate fulfillment processes. That is fast becoming an expensive proposition both in the context of customer service and cost.
The Home Depot report is yet another reminder of the need of traditional retailers to internalize the ongoing implications of a much more information empowered consumer who is now very comfortable with online fulfillment and expects the supply chain to perform in an individual delivery experience.
Supply chains directly associated with up and coming or mid-sized businesses need to be constantly diligent to the effects of a major supply chain disruption, both overt and not so. Procurement teams of mid-sized brand owners need to be especially cognizant that labor unrest has become much more prevalent within low-cost manufacturing regions and the implications to less influential customers have greater significance. Of late, such unrest moves beyond disputes regarding wages, but also worker social responsibility policies. Once more, active use of customer segmentation strategies implies that the bigger global players can often be buffered to such disruptions, both operationally and financially.
Just this week, we have come across news reports of ongoing disruptions involving influential industry supply chain players. In the footwear and apparel sector, workers at certain facilities of shoe manufacturer Yue Yuen Industrial, located in southern China have walked off the job in a dispute over social insurance payments tied to overall wage rates, which are governed by labor law. Yue Yuen employs upwards of 40,000 employees at its facilities located in Dongguan. The Wall Street Journal reported (paid subscription) yesterday that this shoe manufacturer is a supplier for both Adidas and Nike. It quotes an Adidas spokesperson as indicating that the Chinese supplier is currently working at 50 percent of capacity but Adidas has experienced no slowdown in production volumes. A spokesperson for Nike is noted as indicating that that company is monitoring the current situation including ongoing talks between workers and factory management. The WSJ report further indicates that demands raised by the Yue Yuan workers may become an important precedent for labor policies among most workers in China’s manufacturing industry. Thus, the stakes in finding a resolution are somewhat higher.
Judging from the reported statements from both Adidas and Nike, we would venture an opinion that what production capability that is still operating is probably being allocated to the production schedule needs of the most influential customers. That is an obvious supply chain reality, namely, the most influential customers in terms of revenue and profit will in more times than not, be somewhat buffered from such disruption. Consider further that ongoing labor unrest continues for within apparel producers in Bangladesh, Cambodia and other regions as workers continue to be more active in demanding that social responsibility policies are adhered to by employers in these regions. While industry consortiums have been established to address such issues, workers have become untrusting.
Continued work stoppages and production disruption imply that the most influential customers will be somehow buffered while less influential customers may bare the bulk of the disruption or added cost burden.
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.
On Sunday, this author flew to Nashville Tennessee to both attend and moderate a panel discussion at the annual Supply Chain World North America and Global Member Meeting 2014 conference sponsored by the Supply Chain Council. Supply Chain Matters will share highlights from that conference in an upcoming commentary. Flying provides the opportunity to catch-up on reading, and for this author, my prior unread issues of The Economist magazine. Two specific articles with a common theme captured my interest and I wanted to share such observations with you in this commentary.
At the many industry conferences I get the opportunity to attend, I often hear supply chain leaders speak to accelerated clock-speed of product innovation, and how that can add additional challenges and potential havoc for the end-to-end supply chain, particularly when that supply chain is significantly outsourced. For a supply chain that is primarily supporting product innovation, a major industry product shift has significant implications.
The April 5th edition of the The Economist featured the article: General Motors’ woes: What do you recall? (paid print and digital subscription) The article notes that automobile design has become far more complex with thousands of mechanical and electronic parts. If you have acquired a new vehicle in the past three years, you probably have experienced the availability of so many new electronic-based systems such as in-car navigation, satellite radio, in-car diagnostics, and powered operational components and, of course, prompted service reminders. Couple the increased product innovation with supply chain and manufacturing strategies that leverage common global platforms sharing common parts components, and the potential effects of a product recall can be significantly magnified. In the specific case of General Motors, the article states that what appeared at the surface to be a routine recall of 800,000 older models due to a faulty ignition switch has turned out to be anything but. As many of you have been reading in business and mass media, that initial product recall has increased to upwards of 26 million vehicles because the ignition design was shared within so many other models. The Economist authors opine that despite a growing list of reported crashes and human injury, a part that likely costs a few dollars at most now involves significant potential monetary expense for GM. Further stated: “A small part can do great harm if bad publicity leads to reputational corrosion, lost sales and litigation, which in America can include hefty punitive damages.” The article authors point out that carmakers need to spot trends in warranty repairs across global regions in far more timely manner and be able to more quickly respond to these indicators. While the terms of GM’s exit from bankruptcy provided immunity to lawsuits involving products produced prior to bankruptcy, GM will likely have to compensate injured parties to avoid a reputational impact to its product brands.
As noted in a previous Supply Chain Matters commentary related to the GM ignition switch recall, another industry backdrop concerns the Toyota agreement to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. That in the view of many will force automakers to be even quicker to declare a product recall for fear of punitive consequences.
A second article concerning a different industry provides yet another edge to product innovation and its impact on an industry supply chain. Many first-time global-wide smartphone consumers care less about brands and more about price. The Economist article titled: The rise of the cheap smartphone, points out that because the cost of making smartphones has declined so quickly, newer or existing market players can now acquires standardized processors and other components to offer smartphones priced below $80. Some of the brands mentioned are France based Wiko, Micromax and Karbonn in India and Symphony in Bangladesh. The article cites an analyst at IDC indicating that shipments of smartphones priced below $80 more than quintupled, and devices priced under $100 make up one-sixth of the current market. “Two years ago, while the median price of a smartphone was $325. Last year it was $250. This year it may be $200.”
With Apple and Samsung are noted as the only market providers making money, the implication is how long will this continue. Then, there has to consideration to last weekend’s announcement from Amazon indicating that it will enter the market with its own branded competitively priced smartphone. That has set-off additional industry tremors.
If your supply chain exists in this segment, these quickly changing dynamics have implications for supply chain strategy, specifically how the supply chain will be called upon to either differentiate the brand, or drive even more scale and volume efficiencies.
The reading of both of these timely articles reinforced for this author that the linkages from product design and management directly to the manufacturing floor and the broader multi-tiered B2B value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness. Stay tuned for an upcoming announcement regarding my participation in a webinar addressing this area in more detail.
Supply Chain Matters would venture a guess that many of our readers are under the impression that privately held Mars, Inc, the producer of delicious M&M chocolates and Snickers candy bars was primarily a candy and snacks provider.
Mars Pet Care Division which includes brands such as Pedigree and Whiskas is, according to the Wall Street Journal, this company’s largest and fastest-growing division.
Thus, yesterday’s announcement that Procter & Gamble is selling the bulk of its pet food business, with brands such as Eukanuba, Iams and Natura, to Mars is a rather significant development. The value of the deal is estimated to be $2.9 billion, but it does not include distribution of brands in the European Union. The transaction is expected to close in the second half of 2014.
Reuters and other business media reports have indicated that P&G’s current multi-year restructuring program called for the exit of low-growth brands such as the P&G pet food portfolio. P&G CEO A.G. Lafley is quoted that the exit from pet food was “an important step” toward focusing on core businesses.
For Mars, this may well be the opportunity to leverage the company’s supply chain and channel distribution capabilities in the pet food market segment. Both the WSJ and Reuters cite data from Euromonitor, indicating that Mars currently has a 23.4 percent market share in the pet food segment, just slightly higher than Nestle. With the completion of this deal, Mars will have access to specialty pet food retailers as well as club stores and mass retailers. which features the Friskies and Purina pet food brands with a 23.1 market share?
With the addition of P&G’s pet food brands, it will be interesting to observe how both Mars and Nestle supply chain ecosystems respond to a new heightened competition and a changing industry dynamic.
General and business media has provided much amplification of the latest product recall troubles involving General Motors. In the past few weeks GM has recalled upwards of 6.3 million vehicles globally for quality issues related to faulty ignition switches, a sudden loss of electric power-steering assistance and other issues. The incidents have once again raised issues as to why certain automotive manufacturers allow quality conformance issues regarding products to fester until consumers experience the results of such non-conformance, or in some cases suffer personal injury or death. The GM crisis has been billed as the first test of the leadership of newly appointed CEO Mary Barra, who just happens to have a supply chain, product and operations management career background prior to assuming her new top leadership role. Indeed this latest crisis might have been the legacy handed over from previous GM CEO’s. Given Ms. Barra’s background, Supply Chain Matters has confidence that this CEO will eventually insure that GM identifies the root causes that have led to these issues, including product design flaws, organizational culture, supplier related quality conformance, conflicting performance metrics or just plain bureaucracy and overhead.
But alas, GM is not the only automotive OEM that will be skewered by general and social media. Today, Toyota announced that it was recalling upwards of 6.4 million vehicles consisting of five different product recalls. The recalls involve 27 globally based vehicle models and are reportedly prompted by defects involving seat rails, air bag cable connections, engine starters, steering column brackets and windshield wiper motors. Did we mention a repair parts crisis as well?
The latest recalls appear just a few weeks after Toyota agreed to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the prior SUA incidents.
But the track record of Toyota product recalls continued after the SUA debacle. In October of 2012 Toyota announced the global recall of 7.43 million vehicles, the equivalent number involved in the SUA incidents, this time related to a master power window switch defect. At the time, The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years prior. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. Somewhat of a familiar theme to the current GM ignition switch saga.
Supply Chain Matters readers will further recall that Toyota announced a series of major organizational changes to insure that accountability for quality among its vehicles was more transparent, including the empowerment of geographic based Chief Quality Officers that had the power to investigate and correct any quality issues. Our Supply Chain Matters commentary in January 2013 called into question the cost of Toyota’s anointment as global automotive industry leader. In a Financial Times interview in 2013, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that was the declaration of the core business value of the company.
Which of these two different OEM incidents is the more significant indicator of a systemic process issue?
From our lens, a comparison of GM’s current quality crisis pales in comparison to that of Toyota, since the global industry leader has had more time and singular senior management attention to correct systemic process issues involving product quality, whether they involved the supply chain, or Toyota’s own product design or quality conformance.
Since both of these OEM’s remain in the race for global volume leadership, the price to the brand and of consumer brand loyalty we posed in 2013 is again an open question. Each of their supply chain ecosystems will again be forced to rally and respond to crisis and disruption to insure new and revised parts are made available to dealers, distributors and assembly lines.
The race to the top invariably comes with a price, and at least two automotive supply chain ecosystems will continue to feel the effects of the vortex.
Time for our readers to weigh in: by your view, which of these two ongoing automotive OEM quality crisis developments are the most troublesome for the industry? Share your view in either the Comments area associated to this posting, or if you prefer, email them to info <at> supply-chain-matters <dot> com.