Wall Street financial analysts and commentators were quick to pounce on Amazon’s recent quarterly earnings announcement.  In the latest quarter (Q4-2011) that included the 2011 holiday buying season, Amazon revenues grew 35 percent, but income was down 57 percent.  Wall Street was very disappointed. Not only were Street analysts anticipating more revenue growth, they have been savage in questioning Amazon’s increased spending and margin erosion.  During the recent quarter, operating expenses were up 38 percent which surpassed quarterly revenue growth.

The other continual topic of speculation revolves around how many Kindle tablets did Amazon really sell during the holiday season.  Supply Chain Matters is just as guilty as others in speculating on the fulfillment wars of Kindle vs. the Barnes and Noble Nook reader, and of course, the largest shadow, Apple’s iPad.  For its part, Amazon remains rather coy in providing very general statements regarding Kindle sales.  The online retailer was quick to point out that Kindle was, by far, the best-selling Amazon holiday product in both the U.S. and Europe. Then again, Amazon visitors were bombarded with constant reminders about Kindle.  While some industry observers and influencers speculate that Kindle sales may have topped six million, the final authority will be Amazon itself.

We all know that Wall Street’s lens on strategy to results centers on the next 90 days vs. a longer-term perspective of market influence.  If all the doom and gloom were taken literally, a short-term investor would have the impression that Amazon executives are spending for the sake of spending.  History, however, provides a far more long term strategy being deployed.

Like the Cheshire Cat, Amazon has a far broader strategy at play and retailers and other online providers had better be paying attention since Amazon is often characterized as the most competitive company ever built.  According to Morgan Stanley: “Amazon is the Wal-Mart of our era but it’s better, in our view — Amazon.com is the combination of technology + logistics company, allowing it to participate in a transition of physical to digital retail supported by store-less (in Seattle) business model that leads to higher long-term economic returns.”

What should concern all is where Amazon is investing.  The latest earnings briefings indicate that Amazon continues to invest heavily in global based sales fulfillment centers.  The online provider has plans to deploy an additional 17 centers on top of the over 40 global fulfillment centers already in-place.  Headcount has increased 67 percent from a year earlier, and Amazon reports that the majority of people investment is in operations and customer support areas. Add physical distribution and logistics to a virtual network of incredible online IT, cloud and customer intelligence data infrastructure, and the evolving business model becomes clear.

While some retailers and online providers elect to outsource physical fulfillment, technology and services under a strategy of lowest-cost provider, Amazon blends strategies and technological capabilities together as an unstoppable force in physical and digital based fulfillment of customer needs.  While some retailers such as Target are becoming more aggressive in product and price differentiation, Amazon can have the ability to leverage each of its tools and capabilities to always be the lowest-cost alternative.

Supply chain senior managers and strategists should heed the long-term game plan of Amazon rather than Wall Street’s convenient short-term outlook.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, All rights reserved.

Supply Chain Matters has previously noted that in these challenging business times, even the best organizational supply chains can experience a snafu.

Procter and Gamble, on just about every influencer’s listing as one of the top rated supply chains, is experiencing an uncharacteristic supply snafu which is gaining wider visibility. The timing is not ideal since P&G recently disappointed Wall Street by reporting a 49 percent drop in quarterly profits (quarter ending Dec. 31), a hefty write-down of previous acquisition costs, and 1600 planned job cuts.  The Wall Street Journal reported that P&G lost market share in a greater portion of its business lines during the past quarter partly because competitors held back on product price increases while P&G raised prices. P&G is now reversing some of these previous price increases.

The supply snafu involves the market introduction of a new branded line of Tide Pods, a capsule blended laundry detergent that was originally planned for market introduction in August of last year.  P&G product management had to push the market entry date to this month, and it now appears that supply constraints may limit how much supply will be available at retail outlets to support a broad product launch.

An article published on the Cincinnati Business Courier web site cites a Deutsche Bank analyst as indicating a second supply delay involving Pods and that P&G is communicating to retailers that constraints will limit supply for shelf displays only, and that off-the-shelf volume promotions should be timed for no sooner than July of this year. Noted was that the “three-chamber unit dose” delivery system for Tide Pods required special manufacturing processes to be developed. A spokesperson for P&G noted: “Unfortunately, we recently experienced unexpected challenges as we ramped-up new manufacturing capacity and processes in mid-November and December. However, we continue to see improvements in the manufacturing processes and are confident we will achieve the manufacturing capacity we expect on Tide Pods.”

An article appearing on AdvertisingAge noted that P&G appeared to have a first-mover advantage in the biggest laundry innovation in 25 years, but these latest supply setbacks provide an opportunity for laundry detergent competitors to launch their own versions of blended product.  That article notes: “A slew of ultra-concentrated detergent “packs” that are slated to hit stores in February are expected to ratchet up marketing outlays in the category by nearly $300 million.” The article also cites an executive at a P&G competitor indicating that “retailers are furious” and that P&G’s sales force is “having to use up chips saying they’re sorry” for changing plans twice in six months.

While competitors will seize on market opportunity, P&G as a leader in global supply chain capability will eventually bounce back and manage this Tide related supply crisis. Articles have also noted that P&G has complete patent protection on this new formulated product. As is often the case, lessons will be learned, especially regarding the alignment of product management, sales, marketing, and global supply planning in new product introduction involving highly complex manufacturing processes. There well may be lessons related to the executive S&OP processes, and in handing competitors an unplanned opportunity to seize on supply constraints.

We suggest that the takeaway for readers is that even the best supply chain teams can stumble, and when it occurs in the public limelight, when disappointing financial news is being communicated the headlines well become magnified.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC, and Supply Chain Matters.  All rights reserved.

In March of 2011, Supply Chain Matters had posted commentary related to high-level executive re-organizations occurring at Johnson and Johnson.  The noted reorganization came in the wake of prior executive re-organization which Supply Chain Matters  commented upon in December 2010.  Each of these prior executive changes was in light of the significant manufacturing quality problems at J&J’s McNeil Healthcare business unit which resulted in multiple product recall incidents that stretch back to 2009.  McNeil’s prime manufacturing facility in Pennsylvania remains temporarily shutdown pending significant multi-million dollar investments in new process control capabilities, and is scheduled to be re-opened this spring.

In December of 2010, Alex Gorsky was given broad responsibility for proactively addressing company-wide initiatives related to manufacturing and supply chain quality while Sheri McCoy was given global oversight of the entire consumer business unit. In March 2011, the McNeill unit in the U.S. was spun-out as a separate organization to be headed by Patrick Mutchler, a 35 year veteran employee who has had a variety of assignments on the consumer business side. These prior subsequent moves were apparently motivated to give more focused attention to quality and compliance needs as well as restoring consumer confidence in J&J consumer brands.  In December 2010 we opined our concern that Gorsky, McCoy and all other responsible executives would have the motivation to put personal competitive instincts aside and come together with a unified plan of action and executive commitment to address significant manufacturing issues.

This week the Wall Street Journal reported (paid subscription required or free metered view) that the  New Brunswick, N.J. health-products giant is now replacing two company group chairmen who held key roles trying to turn around a consumer business.  Patrick Mutchler, the previous tasked head of McNeill North America last April will now retire from the company and his duties will be assumed by Roberto Marques who currently heads the J&J consumer business in North America. Also reported was that Pericles Stamatiades, chief strategist for J&J’s consumer business, is leaving the company. The Journal also quotes a former J&J executive as noting that Vice Chairman Sheri McCoy encouraged the two officials to leave “to bring in some fresh thinking and direction” and fix the unit. There has been no public mention on any changes related to the responsibilities of Alex Gorsky.

A J&J spokesperson is quoted as noting that the consumer business unit “will continue to be operated as a separate, integrated business in order to maintain its focus on quality and compliance, and on the successful reintroduction of OTC medicines in the U.S. market“.   U.S. sales at the McNeil unit plunged to $1.4 billion, from a peak of $3.1 billion in 2008, which is a significant decline and further amplification as to the severity that the quality crisis has had on the consumer business. Also reported was that morale among employees has suffered amid cost-cutting, including additional layoffs of more than 100 people in the U.S. in recent weeks.

While we can only speculate at this point, it would appear that patience for corrective results is running thin across McNeil and the natural speculation is whether these latest executive changes will help to gain more focus and cross-functional accountability for fixing damaged brands and troubled processes. The stated current need for “fresh thinking and direction” was, one would speculate, motivated by either impatience or organizational non-alignment on a framework of action plans required for in-house and supply chain related changes.

The other open question is whether bringing in new leadership and outside thinking last year would have made a more positive impact.  Then again, would any outsider be willing to risk her/his career to solve this crisis, given such an organizational climate and lack of senior executive alignment at the top?

Seeking the help of outside consultants was perhaps another option, but rather than busloads of inexperienced consultants, speedy resolution may well stem from highly seasoned and experienced change agents who completely understand the tenets of integrative operations and supply chain management.

What comes next is an open question. Executive changes while perhaps required, can frustrate the remaining organization as to who is ultimetly in charge and accountable for fixing overall operational and supply chain related quality.

Reader comments are certainly welcomed, private or otherwise.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

Prediction Four in our Supply Chain Matters 2012 Predictions for Global Chains outlines a year of turmoil among three specific industry sectors, one being the Retail and B2C segment. More empowered consumers armed with smarter mobile devices continue to make a profound impact on this industry sector, and the results of these impacts again manifested themselves in the 2011 holiday buying season.  A recent Wall Street Journal article again re-iterated that showrooming is an increasingly bigger problem for retail chains ranging from Best Buy to Barnes and Noble, while at the same time being a boom for online retailers such as Amazon.

Retailers have no choice but to respond with alternative strategies to restore some balance of power and recent announcements from major retailers Target Corporation and JC Penny have provided some initial indicators for alternative strategies being explored.

Target has emphatically stated that it will not allow its brick and mortar stores to be utilized as a showroom that consumers utilize, only to later buy an item at an online site offering the most attractive price. This latest statement is on the heels of a rather disappointing 2011 holiday sales period for this U.S.  major retailer.   The retailer issued an urgent letter to its major suppliers suggesting that special differentiated products be made available only to Target. Where special products could not be made available by suppliers, Target is seeking assistance in matching the lowest available price for that item. While Target has had a history of influencing its suppliers to provide Target exclusive products, this new iteration appears to be an effort to expand this initiative.  In its reporting, the WSJ noted that designated Target suppliers will have little choice but to cooperate with the initiative or run the risk of losing a significant volume customer.

Meanwhile, retailer JC Penny’s new CEO Ron Johnson, who was the former chief of Apple’s retail stores, will unveil this week a sweeping re-alignment of that retailer’s brick and mortar merchandising strategies.  In an effort to make JC Penny stores a destination,  major stores will be partitioned into a variety of specialty shops, with the high traffic center of the store being turned into a “Town Center” hang-out or experience center similar to the Apple “Genius Bar”.  In addition to these physical store changes, the retailer is eliminating most all previous sales markdown efforts in favor of a lower price every day pricing strategy.  Here again, there is a strategy of differentiation among branded goods and making it more difficult for consumers to price shop particular items.

Supply Chain Matters fully anticipates that other big retailers will also follow with differentiation strategies, but the real impact will involve individual suppliers, who after many months of efforts to consolidate overall product offerings, may find themselves under pressures to once again provide product offerings for individual retailers.  That could also have negative inventory connotations.

As more retailers fire more salvos in the war with online providers, the implications cascading across supplier networks could well negate any previous cost and operational efficiencies.  If these same retailers do not invest in supply network efficiencies and more enhanced supplier replenishment initiatives, the overall goal may be for naught.

Bob Ferrari

Once more, Apple has rocked Wall Street and financial media with spectacular fiscal Q1 financial results, again fueled by the company’s supply chain capabilities.  However, with each passing quarter, that supply chain becomes subject to more visibility, not all of which will remain complimentary.

The numbers are staggering even in context to the fact that the quarter included the holiday selling period. They included a 118 percent year-to-year increase in profits amounting to $13.1 billion on sales of $46.3 billion.  There is commentary that Apple could once again overtake Exxon Mobil as the world’s most valuable company in terms of market value. Internationally based sales accounted for 58 percent of the quarter’s revenue indicating the increased tapping of emerging markets as consumers around the world succumb to the Apple experience.

In terms of output volumes, Apple delivered 37 million iPhones and 15.4 million iPads during the quarter, sustaining an average fulfillment volume of over 402 thousand iPhones and over 165 thousand iPads per day. These are volumes that can challenge any global based supply chain. The iPhone 4S is now available in 90 countries across multiple channels. Company executives also admitted that the company struggled to meet demand and could have done better if it could have ramped production. The iPhone was noted as on ‘significant’ backlog at the end of the quarter, and the unavailability of supply has been cited as a cause of rioting at Apple’s new Beijing outlet as consumers and black market profiteers sought new iPhones.

Gross margin was equally impressive growing to 44.7 percent compared with 38.5 percent one year ago. Wall Street has been taken back with the fact that the company generated $16 billion in free cash flow during the quarter, along with a near $100 billion cash balance. In its reporting, the Wall Street Journal made note that Apple not only benefitted from strong demand but also lower component costs, highlighting how the company’s supply chain remains a distinct advantage. Keep in mind that the consumer electronics industry has been dealing with certain supply shortages brought about by the compounding effects of the Japan tsunami and Thailand floods. Apple’s influence over suppliers made its mark and volume remains a considerable influence.

The lens on Apple naturally turns to what comes next and how can it sustain these spectacular results.

For its supply chain, the lens is of course maintaining a steady stream of supply while supporting a new edition of the iPad later this year. As the company’s distribution turns more toward international channels, the risks will increase. Company officials see China as a huge untapped opportunity but the reality of being the most expensive smartphone implies either more prepaid plans and distribution channels or a scaled-down version. The lens on supplier social responsibility policies has also widened considerably.

Supply Chain Matters provided previous commentary related to Apple’s recent release of its 2012 Supplier Social Responsibility Report.  This weekend, New York Times columnists Charles Duhigg and Keith Bradsher penned one of the most revealing articles in our memory concerning the supply chain capabilities of Apple.  The article, How the U.S. Lost Out on IPhone Work, (paid digital subscription or free metered view) extracts observations from former employees and others as to why Apple elects to source all of its major manufacturing operations in China. It describes one incident where 8000 workers at one of Apple’s contract manufacturers were awakened after midnight and started a 12 hour shift fitting last minute re-designed glass screens into frames to support iPhone volume production.

Bottom line, Apple believes that China provides far more speed, flexibilities and far more skills than can be garnered elsewhere, including the U.S. Corning’s CFO is quoted: “The consumer electronics business has become an Asian business. As an American, I worry about that, but there is nothing I can do to stop it.   Asia has become what the U.S. was for the last 40 years.”

The Times article raises some profound conclusions as to the definition of supply chain flexibilities, and we urge our readers to absorb all that is within the article.  Apple employees and management appear to demand total flexibility without regard to the worker ramifications associated with such directives. At the same time, they enjoy the healthy financial benefits in corporate profits, bonuses, and over $2 billion in stock awards. Apple CEO Tim Cook, the architect of the current supply chain received a 2010 compensation package valued at $59 million, while the average Chinese factory worker garners $17 per day. Not many of these Chinese factory workers could afford to buy a new Apple product.

From our perspective, the most profound cited quote came from an unnamed current Apple executive who states that the company does not have an obligation to solve America’s problems, but rather making the best product possible. Having its pile of cash grow even more each quarter only leads to more perceptions of greed and lack of national or social responsibility as U.S. job growth continues to falter.

Readers no doubt are aware of the technology vendor hype concerning the need for supply chain flexibility.  The looking glass into Apple’s supply chain is perhaps revealing a real-world definition.

The Times columnists began their article by citing an event last February and the question that President Barrack Obama posed to Steve Jobs: What would it take to make iPhones in the United States?  We believe that Apple, and all of us in the supply chain community need to think long and hard on that question.

What’s your view? Have countries such as the U.S. any realistic opportunities in closing the supply chain capabilities gaps in consumer electronics and high tech?

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

Supply Chain Matters provides another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains failing to deliver reliable and life-saving supplies to doctors, hospitals and patients. The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments. Readers can reference our previous updates at the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

The latest developments relate to the U.S. Food and Drug Administration (FDA) becoming very concerned about unscrupulous and grey market suppliers taking advantage of the ongoing critical drug shortages. The FDA is now directly warning clinics and healthcare providers to only procure drugs from approved sources both within and external to the U.S… The advisory warns that “In these cases, patients were unknowingly placed at risk when they received medications of uncertain purity, storage, handling, identity, and sourcing.” The FDA also warns that importing these medications from foreign sources is in violation of the Federal Food, Drug, and Cosmetic ACT.

According to a posting by Phil Taylor on Securing Pharma, the FDA has indicated that it is aware of promotions and sales of unapproved injectable cancer medications being distributed direct to U.S. clinics including unapproved sources of AstraZeneca’s Faslodex (fulvestrant), Amgen’s Neupogen (filgrastim) and Roche’s Rituxan (rituximab) and Herception (trastuzumab). The Secure Pharma posting also makes mention of a federal General Accounting Office (GAO) report that concluded that the FDA lacks proper authority to tackle this issue including a means to require drug manufacturers to report actual or potential shortages. The web link provided takes you to a GAO site that notes that the report is no longer available. We found that strange and interesting. Supply Chain Matters feels that the FDA does have some teeth in these matters, but perhaps not all that is required.

The important takeaway is that the prime U.S. regulatory agency has now publically acknowledged that unregulated and uncontrolled sources of these critical drugs have now entered drug and healthcare supply chains and buying authorities must be diligent to not utilize these sources, despite the enormous pressures to secure life-saving supplies of drugs.

We continue to find this state of affairs rather disturbing.  The FDA now has to warn healthcare professionals and their procurement teams to buy only from approved sources and to openly question whether a price sounds too good to be true, that deep discounts may equate to a product that is stolen, counterfeit or unapproved. Procurement teams should and are most certainly attune to this condition.

As this crisis continues into 2012, we believe that there is likely to be a call for pronounced industry efforts directed at traceability and pedigree of drug supplies and the pressure on drug companies to get more serious on supply chain identity and serialization efforts. While the industry may feel that traceability is an expensive or unacceptable alternative, the fact that healthcare providers cannot insure a reliable and safe supply of life-saving drugs could prove to be a far more expensive alternative.

What is your view?  We once again implore industry participants to weigh-in on this important issue.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.