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Q1 Economic Data Again Echoes Challenges in Integrated Business Planning

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For multi-industry sales and operations planning (S&OP) teams, keeping an eye on the global economy and on individual global regions has been an important consideration in efforts to meet business planning goals and achieve proper supply chain alignment. Yet, global and individual region economic and supply chain indices often reflect a differing collection of trending and forecasting.

Entering the year, there was little doubt that 2017 would provide a multitude of uncertainties related to both global economies and geo-political developments that could impact economies. In its World Economic Outlook published in October 2016, the International Monetary Fund (IMF) cited a subdued outlook for 2017 with political tensions and policy uncertainties prevalent. The October WTO forecast called for anticipated global growth rate of 3.4 percent in 2017.

Last week’s Spring meeting of world finance chiefs in Washington brought forward a more optimistic outlook. The IMF has raised its forecast for global growth to 3.5 percent, the first time this agency has elevated its original forecast in the past six years. The agency cited a stronger reported growth rate in China in Q1 along with improving economies in Europe and Japan. The IMF chief economist indicated to the Financial Times that the world economy was firing on all engines, albeit not very strongly. Another former IMF chief economist indicated to the FT that the low-growth legacies of the 2008 financial crisis have literally reached an end.

That data alone would obviously fuel optimistic perspectives for integrated business planning.

However, during the past few days, GDP growth and PMI indices point to varying sign points.The U.S. Commerce Department reported that the U.S. economy literally stumbled in Q1, as manifested by a 0.7 percent annual growth rate in the January through March period. That figure reflected the slowest pace of expansion in almost three years. According to various commentaries, American consumers sharply cut-back on spending despite consumer optimism being at an all-time high. A drawback in inventories had a significant negative effect on growth in the quarter. Yet, economists and the Commerce Department remain optimistic since other data points to increased business investment and stronger growth in the months to come. The new Trump Administration has put forth a U.S. GDP growth target of 3.5 to 4 percent for the year.

Meanwhile, a review of major global and regional PMI indices indicates that:

  • Global manufacturing and PMI activity reflected by the P. Morgan Global Manufacturing PMI index slipped to a three-month low for April. This recognized benchmark of global supply chain activity registered a value of 52.7 at the close of 2016. The April value was reported as 52.8.
  • The ISM Report on Business PMI (United States) decreased 2.4 percentage points in April, while the accompanying New Orders index decreased 7 percentage points in April.
  • Eurozone manufacturing expanded at the fastest pace in six years during April.
  • China’s General Manufacturing PMI reflected that the country’s manufacturers started Q2 with a further slowdown in production and new business growth momentum.

The above data points, by our lens, are a reinforcement of what integrated business planning processes must now deal with on a continuous basis. There are now multitudes of different data and information points that must be synthesized, weighted, and factored with more emphasis on the weighting of regional or country-specific product demand sensing. General forecasts based on historic data are no longer sufficient. Planning is now a continuous process with continual input at a much more granular level.

Some current examples of the implications can be observed in the consumer packaged goods and automotive industry sectors.

Market data from Nielson indicates that volume sales for packaged food products in the U.S. fell 2.4 percent in the first quarter of 2017. Noted in one of our prior blog postings, many branded CPG food producers continue to deal with challenges of low growth and permanent changes in consumer buying. For the automotive industry, a multi-year period of robust sales growth in North America is showing signs of more subdued growth. Producers such as Ford Motor, Fiat Chrysler and General Motors reported April monthly sales declines, including popular selling truck and SUV models. According to data from WardsAuto.com, U.S. auto dealers are now languished with a 72-day supply of unsold new vehicles. A report by The Wall Street Journal indicates that GM has nearly one million vehicles sitting on dealer lots. Additional manufacturing cutbacks are now being considered even though the late Spring and Summer are traditional periods of higher volume sales.

Our prediction for 2016, and again for 2017 is that resiliency, adaptability, and risk mitigation are very important competencies since the pace of business and of economic data are in constant flux. It is much more important for teams to be able to constantly sense market demand and look-ahead to what is occurring in specific regions.

The takeaway is that S&OP and respective supply chain planning teams are tasked to insure bimodal business plan performance which implies growing the top revenue line, insuring business margins are fulfilled, and that proper contingencies for the business and for the supply chain are always in-play, regardless of the constant ebbs and flows of the global economy.

Bob Ferrari

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


Autonomous Driving Technologies for Trucks Takes on Added Interest

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Supply Chain Matters continues to highlight exponential developments in advanced technologies that will eventually impact various industry supply chains with an update on increased investments in autonomous driving technologies for trucks.

In November of 2016, Supply Chain Matters observed why increasingly high-tech and semiconductor technology providers wanted to position themselves in automotive value-chains. There have been quite several significant merger, acquisition and strategic product development announcements involving automotive supply chains and the stakes involve which company will ultimately control and benefit from the movement of more advanced technology being embedded into value-chains of automobiles and transportation. As we noted last year, a lot of M&A and investment monies are being plowed into the automotive and transportation sector to take advantage of the various movements towards on-demand, autonomous and highly intelligent motor vehicles. This movement presents a competitive dynamic among traditional OEM’s who control brands and markets with those of technology companies that know about software and digital transformation.

It is now becoming ever more obvious that value-chains of short and long-haul trucks are another, perhaps more promising area of long-term strategic interest. The reasons are likely obvious to our readership audience. The increased savings in efficiencies, driver productivity, and overall safety make a case for more near-term investment. There is also the other elephant in the room, namely the continual shortage or turnover of qualified long-distance truck drivers. In September of last year, consulting firm McKinsey indicated in a research report- Delivering Change, the transition of commercial transport by 2025, that by this timeframe, at least one in three new heavy duty trucks will contain higher levels of onboard automation technology, including Level 4 autonomous technologies, that will buffer the need for full-time driving.

Another open question is obviously the receptivity of regulators to various forms of autonomous driving technologies applied to trucking and transport. There are some perceptions that European regulators have been more open to considerations of advanced technology, and have become directly involved in ongoing industry demonstrations of various forms of autonomous driving technology. US federal regulators, on the other hand, seem to be taking a more wait and see perspective. In either case, the receptivity by safety regulators will obviously be an important determinant in timing.

Latest Announcements

Semiconductor technology provider Nvidia whom originally developed of the Graphical Processing Unit (GPU) chip in 1999, and that ultimately sparked the growth of the PC gaming market. The company has moved on to redefine modern computer graphics and gaming platforms and has made advancements in parallel computing. More recently, GPU deep learning ignited modern artificial intelligence married with digital visualization— which Nvidia describes the next era of computing, has led to the development of autonomous vehicle technologies.

Thus far, Nvidia has been collaborating with what the company describes as a wide range of automotive partners, including Tesla, Mercedes Benz, Audi, and others. A recent presentation at an investor conference indicates 80+ companies are currently leveraging the company’s self-driving platform and that every Tesla Motors vehicle now comes equipped with DRIVE PX 2 for full self-driving capabilities

In a company blog posting in March, Nvidia announced that it’s working with PACCAR, maker of Kenworth, Peterbilt and DAF truck brands, on developing technology for autonomous vehicles. The same blog posting further announced a partnership with Tier One automotive parts and systems component producer Bosch, for self-driving car technology.

PACCAR has developed a proof-of-concept self-driving truck with SAE Level 4 (full self-driving) capability built on the DRIVE PX 2 technology. It includes elements of adaptive cruise control, the identification of digital objects along with lane-keeping technology to make trucks safer in long-distance hauling.

Convoy Approach

Wall Street is increasingly paying closer attention to autonomous driving technology applied to trucks and truck fleets. Earlier this month, Silicon Valley based software firm Peloton Technology raised $60 million in a second-round of funding for expanding its development and market presence in automating commercial truck fleets.

As its name implies in the field of competitive cycling, Peloton Technology supports the ability of trucks to travel in a convoy with a driver in the lead vehicle controlling various following truck (s). While the value proposition is predicated on higher safety and fuel savings, some in the industry are a bit skeptical on the notions and regulatory approval of an automated convoy of multiple trucks controlled by software. Instead, the software provider is initially focusing on supporting a convoy of two trucks, with the lead driver in full control of both vehicles. Peloton is planning development and deployment of its software for 2018.

Current investors in Peloton include Intel Corporation, Omnitracs LLC, Magna International, United Parcel Service and Volvo AB, all various value-chain players in trucking, transportation, autonomous driving and truck component technology.

Future Technology Leaders

If our readers have been scanning various other business and technology media, you have likely read that the trucking industry has struggled of-late because of the compelling need of fleet owners to want to invest in new, more fuel efficient and technology-laden trucks. The likely solution rests both in hybrid powered technologies and in increased levels of safety, driver productivity and automation.

Thus, over the coming months, a number of both established players and high-tech startups will all be vying to be the future technology innovators and leaders. Startups will bring the usual speed, agility, and advanced technology knowledge – all prerequisites for the majority of new business models. To counter new entrants, OEMs must demonstrate agility to both build their own digital capabilities and enter collaborative efforts with partners around the product value chain.

Established names such as Daimler, PACCAR, Scania, and Volvo will be contrasted with those of Otto (recently acquired by Uber), Nicola Motor Company, others and yes, even Tesla Motors.

Exponential technology developments will eventually impact many industry supply chains, the product value-chains they support, and the tools and technologies utilized to move physical goods. As in all things exponential, the question is timing, and the cycles of that timing are accelerating.

Bob Ferrari

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


General Motors Production Plant Seized in Venezuela

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In the many dimensions for supply chain disruption and risk, we sometimes cite geo-political events as a significant risk factor. Thankfully, this particular type of risk does not occur often, but this week provides a real-world example, in a country that has increasingly had tendencies towards seizing private assets and operations.

General Motors was forced to halt production operations in Venezuela after its plant in the country was unexpectedly seized by local authorities. Widespread political and sometimes violent street demonstrations have erupted in recent weeks after current political administration barred an opposition leader from holding political office for the next 15 years. At least nine people reportedly have been killed in these protests.

GM described the takeover as an “illegal judicial seizure of its assets” and that the seizure showed a “total disregard” of its legal rights. According to media reports, authorities had removed assets including cars from company facilities.

Venezuelan news reports indicated that the GM plant seizure stemmed from a lawsuit that dated to the early 2000s with a company in the western city of Maracaibo. But a GM spokesperson indicated that the plant had been shut down for the past 42 days because of a takeover by members of one of its labor unions.

In its reporting, the New York Times notes that the country was once among the most lucrative markets in Latin America for foreign businesses, but such times are long gone. According to the Times, the average Venezuelan must now wait in long lines for bread and medicine, and many are going hungry and unpaid, as the government struggles to avert default.

The GM plant in Valencia employed nearly 2,700 workers at its peak, but stopped producing cars in 2015 and has only been selling spare parts since then, according to a company spokesperson.

According to the U.S. State Department, the government of Venezuela has expropriated more than 1,400 private businesses since 1998. Manufacturers such as Bridgestone, Clorox, Coca-Cola, Ford Motor Company, General Mills, Kimberly Clark and Procter and Gamble have all since ceased production operations in the country.

Reuters reported that the country’s economic crisis has hurt many other U.S. companies, including food makers and pharmaceutical firms. A growing number are taking their Venezuelan operations into suspended states.

Because of the country’s volatile currency issues coupled with a severely declining economy, automakers produced only 4,900 vehicles last year, including heavy-duty pickups, down from 31,000 in 2015. In addition to GM, other automakers, including Ford and Toyota, have suspended operations for several months because of low product demand and an inability to get necessary supply chain parts.

Global based industry supply chains are indeed subject to geo-political risks as is being manifested in Venezuela and certain other countries. It is perhaps another tradeoff to forces of globalization.

Bob Ferrari

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


Tesla Reports Q1 2017 Vehicle Production and Delivery Performance

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Global electric auto and solar power producer Tesla reported Q1-2017 automobile production and delivery performance this weekend, and the numbers provide both good, or concerning news, depending on perspective. Tesla ModelX Live 300x210 Tesla Reports Q1 2017 Vehicle Production and Delivery Performance

The automaker reported that it had delivered just over 25,000 vehicles for the March-ending quarter, establishing a quarterly record. Total deliveries consisted of 13,450 Model S and approximately 11, 550 Model X vehicles. These numbers were characterized as a 69 percent increase over the year-ago quarter. However, the year ago, quarter is perhaps not a meaningful benchmark, given Tesla’s strategic objectives.

As noted in our last Tesla operational and business performance focused commentary, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles across all model lines on an annual basis by 2018.

There are many areas all along the supply chain that could prove to be weak links, not to mention the steep ramp-up needs for both the battery gigafactory and the Fremont facility. We called attention to a published San Jose Mercury Times expose commentary in February indicating that long hours and reported unsafe working conditions was causing disgruntled workers to seek out potential external labor union assistance. The report indicates that during November and December, employees worked a minimum of 6-day workweeks to keep-up with production needs, as well as a supply chain disruption involving auto pilot technology, that skewed production output into December.

Included in Tesla’s Q4 production report was a notation that 2750 vehicles missed the production cutoff at the end of December, while a total of 6450 vehicles were classified as in-transit to customers.  Thus, the recent Q1 2017 performance numbers had a total Q4 carryover of 9200 vehicles at the start of the quarter.  Thus, net production could be interpreted to be 20,450 vehicles when one nets out the 9200 vehicle Q4 carryover and the 4650 vehicles that were still in-transit to customers at the end of the quarter.

A broader historic to the vehicles in-transit carryover numbers would be the following:

Q1-2016: 2615 vehicles in-transit

Q2-2016: 5150 vehicles in-transit

Q3-2016: 5500 vehicles in-transit

Q4-2016: 6450 vehicles in-transit

Q1-2017: 4650 vehicles in-transit

As Supply Chain Matters has previously observed, the above in-transit trending points to a building vehicle transportation and customer last-mile fulfillment challenge, that continues to weigh on overall operational performance. To reach its 500,000-annual performance goal in just under two years, both production, distribution and customer delivery processes must scale at a much higher rate.

Tesla is now completing an additional round of equity and debt supplemental funding to launch the scale-up of the new Model 3, designed to appeal to a broader consumer audience, and with higher pent-up demand for production output.

Which each passing quarter, there will be far more scrutiny surrounding Tesla’s operational performance as well as the underlying supply chain processes and management systems. While this week’s financial headline is that Tesla may be a more valuable company than perhaps Ford Motor Company or General Motors, we submit the broader determinant is overall consistent supply chain performance and scalability.

Bob Ferrari

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


Let’s Not Import nor Export an Ethos that Turns a Blind Eye to Social Responsibility

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Our Supply Chain Matters readers have likely discerned that the notions of globalization are being challenged across many political and media platforms these past months, including this blog platform. Many are beginning to question the benefits, and the global and domestic supply chain implications brought about by globalization. That includes the potential for exploitation of labor and of worker safety. While many of our prior blog commentaries have brought forward reported incidents among lower-cost global manufacturing regions such as Bangladesh, China, or Myanmar, we were taken back to read a report of such conditions in the United States.

As a supply chain management community, we can sometimes turn a blind eye when production facilities in external countries provide workers with unsafe conditions. Burning factories with workers inside, workers forced by economic needs to work excessive hours have not stopped U.S. companies from doing business with suppliers residing in these nations. Rather, there is a call for factory audits and oversight when unsafe working conditions become public.

We now have a report that may well serve as a call for audits and responsible actions for certain U.S. production facilities.

The Bloomberg Businessweek published article, Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs- The South’s manufacturing renaissance comes with a heavy price is a sobering account of jeopardized worker safety in its most concerning form. Take away any reference to the location, and one could assume the report describes a low-cost manufacturing region within an emerging region of our world.

The report profiles worker conditions among lower-tiered automotive component suppliers across Alabama. The sub-headline takeaway reads:

In the American South, auto parts workers are poorly paid, barely trained, and under relentless pressure. And they’re being maimed and killed.”

Ladies and gentlemen, please do not view this article as “fake news”, rather, a report that provides some compelling observations and evidence. It does not point a finger toward global and domestic OEM manufacturers, who’s plants and worker safety measures are described as good. Rather, it points to a component supplier environment that has described unrealistic OEM contract performance measures, delivery commitment and profitability as overriding needs.

The report describes that conditions among auto parts suppliers in this region:

epitomizes the global economy’s race to the bottom. Parts suppliers in the American South compete for low-margin orders against suppliers in Mexico and Asia. They promise delivery schedules they can’t possibly meet and face ruinous penalties if they fall short. Employees work ungodly hours, six or seven days a week, for months on end. Pay is low, turnover is high, training is scant, and safety is an afterthought, usually after someone is badly hurt. Many of the same woes that typify work conditions at contract manufacturers across Asia now bedevil parts plants in the South.

One could certainly conclude from this report that the ethos of low-cost manufacturing practices has de-facto spilled over to certain regions of the U.S. to compete to a global norm.

We encourage our Supply Chain Matters readers to take the time to read the many incidents and respective production conditions described. Conditions like a maintenance worker being paid $13 per hour working a continuous 12-hour shift in an environment with little worker protections (gangways, handrails, cables), and subsequently falling into a tank of sulfuric and phosphoric acid. Another, an account of a female worker impaled by a production robot because of the overriding concern of the production team that they were falling behind in daily output.

For us, the conditions described evoked a sense of outrage.

As global citizens, we need to all do better to protect basic worker safety. Providing a job comes with certain responsibilities, and that includes a belief in social responsibility practices when it comes to wages and worker safety.

And by the way, we are not a political blog platform. We are rather a platform for responsible global and domestic supply chain practices that are both financially and socially sustainable.

Bob Ferrari

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

 


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