Today’s business headlines include the reporting of Amazon’s latest operating results for the March-ending Q1 quarter. The global online provider and Omni-channel disruptor reported a net sales increase of 15 percent to $22.7 billion, but also a net loss of $57 million. There was a $1.3 billion unfavorable impact related to foreign exchange rates throughout the quarter. Operating expenses increased nearly 75 percent, prompting The Wall Street Journal to opine that: “Amazon again spent nearly all the money it took in.”
In essence, Amazon is spending and investing in all forms of projects and today’s predominantly short-term focused investors are growing ever more impatient with the timing of a big reward. Once more, Amazon has forecasted the potential of an operating loss, or small profit gain for its upcoming quarter.
An area that has captured Wall Street’s attention is revelations about the often secretive cloud computing support Amazon Web Services (AWS) business operating unit which was finally revealed. AWS revenues were reported as $1.57 billion in the quarter, up a whopping 49 percent, and at an annual run rate of nearly $5-6 billion for the year. Once more, this has been in a fiercely competitive sector with many global enterprise technology players duking it out for market-share dominance. Once more, operating margins for AWS are tracking at nearly 17 percent compared to nearly 4 percent for retail online fulfillment. Retail fulfillment continues to have pressures related to distribution center rollouts as well as the net effects of free shipping offered to Amazon Prime customers.
The high AWS product margins categorizes this business as growing faster than Amazon’s online fulfillment business, although considerably smaller overall, but the difference in margins have now captured the interest of Wall Street, and most likely the community of activist investors.
Among online customer fulfillment highlights for the march-ending quarter were:
- The launching of both Amazon Dash Button, a small button that Amazon Prime customers can place in their home to automatically reorder frequently used products. Supply Chain Matters recently called attention to Procter & Gamble as one key participant in this program, which might have prompted a reaction from Wal-Mart.
- A complimentary offering, Dash Replenishment Service (DRS) enables connected devices to directly order replenishment supplies. Early participants in DRS include Brother, Brita Quirky and Whirlpool.
- The launching of Amazon Home Services, a new marketplace for on-demand professional pre-packaged services
- Amazon’s Prime buying service celebrated its tenth anniversary with tens of millions of members across the globe.
- The opening by Amazon China of an Amazon International retail store on Tmall, featuring thousands of imported products and an expansion of Amazon Global Store offered in China to over one million items.
A common and troubling theme in today’s U.S. business climate has been activist investors surrounding well-recognized internally focused producers including names such as Apple, DuPont, Procter & Gamble and others. The HJ Heinz-Kraft Foods acquisition announcement continues to have far reaching implications for other consumer product goods producers and their respective supply chains.
The question now becoming apparent is whether Amazon’s growth track record contrasted to profitability performance opens the door to activist actions as well, particularly when it concerns the potential of AWS.
What’s your view? Will Wall Street activist investors surround Amazon as-well?
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters© blog. All rights reserved.
Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.
One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk. In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.
During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.
Now there is new news leaking from Apple’s supply chain universe. Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.
Since the Digitimes report, other Apple community blogs have amplified the report. The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.
Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.
Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains. In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.
© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.
From a supply chain disruption perspective, this week has proven to be a rather concerning one for food related supply chains within the United States. And, there may well be added implications in the weeks to come.
Two developments have dominated business and general media; a widespread outbreak of a strain of bird flu that is currently spreading across upper U.S. Midwest states, and a listeria outbreak that has forced a well-known branded producer to suspend sales of its entire product line-up.
Avian Influenza Outbreak
An Iowa chicken farm raising upwards of 3 million chickens is the latest to suffer the effects of what is being described as sharp escalation of bird flu that, according to one report, is rattling the U.S. poultry industry. Iowa is reportedly the largest producing state for egg production. The latest outbreak reported yesterday brings the estimated total number of chickens and turkeys affected by avian bird flu to nearly 8 million.
The largest two turkey producers, Butterball and Hormel Foods have each reported significant supply chain challenges as outbreaks occurring in Minnesota and Wisconsin are where turkeys are predominantly raised.
To mitigate the further spread of the virus, farmers must destroy all birds confirmed to have the virus. The Governor of Wisconsin declared a state of emergency earlier this week authorizing state officials to issue quarantine directives related to feed and poultry.
The states impacted thus far include Arkansas, Iowa, Minnesota, Missouri and Wisconsin. No human cases of avian influenza have been detected and U.S. health officials indicate the current outbreak poses no human health risk. None the less, consumers are obviously rattled and concerned by the news. Farmers and meat processors are on high alert and are taking measures to monitor stocks as well as visitors to farms.
Listeria Related Product Recall
The other important development concerns Texas based Blue Bell Creameries which on Monday, widened a series of voluntary recalls to now include all of its branded ice cream, frozen yogurt, sherbet and frozen snacks branded products distributed among 23 states and various international locations. The recall was prompted after samples of chocolate chip cookie dough ice cream tested positive for the potentially deadly disease, listeria. Thus far, health officials have traced 8 reported illnesses amounting to three deaths which have been linked to contaminated ice cream, but active investigations continue. According to an FDA advisory and a Blue Bell press release, the illness was tracked by health officials to a Blue Bell production line in Texas, and later to another production line in Oklahoma. Consumers are warned not to eat the recall products and throw away or return any purchased product.
Blue Bell itself has taken relatively swift action by actively removing products from retailers and other food service facilities it serves. A statement from Blue Bell’s CEO Paul Kruse apologizes to consumers along with a firm commitment to fix the problem. Blue Bell is implementing a “test and hold” process for all products made at all of its manufacturing facilities, meaning that all products will be tested first and held for release to the market only after the tests show they are safe. Other actions include daily cleaning and sanitizing of equipment, expanded testing and additional employee training.
As is the usual for these types of recalls, the recall news spreads fast and wide with the amplification of the Internet and social media. At this writing, we performed a Google search of the terms “Blue Bell listeria’ which yielded over 2000 web postings thus far. From our tracking of previous high visibility product recalls, there will likely be more short-term impact to the brand before this situation is resolved.
Supply Chain Matters applauds Blue Bell for taking such prompt and far reaching actions. Not many consumer packaged goods companies would recall the entire product line.
Recent postings appearing on the Natural Resources Defense Council (NRDC) and Mother Jones note that the industrial processes used to make our jeans and sweatshirts require loads of water, dirty energy, and chemicals, which often get dumped into the rivers and air surrounding factories in developing countries. China of course, is a major global source of fabric production. According to the NRDC, almost 20 percent of the world’s industrial water pollution comes from the textile industry, and China’s textile factories, which produce half of the clothes bought in the United States, emit 3 billion tons of soot a year.
NRDC recently hosted an award ceremony in Shanghai to recognize 33 Chinese textile mills which completed NRDC’s Clean By Design program in 2014. Four prominent apparel retailers and brands, Target, Gap Inc., Levi Strauss and Co., and H&M participated in the program, handing out certificates of achievement and inducting some star mills into a newly created Clean by Design Hall of Fame.
The effort to get to this point is described as starting five years ago under the umbrella of green supply chain initiatives, providing practical tools to reduce production and environment impact while saving money. Today, NRDC’s Ten Best Practices provides what are described as practical improvements, low cost and offering quick payback for producers.
In terms of results, NRDC indicates that its Clean By Design practices delivered, on average, savings of $440,000 in the first year, with the top five mills saving more than $880,000 – with a payback time (return on investment) of only 14 months.
The NRDC blog posting further describes efforts underway to increase awareness to broader amount of skeptical fabric and textile mills in China as well as to involve more global based buyer brands as sponsors.
Since getting the word out is important to this effort, Supply Chain Matters is pleased to spread awareness of this program to our global and China based readers. We also extend our Tip of the Hat to those retailers who are actively supporting these current efforts.
In a mid-December posting, Supply Chain Matters called attention to a media report indicating that a component shortage within the commercial aerospace sector that was suspected of causing delayed shipments of brand new Airbus and Boeing airplanes. According to this Bloomberg report, France based Zodiac Aerospace, a supplier of upscale lie-flat airline seats was struggling to meet its delivery requirements for such premium aircraft seats. A month-long labor stoppage within a Texas production facility that ended in late October coupled with backlogged engineering teams working with airlines for final seat design approvals have led up to these late deliveries.
This week brings a new and even more noteworthy development. According to a published Reuters report, the head of Airbus’s passenger jet business called attention to suppliers of cabin equipment, indicating their failure to get to grips with chronic production delays was “unacceptable”.
Here is the quote to a group of industry journalists:
“I think the cabin equipment suppliers would do well to have an equivalent level of industrial maturity to that of aircraft manufacturers. They are big industrial companies now, they are not small companies, so they must put in place measures to meet their obligations. It is becoming unacceptable”
While Fabrice Bregier, the CEO of Airbus’s passenger jet division reportedly did not single out any one supplier, he was apparently responding to a question about French seat maker Zodiac, according to Reuters. Further noted is that both Airbus and Boeing have now positioned more people in Zodiac factories to help overcome the delays, and are insisting on vetting Zodiac seat sales as an ‘exception’ to their catalogs, according to industry sources.
As our supply chain community well knows, when frustration levels regarding the reliability of a supplier reaches the CEO level in a public lambasting, the crap has hit the fan and frustration levels have probably reached the boiling point.
Perhaps we can speculate that the CEO of a certain supplier, or multiple suppliers have been on the phone and in the air attempting to perform damage control and make assurances that all outstanding and future commitments will be performed to expectations.
Not a pleasant situation to be in, particularly in an industry with multiple years of backlogged customer orders for completed airplanes. It’s a slippery slope when a preferred vendor effects actions that are deemed “not acceptable to a level of industrial maturity.”
The turmoil among consumer product goods focused supply chains promises to increase with the implication of today’s business media headlines concerning Nestle and Unilever. These implications relate to ongoing merger and acquisition developments and the continuing effects of foreign currency headwinds, which are negatively affecting U.S. producers while positively impacting European based firms.
While speaking at its Annual Meeting this week, Nestle’s Chairmen acknowledged that the combination of H.J. Heinz and Kraft Foods, being orchestrated by 3G Capital Partners and Berkshire Hathaway would create a formidable competitor, particularly in the United States. Because of this, the global CPG provider indicated to shareholders that it will accelerate its shedding of marginal performing businesses.
Readers may recall that CPG industry icon Procter & Gamble is similarly involved in a shedding of non-performing or non-core businesses.
According to a report published by The Wall Street Journal, Nestle Board Chairmen and former CEO Peter Brabeck-Letmathe indicated that Berkshire Hathaway and 3G have “pulverized” the food industry.
The CPG company has already sold off ice cream and water related businesses, has struck deals to sell the bulk of its Jenny Craig diet business as well as an ice cream business and is reported to be in talks to sell its frozen food business. The CEO further indicated that Nestle needs to better leverage its global scale more effectively. According to the WSJ, that could imply even more added pressure on suppliers for better buying terms.
Earlier today, Nestle announced its operating results for the March-ending quarter. Those results included an overall 4.4 percent organic growth of which 2.5 percent was attributed to pricing moves. Sales increased a mere 0.5 percent with the effects of negative foreign exchange attributed to 4.5 percent. In its full-year outlook, the company remained committed to achieve organic growth of around 5 percent while improving margins.
That level of sales growth challenges many of today’s large global CPG producers.
The positive or not so positive shadow of foreign currency effects was further evident in the operating results of Unilever, whose first-quarter total sales rose 12 percent largely due to the effects of a stronger valued U.S. dollar, amounting to a 10.6 percent boost. Once more, Unilever indicated that factoring current exchange rates, its full-year earnings growth would be in the 7-8 percent range.
On the flip side, U.S. headquartered CPG producer Colgate Palmolive indicated a 9 percent negative impact on sales while Procter and Gamble indicated in January that it was anticipating currency swings to curb profit by as much as 12 percent.
Thus the pending Heinz-Kraft combination coupled with the current foreign currency shifts is indeed precipitating more industry turmoil. Many CPG businesses are being pitched for sale and/or consolidation.
When penning our Supply Chain Matters commentary related to the Heinz-Kraft announcement we opined that a clear message was now sent to consumer product goods supply chains that business-as-usual was no longer acceptable, and that further industry changes and developments were inevitable.
Add the current effects of currency and those in the industry negatively impacted may well initiate changes in product sourcing, promotion and distribution to help offset currency effects. Meanwhile, product innovation in more natural and less processed foods remains the key to longer term growth, whether by acquisition or by supply chain sourcing and development.
There is literally a new playbook for global based CPG firms and their respective supply chain teams, and be prepared for constant change in the months to come.