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Delivering on Customer Promises in both Automotive and Retail Industries

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At the Council of Supply Chain Management Professionals (CSCMP) Annual Conference held in late September, this author had the pleasurable opportunity to moderate two very informative panel discussions. These sessions were jointly sponsored by The Washington Post and Ryder Inc.

Panel One: How a refreshed distribution strategy revs up savings in the automotive industry, featured Steven Crowthers, Director of Distribution North America, FRAM Filtration, and J Steven Sensing, President, Global Supply Chain Solutions, Ryder System, Inc. Our discussion touched upon several challenges impacting automotive supply chains today, the impact of on-line, Omni-channel commerce.

Panel Two was titled: Is it possible to achieve high touch deliverables with lower costs?, featured Abhinav Shukla, Senior Vice President and Chief Operating Officer, True Value Company along with John Diez, President of Dedicated Transportation Solutions, Ryder System, Inc. This panel focused on how a traditional retailer is meeting the challenges of online commerce, particularly in relationship to transportation and inventory replenishment needs.

The videos recorded for both panel discussions are now available and can be viewed by clicking on this Washington Post Brand Studio web link.

 

As a reminder, if your organization is in need of noted and knowledgeable speaker or interactive panel facilitator please check out our speaker services web page.

Bob Ferrari, Founder and Executive Editor

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


Why More High Profile Technology Players Want to Position Themselves in Automotive Supply Chains

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There continues to be significant merger, acquisition and strategic product development activity involving automotive supply chains and the stakes involve which company and which advanced technologies will ultimately control and benefit from the movement of more technology being embedded into automobiles.

If readers have not been up to speed with industry focused news, two recent major acquisitions add more evidence to this movement and to the pending battle between OEM manufacturers, transportation service providers and certain major supply partners as to whom will benefit the most from the ongoing technology wave.

In late October, fabless semiconductor manufacturer 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 is paying 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. The announcement represented one of the largest semiconductor related acquisitions to-date. With this proposed new arrangement, Qualcomm brings its own technology strengths in mobile cellular communications technologies along with an evolving thrust into Internet of Things based capabilities.

Earlier this week came the announcement from Samsung regarding its intent to acquire electronic components supplier Harmon International for a reported $8 billion all-cash deal. This deal represents Samsung’s largest deal in its history and is no doubt motivated by strategic intents to gain deeper access to the automotive product value-chain.  Here again, the deal has similar indicators of 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. Harmon has already secured a reported $24 billion in order backlog from major automotive OEM’s.

In a prior automotive supply chain commentary, we called reader attention to a Bloomberg Businessweek report titled: The Foxconn of the Auto Industry, that indicates that Tier One supplier Magna has taken more proactive actions to position itself as the contract manufacturer of choice for self-driving vehicles. The premise is that if Apple, Google, Uber or other technology focused firms want to manufacture a self-driving vehicle than Magna may well remain as the first step as the design and manufacturing outsourcing option, freeing up resources of the automotive or transportation services provider to concentrate on a software and managed services business model. For Magna, the premise of its current strategy is twofold.  First, there is a belief that in the coming five years, the core of product design expertise and IP for hybrid or electric powered self-driving vehicles will rest in software and services, rather than automotive component design such as bodies, engines and transmissions. Second, the contract manufacturing industry itself is moving more towards a one-stop shop for product design as well as more automated manufacturing processes including additive manufacturing techniques. Such a shift allows contract manufacturers to broaden their margins while increasing a presence up and down the automotive value-chain.

Obviously, major global automotive manufacturers are not inclined to ignore technology forces and consumer desires for more connected and more safety oriented automobiles. Collectively they each are sinking serious investments into either developing their own advanced technologies or teaming-up with other advanced technology providers such as Apple, Google, Microsoft and others to gain added footholds in these technologies.

From our lens, the vulnerability of some OEM’s rests with supply chain strategy decisions undertaken several years ago, when conscious decisions were made to transfer product innovation of major automotive sub-systems to Tier One or Two suppliers. That strategy afforded OEM’s the flexibility to be able to select from various competing product designs, take advantage of quicker time-to-market, and to be able to maintain buying leverage among key suppliers. Indeed, these strategies have yielded faster product innovation cycles in vehicle safety and control systems, connected cars and navigation systems.

As consumers opt for even more fuel efficient and autonomous type vehicles that serve as both satisfying needs for transportation and another source of entertainment and content, the industry picture takes on a different perspective. Fleets of connected vehicles, leveraging mobile and IoT technologies among such connected vehicles, opens the opportunities for a contract manufacturing strategy that affords new transportation services providers such as Uber, Lyft and perhaps other automotive OEM’s, to be able to directly contract or build autonomous driving fleets.

For automotive OEM’s themselves the strategy has to focus on maintaining brand loyalty and a unique driving experience. That implies continuing to provide consumers with both driving and entertainment technology innovation, marrying modular sub-system hardware, software and respective vehicle platform capabilities with a far faster overall innovation timetable may well be outpacing the OEM’s themselves because industry disruptors may now rest within product value chains themselves.

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 is big money and large technology stakes at-play.

Where these forces converge is indeed worth observing in the months and tears to come. Industry participants all along the supply chain should nor be surprised by other new entrants as well.  Indeed, automotive and high-tech supply chains are merging, and that includes cultures of fast innovation in products, coopetition in processes and in value-chain strategies. Future supply chain sourcing strategy decisions will surely be grounded in deeper knowledge of technology capabilities and overall scope of supplier.

Bob Ferrari

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


Revisiting Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains- Part Three

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While industry supply chain teams continue to work on achieving 2016 year-end strategic, tactical, operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of the year.

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.

As has been our custom, our scoring process is based on a four-point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.  Supply Chain Matters Blog

In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.

In our Part Two posting, we revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.

In this Part Three commentary, we will revisit each of our industry-specific supply chain predictions.

For reader awareness: this posting is much longer than our typical blog postings but we felt it would not be appropriate to break-up the various industry sectors. You can scan the industry sub-headings if an industry update captures your interest.

 

2016 Prediction Five: Noted Supply Chain Industry-Specific Challenges

Each year when we publish our annual predictions, we often include a specific prediction addressing what we feel will be industry-specific challenges that are likely to dominate business and media headlines in the year.  For 2016, we predicted challenges remaining in B2C Online Retail, Commercial Aerospace, Consumer Product Goods (CPG) and Automotive industry sectors.  We added a further 2016 industry challenge, that being current efforts to deploy more sustainable and health conscious agriculture and food based supply chains.

B2C Online Retail

Self-Rating: 3.8 (Max Score 4.0)

We once again included the prediction of continued challenges in the B2C online fulfillment sector for several reasons. First, industry CEO’s were openly admitting that online trends provided one of the most challenging eras for the retail industry, with impacts ranging from merchandising, organizational and supply chain process and technology dimensions. Second, the byproduct of the late 2014 U.S. West Coast port disruption significantly impacted retailer bottom lines, that has obviously carried over as a challenge for better planning of inventories and expected volumes. Finally, there was the ongoing threat of Amazon, and what actions Amazon would take to impact online retail even more. The Amazon Effect continues to fuel online consumer expectations for faster delivery and instant gratification with little patience for shipment delays or lack of up-to-date information.

As the 2015 holiday fulfillment season, winded down, one important trend became crystal clear for 2016, more and more additional consumers have opted for online shopping.  That reality was evident after the Black FridayCyber Monday weekend, and it continued right up until the 2015 Christmas holiday. Forecasting firm ChannelAdvisor indicated that online sales in the period of November 26 thru December 20 rose nearly 12 percent over 2014. Another takeaway for retailers as a result of the 2015 holiday period was the reality of the higher costs for inventory, distribution and order fulfillment to support online channels.

By mid-December 2015, reports began to reinforce that online orders were far more than originally anticipated with major parcel transportation provider FedEx and UPS networks falling behind in delivery commitments. Despite the best efforts, technology and forecasting tools, both parcel carrier networks were strained at various points, the former being impacted just before the Christmas holiday by supposedly severe winter storms. Some FedEx employees volunteered to work the holiday to get packages to their holiday destinations, as last-minute shoppers swamped its network.  Our Supply Chain Matters assessment commentaries echoed whether the 2015 holiday surge brought forward the question of whether hub and spoke designed delivery networks can accommodate increasing holiday-surge volumes.  While UPS managed to make all its required deliveries by 6pm Christmas eve, its network experienced visible slowdowns in the middle of December. Once again-finger-pointing among carriers and online retailers broke out as to which party exhibited accuracy of forecasting.

Two apparent stars of 2015 were Amazon and the U.S. Postal Service (USPS). Amazon took more control of its shipping network, chartering its own air freighters and implementing its larger network of customer fulfillment and package pre-sorting centers. The online retailer literally exposed the weaknesses of hub and spoke logistics and distribution and could promote holiday sales up until Monday of Christmas week. Package volumes handled by the USPS matched that of UPS. Profitability of the agency was however, a whole different story.

In early January, Wal-Mart announced plans to close 269 stores and re-align its brick and mortar retailing strategy. We viewed that announcement as the initial shockwave of the new industry realities, acknowledging the structural impacts that Omni-channel and online customer fulfillment were having on physical stores. In essence all retailers would have to rationalize their dual physical and supply chain presence in the light of consumers’ emphatically moving to online.  Other announcements of physical store closings came from other large scale retailers including Macys. That was followed by Wal-Mart’s announced acquisition of Jet.com coupled with a declaration of a strategy more committed to online vs. physical store expansion.

There were added financial casualties from the movement to online including the declared bankruptcy and asset selloff of the Sports Authority retail chain.  Athletic goods retailer Finish Line initiated efforts to close upwards of 600 retail stores after its new warehouse management system failed to process orders fast enough, costing the retailer an estimated $32 million in lost sales.  This motivated us to declare in a research advisory: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, (Currently available for complimentary download in our Research Center) that this new phase will include physical stores being evaluated by either Return on Investment Capital (ROIC) or profitability growth, much more sophisticated supply chain and inventory management systems tied to advanced forms of predictive and prescriptive analytics, and the ongoing battle of Alibaba and Amazon for global online platform dominance.

We believe our prediction to anticipate more challenges for the retail industry in 2016 was on the mark and we likely continue into the coming year based on the results and final outcomes of this year’s holiday period.

 

Commercial Aerospace

Self-Rating: 3.8 (Max Score 4.0)

Industry dominants Airbus and Boeing continue to manage an unprecedented phase of ramping-up each of their individual global-based supply chains and ecosystems to make a dent in multi-year order backlogs over the next 3-4 years among new aircraft programs. We predicted a rather fragile commercial aerospace supply chain in 2016-17 with many increased risks and concerns. We expected the smaller industry OEM’s to be the primary victims of any supply disruptions.

Throughout 2016, delays in securing certain supply needs such as seats and aircraft interior components hampered production, especially for higher margin wide body aircraft. In May, The Wall Street Journal reported that that Airbus executives were trying to end what has become an annual rite, the end-of-year hockey-stick effort to fulfill the annual target for customer airplane deliveries. The company’s COO of commercial aircraft acknowledged to the WSJ the ongoing frustration and that: “we need to do better.” The report further indicated that the company was exploring further means to change the way airplanes are manufactured in a more predictable manner, language that often translate to additional manufacturing automation.  Similarly, Boeing’s efforts to invest in more manufacturing automation became visible with the prototype build of the new 737 Max single aisle aircraft.  In February, Boeing made a stunning announcement that it would deliver fewer completed aircraft in 2016 than the manufacturer delivered in 2015.

Another critical shortage turned out to be the new Pratt and Whitney geared turbo fan (GTF) engine that ran into a series of software snafus and key component delays during Q2 and Q3, causing Pratt to declare that it would miss its original 2016 delivery commitments. That event alone impacted the planned shipping schedules for the Airbus A320 neo, and eventually caused Bombardier to announce significant headcount reductions as a result of unplanned delays in deliveries of that manufacturer’s CSeries jets.

On the aerospace strategic supply and product value-chain front, merger, acquisition and business split-out strategies became even more evident in 2016. This was compounded by a general cyclical buying patterns and pressures for added cost reduction among aerospace OEM’s.  Metals and forgings supplier Alcoa, the holder of multi-billion supply agreements with both Airbus and Boeing announced plans in March 2015 to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. In January of this year, Alcoa announced the split-out of Arconic, a new value-added aluminum and nonaluminum specialty forging manufacturing company. This split new company was formed to take advantage of the growth of supply needs for high-tech alloy fasteners, forged metal parts within the commercial aerospace and automotive industries. In early November, Arconic became listed for trading and was immediately greeted with 12 percent stock decline due to the concerns of the constant delivery adjustments to delivery schedules of aerospace and automotive supply chains.

Just a few weeks ago, Rockwell Collins and B/E Aerospace announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt. Other such moves occurred, each with the promise of long-term supply agreements and enhanced supply negotiating power with major commercial aircraft manufacturers.

By October, it was becoming rather evident that Airbus and Boeing were pursuing a different set of strategies. The Wall Street Journal reported this dichotomy by observing that while Airbus seemed to be pursuing efforts to increase its aircraft delivery cadence, Boeing was observed as pursuing a strategy of added wide-body sales to expand margins and fund needed production increases.

While the final 2016 production output numbers remain to be completed and announced, there was little doubt of the continued and ongoing supply chain challenges among various aerospace supply chains.

 

Automotive Industry

Self-Rating: 3.0 (Max Score 4.0)

Despite an improved economy and more optimistic consumers, the automotive industry continued to have its own unique set of challenges.  An unprecedented level of industry-wide product recalls has taxed service management and repair parts supply chains and indeed continued to overflow into 2016.  In 2015, the ongoing series of recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands continued to permeate in 2016. Multiple manufacturers were forced to add additional product recalls related to a whole series of automotive components with the result being that most brands had vehicle nameplates under product recall notices.

We predicted that the headline would shift to Volkswagen in 2016 and its needs to address thousands of diesel-powered vehicles with illegal air pollution monitoring devices and software, which continues to impact the reputation of its brand. By October, the financial implications for VW in the U.S. alone amounted to $15 billion in compensation agreements to vehicle owners, dealers and to government regulatory agencies. Other financial settlements involving European and other global owners will add to that number. The brand erosion impacts and remediation efforts are likely to likely extend for multiple years, along with the implications among the broader industry for attempts to alter emissions or other government monitored data.

Another concern indicated for 2016 was that of China’s automotive sector where significant overcapacity existed.  We predicted that declining domestic demand would likely force more global exports. Our China sector prediction did not occur, primarily because China’s government provided a much-needed tax break incentive for would-be automotive buyers. Currently, more than 70 percent of autos sold in China qualify for an average $1470 incentive for buying a new vehicle. As of October, new car sales were a cumulative 19 million vehicles, reflecting a 15 percent increase from the same period a year earlier. By year-end, total output in China may exceed that of the United States.

In December, we concurred with Fortune Magazine’s published prediction that Apple will likely buy Tesla to springboard entry into the industry as well as acquisition of a fully operating, vertically integrated supply chain.  We thought that Google (Alphabet) was likely another potential player. Obviously, none of these occurred and we blew that prediction. However, the most interesting development was Apple’s subsequent changed strategy in developing its own automobile design, causing the layoff of design team members and a possible different strategy.

We predicted that the bottom-line for the automobile industry in 2016 would be stepped-up efforts in quality assurance, combined software and hardware innovation, alternative energy and Internet-of Things technologies. We feared that automakers would again run the risk of complacency in the current environment of unprecedented low prices of gasoline, opting to promote higher margin trucks and luxury vehicles over those of more increased fuel efficiency and range. The latter is turning out to be the prevalent strategy and it has come at the cost of added innovation. According to JD Power, more than 62 percent of all motor vehicles sold in the U.S. during the month of October were either pick-up trucks or sports utility vehicles.

Global automakers now suddenly find themselves in late 2016 scrambling to stay in front of quickly evolving autonomous vehicle technologies that are prevalent with the likes of Google, Tesla, Uber and others. Both GM and Ford are now plowing investment monies in software development or in new start-ups to avoid opportunity lost.

 

Consumer Packaged Food and Beverage Goods

Self-Rating: 3.0 (Max Score 4.0)

Since 2014, we have included CPG in our industry-specific challenges for the coming year amid permanent changes in consumer tastes.  The year 2016 provided little exception and the stakes indeed were far higher. Consumers continue to shift their food shopping preferences away from traditional processed foods in favor of food providers that offer more perceived healthy foods containing natural and sustainable ingredients. That in-turn has led to continuing low single-digit organic sales growth and laggard profitability levels among the largest CPG companies.

Declining profits and meager sales growth continues to spawn activist equity investors to influence certain CPG, food and beverage firms to consolidate. We predicted further M&A announcements in 2016, possibly involving blockbuster global brands, other than AB In-Bev’s acquisition of SAB Miller, but that by our lens, was a global market-share acquisition effort. There were attempts, such as Mondalez’s overtures to acquire Hershey that later fizzled. Thus, our prediction of wide-scale M&A was off the mark.

The industry remains consumed by zero-based budgeting and significant supply chain focused cost-cutting techniques.  Industry leaders and past veterans point to experiencing one of the most dynamic, challenging and disruptive periods ever seen in the industry. As an example, Kraft Heinz Company, formed in 2015 when AB In-Bev’s HJ Heinz acquired Kraft Foods indicated in October that efforts to decrease annual spending by $1.5 billion by the end of 2017 has already met three-fourths of that goal.  However, this large food producer reported a sales decline of 1.5 percent for the October-ending quarter, an indication of possibly trading product innovation and sales growth for higher margins and profitability. Executives of the merged company now indicate they will likely raise the cost-cutting goal for 2017.

We predicted that in 2016, the industry winners or survivors will be those who can lead in product and process innovation and gut-wrenching transformation to satisfy consumer preferences more healthy foods, while dealing with the significant distractions and de-moralization brought about by ZBB or other wide-ranging cost cutting initiatives. Generally, we sensed a noticeable uptick in industry product innovation with new product innovation cycles accelerating overall.

We further predicted that lean and mean cost controls would cause food quality monitoring levels to suffer and there will be yet another uptick in highly visible food related product recalls.  Our review of the United States Department of Agriculture, Food Safety and Inspection Service listing of food related product recalls through the end of October indicted a near doubling of recall action in 2016, but many of these recalls were related to either undeclared allergens, mislabeling or misbranding of products.  That would be an indicator of lax controls related to product management vs. food borne disease. Thus, our prediction of highly visible product recalls was off the mark but likely reduced staffing levels have an effect on assuring that accurate and up-to-date product quality and safety information is being maintained.

 

The True Organic, Green and Sustainable Food Supply Chain

Self-Rating: 3.8 (Max Score 4.0)

 

We added this specific 2016 industry related prediction because of the obvious reasons noted in our CPG industry prediction and the shear multi-year scope and effort implied in this effort.  Consumers of food now demand to know more about the origins of the food they consume, and how it was produced. They are clearly holding well-known iconic food and restaurant brands accountable for increased commitment to this effort and companies in-turn, are rushing to satisfy these requirements. However, for large, global based companies with complex and established food supply chain practices, the challenge comes down to long-term planning and managing expectations of supply and demand.

Brands such as Costco, Hershey, Kellogg, McDonalds, Nestle, Tyson Foods, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. Yet, do consumers and providers realistically understand the significant challenges and timetables for these efforts? In other words, the entire food industry and respective shareholders needed to come together in concerted efforts in 2016 and beyond to address realistic timetables and consumer expectations as to when true organic, green, sustainable and socially responsible foods will be available in adequate supply and at more affordable prices.

We noted that providers and originators of meat, grocery and produce products will require financial incentives and economic resources to make such transitions over reasonable time periods.  The other obvious concern is food safety.  When massive scale methods are removed that focus on the use of harmful drugs, genetically modified methods of farming or raising animals in quicker time periods, what will be the near-term impact on food safety? The widespread food safety incidents that impacted Chipotle Mexican Grill since 2015 are a wake-up call reminder to consumers that a fully sustainable food supply chain is a big and complex challenge that is beyond individual companies and food suppliers.

In 2016, food companies indeed stepped-up initiatives and efforts in providing more visibility to the individual product supply chain. Many of these efforts were in enhanced information included in food labeling, or in specific web links that provide even more origin related information. New software can now report on inspection checks among each step in the supply chain while other software can provide very detailed ingredient information of all the possible allergens and health reactions. However, that was just an initial marketing and informational step that merely scratched the surface. The fact remains that consumers generally do not trust brand manufacturers and more industry-wide efforts in long-term supply planning are required.

There is an adage that when the industry big dog makes significant change, others quickly follow, especially those suppliers who also view opportunity for first mover or preferred supplier advantage. One of the more influential sustainable focused food companies in 2016 was McDonalds.  This well-known chain was not the only big dog, for example, Nestle indicated it would make the transition to cage-free in five years’ time. Responding to its own challenges relates to sustaining revenue growth, this big dog restaurant chain has ended the use of certain antibiotics in chicken supplies and has embarked on a 10-year effort to provide cage-free egg supplies, which currently are part of upwards of 50 percent of current menu items. As Fortune Magazine noted in a published September report, the firm’s efforts in committing to changed efforts in poultry and egg sourcing are transformative for the entire U.S. food industry. This is because McDonalds represents a huge demand source with large-scale buying influence. It is currently buying over 2 billion eggs per year, and only an average of 13 million eggs currently can meet the cage-free standard. As Fortune noted: “McDonald’s cage-free commitment set off a stampede throughout the food industry. Nearly 200 companies have followed suit.” It further stated: “Now McDonalds isn’t waiting for the supply- it’s creating it.”

Agricultural commodities firm Cargill manages the egg supply for the restaurant chain and is now a founding member of the Coalition for Sustainable Egg Supply which is collaborating with farmers on new henhouse systems, revised farming practices, animal genetics as well as dealing with mitigating the impacts of cage-free in higher mortality rates and potentially higher bacteria levels. The commodities firm is further responding to the demand for non-genetically modified food by modifying practices for how it sources materials in the supply chain and meat-packing facilities.

On the producer side, some specialty egg providers see the opportunity for preferred supplier and our well on the way towards that object. The most prominent is the Happy Egg Company that controls 11 farms scattered across the Ozark Woodlands of Arkansas and Missouri. Other noted producers are Handsome Brook Farm and Vital Farms. In the case of Happy Egg, this producer now has upwards of 400,000 birds in totally cage free settings and plans to double production by the end of 2016. Distribution of product includes more than 7000 grocery stores nationwide with partnerships with Costco, Safeway and Wal-Mart.

There is indeed an acknowledgement that such changes require major multi-year shifts in farming. The U.S. Department of Agriculture estimates that the transition to cage-free could cost upwards of $7 billion for the industry, a considerable burden for producers alone. McDonalds remains committed to financially assist in some of this transition but other egg buyers have provided little interest to subsidize an industry transition.

Fortune notes that consumers are agitating McDonalds to implement pig and cattle antibiotic practices as well as more organic and sustainable meat sourcing practices globally. That challenge is currently characterized as far more challenging because it involves many more suppliers and intermediaries. This undoubtedly is a far more complex multi-year effort.

Therefore, we self-score this prediction on the mid-high side because we sense that the industry influencers are beginning to take on the long-term supply strategy view and have been willing to help producers in the multi-year transition. That stated, there’s a long way to go and it will include further food supply chain challenges. Therefore, do not be surprised if we carryover this prediction into 2017.

 

This concludes Part Three of our scoring of this year’s predictions. In Part Four, we revisit our predictions related to S&OP processes, the realities of Internet of Things initiatives.

Bob Ferrari

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

 

 

 


Tesla Motors Announces Intent to Acquire German Advanced Manufacturing Automation Design Firm

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In case our automotive and high tech industry focused readers were not aware, Tesla Motors made a very significant announcement this week regarding efforts to ramp-up manufacturing and supply chain volume expansion needs.

The innovative electric car manufacturer announced its intent to acquire Grohmann Engineering of Germany, a noted manufacturing automation design firm. A Tesla blog posting regarding this deal indicates that when this deal closes, the design firm will be renamed Tesla Grohmann Automation and will serve as the foundation of Tesla Advanced Automation Germany.  The automaker further indicated that it expects to add over 1000 advanced engineering and skilled technician jobs in Germany over the next two years.

In disclosing this deal, company founder and CEO Elon Musk declared to analysts; “This will really be our first acquisition of significance in our whole history.” Terms of this proposed acquisition have not been disclosed and the automaker indicates that it hopes to gain full regulatory approval by early 2017.

Grohmann is recognized for designing automated manufacturing plants in the semiconductor, electronics and automotive industries as well as the biotechnology and medical technology sectors, among others.

As we have highlighted for our Supply Chain Matters readers, Tesla’s ongoing challenge is the need for increasing annual production output to 500,000 cars per year by 2018. A posting appearing on TechCrunch indicates that both firms have been working in a partnership for the past few months and found that team cultures complemented each other, thus the decision to move forward in a formal relationship.

At its most recent annual meeting of shareholders earlier this year, CEO Musk declared that Tesla will “completely re-think the factory process.” He repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. Advanced reservations with associated deposits for over 300,000 of the announced mass-market appeal Model 3 helped in the realization of such principles. He challenged Tesla engineering teams to the principles of “you build the machines that builds the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.

Adding a significant amount of additional manufacturing process design engineering resources in Germany has, by our lens, added significance that may well reveal itself over time.

By our lens, this week’s announced intent to acquire a noted external manufacturing process design firm is an acknowledgement from Tesla that it must seek external expertise, experience and outside process innovation thinking in achieving its production volume ramp-up goals by 2018. While Musk recently noted that he would move his office to directly on the company’s factory floor in Fremont California to better understand the exact needs for the production machine, the current aggressive goals for ramp-up had to compel this latest action to acquire external, proven experience. With a mere two-year planning and implementation window remaining, and with industry competitors now more keenly focused on Tesla, it was time to make a bold move.

Readers will recall when online retailer Amazon acquired warehouse automation and robotics firm Kiva Systems in 2012. The industry was initially puzzled with the move along with the hefty acquisition price, only to discover a few years later that Kiva technology now serves as a foundation for Amazon’s vast and quickly expanding global network of customer fulfillment and logistics centers.

Obviously, this is a significant announcement, one that merits industry attentiveness in the coming months.

Bob Ferrari

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

 


Volkswagen Reaches Major U.S. Milestone- Financial Settlement Regarding Emissions Scandel

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Supply Chain Matters provides an update regarding ongoing brand crisis involving Volkswagen, specifically its customers and franchised dealers over the diesel engine emissions alteration admission scandal that occurred over a year ago, and that continues to move toward action plans and financial compensation.

Yesterday the global auto maker was granted final court approval related to a $14.7 billion settlement with U.S. based consumers, dealers and government agencies.

This agreement allocates upwards of $10 billion to allow the 475,000 existing owners of two-liter powered diesel vehicles the option of either selling back their vehicles to Volkswagen, or wait for a government approved vehicle repair that would allow such vehicles to remain in operation on U.S. roads. The impacted models include Beetles, Golfs, Jettas, Passats and Audi A3’s dating back to model year 2009. Vehicle owners will further benefit from additional cash payments that can range as much as $10,000 per owner. Owners have until September 2018 to make a final decision as to whether to turn-in their vehicles or have them repaired to meet emissions specifications. There are current indications from media and industry sources that most current owners may elect the vehicle return option, which as this blog noted previously, sets-up an interesting reverse supply chain challenge in terms of salvage or recycling of such vehicles for non-affected components.

As indicated in our blog posting earlier this month, over 600 U.S. dealers themselves are expected to be compensated upwards of $1.2 billion for the financial hardships of lost sales, damaged reputations and declines in dealership value that has been precipitated by the emissions scandal.

The court settlement further requires the automaker to contribute $2.7 billion over three years to an environmental trust to remediate the pollution caused by the diesel-powered vehicles. According to judge that approved the settlement, the beneficiaries of this environmental trust can include projects that reduce nitrogen-oxide emissions in freight related trucks, buses, ferries or airport ground transportation equipment. That would indicate a bonus for environmental initiatives related to transportation and logistics.

Also included in the settlement is the automaker’s investing upwards of $2 billion over the next decade into the design of zero-emission vehicles. Industry media believes that VW will now concentrate more on electric and hybrid powered vehicles and this may well be the death knell for VW diesel powered vehicles for the U.S. and perhaps other countries as well.

Owners of the larger 3.0-liter vehicles that were impacted by the emissions alternation are still waiting terms of a financial settlement along with an expected repair procedure. That will likely add further financial impacts to Volkswagen, as will be further settlements involving other countries.

As noted in our prior blog commentaries related to this ongoing VW emissions incident, the global automaker will continue to experience painful lessons, both organizational, design and financial related.  The one positive, if there is one, is that management remains committed to addressing the mess created in an expedient manner.

A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons because of this scandal. Further, the industry will adsorb some key learning regarding balancing the pressures to introduce market-leading innovative products on a timely basis with organizational tendencies to cover-up potential hardware or software design flaws.

Bob Ferrari

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