Four weeks ago, Supply Chain Matters called attention to the good news – bad news world of today’s aerospace focused supply chains. We cited a Bloomberg Businessweek report that posed a fundamental question- with over 10,600 firm orders for new commercial aircraft among Airbus and Boeing, when is order backlog too big?
Many of these new and technology laden fuel efficient aircraft orders are destined to support expected explosive Asia focused air travel growth. But, what happens when the CEO of Asia’s fastest-growing discount airline and other airline executives begin to communicate an air of caution. A more recent Bloomberg published report now indicates that Asian aviation guru Tony Fernandes, CEO of AirAsia has cautioned that the jet buying frenzy among Asian based carriers may give way to a more sober approach that reflects the current airline challenges of intense competition, pilot shortages and inadequate infrastructure. That is significant since AirAsia has reportedly 350 in unfilled aircraft orders. The report further quotes senior executives of prominent aircraft lessor firms indicating that there may well be a thinning of order volumes.
Carriers operating across Asia are responding to pressures to sustain 30 to 40 percent growth rates while having to deploy new aircraft on newer routes. Intense competition has raised concerns for overcapacity, especially if marginal airlines start to succumb to faster growing operators. Terminals, runways and air traffic control systems are reportedly not keeping pace with current demands for airline expansion across Asia. Euphoria has made way to the realities of hyper-growth.
The question posed by the January Bloomberg report was that elongated aircraft deployment plans can be impacted by ever changing business conditions motivating some aircraft owners to consider alternative aircraft deployment or deferred procurement strategies. When senior executives of the most influential customer stakeholders for new aircraft orders begin communicating such caution, than supply chains need to be cautious and diligent. Suppliers have a special take since OEM’s continue to practice financial compensation when aircraft are shipped.
We again echo our prior advisory, namely that an enviable industry position awash with order backlog does not condone a business-as-usual focus on product introduction and supply chain management. Rather, dynamic and responsive capacity management, end-to-end value chain intelligence, enhanced supplier collaboration and goal-sharing will all come into play as aerospace supply chains continue to adjust to extraordinary and constantly changing industry dynamics.
General Hospital Has Been Cancelled! – A Need for Renewed Emphasis on Healthcare Supply Chain Management
A Supply Chain Matters Guest Contribution from Rich Sherman
So you think that Obamacare is changing the healthcare industry in the United States? Think again.
It’s just the tip of the iceberg. The healthcare industry is undergoing a fundamental transformation from delivering patient treatments to delivering patient outcomes. And, it’s turning the industry upside down. The television series General Hospital may have celebrated its 50th anniversary last year; but, in real life General Hospital is about to be cancelled.
With the transformation to patient outcomes, healthcare providers simply can’t afford to treat anything generally. Specialty patient outcome centers (SPOC) are emerging throughout the healthcare industry. With nurse practitioners having expanded diagnostic and treatment licensing, general health clinics are appearing in every corner drugstore, 24/7. Emergency treatment and diagnostic centers are emerging in every strip mall. SPOCs, such as oncological, cardiac, ophthalmic, orthopedic, cosmetic, etc. for every ailment are emerging in every city. Quite simply, patient care centers are appearing and proliferating across the country increasing the cost and complexity of healthcare supply chain management as well as operations management in general.
Consider that it is not unusual for supply chain costs to consume 35% or more of the operating budget of a healthcare facility.
Supply chain management is a new term to most hospital and healthcare administrators. Haven’t they got enough on their plate with compliance, reimbursement, Electronic Medical and Healthcare Records (EMR/EHR)? Yet, with the transformation in the industry, administrators have to be more focused on revenue and cost. Effective supply chain management addresses both and healthcare providers have to consider bringing on a new breed of supply chain professionals to their leadership team even to the extent of hiring a Chief Supply Chain Officer. Most other industries are recognizing the significant contribution supply chain excellence makes to the financial health of the organization.
Transforming from materials and procurement management to supply chain management requires a more holistic view of the organization’s operations. Beginning with demand generation, acquiring patients to generate revenue, through demand fulfilment, delivering a successful patient outcome, supply chain management is the support system that enables cost effective, high quality delivery. And, it’s not optional. With the proliferation of patient delivery locations, competition for revenue is heating up. We’re finding more and more of our clients are seeking help in attracting patients just to maintain occupancy and revenue. But, that’s just treating the symptom.
The cure is to be found through providing a successful outcome for operations excellence. Operations excellence requires professional operations management. Medical professionals have to focus on patient outcomes not operational outcomes. This will create a transformation in the leadership structure of many healthcare providers from medical leadership to management leadership. The days of doctor controlled operations are waning. Healthcare providers that are restructuring their organizations for effective supply chain management will lead the way as the industry transformation continues.
General Hospital may be cancelled; but, the requirement for delivering successful patient outcomes will never end.
About the Author: Rich Sherman is an internationally recognized researcher and author on trends and issues across supply chain management. He currently serves as a Principal Essentialist at Trissential LLC in their supply chain consulting practice. His book Supply Chain Transformation: Practical Roadmap for Best Practice Results (Wiley, 2012) has received praise by practitioners, academics, and non-supply chain executives as a great read on business transformation. Rich has been a previous guest contributor to Supply Chain Matters.
We along with other recognized supply chain thought leaders have been raising awareness to the current talent shortages regarding areas of supply chain management, particularly individuals with experience related to linking the introduction of new products and product management with overall supply chain ramp-up and ramp-down deployment needs.
One of globe’s top-ranked supply chains, Apple, has been under considerable pressure of-late because of the perception that its product innovation cycles have slowed and industry competitors are quickly narrowing the gap in surpassing such capabilities.
A newly published report from the Wall Street Journal (paid subscription or free metered view) places a poignant perspective to Apple’s growing need. The report indicates that Apple is in the midst of hiring hundreds of new engineers and supply chain managers across China and Taiwan in its attempts to speed product development and introduce a wider range of innovative products. The report notes that current victims of this hiring blitz include the likes of HTC Corp. and other Taiwanese technology firms. According to the report: “The total number of engineers and (supply chain) operations staff in China now exceeds 600…”
The report further outlines that while core research and development will remain in Cupertino, engineering and supply chain management talent investments within China pale in comparison to those in the United States, implying an ever more expanded presence in China. Further disclosed is that Apple has added contract manufacturers Wistron Corp. and Compal Communications to help produce upcoming versions of iPhones and iPads.
Supply Chain Matters has often commented how Apple’s purchasing clout and volume scale can lock-out smaller high tech and consumer electronics OEM’s from lowest cost pricing and favored supply agreements. With this latest report regarding the current talent seeking hiring spree centered on China, the industry can probably add talent raiding and talent shortages to the impacts of Apple along with its competitors.
Talented and experienced cross-functional supply chain management professionals with experience in new product ramp-up and time-to-market, along with alleviating supply chain choke points are going to be in the catbird seat across global locations, since the talent war seems to be escalating across high-tech supply chains.
Last week, Home Depot named Craig Menear to be its new president of U.S. retail operations, assuming leadership of this retailer’s over 2200 retail outlets.
The Wall Street Journal characterized this appointment as a “transfer of power” and marked the end of the previous rebuilding era for Home Depot, including investment in a more streamlined and responsive supply chain capability which Supply Chain Matters has praised.
This appointment is part of the home improvement retailer’s succession planning, paving the way for the eventual retirement of current CEO Frank Blake whose leadership has done wonders for the retailer’s current stock performance. The WSJ, cites in-part, Blake’s achievements as the following: “He ushered in a huge overhaul of the company’s supply chain and technology systems, spending billions of dollars to make its operations more efficient and move more workers out of the back rooms and onto its sales floor.”
Menear previous role was head of merchandising, responsible not only for the assortment and pricing of all Home Depot products but also its suppliers, supply chain and online operations. In essence, if this succession plan comes to pass, we will have another CEO with operations, supply chain and procurement leadership as a part of their resume.
What makes this development more interesting to our community is that Blake’s leadership efforts included the hiring of a new cadre of supply chain management leaders. That included the hiring of Mark Holifield, a highly experienced retail and consumer products supply chain leader. The new appointment of Menear as president of retail operations includes the elevation of Holifield to the role of executive vice president supply chain and product development, reporting to Menear. Another executive brought in to transform U.S. distribution was Charles Armstrong, vice-president of distribution, who has outlined the transformation of Home Depot’s distribution networks at prior CSCMP annual conferences.
It has long been the contention of Supply Chain Matters that companies with critical value-chain dependencies are increasingly seeking senior management teams with solid grounding and understanding in principles of operations and supply chain management. These firms often desire that the supply chain continues to serve as a competitive differentiator for business outcomes. There are many industry examples. We can reflect on the CEO’s if firms such as Apple, McCormack Foods, and global apparel retailer Zara, part of Spain’s Inditex Group. Each came to their role with solid supply chain wide leadership experience and grounding. There are others as well.
The takeaway for those future leaders aspiring for a path to the top leadership role within an industry with critical value-chain dependencies is that focusing your career in cross-functional supply chain leadership can indeed be favored over backgrounds in solely financial management or sales, marketing or merchandising. Responsive product lifecycle management is an added experience differentiator, especially when coupled to integration to value-chain needs.
These trends continue to reinforce how important responsive and resilient supply chain business processes, supported by differentiated enabling information technology capabilities, are becoming paths to the top. While some in supply chain leadership may feel, at-time, unappreciated, your experience and insights really do matter.
Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.
This week, general, business and social media as abuzz with the announcement that electric automobile maker Telsa Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory” capable of supplying up to 500,000 electric vehicles per year. This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost. The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored. The area of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Telsa’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.
According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.
Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.
Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.
From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States. It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.
Investors seem also impressed since Telsa stock has shot-up since the announcement.
Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.
In B2C supply chain environments, the term “Amazon Effect” has particular meaning, mostly all of which revolves around how to best compete against this online juggernaut. Sometimes, tactics can get a bit nasty, with strong gestures sent, even if it involves one of the most prominent collections of global brands. The field of competition has become much more acute.
Readers can recall that back in October, news leaked out that Amazon is partnering with global consumer product goods producer Procter & Gamble in an ambitious pilot program termed Vendor Flex that involved Amazon co-locating its online pick and pack customer fulfillment of bulk consumer goods such as diapers or household staples directly within a P&G distribution center. Goods literally move across the aisle from P&G to Amazon fulfillment.
Today’s edition of the Wall Street Journal provides additional information (paid subscription or free metered view) concerning the immediate response from one particular retailer, Target Stores, who happens to be a preferred customer partner to P&G. The WSJ quotes sources familiar with the situation as indicating: “Several months ago, the discount chain started to give some P&G products less-prominent placement in stores, including less space on “end-caps”- the coveted shelves where featured items are highly visible to shoppers and tend to sell quickly ….” Target additionally removed some P&G brands from their “category captain” status, and encouraged P&G competitors to work together on offering promotions on combined purchases.
The WSJ was quick to point out that its sources indicated the dispute among P&G and Target has since de-escalated with P&G products returning to their end-cap status and preferred status.
From our view, the recent credit card security breach that impacted Target removed Target’s clout, and perhaps the tables are turned.
None the less, this report gives us evidence that CPG companies who collaborate closely with Amazon can sometimes bear the chagrin from other influential brick-and-mortar retailers and that ugly tactics exist when it comes to competing with Amazon.
Would your company dare to take on a key partner who collaborates closely with Amazon?