Yesterday, the National Labor Relations Board (NLRB) in the U.S. handed down a ruling that will present significant implications for supply chain logistics, warehousing and customer fulfillment services providers.
In a narrow, 3-2 decision, the NLRB revised the “joint employer” standard for determining when one company shares responsibility for employees hired by another. This ruling applies to the use of contract workers and temporary employees where a hiring agency assumes responsibility for recruiting temporary employees, and those same employees are managed by another firm.
Business media headlines have been quick to cite the impact to fast-food, construction, and service industries but the ruling, if upheld, will have similar dramatic effect across industry supply chains.
The nature of supply chain activity is its constant operational ebbs and flows timed to either end-of-month, end-of-quarter or seasonal fulfillment activities. Large customer fulfillment centers managed by the likes of Amazon, Wal-Mart and others, include significant numbers of temporary workers brought in to support volume surges, especially in the October thru December holiday fulfillment period. Similarly, warehousing, transportation and third-party logistics (3PL) firms utilize temporary workers. It has been a means to leverage a flex workforce to manage overall costs. Companies generally share decision-making on employment, hiring and dismissal. But, in some cases, policies for the use of temporary workers have broached into other dimensions.
As one example, during the U.S. West Coast port disruption that severely impacted so many industry supply chains last year, independent truckers servicing these ports, who were compensated by number of loads completed, were especially vocal in expressing grievances for not being adequately compensated for the enormous amount idle time spent in long queues entering West Coast ports. Similarly, while West Coast Longshoremen were able to negotiate a new five-year contract, independent truckers remain with the same grievances and have conducted wildcat work stoppages.
The NLRB is now more concerned on the meaningful impacts to workers concerning working conditions, and worker rights to bargain with all responsible parties that determine working conditions and benefits. According to business media reports, the NLRB, with its latest ruling, will now consider whether a business exercises control through an intermediary or has the right to do so.
The ruling has triggered new concerns and emotions by businesses that the NLRB is making it easier for temporary workers to organize and join labor unions.
Industry groups are already urging the U.S. Congress to overrule the labor board ruling, and with the U.S. Presidential nomination season underway, what transpires is anyone’s guess.
Whether you agree or disagree with this ruling, the implication, if upheld, is especially significant and will change the labor cost and work policy scenarios related to temporary and flex workforce needs, an essential for many industry supply chains.
The Renaissance of Available-to-Promise Capability to Support Retail and Online Omni-Channel Fulfillment
Supply Chin Matters has featured prior commentaries exploring the supply chain impacts of Omni-channel and online customer fulfillment for retail supply chains. Such impacts are many, but one of the more important relates to the needs for efficient overall inventory management while exceeding more demanding customer fulfillment and satisfaction needs.
In B2C retail, and in online B2B, inventory investment has a major impact on margin and profitability, and Omni-channel strategies that allow customers different fulfillment options can cause havoc with the proper balance of inventory.
Consumers increasingly prefer to buy online, and at the same time, seek flexibility to either have their orders ship direct, or pick-up or return in a local retail store or outlet. This new paradigm is why so many Omni-channel retailers are seriously re-visiting inventory management strategies. Some are building dedicated online customer fulfillment centers to directly support online order volumes while allocating separate inventory to support brick and mortar retail needs. Other Omni-channel retailers have rightfully determined that the same inventory has to be efficiently managed to support fulfillment needs across all channels. This changes the role of the brick and mortar store to be an added node within the fulfillment network with the ability to support in-store pick and pack.
Within this increased retail business challenge, available-to-promise capability (ATP) has taken on a new significance as a key capability to assist in more efficient and responsive inventory management. As Supply Chain Matters sponsor JDA Software describes it, ATP is experiencing a new renaissance.
Last week, The Wall Street Journal provided further evidence of the business importance of efficient inventory management. In the article, Retailers See Gains in Serving E-Commerce Supply Chains (Paid subscription or free metered view), the WSJ reports that while retailers view online shopping as a boon to sales, it can provide a drag on profits especially in the light of parallel delivery networks. Some retailers, however, may be on the way toward figuring out the logistics and profitability potential of Omni-channel. Examples cited was that Home Depot which grew online sales 25 percent in the second quarter while improving overall logistics, including higher efficiencies in its distribution network. Target, grew online sales 30 percent and reported a small increase in margins.
Last week, Supply Chain Matters contrasted the financial results and supply chain strategies of Wal-Mart and Target. Wal-Mart’s financial results were perceived by Wall Street as disappointing. To address Omni-channel, the global retailer is currently implementing a new inventory management system. That strategy includes shifting inventory to regional and dedicated customer fulfillment centers, rather than from the retail store backrooms. That would allow the flexibility to meet both online and in-store demand from a distribution center centric inventory strategy. The downside is a de-emphasis of the retail store as a fulfillment node and a greater potential for stock-outs at retail store locations as online orders consume available inventory.
Target on the other hand, has recently demonstrated improving financial results, but at the same time has been candid to Wall Street that balancing inventory across its network and leveraging resources at store level are an integral part of strategy. Senior management candidly admitted that in-stocks within physical stores have been unacceptable so far this year, but a newly appointed role of Chief Operations Officer will have as an initial priority, beefing up the capabilities and responsiveness of the supply chain. Target’s strategy includes the retail store as a direct fulfillment node. Thus far the retailer’s is shipping online orders direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target senior management further noted that an important enablement of ship-from-store will be will be testing and deployment of a new ATP system that provides specific online customer delivery commitments.
On JDA Software’s Supply Chain Nation blog, Kelly Thomas writes on the renaissance of: Order Promising and Demand Shaping in a Segmented, Omni-Channel World. Thomas observes that ATP married with demand shaping provides an increasing number of fulfillment options as well a means to determine profitability profiles for fulfillment channels. It provides a basis in making the most informed decision on the source of inventory for a given customer order line and the pick-up or delivery location of the online customer.
Rightfully noted is that nearly 20 years ago, elements of what is today JDA Software (i2 Technologies) pioneered and patented allocated-driven ATP functionality for discrete manufacturing and other industry supply chain environments. Today’s JDA Order Promiser application is now being applied to the evolving needs of Omni-channel retailers for facilitating more responsive online fulfillment as well as improved inventory investment and bottom-line profitability.
The technology has come a long way and has found new meaning in more efficiently managing inventory in a B2C and B2B Omni-channel world.
Disclosure: JDA Software is one of other current sponsors of the Supply Chain Matters blog.
There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)
As far back as 2011, this analyst began to share observations on a growing reality of a changed model of contract manufacturing services (CMS) among high tech and consumer electronics supply chains. The reasons were obvious five years ago, and far more obvious today. The ability to continually experience a mere one to two percent in operating margins, regardless of volume scale, was unsustainable in a strategic window. Once more, with direct labor costs increasing in major manufacturing hubs across China and other areas, and with technology cycles changing more quickly, the need for constant capital infusion in investments in the newest technologies and automation further requires an increased return for such investments. Remember that the CMS model evolved from a need by OEM’s to avoid the need to invest in manufacturing assets and process automation.
CMS firms such as Hon Hai Precision (Foxconn Technology) have been steadily executing a diversification strategy. In the case of Foxconn, the world’s largest contract manufacturer, it includes entry into consumer component and electronics, as well as service sectors serving China’s and greater Asia’s growing middle class. In our last published Supply Chain Matters commentary, we highlighted a report that Hon Hai may well be on the verge of a tie-in with Sharp’s LCD flat screen unit, opening the door for broader high tech value chain integration.
We now call reader attention to this week’s edition of Bloomberg BusinessWeek, that includes the article: The Foxconn of Bathroom Scales. This article describes how Flextronics, now renamed Flex, after spending in excess of 40 years as a low-margin CMS, is re-making itself as a leading manufacturer in a new ecosystem Internet Of Things (IoT) enabled products.
The article astutely observes: “Building stuff for startups and non-tech companies is a lot more profitable than trying to satisfy giants such as Apple and Cisco, which have squeezed contract manufacturers’ margins to 2 percent.”
Flex’s mission is to become to go-to manufacturer for connected products. That would include products ranging from sneaker mounted wireless charges, clothing embedded with sensors that monitor all sorts of body functions, to driverless farm equipment or smart shelves for retail outlets. Its Innovation unit has opened 23 R&D labs where startups and up and coming companies can work with designers and utilize 3D printers and manufacturing equipment to develop new product prototypes. Flex’s design teams have created a library of 130 reusable component designs to help start-up companies to develop IoT related products more quickly and move these products to volume manufacturing and/or service needs.
Bloomberg observes that Flex’s business is growing with clients such as Ford, Fitbit, Johnson & Johnson, and Whirlpool, but perhaps not fast enough to avoid getting crushed by other large manufacturers. The report ends with a quote from a consultant: “If you aren’t getting 50 percent of your revenues outside of traditional electronics, please contact us, and we’ll help you liquidate your assets.”
While a rather blunt and self-serving statement, it does reflect that the traditional CMS model within the high-tech industry will change.
CMS providers have no choice but to move their services models either further up the electronics value-chain, within our consumer service areas, or virtual engineering and manufacturing support and services in areas beyond today’s traditional consumer electronics areas.
For the CMS sector, change is a definite factor. The question will be which firm makes the most successful transition. Meanwhile, high-tech OEM buyers and strategic sourcing teams should best be thinking of the consequences, and the implications.
Our high tech and consumer electronics supply chain readers may recall that Japan’s Sharp Corp., and specifically its LCD screen business unit has had months of financial struggle. One of the important significant factors related to Sharp is that it serves as one of the four Liquid Crystal Display (LCD) and flat panel screen suppliers to Apple, including screen supplier for the iPhone. Sharp has had a track record of innovation in LCD technology but a rather rocky financial history as well
This week, Reuters is reporting that its informed sources indicate that tie-up talks involving contract manufacturer Hon Hai Precision (aka Foxconn Technology) are now in-progress. The Financial Times also published a similar report. Hon Hai declined any request for comment by Reuters and FT.
Initial talks between Hon Hai and Sharp actually began in 2011, after both firms had established a joint technology partnership. In 2012, there were many business and social media reports indicating that Hon Hai was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp. A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component strategies would cede to Hon Hai. The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.
During that same period, Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. together merged their money-losing small LCD display operations to form a single company, Japan Display, backed by $2.6 billion of funding from Innovation Network Corp. of Japan, a government backed agency. Japan Display is currently another of the LCD component suppliers to Apple, and the combined operations and infusion of significant new capital likely cemented that relationship.
According to this week’s Reuters report, the latest proposed tie-up would spin-off Sharp’s display unit and possibly includes additional cash injections from other outside entities such as the state-directed Innovation Network Corp.
The two firms continue to jointly operate the advanced large LCD production facility located in Western Japan.
Interesting enough, in 2012, Apple rival Samsung opted to provide a $110 million lifeline investment for Sharp. The deal was reported to provide Samsung with a 3 percent stake, along with gaining access to leading-edge IGZO display and other technology. Business media reports at the time speculated that Samsung’s investment was an attempt to stem Apple’s strategic influence on Sharp.
In late June, Supply Chain Matters called attention to a published report from The Wall Street Journal indicating that Sharp senior management had struck a last-minute deal with the firm’s bankers to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included exiting the North American television market and a 10 percent workforce reduction. Also noted were the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cited data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through mid-year.
This legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. Product OEM’s such as Apple and others demand the latest breakthroughs in technology and more automated manufacturing processes, in return for orders representing volume scale. However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for constant capital becomes paramount. That may be the legacy of Sharp’s LCD unit.
If this reported tie-up were to occur, it would provide another significant milestone in Hon Hai’s prior strategic plan to move away from a sole focus on the slim margins of contract manufacturing, and more towards a supply chain vertically integrated high-tech and consumer products manufacturer that can control multiple key component supply tiers.
This week’s edition of Bloomberg BusinessWeek features a timely but sober update indicating that: Things Are About to Get Ugly at Kraft.
Not only does this report indicate that change is already already underway for Kraft, it provides more sobering indicators of expected erosion in other associated industry business and supply chain capabilities in the months to come.
We are Supply Chain Matters have featured a number of commentaries related to Kraft and its associated supply chain capabilities since our inception in 2008. That includes its split in 2012 into two separate companies, Kraft and Mondelez International. We have done so because of our belief that this global CPG giant was a true barometer of the significant market and industry forces impacting what is increasingly being termed as “Big Food” today.
In 2009, Irene Rosenfeld, the CEO of Kraft at that time, indicated to The Wall Street Journal that “scale is a source of great competitive advantage” in terms of industry growth and innovation. That motivation probably led to the acquisition of Cadbury. Eighteen months later, Ms. Rosenfeld, along with Wall Street partners, orchestrated a massive corporate split, carving out Mondelez as a $30 billion focused snacks company with the most attractive prospects for global growth, particularly in emerging consumer markets.
The $18 billion North America focused grocery brands business was to be Kraft Foods which literally was forced to develop its own separate supply chain and business support systems.
Prior to the split, Kraft corporate had reportedly invested $700 million in a global rollout of a singular SAP ERP system. All of the assumptions that made-up that implementation suddenly changed.
This corporate split further implied two different supply chain business support and distribution models. Snack food and cookie consumers are impulse buyers, with promotions, market timing and inventory deployment strategies requiring sophistication and proper timing. The distribution model is focused on higher touch including direct to store service needs of convenience stores and smaller retail, particularly when emerging consumer markets are considered. Grocery, on the other hand, was a model of conservative sales growth but high scale and distribution volume. Much of the grocery customer base was large supermarkets, with emerging penetration among smaller retail and convenience stores. Grocery implied a high dependency on vendor managed inventory and responsive replenishment business replenishment. We again bring these tenets out, because they provide more context as to what existed and to what is now occurring.
In September of 2013, we praised the positive transformation and new leadership that was underway at split Kraft Foods. Former Procter & Gamble supply chain executive Bob Gorski was recruited to lead a dramatic transformation. In an industry conference presentation we viewed at the time, Gorski described product demand and supply processes touching literally 60 different times with little effect on forecast accuracy. Supply chain wide metrics were at odds with individual plant and functional metrics, some in direct conflict. There was a lack of a fixed execution planning window with 60 percent of plan changes occurring in the execution window. Production lines, on average, were forced to shutdown every 4 minutes because of various maintenance or setup issues due to inconsistent process specifications. Gorski articulated a goal as moving from metrics in isolation to metrics as part of a performance culture. Oh yes, adding to the challenge was a need for Kraft grocery to adopt a new supply chain software support system and more responsive technology enabled decision-making.
In March of this year, the industry was taken back with the news that H.J. Heinz would merge with Kraft Foods in a combined public company that was named Kraft Heinz Company. It creates what is anticipated to be the world’s third largest food and fifth largest beverage company featuring many well-known consumer brands. This deal was backed by infamous private equity firm 3G Capital Partners, and the financing of Warren Buffet’s Berkshire Hathaway, which each contributed $5 billion in financing. Together, bot investors own 51 percent of outstanding equity.
The latest Bloomberg article essentially opines that in the end, the Kraft-Heinz deal has little to do with market growth and a lot to do with cutting costs. That includes targeting an additional $1.5 billion reduction in annual costs before 2018 and according to the article: “The company will lose employees, whole levels of management, and maybe a few brands, too.” It cites as a reference a February 2015 McKinsey report which describes 3G Capital’s strategy as acquiring marquee brands that need operational improvement, and then “purging existing culture and management teams” while employing zero-based budgeting techniques requiring departments to justify every expenditure, and squeezing suppliers for similar cost savings. McKinsey noted that Heinz itself has since its takeover, lost market share in 65 percent of its product categories, yet adjusted earnings have risen nearly 38 percent.
Bloomberg cites data indicating that with the prior Heinz merger, 90 percent of the senior executive team departed within three weeks and more than 7000 jobs, 20 percent of the then existing workforce was cut, along with closing of five factories. Thus far, after closing the Kraft-Heinz deal last month, 2500 job cuts have been announced including more than a third of the existing staffing at Kraft corporate headquarters. Further announced was that Kraft headquarters will be move from a 700,000 square foot complex of a Chicago suburb to a 170,000 square foot office in downtown Chicago. Travel has been restricted, conferences have been put on-hold and employees instructed to print double-sided.
To reinforce an overall industry concern, Bloomberg reminds us that Nestle Chairman Peter Brabeck-Letmathe had indicated earlier this year that Buffet and 3G have: “pulverized the food industry market, particularly in America, with serial acquisitions.” The Nestle executive additionally indicated that 3G’s “ruthless cost-cutting’, to improve profit margins has had a “revolutionary impact” on other food companies.
Parallel Impact- Mondelez
Today’s Business and Finance section of The Wall Street Journal features an updated report on Mondelez’s efforts at expanding market growth while attempting to reduce costs and improve margins. It observes that a second high-profile activist investor, William Ackman and his Pershing Square Capital Management firm revealed that it had built a $5.5 billion, 7.5 percent stake in the company, and cites sources as indicating a Pershing view that the snacks producer must cut costs significantly or sell itself to a rival. Activist Nelson Peltz of Train Fund Management joined the Mondelez Board in 2014 after a six month conflicting public debate on company strategy.
In emerging markets which currently account for 40 percent of existing Mondelez revenues, the company’s margins reportedly trail those of several rivals. The global snacks company has now reportedly engaged Accenture to implement zero-based budgeting techniques and a sweeping reorganization plan that is closing older factories in the U.S. and opening more efficient ones in lower-cost regions such as Mexico and Russia. The WSJ cites other equity analysts as engaging in debate as to whether the Nabisco brand use of direct-store delivery (DSD) in the U.S. should be curtailed or replaced for a lower-cost alternative.
Impact to Industry Supply Chain Capability
A fundamental belief in supply chain management is that supply chains exist to service customer needs and support required business strategic and tactical outcomes.
As activist actions continue to drive “Big Food” into modes of acute efficiency, cost-cutting and continued break-up and consolidation, the impact to supply chains invariable becomes destructive, risking the obliteration of previous gains in service, product quality, sustainability and process responsiveness. Once more, the tenets of supplier based product and process innovation are subsumed by other tactics to wring out additional cost reductions or more onerous payment terms.
While business and other industry media can for-tell of the pending ugliness that is circling Kraft, and perhaps Mondelez in the not too distant future, industry “Big-Food” supply chains risk a significant erosion of prior process, technology and other transformational gains as zero-based budgeting and wholesale cost-reduction efforts sap the energy of survivors. More importantly, the real objective for providing consumers with healthier, more sustainable food choices becomes subservient to an overriding short-term emphasis on increased margins and stockholder returns.
Hence is the legacy of activism, short-term results and the rest being damned. In the analogy of the wild kingdom, the weak in the herd are overtaken by predators, and soon the predators begin to overtake even the strong, as stamina is weakened.
One final editorial note: Our house has switched to French’s Ketchup. It is noted as free from high fructose corn syrup, artificial flavoring and preservatives and has a great taste. Hopefully, brands that have been around from the 1900’s will not succumb to the current madness surrounding “Big Food” and the wonton destruction of previous supply chain transformation initiatives, commitment to quality and commitment to talent and people development.