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Are Retailers Planning for the Most Optimistic Holiday Sales Scenarios?

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Earlier this month, Supply Chain Matters featured a commentary focused on predictions of upcoming holiday sales.  Our commentary referenced the latest forecast from the National Retail Federation (NRF) indicating that holiday sales in the coming quarter are expected to increase 4.1 percent, which in monetary terms, represents the largest rise in holiday sales in the past three years. We further noted an interview on business network CNBC featuring the NRF chief economist indicating that the 4.1 percent may be on the low-end, considering the current trend toward lower gasoline prices and increased employment in the U.S…

A new data point is a recent joint release from both the NRF and Hackett Associates that forecasts ocean container shipments will rise 6.4 percent in October, compared to last year’s monthly volume.  The report does caution that August and September port volumes saw modest increases. A report published by The Wall Street Journal interpreted this latest container data prediction as an indicator of more confidence on the part of retailers to bring-in additional holiday sales inventory.

For curiosity, we re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year.  Indeed, for the three months, 2014 TEU inbound load volumes this year are trending up roughly 6 percent from 2013 levels.  That is in the backdrop of the continued uncertainty of a potential port labor stoppage as union labor talks have continued since labor contract suspension earlier in summer.  Therefore, if October inbound container volume trends even higher, as indicated by NRF’s forecast, than perhaps retailers have indeed become more optimistic.

We would appreciate hearing from Sales and Operations planners and procurement professionals residing within retail and wholesale supply chains. 

We have added a Supply Chain Matters interactive polling question: (Located on the lower portion of our right-hand panel) Is your organization planning increased inventory levels, relative to 2013, to support expected 2014 holiday sales? The poll is anonymous and will provide trending results. Let’s all see what those closest to the action indicate.  We will run this poll for the next three weeks.

Like many of you, we will also closely monitor inbound container stats for October.

In the meantime, let’s all observe and best wishes in the upcoming 10 weeks of craziness.

Bob Ferrari


The Movement Toward Cheaper, Open Computing Compatible Servers Spells Opportunity for ODM and CMS Providers

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Here is a Supply Chain Matters follow-up commentary that relates to the previous news on the pending split-up of Hewlett Packard along with our commentaries of several years ago, beginning in 2011/2012 commentaries and supplemented in a 2013 commentary) foretelling of original design manufacturing (ODM) and contract manufacturing systems (CMS) providers competing directly with their larger OEM customers.

A recently published Bloomberg article, Cheap Servers Are Bad News for HP and Dell, indicates that the contract manufacturers such as Quanta Computer that these OEM’s often depended upon are now producing generic, Open Compute Project compatible computer servers for hungry data center customers. These generic servers are reported to be one-third to two-thirds cheaper than the branded versions. According to the article, this has been a boon for server-hungry customers such as Amazon, Google and Facebook, but bad for established, branded hardware OEM’s. Further noted is that mega financial services firms such as Fidelity, have jumped-on the generic server bandwagon to reduce IT infrastructure costs.

What’s keeping branded OEM’s in the competitive game is their ability to provide extensive global customer service as well as global distribution scale. However, the current accelerating trend for matching generic server hardware customized to a specific software application compute resource need will only add to the momentum toward generic commodity servers.

Bob Ferrari


Two Visible Examples on the Perils for Being an Apple Supplier

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This week brings two visible and poignant reminders of the perils for being an Apple supplier.  There are of course, the positives related to the sheer production volumes that doing business with Apple provides, along with being on the leading-edge of product or component innovation. Along with the positives come the perils for dealing with a highly demanding and influential customer.   iPhone_6_und_6_Plus_324_267

Today’s printed edition of the Wall Street Journal cites suppliers and other sources as indicating (paid subscription) that because of the current surging demand for Apple’s newly announced iPhone 6 models, the Apple supply chain ecosystem has altered previous plans for ramping-up production volumes associated with new models of iPads, and instead are allocating current production resources to iPhones, specifically the iPhone 6 Plus. Apple’s Sales and Operations process has obviously issued marching orders that indicate all hands on deck supporting iPhone shipment needs. That implies a invariable delay for new iPad market availability plans as critical component supplies such as displays allocated their current efforts strictly to supporting current iPhone output demands.

Foxconn, Apple’s prime contract manufacturer has again placed in the role of doing whatever it takes to keep-up with demand, fulfill customer orders and not let lack of finished goods supply be an inhibitor to Apple’s financial results in this all important holiday shipping quarter. The WSJ reports that Foxconn’s Chairman Terry Gou is personally at the Zhengzhou assembly facility “… to monitor production closely.”

In prior Supply Chain Matters commentaries we have pointed out that Foxconn’s real desire is to continue to diversify its business models with less overall dependence on the ebbs and peaks of Apple. That includes building independent branded products. The contract manufacturer has thus been willing to assume a secondary provider role for other of Apple’s products such as the iPad Mini. But, when the stakes are really high, the Apple operational pattern is to turn to its long-standing CMS provider to pull the proverbial rabbits out of the hat in providing almost virtual capacity to move finished goods to consumers and channel partners. 

Thus, one peril for being an Apple supplier is having the capability of high agility in the wake of what others would view as rather difficult obstacles.

The other supplier peril reminder comes from this week’s sudden and unexpected news regarding evolving sapphire glass supplier GT Advanced Technologies and its filing for Chapter 11 bankruptcy protection, sending its stock plummeting. This was a classic current day example of what various supply chain academics have noted as bad supply chain news directly correlated to negative stock performance. In GT’s case, it was literally wiping out upwards of $1 billion in equity value according to one report.

Since the GT news broke earlier this week, the reports we have been monitoring indicate that after further testing of the new sapphire glass material that GT was producing a its new start-up plant near Mesa Arizona, Apple engineers determined that the material was not appropriate for the new iPhone models, and reportedly, withheld the final seed investment payment involving upwards of $130 million. Today, the WSJ reports that GT Technologies will exit the business of manufacturing sapphire. A U.S. bankruptcy judge allowed GT to keep the details of its relationships with Apple secret, no doubt from the influence of Apple as a major creditor. Apple has apparently declined any further statements to business media regarding its relationship with GT.

We sense that this Supply Chain Matters commentary regarding perils will resonate with our readers residing within either Apple’s or other supply chain dominant customer supply chain business models. We know that there not much any of you can state publically. However, we as a broader community, in just one week, have open visibility and can dwell, albeit briefly, to such perils.

We usually strive to point out important takeaways for readers in our individual postings. In this particular case we rather play the observer role and state that perhaps this is today’s mission for supply chain, namely dealing with whatever is required to make the business model successful, including a can-do relationship with the most influential and important of customers. It is what is expected for today’s industry supply chains.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Boeing to Increase the Pace of 737 Production

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Last week, commercial aerospace manufacturer Boeing announced an increase for its monthly production rate of 737 aircraft starting in 2018. The designated production rate will increase to 52 airplanes per month in order to sustain a production goal of 620 finished 737’s per year, the highest ever volume for this particular aircraft. This boost amounts to a near 24 percent increase from the current   737 MAX8pace of producing 42 of the 737 aircraft per month. Boeing is providing an ample two year notice to its supply chain and ecosystem partners in ramping the 737 supply chain to sustain this level.

With a reported 4000 unfilled orders for both the named Next-Generation 737, and even more fuel-efficient 737 MAX models, Boeing has to crank-up the pace in order to satisfy customer operational and business timing needs.  Once more, the global economic environment can change very quickly. We suppose our readers among other industries would relish a two-year window for planning.

Meanwhile, Boeing also announced its report of aircraft deliveries in Q3. Deliveries included 120 of the Next Generation 737 aircraft and 31 of the 787 Dreamliners, which reflect meeting current quarterly production goals. Year-to-date, Boeing has delivered 79 Dreamliners utilizing two final assembly sites with quite a ways to go in reducing the current backlog of that aircraft family.


NRF Issues Optimistic Forecast of Holiday Sales- Be Watchful and Be Prepared

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Business media and online channels are abuzz regarding the latest rather optimistic forecast of expected retail holiday sales issued by the National Retail Federation (NRF), an industry trade group of the retail industry. However, retail supply chains need to be prepared for even more challenges and unknowns in the coming weeks leading up to the end of year.

The NRF is forecasting that upcoming retail sales in the months of November and December (excluding autos, gasoline and restaurants) will increase by 4.1 percent over 2013 levels, equating to nearly $617 billion. According to the NRF, retail sales incurred an actual 3.1 percent increase during this same time period in 2013. The current forecast marks the first time since 2011 that holiday sales would increase by more than 4 percent.

In an interview with business network CNBC, NRF’s chief economist indicated that the 4 percent increase could be on the low end, given the current downward trend in energy prices that are benefitting consumers.

Also today, Shop.org released its 2014 online holiday sales forecast, expecting sales in November and December to grow between 8 – 11 percent over last holiday season to as much as $105 billion.  Holiday non-store sales in 2013 grew 8.6 percent.

In its release, the NRF wisely warns retailers that shoppers will remain extremely price sensitive and that retailers will have to overcome such challenges through differentiation in value and exclusivity. That trend was reinforced by a recent PwC study based on a poll of more than 2,200 consumers across the U.S. that spanned all demographics and income levels, and defined the holiday season as September through January. The PwC study reported that 84 percent of respondents indicated that they plan to spend the same or less than they did in 2013.  That is a somewhat conflicting data point relative to spending levels and for us, is a clear indicator of continued price sensitivity among the majority of consumers.  Thus, the retail winners in 2014 are those with the most attractive promotions and merchandising creativity.

Even more confusing is presumptions that termed “webrooming” (researching online and buying in physical store) the opposite of “showrooming” (research and touch in-store and buy online) will prevail this year. We refer readers to various commentaries, including our own,  written at the conclusion of the 2013 holiday buying period regarding lessons learned.  In early January, the Wall Street Journal produced ShopperTrak trending data related to total retail foot traffic since 2010 that clearly indicates a significant reduction in store visits, by a factor of almost a half since 2010.  In our Supply Chain Matters 2013 lessons learned commentary, we addressed information data security (credit card data breaches) coupled with logistics and transportation capacity breakdowns as important lessons. Some of those learnings are now reflected in conversations among retailers and their logistics partners.

What does all of this mean for retail supply chain teams? 

It essentially means that the challenges in the upcoming holiday surge are going to be even more dynamic  than last year and supply chain agility, flexibility and patience will be all important factors. 

Sales and Operations teams will probably have dynamic, perhaps even heated  discussions with merchandising and marketing on the timing of promotions, including how late to keep the channels open for orders and guarantee holiday delivery for consumers.

Planning for inventory needs in the correct fulfillment channel will be another challenge and will require a lot of demand sensing and day-to-day collaboration with marketing and merchandising teams. There are but 11 weeks remaining of planning time. Because of the threat of a west coast dock labor stoppage, most of the inventory has arrived and is making its way to various distribution points. Similar to last year, the period between the Thanksgiving and Christmas holidays is a short 26 days and the severity of winter weather conditions will again be all important in assuring continuous logistics flow without last year’s numerous logjams.

One very important other wildcard to monitor is whether economically stressed but savvy consumers, who may have lost trust in the data and information security practices of retailer systems, trend toward shop online and pickup and pay by cash at retail stores at the very last minute.  That may well be the 2014 doomsday scenario for retail supply chains that lack adequate agility in inventory re-positioning, multi-channel and logistics partner fulfillment capabilities.

Good luck, best wishes and let the planning and execution begin.

Bob Ferrari


Breaking News: Apple Sapphire Glass Supplier Files for Protection Under Chapter 11

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In a sudden and startling announcement, GT Advanced Technologies Inc., a developing supplier for new, more durable sapphire glass applications for Apple’s product lineup, announced today that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company and provide a path to future success. In the announcement, GT indicated that as of September 29, 2014, the company had approximately $85 million in cash, but there is no mention in the release of current outstanding liabilities.

In early August in its announcement for fiscal year second quarter results, the company indicated six month, year-to-date revenues of $80.5 million including $49.7 million attributed to sapphire equipment and materials. Non-GAPP operating expenses were reported as $76.3 million year-to-date and the supplier incurred a $139 million net loss from operations. GT reported ending its second quarter with $333 million of cash, cash equivalents and restricted cash, compared to a $509 million at the end of the company’s first quarter.

A statement from this supplier’s CEO states:

GT has a strong and fundamentally sound underlying business. Today’s filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet.

The company indicated that it expects to provide additional details with respect to the Chapter 11 filing as soon as they are available.

Readers may recall that in our previous commentaries related to Apple’s ongoing efforts in product innovation, that Apple provided a long-term strategic seed investment in GT, valued in excess of $500 million, to develop a stronger more durable alternative to the use of gorilla glass for displays in Apple’s forthcoming line-up of products. GT invested in a 1.4 million square foot production facility near Mesa Arizona to produce sapphire at high volumes at comparative cost. There was further speculation that GT was being positioned as the prime supplier of sapphire for the iPhone line-up and the now announced Apple wearable watch scheduled to ship early next year. The recent iPhone 6 new product announcements from Apple did not include sapphire glass as a feature, leading to speculation that GT could not initially ramp to Apple’s high volume production requirements for its newest model.

Suppliers with groundbreaking technology can often fall victim to a far larger and very influential customer with demanding requirements. What happened with GT Technologies will obviously unfold in the coming weeks including its current relationships with Apple.


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