The Marketplace Section of today’s Wall Street Journal leads with an article, Wal-Mart’s Big E-Stumble- After Years Giving Short Shrift to Web, Retailer Plays Catch-up with Amazon. (Paid subscription required or free metered view) Many in B2C supply chain and online fulfillment circles are fully aware of the competitive threat that Amazon poses to many retailers and consumer goods producers. Teams should especially take notice when Wal-Mart, one of the largest global retailers, also stumbles in overall online fulfillment strategy.
This author has highlighted on Supply Chain Matters along with other guest blog contributions that online fulfillment must exhibit its own strategy, even if the business model requires a combining online with traditional in-store brick and mortar fulfillment. Just prior to the 2012 holiday buying season, this author reminded readers of the critical importance of not placing organizational walls or conflicting performance metrics among online and traditional retail fulfillment teams that frustrate teams in achieving seamless buying channel fulfillment. That point is reinforced in this latest Wal-Mart online fulfillment report.
The WSJ article observes that Wal-Mart management concluded that it must tailor its online fulfillment model because of the continuing need to supply its vast network of stores. That sowed the seeds for internal conflict regarding adherence to Wal-Mart’s long passion of extreme efficiency with the responsive distribution and logistics required in online fulfillment. The current online strategy includes the utilization of more than 4000 existing Wal-Mart retail stores as shipment fulfillment entities. The article cites former company executive’s indications of culture clash between the online fulfillment team located on the U.S. West Coast and Wal-Mart’s Bentonville culture where logisticians have passion for the ultimate in efficiencies and profitability.
Two-thirds of the U.S. population lives within 5 miles of a Wal-Mart store, which are replenished daily. As noted in October, Wal-Mart believes that its core customers are reluctant to utilize credit or debit cards in online transactions, given the fact that half of 2012 online sales involved either pick-up or payment at the local store. There lies the core of Wal-Mart’s current online fulfillment strategies, leverage the retail store and pooled national distribution and logistics together in a comprehensive network of online response. That one can argue is a differentiated strategy from that of Amazon, one that can bear fruit. The challenge remains in timely plan execution.
The WSJ reports that Wal-Mart’s online fulfillment can cost $5 to $7 per parcel vs. the Amazon benchmark of $3 to $4. The online business has been forced to turn to 3PL’s and other online trading partners such as Ingram Micro to support online fulfillment needs while one reported warehouse near Atlanta is Wal-Mart’s only company owned DC dedicated to online orders.
In October of last year, as Wal-Mart responded to Amazon’s announced same day delivery option, our Supply Chain Matters commentary at the time pointed out that the most expensive, unreliable and inefficient fulfillment point can be traditional retail store. Bare bones retail store budgets leave little room for investment in item level tracking, accuracy and stock handling, let alone individual pick and pack fulfillment or online order customer pick-up. Inventory stocking is predicated on national distribution network store replenishment strategies vs. multi-echelon, pooled distributed inventory available to fulfill both retail and online customer needs. There are also rather important considerations for distributed or supplier drop-ship order management needs.
By our lens, the current challenge for Wal-Mart online fulfillment should be weighted in additional investments in business processes and information technology that umbrellas both pooled inventory/distribution and inclusion of 4000 retail stores as fulfillment stocking and customer pick-up points, some with same day fulfillment capabilities. That is no small challenge, even for an organization with the resources of Wal-Mart.
The WSJ points out that $430 million have been budgeted this year on e-commerce investments. We certainly trust that these investments are weighted not just to a more attractive web site or traditional distribution center automation, but rather end-to-end supply chain network with seamless inventory visibility, store level inventory tracking and distributed pick and pack capabilities.
The other critical aspect of investment centers on breaking-down existing organizational barriers, management thinking and performance metrics. Wal-Mart has struggled for some time with same store sales growth among its U.S. stores with constant explanations that its core customers are economically stressed and refraining from buying. One wonders if the Wal-Mart customer has discovered the benefits of online comparisons and shopping, which has reduced trips to the store.
The response by management has led to failed attempts to change retail level merchandising and stocking strategies and a renewed emphasis on controlling retail level operational and labor costs. If an online strategy is to succeed it requires holistic thinking that spans all buying options. Retail staffing had better include something beyond the traditional back room inventory stock clerk, augmented to include systems savvy fulfillment associates.
The above described organizational scenarios and conflicts should sound familiar to many of our retail industry readers. Teams and online business leaders have the benefit of observing and learning what others such as Wal-Mart are experiencing in real-time. External consultants sometimes make the most impact by helping organization’s breakdown existing silos and think holistically.
No online organization wants to read in business media that its strategies are catch-up, especially if you are one of the industry leaders. In that same vein, no B2C fulfillment team wants to later regret that existing management was just not listening to the implications of the Amazon effect.
This is a premiere week for the global aerospace industry and their associated global supply chain partners. This week, the Paris Air Show, a weeklong gathering of a who’s-who of the industry is underway along with the contest for booking orders for new aircraft.
Business media has already positioned this year’s show as the continuing battle between Airbus and Boeing for industry domination for new, more technology advanced and energy efficient wide-body jets. In a previous Supply Chain Matters commentary late last week, we noted the well-timed inaugural flight of the Airbus A350. The reality remains, however, that both of these premiere global aerospace providers have over eight years of current order backlog, and the pressure to ramp-up production output levels is building with each passing month. Any new orders booked this week by either or both of these manufacturers adds to individual and collective supply chain pressures.
The spotlight is not only on the two industry giants but on the other highly competitive segment of single-aisle, more fuel-efficient regional jets. That battle pits Bombardier, Embraer, Mitsubishi and COMAC vying for airline operator attention and new orders. They each share supply chain partners with either Airbus or Boeing.
We were especially curious to note an article in yesterday’s Wall Street Journal that described Airbus CEO Fabrice Bregier new emphasis on efficiency and empowering factory managers with more independence for delivering aircraft on-time and on-budget. Last year, Airbus, the operating group of parent EADS, posted an operating profit margin of 4 percent. That is roughly half of Boeing’s recorded operating margin of 9.6 percent in the same period.
Readers from the high-tech industry OEM community may scoff at such margins, given the double digit margins that they encounter. Then again, high tech OEM’s do not want to own production assets and elect to transfer that burden to contract manufacturers who have to manage in single-digit operating margins.
Mr. Bregier has tasked Airbus teams to improve operating margin to 10 percent within the next two years. The plan is to eliminate complexity as much as possible and to allow factory managers to run their operations as a streamlined business with the ability to make independent decisions. That’s a tall order given the complexity, dominance and influence of engineering and product design teams.
Our aerospace industry readers may well question whether the 10 percent operating margin goal within the next two years is really a stretch goal given the current operating pressures, complexity and complex culture of today’s aerospace industry. Consider that Airbus’s 4 percent profitability came on a total revenue base of €39 billion ($52.3 billion). That is the testament to a rather complex, engineering-driven supply chain with lots of opportunities for added efficiencies and more streamlined suppy chain related decision-making.
Both the WSJ and The Financial Times have declared that for Airbus and Boeing, a new emphasis on profitability is largely dependent on efficiency rather than which manufacturer books the most orders this week and in the weeks to come. That is perhaps a new reality that limitless order flows may be waning and that the industry may perhaps be reaching too much adsorption of new aircraft.
One of the time-tested principles of change management relates to the fact that change only comes when management teams set specific goals as to which metrics and behaviors need to change and subsequently call attention and measure such goals. For aerospace leaders Airbus and Boeing, the corporate culture and executive bonus system is perhaps too focused on declaring industry leadership based on orders booked.
Supply Chain Matters concurs that this may well be the time for the aerospace industry to shift the focus and the measurement systems toward improved production efficiencies, more streamlined decision-making and broader end-to-end supply chain intelligence.
Aerospace industry readers are welcomed to share their perspectives on whether the shift toward supply chain efficiency and more streamlined decision-making is doable given today’s operating norms and management approaches.
Today marked the successful completion of the maiden first flight of the Airbus A350 XWB aircraft, and the beginning of a final phase toward production. The aircraft completed its four hour maiden flight from Airbus’s corporate airfield near Toulouse France amid lots of fanfare. The timing of this maiden flight coincides the opening of next week’s Paris Air Show, one of the largest aerospace industry bazaars where lots of airline, industry and aerospace supplier executives gather to view the latest aerospace products and to conduct lots of deals. The theater is well-timed and well-chosen.
Readers can view a series of videos of this maiden voyage by visiting the dedicated A350 first flight web site. There are some great videos that outline the supply chain flows and advanced final production process of this aircraft on the Airbus web site. We enjoyed watching them and they are very well done.
The A350 is the Airbus response to Boeing’s 787 Dreamliner and 777 series aircraft. It is built with composite fiber materials in its fuselage structures and is equipped with two Rolls Royce Trent XWB engines featuring cutting-edge materials and cooling technologies claiming 25 percent less fuel consumption than prior generations. According to Airbus’s web site, the engines themselves are slighter larger in diameter than those that power the huge A380 but they are actually lighter in weight, quieter, and the lowest in carbon emissions. Similar to Boeing’s 787, the supply chain is global, but not as extended. Having had the opportunity to observe developments concerning the ongoing customer introduction of the 787, Airbus elected not to utilize lithium-ion batteries as backup power.
Similar to Boeing’s 787, challenges concerning the overall supply chain lengthened original product development and market release plans. In November of 2011, the CEO of Airbus’s parent EADS expressed a personal apology in announcing a delay in the originally planned A350 program. The market introduction was pushed back from late 2013 to first half of 2014. In the announced delay, Airbus noted: “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” At that time, The Financial Times speculated that Airbus had concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program, which was characterized as a bold but practical decision. At that time, Supply Chain Matters praised the decision, noting that it was far more important to fix any supplier readiness issues earlier than later in the program, when the stakes are far higher. We have since learned that Airbus has added advanced technology to insure that engineering and supplier teams collaborate virtually working with electronic designs and 3D renderings of designs and component parts.
This far, Airbus has garnered 613 firm orders for the A350 from 33 airline and leasing customers. Many of the customers are the emerging airline industry disruptors like Qatar, who are aggressively augmenting long-distance lift capacity and not shy about exhibiting aggressive demands and negotiating skills. They recognize that they are players in explosive emerging markets where air travel will expand quickly, and new, more efficient aircraft need to be ready on-time to meet this demand.
This maiden flight is the prelude to a series of 2500 flight hours of rigorous test flights involving five separate aircraft that should culminate in aircraft certification. The Airbus plan is to have first customer ship to inaugural customer Qatar Airways by the second-half of 2014. In our view, that is a critical milestone for the A350 supply chain community, since the Dreamliner has apparently moved beyond its battery failure issues and is in its production ramp-up stage. As readers know, the Dreamliner program is over three years late, and customers are feeling the financial effects. Meeting the revised A350 time-to-market plan assures that customers have options to meet their planned operational scheduling and financial savings milestones. As our aerospace industry readers also are fully aware, the new wave of combined production ramp-ups involving Airbus, Boeing, Bombardier, Cessna, Embraer and COMAC are both a blessing and enormous stress. Any glitches and or hiccups have implications.
Supply Chain Matters extends its thumbs-up recognition to the entire extended A350 global supply chain community for reaching today’s very important milestone.
We look forward to posting future updates regarding successful production ramp-up and look forward to perhaps taking part in the A350 flying experience on a future journey.
Supply chain management teams involved with consumer goods are all too aware that one large and dominant customer, particularly a retailer with the scale of a Wal-Mart, can determine the fortunes of a manufacturer.
The latest reminder of this fact comes with news that Exide Technologies, a producer of lead-acid batteries for automotive, marine, recreational and other purposes, filed for Chapter 11 bankruptcy protection for its U.S. entity earlier this week. While its customers included automotive OEM’s, parts suppliers and retailers, it biggest customer was Wal-Mart. In its formal filing, Exide attributed Wal-Mart’s decision in 2010 to change its sole supplier for automotive and other battery needs to Johnson Controls as the primary supplier amounted to a loss of about $160 million in annual revenues for Exide. Obviously, that is a significant hit.
In its reporting, the Wall Street Journal points out that Exide was also dealing with issues associated with a California lead-recycling facility that supplies a “significant portion” of its domestic lead supply. The manufacturer was forced to suspend operations at this Vernon California based facility in April, and further claims that this development will eliminate about $24 million in projected pre-tax earnings.
Exide has six months to develop an acceptable business plan and nine months to file a restructuring plan that lenders can approve. Exide’s CEO has indicated to business media that there are no current plans to close additional facilities but at that same time, would not rule out layoffs.
Wal-Mart can carry a big stick, especially when a manufacturer becomes a sole supplier of a product category. That stick comes with obvious circumstances without offsetting businesses and customers.
In late March, Supply Chain Matters called our reader’s attention to a rather visible and potentially expensive supply chain related snafu involving Canada based yoga apparel retailer Lululemon Athletica. This retailer was forced to both recall and stop selling its most popular line of yoga pants after discovering that the “sheerness’ of the fabric allowed too much to be seen underneath. The CEO had to publically apologize to customers for the problem. The affected product, which sold for a premium price, accounted for nearly 17 percent of all women’s pants sold by the company. This glitch involved a proprietary signature fabric which is termed Luon which apparently was the center of the quality problem.
This week, roughly three months after this highly visible incident, the company appears to have overcome its crisis, but the fallout has been some leadership changes. Yesterday, Lululemon reported fiscal first quarter 2013 financial results that included a 21 percent increase in revenues but a 10 percent decline income from operations. In the earnings briefing, CEO Christine Day described the recent quarter as “one of the most important in the company’s history.” To Lululemon’s credit, supplies of its Black Luon yoga pants are beginning to be made available but full inventory recovery is not expected until end of the company’s fiscal second quarter.
Day further announced that she has decided to step-down as CEO of the company after over five and one-half years because of personal reasons. Day will stay-on until her successor is in-place. There were also previous reports that a high level product manager had been dismissed shortly after the incident.
During the earnings briefing, executives indicated a new awareness as to the importance of end-to-end supply chain quality control and the running of a tight sourcing operation. CEO Day described that the company has to become an in-depth expert on all of its technical fabric specifications, not relying on suppliers to be the total experts. More tests have been added at the raw material stage and tolerances have been tightened with producing factories. Investments described as $4.5 million are now being made in these areas including the hiring of raw material teams and separate executives to lead both product design and merchandising and supply chain functions. This retailer also described a roadmap involving heavy IT investments that began in 2012 and will continue in the coming months.
It was disclosed that the product recall contributed to a 510 basis point decrease in gross margin due to a $17.5 million write-off of unsellable inventory. Executives stressed that the company will continue to work with a relatively small group of suppliers. Executives also describe a recent labor strike involving a Cambodia based supplier, but stressed that this supplier has been a leader in raising worker wages and benefits.
A more important learning for this retailer has been the loyalty of customers to the brand, in spite of the snafu. Loyal customers apparently applauded the decision to remove poor quality and were willing to wait for the replacement inventory. Executives described a much higher level of web-based inquiry activity by customers, apparently checking status of the quality issue, by a frustration that heightened web activity did not lead to significant web-based sales increases. However, a Wall Street Journal opinion column points out that market competition, specifically the Athleta chain of Gap Inc., is similar in look and feel and undercutting Lululemon on price.
Investors did not seem pleased with the latest earnings and announcements. As we pen this commentary, the Lululemon stock is tracking down by over 16 percent, a significant negative response. The stock had been trading at a level of over 40 times earnings of-late.
More work and additional supply chain leadership efforts remain for this unique retailer but for the time being, brand loyalty and reputation seem to have overcome severe financial fallout from the supply chain snafu. Investors however, are reserving judgement.
In our Supply Chain Matters perceptions of this year’s ranking of the Gartner Top 25 Supply Chains, we noted how pleased it was that Unilever had finally made top-five recognition and how this global consumer goods provider actually garnered the highest score among the Gartner analyst community More than many consumer goods supply chains, Unilever has demonstrated agility in supporting expanded revenue growth tapping emerging global markets and agility in managing its extended value-chains.
The June 10th edition of Fortune provides more evidence of Unilever’s stature as a global supply chain leader. The article paints a broad portrait of CEO Paul Polman, and specifically his charge that sustainability goals will not trump traditional goals such as shareholder return. Fortune declares that Unilever “has gone beyond big U.S. companies like GE, IBM, and Wal-Mart by putting sustainability at the core of its business.” Polman iterated to Fortune: “The essence of the plan is to put society and the challenges facing society in the middle of the business.”
While some may be skeptical of these statements, the business results certainly speak for themselves. Since taking over as CEO, Unilever has increased revenues by 30 percent, made larger penetrations in emerging markets and is giving competitors such as Nestle and P&G a run the money. The article points out that last year, despite the severe economic crisis impacting Europe along with rising commodity costs, Unilever posted record revenues and profits. Its revenues grew in every region while it was successful in reducing the costs.
Unilever translates its passion for sustainability in many phases of its direct consumer marketing as well. Fortune points to one examples of a campaign related to the Axe brand of grooming products that challenges young men to save more water by showering with a friend. Last year the company rolled out a program to begin the rollout of new, climate-friendly ice cream freezers in the U.S.. Ben & Jerry’s ice cream, along with other Unilever ice cream brands like Breyers, Good Humor and Klondike, are to be kept in freezers that use at least 10 percent less energy and replace harmful “F” gas coolants with hydrocarbon (HC) refrigerants.
From a supply chain lens, the company is driving farmers and suppliers to be certified as sustainable or else risk losing Unilever’s business. Unilever’s plan includes 60 targets with targets related to chickens, cows, cocoa, use of paper harvested from manageable forests and consumption of water. Fortune points out that: “Unilever’s sustainable sourcing program is intended to ensure that the company will have access to affordable raw materials as logs as it needs them.”
Of little surprise, Fortune cites that the company is one of the five most-searched-for employers on Linked-In.
Full Disclosure: This author is impressed- I am a current Unilever stockholder.