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Pending Transportation Industry Disruption Will Require Industry Supply Chain Management Attention

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Looking back at the 2015 holiday fulfillment period, there were two significant supply chain and Omni-channel fulfillment trends that made their presence. These trends will continue to unfold in 2016 and beyond with significant implications for industry supply chains.

The first was Amazon, and from a number of dimensions. As noted in our Supply Chain Matters commentary earlier this month reflecting on the online retailer’s latest financial performance, Amazon will increasingly play an industry disruptor role in 2016 and beyond.  Certain sectors of B2C / B2B online fulfillment, parcel logistics and transportation are ripe for process innovation facilitated by more innovative Cloud-based technology. We believe that Amazon is showing all of the tendencies to be that disruptor and existing industry players should be prepared. Just like Amazon Web Services (AWS) provided a new model for utility based information technology services, Fulfilled by Amazon will continue to be the next disruption. Yesterday, a report published by Bloomberg reinforced this disruptor trend in its headline: Amazon Building Global Delivery Business to Take On Alibaba. The article discloses a far bolder plan originally conceived in 2013 that outlines an aggressive global expansion of Fulfillment By Amazon services that includes a global delivery network capability that controls the flow of goods from factories in China and India to customer doorsteps throughout the world. A profound statement included in the report was: “The ambitious strategy promises to turn FedEx and UPS into Amazon rivals, but also pit the Seattle giant against Chinese counterpart Alibaba Group Holding Ltd.” The report goes on to describe a strategy that places Amazon at the center of a logistics capability that today controls legions of middlemen who handle transnational world trade, and is ripe for a new model. Through its control of large amounts of online volumes, the online retailer can acquire transportation and logistics capability at lower wholesale rates while transforming Fulfilled by Amazon into a virtual online fulfillment and delivery services platform.

The second compelling trend reinforces the first in some respects. This week, the United States Postal Service (USPS) reported its financial performance for the holiday quarter and recorded its first quarterly profit since 2011, earning $307 million  Included in this reporting was a compelling statistic. During the 2015 holiday period, the USPS surpassed UPS in total delivered packages.  Letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. In contrast, UPS reportedly delivered 612 million packages as compared to its initial forecast of 630 million. The postal agency offered the equivalent of as many as 25,000 Sunday delivery routes, up from a normal 4000 pattern.  In essence, the USPS became a go-to carrier for Amazon’s needs for Sunday deliveries.

Just before the start of the 2015 holiday fulfillment period, Supply Chain Matters railed on both FedEx and UPS regarding their announced added rate hikes for both 2015 and 2016. Our commentary reflected on whether both global parcel logistics and delivery carriers were inching closer toward upsetting the “golden goose” of their current growth strategies, that being their participation in the boom in online B2B/B2C fulfillment. We opined that these pricing scenarios threatened Free Shipping options for online consumers and opened the door for new industry disruptors, either larger online retailers, or other transportation and parcel services providers to serve as an alternative parcel delivery mechanism in 2016 and beyond. Our belief was that retailers would have to find alternative methods to leverage localized inventory. If readers had not guessed at the time, we had Fulfilled by Amazon in-mind.

Earlier this month, UPS reported its financial performance and the Wall Street headline was a near tripling of reported profits. Deliveries to consumers accounted for roughly 60 percent of all U.S. deliveries, up from 45 percent in the prior quarter. Why, because 35 percent of Sure Post packages were transferred back into the UPS network. UPS executives set upbeat expectations for 2016 including a potential 5 to 9 percent increase in earnings per share.

As B2B customers and B2C consumers are now aware, during the 2015 holiday quarter it was a lot more expensive to ship parcels via the traditional parcel carriers, and ground delivery times were extended to compensate for lower overall amounts of temporary workers. Fuel surcharges remained in-effect despite unprecedented reductions in the current cost of gasoline, diesel and jet fuel. The USPS in-essence became the go-to carrier for shipping options while UPS and, to some extent, FedEx networks struggled to manage peak volumes.

We now believe that both outlined trends are indeed the prelude to pending disruption. Established parcel delivery firms have elected a strategy that will preserve profitability. Amazon is moving aggressively forward with its far reaching Fulfilled (and Shipped) by Amazon strategic plan. Alibaba will not sit idle and indeed is working on broader elements of global logistics and fulfillment capabilities that stretch beyond China. The third-party logistics sector is already undergoing merger and acquisition activity and, as Amazon’s plans continue to unfold, international freight and small package brokerage will be under attack.

Online fulfillment events are changing rapidly and there are definitive signs of pending industry disruption.

Industry supply chain teams need to pay closer attention to these evolving trends, especially those residing in small or up and coming businesses or in organizations that ship a large amount of packages.  If your business has a growing online presence, you know how compelling a Free Shipping option is to online consumer’s motivation to buy.

Up to now, it was more attractive from an overall cost and resources perspective to outsource customer fulfillment to an established logistics provider. There is now a cost vice underway that is setting the stage for change and it is important to understand the short and longer-term implications and be able to inform and navigate the business through pending changes.

Now, more than ever, industry supply chain teams need to have the tools and capabilities to be able to quantify and model total customer fulfillment costs under various channel options. It is no longer an option to assume that an online presence is the sole key to growth. Rather, online is a compelling opportunity that comes with its own set of unique profitability challenges. Supply chain teams must be prepared to avoid being the scapegoat for not educating lines of business on cost vulnerabilities or cost saving opportunities.

For our part, Supply Chain Matters will continue with our market education and advisory efforts since there are, by our lens,  few independent and objective voices concerning logistics and transportation.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Chipotle’s Consumer Trust Crisis Enters a New Critical Phase

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In mid-December, Supply Chain Matters published our commentary: How Events Can Change in a Matter of Months- Time for Chipotle to Openly Demonstrate Resolve. In our posting, we outlined from a supply chain lens the crisis that Chipotle Mexican Grill was involved in after hundreds of consumers were sickened by a series of varying incidents ranging from E-coli outbreaks to norovirus that date back to last summer.   Chipotle logo

In our commentary, we declared what most consumers and general media have since concluded that Chipotle needed to rebuild trust in its brand and in its restaurant and supply chain food handling practices. We called for, among other actions, a temporary nationwide suspension of all outlets to perform top to bottom cleaning and rigorous employee training at each and every Chipotle outlet.

Yesterday, all Chipotle restaurants were closed for four hours during traditional lunchtime hours in order for all employees to participate in a company-wide meeting concerning food safety.

Thanks for listening.

According to reports, yesterday’s company-wide meeting included a briefing addressing the improved “farm to fork” food safety efforts that are being implemented, an announcement of paid sick leave to insure that sick employees stay home when they are ill, and a series of changes related to food preparation practices and protocols. There are a host of new protocols being implemented to include more preparation of food at central kitchens, DNA based testing of supply chain ingredients before being shipped to restaurants and new ways of marinating meats. In essence, Chipotle has little choice but to revert to a model of more centralized food supply chain control to restore trust and added food safety for the chain’s brand. Further announced was $10 million set aside to help smaller local farmers meet the restaurant chain’s new food safety standards and protocols.

The U.S. Centers for Disease Control (CDC) concluded its investigation of the recent nationwide E-coli outbreak last week without any conclusive findings.  That was not good for the restaurant chain since it leaves consumers with additional doubts. The Wall Street Journal recently reported that behind the scenes, Chipotle disagreed with health officials on the likely source of the infection.  While officials suspected some form of produce, Chipotle concluded it was imported Australian beef that must have been contaminated. But that does not fully explain the outbreaks not related to E-Coli infection.

The economic cost of Chipotle’s food crisis has also become far more visible. Sales at existing restaurants fell 14.6 percent in the fourth quarter while stock has fallen more than 25 percent in value since October. New costs incurred to mitigate food safety risks are yet to be totally quantified. This is yet more current day evidence that a supply chain focused disruption or snafu does and will directly affect both shareholder and brand value.

This crisis remains ongoing and Chipotle must now convince it’s once loyal customers that it serves safe food with integrity.

This author recently conducted an interview with Chloe Demrovsky, Executive Director at Disaster Recovery Institute International (DRI), a noted foremost authority on business continuity and risk management. Our interview generally touched upon a trend toward lack of consumer trust in food related supply chains which has been come about from a new resurgence of food, drug and other related product recalls or food safety incidents.  While discussing the implications of these trends on food supply chains, we could not avoid discussing the ongoing Chipotle situation.

Ms. Demrovsky stressed how important and difficult it can be to restore consumer trust in a brand once it has tainted by unfortunate incidents. She also reminded me of how important it is for businesses to have business continuity and supply chain disruption plans in-place before any crisis occurs. We both touched upon business media reports that are concluding that for the past few months, Chipotle has been playing defense, trying to respond to one report after another. Any organization, especially those associated with food, needs to be prepared as to how to respond, and how to protect consumers and the brand when a major snafu or incident occurs. In helping companies with business continuity planning, DRI advocates a thorough risk assessment that includes both internal and external dimensions, coupled with a business impact analysis as cause and effect impact.

Consumer trust is hard won, but also hard to get back when consumers believe that trust has been violated. Consulting firm Deloitte recently partnered with the Food Marketing Institute and the Grocery Manufacturers Association (GMA) on a recent survey of 5000 consumers nationwide regarding food buying decisions.  One of the stated conclusions of this survey was that consumers not only want toxin and pathogen-free food but also more transparency from food producers and retailers about food safety. Another stated finding of this survey was that consumers want accountability and transparency across the entire food supply chain. Other food safety concerns identified by respondents included clear information on ingredients and sourcing, clear and accurate labeling, added visibility to the nutritional content of food.

Chipotle management is now planning to launch an extensive nationwide marketing plan to convince consumers that Chipotle outlets will be the “safest restaurant to eat at” and that the chain’s goal is to reduce risk of another infection outbreak “as near zero as possible.” The Wall Street Journal recently disclosed (Paid subscription required) an interview with a former Chipotle operations executive. According to that executive, Chipotle’s stated mission of “food with integrity” was always the prime emphasis, and when translated to supplier management; “they’d never talk about food safety. It doesn’t mean it wasn’t checked, but the discussion was always about the story behind the supplier and keeping up with growth.

A director of the University of Georgia’s Center for Food Safety indicated to The Wall Street Journal that claiming the risk of another outbreak is near zero is: “really going out on a limb.”

We concur.

Supply chain risk mitigation is not a marketing exercise, it is rather a comprehensive plan addressing area of supply risk, internal process shortfalls or vulnerabilities, and action plans to resolve such risks.

We would instead offer one further recommendation to Chipotle. That would be weekly and monthly management updates on progress obtained in the mitigation of food safety risks both within each and every restaurant and within the supply chain. That is not marketing but rather management’s efforts to continually inform consumers as well as shareholders on what is being done and how progress is being measured and achieved. Restoring consumer trust in a badly damaged brand is not a marketing challenge. Now is the time for straight talk not marketing spin.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Report That Ford is Planning to Double Production Capacity in Mexico- The Political Dimensions Become More Prominent

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In August of 2014, we initially alerted our Supply Chain Matters readers to the growing attractiveness of Mexico as a North America based Manufacturing and export hub for the global automotive industry. At the time, automotive OEM’s BMW, Honda, Kia Motors, Mazda, Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. That process has continued. Today, The Wall Street Journal reported that Ford Motor Co. has plans to more than double its Mexico based production capacity by 2018. The decision, if confirmed, has many further implications from many dimensions, including the political dimension.

As we observed in 2014, Mexico’s attraction stems from two strategic considerations.  The first is to serve as an alternative global manufacturing region in the context of lower direct labor costs as well as to offset global currency impacts. The second is serving as a hub of automotive exports to serve both North America and other global markets because of the former considerations.

Citing informed sources, today’s WSJ report indicates that Ford will build an entirely new assembly plant in Mexico as well as expand capacity of a current facility. The new assembly complex is expected to be built in San Luis Potosi with an annual capacity for as many as 350,000 vehicles per year. A separate expansion is being planned for Ford’s Cuautitlan production facility near Mexico City, which will reportedly augment production capacity for an additional 150,000 vehicles annually. Total invested cost is noted as $1 billion, on top of the $2.5 billion in investment that Ford announced last year concerning a new engine and transmission production facility.

As for models being considered for Mexico production sourcing, the WSJ indicates the current Ford Focus is scheduled to transfer production from a U.S. facility in Michigan within the next two years to make room for more profitable truck based vehicles. Two other new models are being planned for Mexico, one being termed as an all new hybrid car designed to compete with Toyota’s Prius hybrid. Ford already produces two other midsized sedans in Mexico. The WSJ views Ford’s product strategy as having higher margin product models such as SUV’s and pick-up trucks sourced in U.S. plants under labor union contracts, with lower margin models sourced in Mexico and other foreign countries.

The WSJ report’s editorial reflects that Ford’s latest moves are indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raises direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates are indicated as being one-fifth that of unionized workers in the U.S.

Ford itself refused to comment on both the WSJ report as well as its editorial related to offsetting direct labor costs.

Speculation that Ford was considering an increased manufacturing presence in Mexico has been cited among certain candidates in the U.S. Presidential election cycle, and not in a positive manner. The politics of such a decision are ripe given that certain U.S. states with unionized workers will vote in presidential primaries over the remainder of this year, and states like Michigan, Ohio and Illinois have influence in delegate and Electoral College voting. Presidential Republican candidates such as Donald Trump while democratic candidates Bernie Sanders and Hillary Clinton echo the fears of more jobs being lost to Mexico and other countries. Then there is the rhetoric in Republican ranks of building higher walls on the U.S. and Mexico borders to stem illegal immigration and protecting jobs.

As our Supply Chain Matters readership is well aware, major production sourcing decisions have broader implications, the need for many dependent suppliers to also increase their sourcing presence to supply production in Mexico.   This is especially important in automotive supply chains that are mostly driven from just-in-time production and inventory movement methodologies. The greater the investment presence in a single country, the more value-chain presence occurs, adding to more investment.

The Trans Pacific Partnership Agreement when and if ratified, will provide even more implications to multi-industry global sourcing strategies, especially automotive. No doubt it well heightens more political discourse on job creation or job loss among North America countries. Mexico itself threw a monkey wrench in ongoing talks hoping to preserve the current automotive sourcing investment wave and to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S.  Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free.

Mexico recently overtook Japan to become the second-largest exporter of vehicles to the U.S. The WSJ report cites data from LMC Automotive indicating that auto factories in Mexico produced 3.4 million vehicles in 2015, about one-fight of all North America production.

U.S. and other global-wide political leaders, whether current or aspiring, should be concerned with such global supply chain strategic sourcing decisions. This latest WSJ report cites Mexico’s economy minister as indicating that there will be several other significant automotive industry investments announced in the not too distant future.

The obvious takeaway is that in the current period of trending reflecting global manufacturing recession and consequent heightened concerns for global trade and local economies, strategic sourcing decisions will take on heightened political dimensions, and such an environment transcends quantitative data such as direct labor and landed costs. Beyond analytics, quantification and spreadsheets are the politics of jobs and economic security, which are taking on far more concern.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.  All rights reserved.


A Tour of Healthcare Supply Chain Innovation in Action

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According to a 2015 survey of hospital executives commissioned by Cardinal Health, services reimbursement followed closely by the increasingly higher costs of supplies are two of the biggest challenges facing these executives. Financial issues, drug shortages and efficiency of the overall organization follow as major concerns.

One can notice a common theme among hospital executives that are often directly related to lack of supply chain efficiencies.

A 2015 white paper, 10 Barriers to Effective Inventory Management, points to the continued need for addressing barriers to effective supply chain and inventory management in hospital settings.  This is especially important in operating room or cardiac catheterization settings where medical devices are expensive and inventory management policies often stem from individual physician or surgeon relationships with individual device manufacturers. Cardinal’s white paper cites one report as indicating that supply chain inefficiency, waste and lack of visibility result in a $5 billion in inefficiencies each year in the implantable device market alone.

In operating room settings, surgeons, scrub technicians, resource nurses or operating room managers assume responsibility for maintaining relationships with manufacturers of implantable devices. They do so to insure access to the latest technology and patient safety innovations as well as surgeon preferences for certain devices. In emergency surgery situations, adequate inventory takes on an all-important life and death dimension, one that must be supported by accurate data related to demand incidence.

These complex relationships often extend to rendering orders and managing inventory. The result can often lead to lack of visibility of existing inventory in terms of expired, obsolete or recalled devices. There are also miscommunications and emotion among clinicians and hospital procurement professionals as to inventory exposure and cost. This is an area that has long been fertile for improvements in inventory management, particularly in advanced methods of item-level tracking.

As a major healthcare products distributor for hospitals and health care providers, Cardinal Health is working with hospitals in availability of more innovative inventory management practices in this area.

In November, this author had the opportunity to visit the Cardinal Health Healthcare Supply Chain Innovation Lab located in Concord Massachusetts.  This is essentially an R&D facility dedicated to reducing waste in the health care supply chain for implantable devices utilizing an Internet of Things (IoT) item-level technology approach. The lab serves as a hub to explore innovative technology approaches such as smart sensors and near-field communications (NFC) in addressing healthcare supply chain product demand and supply inefficiencies.

At the conclusion of the tour and a comprehensive briefing from Jean-Claude Saghbini, Cardinal Vice President and GM for Inventory Management Solutions, this author was impressed.

My impressions stemmed not only from the leveraging of advanced technology to challenging healthcare focused inventory management process needs, but in the notion that healthcare supply chains as a whole, and we as healthcare consumers, can greatly benefit from the application of such technology.

Cardinal’s approach to inventory management is described as product agnostic and can include devices not distributed by Cardinal.  The initial focus on medical, orthopedic and implantable device inventory is obvious, in that this inventory is expensive and as noted above, there has been a long history of process inefficiency. While surgeons strive to be up-to-date with the latest in medical technology, their concerns should not be inventory and supply chain management.  That is the purview of hospital administration.

We observed RFID enabled storage cabinets where inventory is RFID tagged by either suppliers or hospital teams. Storage cabinets constantly monitor item-level inventory including serialized devices.  An operating room nurse or physician removes an item from the cabinet and inventory status is immediately adjusted. Within the OR setting, a nurse scans a bar code affixed to the patient and the inventory transaction is  RFID Smart Cabinets for Hospitals automatically updated to include association with a patient.  If the item withdrawn is not accompanied by a patient scan, an inventory alert is generated.

Cabinets monitor and report inventory balances at prescribed intervals and can automatically generate replenishment orders when inventories drop to prescribed levels. If one particular hospital does not have a particular implantable device on-hand, a quick search of other networked cabinets quickly indicates which nearby or healthcare network hospitals have the specific device. The process works similarly for consignment inventory placed adjacent to operating rooms, helping hospital administration to control premium inventory costs.

Analytics associated with this automated process that are available to hospital administrators include open and completed inventory withdrawals, device consumption patterns to calculate replenishment thresholds, inventory nearing shelf-life expiration, inventory subject to product recall, or data needed to ascertain opportunities for specific device standardization.   RFID tag 250-87

Physicians and care givers can also take advantage of embedded analytics in searching for specific devices implanted in patients by serial number, or in queries related to historic procedures, or proper item stocking levels based on actual consumption data.

The value-proposition of Cardinal’s approach is that technology allows care givers more opportunities to better concentrate on patient care and patient outcomes, removing the administrative burden of inventory management. Hospital administrators and procurement team’s in-turn gain valuable efficiencies and inventory knowledge to help in improving overall efficiencies.

This author remains convinced that healthcare product suppliers, product distributors, hospitals and caregivers must continue to come together to collaboratively address the chronic inefficiencies of today’s healthcare supply chains. The visit to Cardinal’s Healthcare Supply Chain Innovation Lab and the exchange of ideas with staff convinces me that today’s advanced supply chain item-level and IoT focused technology can and will provide significant strides in overcoming such inefficiencies.

As our blog nameplate connotes, supply chains do matter in many industry settings and in healthcare supply chains, the opportunities for increased efficiencies and process innovation are vast.

Bob Ferrari


General Electric Declares a Pivotal Year and a Look into its Future

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General Electric recently announced its fourth quarter and full 2015 financial results and made it a point to call attention to its new GE Digital business unit. It did so because GE’s bold goal is to be a top 10 software company by 2020. In its press and media outreach, GE declared that GE Digital accomplished $5 billion in 2015 revenues with anticipation of far more growth in the coming years.

This relatively new GE Digital business segment was formally launched in November after a series of internal re-alignments. The unit brings together all of GE’s digitally focused and Industrial Internet capabilities under a single business focus. This includes GE’s Software Center, the company’s global IT and commercial software teams along with cyber security teams.

The underlying mission of this business is to make intelligent machines and connected industrial equipment as an emerging reality. GE is of the belief that the Industrial Internet could add $10 to $15 trillion to the global economy over the next 20 years. This includes aircraft engines that can self-diagnose operating performance, alert to pending operating maintenance needs and automatically order required repair components.  Railroad locomotives that can communicate onboard diagnostics, train operating conditions and train rail car composition. Data can be analyzed across fleets of similar equipment providing design engineers timely performance information while fleet owners have the ability to optimize operating assets.

GE executives are quick to differentiate Smart Machines and Industrial Internet from Internet of Things (IoT). The latter GE views as more consumer market focused. The Head of GE Digital, Bill Ruh, states in a recent blog post: “There’s a difference between running a smart thermostat in your house and controlling a power plant. We work in mission critical environments.”

Some in today’s broader tech world of IoT may take issue with GE’s succinct differentiation of consumer vs. industrial facing connected devices. Suffice to point out that the opportunities are indeed enormous for both dimensions. However, by our lens, it is rather important to differentiate the different scale, scope and function of needs for both, especially in the data security and scalability dimensions of industrial applications.

GE has indeed been a pathfinder in the notion of connected machines and is now beginning to harvest the financial and market benefits for being an early innovator.  From its longstanding industrial roots, the company can surely grasp the notions of what is required for mission critical operating environments.

Other industrial manufacturing and enterprise software providers will surely escalate their commitment to intelligent machines and by 2020, there may well be a different software provider landscape with competitive dynamics. What we term IoT today become more differentiated and more succinct in application. As with all prior tech revolution, there will be winners, laggards and market casualties.

The good news, however, is that bringing the physical and digital aspects of supply chain information and decision-making together are no longer a distant vision, but within the realm of a five-year goal.


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