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A Statement That Evokes Special Concerns and Actions Within Retail Supply Chains

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Earlier this week, Sears Holdings, operator of Sears and Kmart branded retail stores in issuing what is termed a “going-concern” warning to the company’s investors, evoked special, and added concerns among its supply chain partners. In its annual report, the retailer indicated “substantial doubt exists related to the company’s ability to continue as a going concern.”

That message alone precipitated a 12 percent selloff in the company’s stock on the news of this statement.

The retailer’s CFO moved to calm the waters in a blog post that indicated that such a disclosure was in line with new FASB regulatory reporting requirements and did not reflect management’s expectations for the near-term health of its business operations. Declared was that “We (Sears Holdings) are a viable business that can meet its financial and other obligations for the forseseeable future.”

Unfortunately, this week’s required statement will cause other reactions and added concerns.

After several years of cumulative billion dollar operating losses coupled with selling off valued real estate and associated branded businesses such as Lands End, Sears Hardware Stores and the Craftman’s tool brand itself to compensate for operating losses and maintain working capital needs, landlords, suppliers, services provider and indeed, consumers, will make individual judgements.

Any of our readers who have experienced similar types of financially strained environments can well relate to how quickly the supply chain begins to respond to financially concerning news regarding a key customer’s ability to pay debts. They do so because in retail, suppliers take on a considerable burden in inventory ownership and elongated payments for such inventory. Recent actual bankruptcy declarations from other retailers such as Sports Authority in 2016, had certain suppliers scrambling to recover existing consigned inventory located in actual stores. The controlling private equity owners of that retail chain filed lawsuits with more than 160 suppliers challenging supplier claims to consigned inventories. According to reports at the time, upwards of $85 million in shoes and other gear that were on the shelves in retail stores were contested. The supplier lawsuits were a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. Courts subsequently ruled in favor of some supplier claims.

In an October 2016 blog posting, we called Supply Chain Matters reader attention to Jakks Pacific, the fifth largest designer and marketer of toys and consumer products featuring a wide range of popular branded products and children’s toy licenses, announcing the suspension of supplying products to retailer Kmart. The stated reason was concerns related to the financial health of the retail chain and to minimize risks of not being paid for inventory. Yesterday, a published report by Reuters indicates that suppliers are doubling down on defensive measures including reducing unit shipments, asking for better, or up-front payment terms or refusing to accept expanded volume orders. In one example cited, a Bangladesh apparel firm, working on production needs for the 2017 holiday period later this year, has already scaled-back production lines working on Sears orders. Insurance companies that once provided policies to Sears vendors to protect for nonpayment are no longer doing so.

Suppliers become very concerned and word spreads to transportation and logistics providers supporting a financially distressed retailer. Inventory, and inventory movement becomes static or disrupted.  If readers have had the opportunity to visit a Sears store recently, as we have, you may have noticed that holiday merchandise such as jewelry and shoes from the past holiday season remains in stores, yet to move off the shelves, despite markdowns.

And so, it goes in a cascading sequence of events.

Sears Holdings may indeed have a viable plan to mitigate and resolve its latest warning, but that plan needs to address managing the effects among its retail supply chain.

In the end, consumers and shoppers will serve as the ultimate judge and make their own judgements regarding Sears and Kmart. Obviously, the financial numbers would indicate that some consumers have turned elsewhere.

Suppliers and trading partners should not be faulted for protecting their own financial interests, especially in light of today’s retail industry environment of consumer’s permanent shifts towards online buying. Bankruptcy declarations among retailers have taken yet another toll since the 2016 holiday period.

Once or twice burned, the new word for suppliers vigilant and protective to self-needs.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Additional Report Indicating Apple to Begin Manufacturing iPhones in India

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In late January, Supply Chain Matters called attention to a published report by The Wall Street Journal, citing local government sources, indicating that global smartphone and consumer electronics provider Apple was nearing a deal to manufacture its products locally in India.  The Wall Street Journal is now reporting (Paid subscription required) that production could begin in a matter of 4-6 weeks.  Apple Logo

This latest update indicates that Taiwanese contract manufacturing services provider Wistron will likely manage local manufacturing of iPhone6 and 6S smartphones from an existing production facility located in Bangalore. The facility will add production on the entry level SE model in three months, according to this report. An Apple spokesperson acknowledged to the WSJ that the company was working hard to deploy operations in the country but declined to elaborate further.

The latest report brings forth added information implying that a broader manufacturing and supply chain strategy may be at-play for Apple, one that is different than the January report.  Noted is that the company is discussing with Indian government officials on its additional desires to add various smartphone component manufacturers into India as well to support final assembly as well as export of finished products to other countries. The previous indication was that component parts would be imported from China and the United States. The January report indicated that specific Apple requests included concessions related to tax and tariff exemptions, including a 15-year tax holiday on imports of components and equipment. A new reference is made to Apple CEO Tim Cook’s recent call with analysts where a statement was made that the company intends to invest significantly in India.

From our lens, this added information implies potential moves toward a new segmented supply chain strategy that can possibly reduce the overall production costs for certain iPhone models, making them more price affordable for emerging Asian based consumers. It further implies a shift from a sole dependence on a China-centric supply chain and manufacturing value-added strategy.

With a reported 2 percent of existing market-share within India, Apple has a long way to go to penetrate the second largest consumer smartphone market beyond China.

We do raise a cautionary note however, since most the current information is emanating from state or local government officials as opposed to the government itself. That implies that a lot of back and forth discussions remain in terms of overall cost and regulatory concessions to be granted by the government, not to mention any additional political fallout to existing manufacturers in the country.

As we opined in January, if local, and now, perhaps export based manufacturing of Apple products were to be formally announced, we suspected a reaction emanating from the Twitter account of U.S. President Donald Trump. It’s no secret that Trump has Apple in his crosshairs because of the presence of a large number of Apple’s manufacturing employees throughout China. Not to mention that Apple is the most highly watched supply chain among Wall Street investors and consumers themselves.

Thus, perhaps there will not be any formal government of Apple announcements, not until all the components of the evolving manufacturing and supply chain strategy fall into place.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


The Implications of Brexit Grow Near but So Far for Industry Supply Chains

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In a published Supply Chain Matters commentary in late June of last year, we explored our initial perspectives of the new term in geopolitical events, that of Brexit. By voting to exit the European Union, the British electorate set off a series of events that many continue to describe as unprecedented.  The most cited analogy remains- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the United Kingdom, but on the EU alliance itself if other select countries take a similar course.

On Monday, Britain’s ambassador to the European Union informed European Council President Donald Tusk that his country would trigger Article 50 of the Lisbon Treaty, the formal mechanism seeking withdrawal, on March 29, a week from today. That starts the clock in a rather complex, two-year window of negotiations between Britain and the 27 other EU member nations and the European Parliament leading to the actual exit. Tusk has asked EU leaders, minus the UK, to meet on April 29 to begin discussions relative to the guidelines for Britain’s exit. In a statement, Mr. Tusk indicated that the main priority for the upcoming negotiations is to create as much certainty and clarity as possible for all citizens, countries, and member states. Supply Chain Matters could certainly suggest adding clarity to industry supply chains to Mr. Tusk’s statement.

Business and broad media all point to the start of some of the most complex negotiations either side has undertaken, with many issues to resolve over the next two years. They include trade and tariff, border security and the movement of goods.

Since the announcement of the results of the referendum, the pound sterling has had a somewhat steady decline in relation to its value with the Euro and the U.S. Dollar. As a rather positive consequence has been increased attraction of British goods among domestic and global markets.  Broad supply chain activity, as reflected by the CIPS UK Manufacturing Index, reached a significantly high value of 56.1 at the end of December, with the report noting that rates of growth in production and new orders were among the best observed over the past two-and-one-half years. Since December, this index has moderated slightly to 55.9 in January, and 54.6 in February, both reflecting healthy activity. Thus, in the short-term, the UK has garnered supply chain economic benefit related to Brexit.

The open question is course, the longer-term picture.

Entering the triggering of Article 50, British Prime Minister Theresa May has advocated for a “clean” break from the EU. She has threatened to walk away from negotiations if Britain did not get the trade deals it was seeking or if the EU tried to impose punitive measures.  She has further indicated that the UK could cut corporate taxes, loosen regulations, and could have a free trade deal with the EU that would include tariff-free access. British media including the Financial Times have interpreted such a stance as to indicate that Britain could transform itself into the low-tax Singapore of the west.  Such declarations appear to not set well with established EU countries.

Thus, a lot will transpire over the coming months and industry supply chain strategies will have find ways to navigate such a geopolitical environment. Most observers tend to believe that new trade agreements between both parties cannot be realistically negotiated and ratified by over 30 various parliaments in two years’ time. In fact, Mrs. May has indicated that the entire body of EU laws will be copied onto British statutes, and then over time modified by negotiation events and outcomes. The Economist noted in its editorials that it has recently taken nearly seven years to secure Canada’s free-trade deal with the EU.

As noted in our original commentary, two major industries dominating UK based manufacturing are automotive and the aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing. Two of the most dominant stakeholder brands of autos are Volkswagen and Tata Motors, followed by Nissan and Toyota. According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. As indicated in our 2017 predictions, the aerospace industry itself is believed to be reaching a 15-20 year inflection point, one that will be quite different from the past boom years of upwards of 10 year customer order backlogs.

No doubt, the invoking of Article 50 begins a period of discernable uncertainty among specific industry supply chains, related to access to key markets, financial goal performance, engineering, manufacturing, and overall talent capability.

A lot can and undoubtedly will occur, since in today’s clock speed of global business, two years can be a rather long-time, perhaps reflecting a new wave of geopolitical and technology change.

So goes this global environment of uncertainty, implications that seem near but yet so far.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Zara Unveils a Strategy to Embrace and Integrate Physical and Online Presence

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Many analysts and academics in our supply chain world often point to Inditex SA and its fashion and apparel retail brand Zara as the iconic benchmark in retail supply chain agility. It seems that despite the many iteration of retail apparel industry challenges, this fast fashion focused retailer continues to demonstrate a resiliency to changing economic conditions or online buying trends.  Today, Zara is cited as the world’s largest fashion retailer.  121202_ZR_460 Oxford_Shooting

It should therefore be no surprise that Zara continues to provide the content basis for many business case studies related to demonstrating a and industry-leading systemic integration of fashion retail business strategy with consistently admired agile supply chain response practices.

Thus, retail supply chain industry focused readers should take note to last week’s unveiling of Zara’s newest flagship store in the retailer’s hometown of La Coruna Spain. The store, sized at 54,000-square-feet and spanning over five stories, will replace five other existing smaller footprint stores, and will reportedly serve as the model for Zara flagships around the globe. The apparel retailer is now transitioning to a new strategy to meet the challenge of the Omni-channel focused online fashion consumer.

In a press conference held last week, Inditex Chairman Pablo Isla declared that Inditex seeks “full integration of the brick-and-mortar stores and online businesses, with store openings that are increasingly more relevant.” According to a published report by The Wall Street Journal, the 2017 strategy calls for the opening of between 450-500 new larger retail stores that will merchandise a full range of apparel, while consolidating 150-200 existing smaller sized stores.

The larger stores are being designed to allow consumers the opportunity to browse broader fashion and apparel offerings while also embracing online capabilities, allowing the ability for shoppers to either buy in-store or order online with the assistance of sales clerks. Online order pickup or return of purchases can be exercised at the retail store as-well.

Despite a rather difficult year in retail, this retailer’s latest report of financial performance established a new record of nearly $25 billion in revenues with a 10 increase in profitability.

As noted in our 2017 industry-specific predictions for the retail industry, we observed that the implications of permanent reductions in physical foot traffic have taken a toll on traditional mall-based retailers and department stores. While well-known broad-line retailers such as Macys are undertaking additional store closings, Zara once again has a different strategy emphasizing larger, more integrated stores to appeal to the Omni-channel consumer, supported by one of the retail industry’s most responsive supply chain response capabilities.  As noted in our prediction, the physical retail store is now the virtual online store, and that brick and mortar stores are the one advantage that differentiates retailers in their ability to offer more timely fashion from that of Amazon and Alibaba.

Obviously, consumers will be the ultimate determinant for the success of Zara’s new strategy.  A successful record of accomplishment up to now provides evidence leaning toward success.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


What’s Behind Intel’s Intent to Acquire Automotive Technology Provider Mobileye?

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In November of 2016, Supply Chain Matters called attention to the building trend of high profile technology and semiconductor firms beginning to position themselves in automotive supply chains mostly via market acquisitions. This week provided further evidence of this strategy with the headline that semiconductor giant Intel will acquire advanced vision and driver assistance technology provider Mobileye for an estimated $15.3 billion.

As noted in our prior commentary, the strategic stakes involve which company and which advanced technologies will ultimately control and benefit from the movement of more advanced technology being embedded into automobiles, trucks, and other vehicles. Last year, fabless semiconductor and cellular tech provider Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media, and audio functions. Qualcomm was willing to pay a hefty sum, upwards of $39 billion, a 34 percent premium in existing NXP stock value, to gain entry into automotive technology value-chain needs. Samsung recently closed on its deal, the largest deal in the company’s history, on the acquisition of electronic components supplier Harmon International in an $8 billion all-cash deal. The deal again had the intent to gain deeper access to the automotive product value-chain, marrying Samsung’s technology based capabilities in mobile communications, electronic displays, memory chip and microprocessors with Harmon’s evolving capabilities to support connected vehicle and lifestyle audio product innovation.

In Intel’s case, the semiconductor and microprocessor provider was willing to pay a 34 percent premium over Mobileye’s closing share price at the time on the announcement. This Israeli-based technology firm, founded 20 years ago, at the Hebrew University of Jerusalem, develops the sensors and artificial intelligence that allow a vehicle’s on-board computer to know the context of where the vehicle is in relation to other vehicles and surroundings. Mobileye recently reported revenues of just over $358 million with net income of $108.4 million.

Our readers may recall that in July of last year, Mobileye elected to drop Tesla as a customer, and according to news reports at the time, the cause was attributed to “disagreements about how the technology was deployed.” Earlier in May, a fatal crash involving a Model S operating on semiautonomous mode autopilot control had reportedly motivated the decision to drop Tesla at contract renewal time because this supplier wanted more control as to how its camera technology would be operationally deployed. Tesla has since indicated that its autopilot system will rely more on its radar sensors and advanced software to detect obstacles, rather than the forward-facing camera. That decision impacted Tesla’s production cadence in Q4, requiring a huge spike of production in December to make customer delivery commitments.

According to Mobileye, the company’s technology is installed in more than 15.7 million vehicles globally, and includes relationships with 21 automotive brands including General Motors, Honda, and Volkswagen AG.

In statements regarding the acquisition, Intel CEO Brain Krzanich indicated to investors; “You can think of the car as a server on wheels.” In an internal note to employees, regarding the acquisition, the CEO indicated: “The saying ‘what’s under the hood’ will increasingly refer to computing, not horsepower.”

Indeed, that is how tech companies now view automotive value-chains, providing intelligent transportation services with lots and lots of on-board technology and autonomous decision-making.

According to reports, after the completion of the acquisition, Mobileye’s development and operations will remain headquartered in Israel and led by the company’s co-founder, chairmen and CTO, Amon Shashua.

As noted in our prior November commentary, when a major new technology trend emerges, innovators can try to capitalize on the trend by creating and fostering a consumer product or service, or by creating the tools and technologies (the product supply and value-chain) that both enables and controls the intellectual property of the consumer product or service.  Like the California gold rush analogy, you can either make money in providing the service to multitudes of consumers or in supplying all the pick axes and supplies needed to mine for gold. This is the analogy now emerging among today’s global automotive supply chains and there continues to be big money and large technology stakes at-play.

Who knows what the names of key automotive suppliers and brands will be over the next five years. Your shiny new auto or SUV made have an “Intel Inside” emblem on its dashboard. An automobile, a truck or a municipal bus could morph to an on-call or on-demand transportation services business controlled by a lots of embedded dat and technology.

One thing is certain, the march of technology continues to impact all forms of traditional industries and their supply relationships.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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