This week, Gartner unveiled its annual regional listing of what the analyst firm considers to be fifteen of the best supply chains in the European region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain rankings that are traditionally announced in the fall. According to Gartner, the top three European supply chains, Unilever,Inditex and H&M, remain unchanged and continue to lead in supply chain excellence while Seagate Technology made its debut in the number four ranking. Three new company supply chains also made a presence in the Gartner Europe ranking.
The published ranking for Europe Top 15 supply chains were noted as:
- Unilever (ranked 4th in 2014 Top 25 global ranking)
- Inditex (ranked 11th in 2014 Top 25 global ranking)
- H&M (ranked 13th in 2014 Top 25 global ranking)
- Seagate Technology (ranked 20th in 2014 Top 25 ranking)
- Nestle (ranked 25th in 2014 Top 25 ranking)
- Delphi Automotive
- Reckitt Benckiser
Similar to our view of this week’s Gartner’s Asia-Pacific rankings, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Unilever is indeed a great supply chain competing in a very challenging CPG industry group. As we noted in our commentary associated with Gartner’s Top 25 ranking, Unilever has made steady progress over the past three years and deserves special recognition. Inditex has long been an icon when describing a top retail focused supply chain that is extraordinary in sensing and responding to fashion and customer demand. Seagate Technology as well, has bounced back from the near disaster of disruption and supply shortages caused by the 2011 floods in Thailand. L’Oreal has made great strides in integrating supply chain planning and execution across its supply chain business network. Nestle deserves its recognition especially in leading with industry-leading supply chain sustainability initiatives.
Three of the Gartner European Top 15 reside in the automotive industry sector which has been an industry segment not previously noted for consistent supply chain excellence. Both BMW and Volkswagen have been deploying a global based product platform strategy and have weathered the European economic crisis through a focus on international markets.
Also noteworthy is the appearance of two pharmaceutical supply chains, Glaxo and Reckitt in Gartner’s Europe ranking.
We believe that a ranking of the top Europe supply chains has even more significance given the ongoing challenges related to the severe economic conditions that have impacted Europe. These are supply chains that had to demonstrate various aspects of resiliency to insure required business and product outcomes.
Supply Chain Matters again extends its congratulations and recognition to each of the named supply chain organizations for achieving such recognition. There is obviously hard work that goes into achieving such recognition and citation and it should be acknowledged.
It’s the end of the calendar work week and the prelude to the Labor Day Holiday weekend in the U.S… This commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following updates:
Report that McDonalds is Reevaluating its China Supplier
Boeing and a Major Supply Chain Partner Land a Big Order
Oracle Announces Release of E-Business Suite 12.2.4
Report that McDonalds is Reevaluating its China Supplier
A few weeks ago, Supply Chain Matters highlighted a Wall Street Journal report that indicated that in the light of China’s food regulators finding the existence of certain expired meat products within the McDonalds supply chain in China that the restaurant chain was going to give the benefit of doubt to its long-time supply chain supplier of 59 years, OSI Group, who’s China based subsidiary, Shanghai Husi Food Company was allegedly implicated in the expired meat mis-labeling investigation.
This week, the WSJ published a follow-up report that now indicates that McDonalds is reconsidering its prior relationship with OSI Group. The report quotes a corporate spokesperson as indicating that in the past six weeks, the OSI partnership for supply of China outlets has been suspended. After due-diligence investigation by McDonalds, the chain suspended all cooperation with Shanghai Husi as of July 20th, which precipitated a near three week shortage of meat products for outlets in China and Hong Kong. The chain is instead positioning alternative suppliers Cargill and Keystone Foods to increase supply capacity within China.
Considering both WSJ reports spanning a month, its somewhat confusing to ascertain if McDonald’s has indeed been standing by a loyal supplier. We can only speculate that due diligence either uncovered troubling labeling practices or the restaurant chain feels an entirely new supplier slate is needed for China and other Asia outlets.
Boeing and a Major Supply Chain Partner Land a Big Order
In our ongoing Supply Chain Matters commentaries directed at commercial aerospace supply chains, we have echoed the new buying influence of airlines and leasing operators supporting emerging market regions such as China and greater Asia.
This week, Boeing and Singapore based BOC Aviation, a leading aircraft lessor in Asia, announced a near $9 billion order, at list prices, for a total of 82 new aircraft. The order includes 50 of Boeing’s 737 MAX 8s, 30 Next-Generation 737-800’s and two 777-300 Extended Range aircraft. These new aircraft are destined for expansion or replacement needs for a number of unnamed airline operators across Asia with deliveries spanning the time period from 2016 to 2021. According to a published report by Bloomberg and The Seattle Times, the estimated order is more likely to be $4.2 billion when discounting is factored. That is obviously a reflection of buyer power.
The Boeing order follows a mid-July announcement from BOC Aviation of an order from Airbus consisting of an additional 43 A320 and A321 series aircraft with deliveries extending through 2019. Airbus had additionally landed a sale of $11.8 billion of new aircraft from Japan based lessor SMBC Aviation. The Bloomberg report quotes a spokesperson as indicating that BOC Aviation projects receiving an average 27 planes a year starting in 2015, while also disposing of 20 to 30 annually.
In the adage that a rising tide raises all supply chain boats, another major beneficiary of the bulk BOC Aviation order involves the aircraft engine consortium of CFM International, the joint venture between General Electric and Safran. CFM was the recipient for orders involving 100 LEAP-1B and 60 CFM56-7BE engines that is valued at $2 billion at list prices. The engine orders additionally include longer-term, multi-year service and maintenance considerations.
Oracle Announces Release of E-Business Suite 12.2.4
Oracle recently announced the release of Oracle E-Business Suite 12.2.4. According to the announcement, this latest release provides an updated user experience, significant customer-driven enhancements across the applications suite, with added integrations to Oracle Cloud Solutions.
This particular release has many enhancements related to the support of various supply chain procurement and customer fulfillment technology enhancements. Highlights include:
Oracle Procurement: Web ADI–enabled spreadsheet creation and modification of purchase order lines, schedules, and distributions to improve buyer productivity when dealing with large orders.
Oracle iProcurement: A streamlined single-step checkout flow allowing employees to quickly complete shopping activities and initiate the requisition approval process.
Oracle Procurement Contracts: Improved buyer efficiency from auditing of contract documents by reviewing details of policy deviations and net clause additions.
Oracle Services Procurement: Enhanced capabilities provide buyers with greater flexibility to support a broad range of complex order scenarios.
Oracle Channel Revenue Management: Improved volume offer capabilities and a streamlined user interface enable users to quickly adapt to changing business conditions.
Oracle Order Management: A long overdue new HTML user interface addressing improved usability, greater flexibility, and a more modern user experience.
Oracle Yard Management: A new solution enables manufacturing, distribution, and asset-intensive organizations to manage and track the flow of trailers and their contents into, within, and out of the yards of distribution centers, production campuses, transportation terminals, and other facilities.
Oracle Manufacturing: Significant usability improvements in the Oracle Manufacturing Execution System (MES) help improve operator productivity by simplifying time entry and quality collection. New capabilities to manage the auto-de-kit (disassembly) of serialized products supports customer returns and internal reuse of component parts.
Oracle Enterprise Asset Management: Enhancements to support linear assets in industries, such as oil and gas, utilities, and public sector, help improve productivity and retire costly integrations and custom code.
Oracle Service: Enhanced spare parts planner’s dashboard provides rich user interaction to improve planner productivity.
Oracle Value Chain Planning: Numerous enhancements across multiple products include deeper industry functionality, such as minimum remaining shelf-life enhancements for the pharmaceutical and consumer goods industries, multistage production synchronization for process industries, and integration between Oracle Service Parts Planning and Oracle Enterprise Asset Management for asset-intensive industries. New promotions planning analytics in Oracle Advanced Planning Command Center improve business insight.
Earlier this year, severe winter conditions across North America coupled with the continued boom of bulk crude oil shipments originating from the Bakken region of North Dakota led to significant railcar bottlenecks and shortages. Business media was quick to note that the rail car shortage problems stemmed from pileups at the BNSF Railway, which was one of other railroads heavily burdened by surging demand for crude oil transport. The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into the year.
A recent published report from Bloomberg now indicates that grain farmers in the upper Mid-West region of the United States now have a compounding problem. The article quotes grain industry sources indicating that 10 to 15 percent of last year’s grain crop still remains stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled.
This problem is expected to now compound further because the harvest of spring wheat is about to take place. Grain elevators still contain storage of the prior harvest while an expected large harvest needs to be stored and transported to designated domestic and export markets. According to the U.S. Department of Agriculture, the U.S. spring wheat crop will rise to a four year high in the coming weeks, the bulk of which coming from the Dakotas, Minnesota and Montana. The president of the North Dakota Grain Growers Association is quoted as indicating: “With the railroad situation the way it is, it almost looks hopeless as far as catching up.”
From our Supply Chain Matters lens, the key railroad carriers, BNSF and Canadian Pacific seem to be taking the classic rear-view mirror approach to the problem. A BNSF group vice president reports to Bloomberg that the backlog is expected to be down to less than 2000 past-due railcars by the middle of September. Bloomberg further reports that as of the end of July, the Canadian Pacific reported in excess of 22,000 requests for grain cars in North Dakota being an average 11.7 weeks late while over 7000 rail cars are over 12 weeks late in Minnesota.
We strongly suspect that farmers, agricultural distributors and consumer goods companies are more interested in the plans that railroads will put in-place to avoid both the past and expected upcoming railcar backlogs. What are these railroads specifically addressing to get in front of the problem? More than likely the resolution involves broader considerations including crude-oil shipments taking up the bulk of line capacities, along with compounding specialty rail car supply and demand imbalances.
Last winter, rail bottlenecks and delays rippled not only to grain and crude oil, but to other bulk commodities such as sugar and fertilizer, and to the shipment of automobiles and steel. According to this latest Bloomberg report, rail lines anticipate the backlog of grain rail shipments could extend through the October-November period, which overlaps with other agricultural harvests. Some railroads may not recover at all, which will present additional shipping challenges for farmers, grain operators, and indeed other industry supply chains in the coming months. As noted in previous commentaries, ongoing capacity and driver shortages among U.S. trucking companies cannot be relied on to solve this problem, nor is it economical for shippers and producers.
U.S. rail transportation infrastructure remains challenged and there needs to be concerted efforts to address both short and longer-term resolution of consistent reliability in rail shipping networks.
To our readers directly involved in the impacts of these bottlenecks, let us know what you are observing. How can and should railroads resolve these bottlenecks?
Last week, Supply Chain Matters featured a commentary regarding the blunt business realities that are impacting many consumer product goods focused businesses and supply chains. Multiple corporate earnings reports bring home the compelling reality of an industry undergoing profound external and internal business challenges. Our conclusion was that invariably, CPG supply chains will bear the brunt of changes and needs required for more market adaptability and responsiveness while having to deal with continued pressures to reduce costs.
Another compelling evidence point is the latest announcement from Procter and Gamble which indicates that this CPG icon plans to divest, discontinue or merge more than half of its global brands as it once again, initiates an effort to focus on its most profitable brands.
This is a similar strategy that former CEO A.G. Lafley has initiated in times of profitability challenges and comes almost a year after he was compelled to return from retirement to lead P&G. The announcement comes after P&G reported both fourth quarter and fiscal year earnings. Earnings per share growth were reported as 5 percent in fiscal 2014 while organic sales growth was 3 percent. Net sales for the fiscal year grew by a mere one percent. In the earnings press release, Lafley states: “We met our objectives in a very difficult operating environment, delivered strong constant currency earnings growth, and built on our strong track record of cash returns to shareholders. Still, we have more work to do to deliver the profitable sales growth and strong cash productivity we are capable of delivering.”
From our lens, this is yet another acknowledgement of the short-term focused, external Wall Street and hedge fund pressures being exerted on industry players. It’s a two-fold vice. Consumers have permanently altered their shopping practices and buying choices and larger industry players are struggling to provide business responses. The Wall Street and activist community continues to have a very short-term financial results focus for industry players, viewing CPG companies as cash, dividend or acquisition plays.
According to published reports from both the Wall Street Journal and AdvertisingAge, the latest divestiture announcement implies major consolidation of 90 to 100 current P&G brands in the coming months or years. The company previously divested of its pet care business. P&G will retain 70 to 80 of its most profitable core brands, those reported to be fueling 90 percent of total revenues and the majority of current profits.
According to the WSJ, the brands being shed account for $8 billion in revenues and could prove attractive to private equity firms that specialize in orphaned brands or CPG focused companies in China or Brazil looking for more global presence. The scope of this P&G strategic initiative implies both opportunity and/or added challenges for existing industry chains, especially the commodity supplier community.
The WSJ once again acknowledges that the P&G announcement reflects the reality of a new environment of weak sales growth for consumer products, increased currency fluctuations and inbound commodity costs that are eroding profitability. Meanwhile, activist investor pressures to cut costs, consolidate and merge brands continue to influence industry behavior.
The adage that as P&G goes, such does the industry, is yet another poignant indicator of the current business challenges that are surrounding CPG focused supply chains.
Prediction Five within our Supply Chain Matters 2014 Predictions for Global Supply Chains, (full research report available for complimentary downloading in our Research Center) specifically addressed extraordinary challenges for consumer product goods supply chains during 2014, where combinations of external market forces are fueling incredible challenges for traditional CPG companies.
Multiple business headlines this week bring home the compelling reality of an industry undergoing profound challenges with compelling and the bluntest statements from senior management. Invariably, CPG supply chains will bear the brunt of these ongoing changes and needs for more market adaptability and responsiveness.
In prior commentaries, Supply Chain Matters initially raised awareness to the industry challenges. In February, we analyzed supply chain directional indicators from CPG companies Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. They were provided in presentations from each of these firms that were delivered at the Consumer Analyst Group of New York (CAGNY) Annual Conference. It was clear to us that current signs of slowing growth among emerging markets as well as the U.S. have placed a pointed emphasis on improved operating margin and cost savings. Additional evidence came from an announcement from General Mills indicating that that amid a slowdown in U.S. sales and consequent stalled earnings growth that company would initiate more aggressive cost savings specifically directed at North American supply chain operations. Rival Kellogg was already reacting to market changes and had initiated a multi-year supply cost savings improvement initiative termed Project-K.
This week, in conjunction with various reporting of quarterly financial results, industry CEO’s shared the most profound and blunt statements regarding the current state of the industry.
Tony Vernon, the CEO of Kraft Foods remarked that the current pace of change taking place across the industry is challenging the largest companies.
“Our customers (are) coming to terms with changing shopping patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices. In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. (Our bolding emphasis) In the short-term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base.”
Campbell Soup CEO Denise Morrison described the current market conditions as “tumultuous” “persistently challenging” adding that “a new normal is coming to food.” … “The winners will be the companies that adapt successfully to a changing world.” Other statements from CEO Morrison noted:
“A second is the profound transformation in consumer preferences and priorities with respect to food, a transformation that has been building for a number of years and now appears to be at or near a tipping point in terms of its impact on the industry.Consumers are clearly demanding greater transparency about their food. They want to understand how it is grown, produced and marketed. They want to know what ingredients are used in their food and where those ingredients come from.”
Previously mentioned Kellogg announced another disappointing quarter indicating that earnings fell 16 percent, while reducing its outlook for the remainder of the year. The company blamed shifts in consumer preferences in consuming breakfast cereals. Further announced was the replacement of the head of the U.S. morning foods division, for the second time in a year. Kellogg CEO John Bryant noted: “The good news is that more people are eating breakfast; the bad news is that there are more alternatives.”
Also this week, snack and candy provider Mondelez International announced a CEO level reorganization. Its Chief Marketing Officer, a long time veteran, is leaving the company to be replaced by a new role, that of Chief Growth Officer. The company’s North American president will assume this new role with responsibility for corporate strategy, sales, research and development and global marketing. The reorganization was noted as designed to “drive growth, streamline decision-making and accelerate speed to market.”
In a very related development, global retailer Wal-Mart abruptly replaced its CEO of U.S. Store operations to stem a steady stream of flat or negative sales growth among its U.S. based stores. Wal-Mart management also points to significantly changed consumer buying trends along with a continual economically stressed consumer base.
As noted in our Supply Chain Matters February commentary, the notions of continuously striving for product forecasting accuracy, driving incremental improvements in supply chain performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity, clearly, no longer suffice. The above CEO statements have a common and very blunt message: business as usual is no longer acceptable. Industry crisis is at-hand, requiring bolder cross-functional and cross-business leadership. The industry leaders of tomorrow are those that are most responsive to changing consumer preferences and needs including more healthy and innovative products in smaller package sizes. Pushing volume and scale to insure profitability is now a challenge.
The CPG supply chain leaders and individuals now required must possess different leadership and tech savvy skills or be able to adapt very quickly. Older approaches must be replaced with more innovative ones, anchored in supply chain responsiveness, more flexibility with continuous adaptability of processes and new product introduction. The online consumer that has a new consciousness regarding food and diet and the impact of the digital age is indeed an industry reality. Procurement of inbound commodities is taking on ever new dimensions of sustainability and health consciousness of ingredients.
As noted in our previous commentary that noted the timely article Culture Eats Strategy, such wide-scale changes will require some tough organizational un-learning.
We as thought leaders and/or consultants need to deliver more straight talk on what skills and competencies that CPG supply chain leaders, and their teams, need to have in order to be more successful in their efforts. Technology vendors need to stop the endless re-purposing of supply chain visibility or competency acronyms and get to the essence of supporting CPG supply chains with more cost-effective and responsive solutions to an industry that is experiencing unprecedented challenges.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following topics: Zara Implementing RFID Tagging System; Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs; Pratt and Whitney and IBM Embark on Predictive Analytics Initiative; U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil
Zara Implementing RFID Tagging System
Reports indicate that Zara, a known icon in world class logistics and supply chain management, is implementing a microprocessor-based RFID tagging system to facilitate item-level tracking from factory to point-of-sale. This initiative was revealed at Zara’s parent company, Inditex SA, annual stockholder meeting earlier this month.
The tracking system embeds chips inside of the plastic alarms attached to various garments and supports real-time inventory tracking. The retailer indicated that the system is already installed in 700 of its retail stores with a further rollout expected to be 500 stores per year. That would imply that a full rollout to all 6300 Inditex controlled stores would entail a ten year rollout plan. No financial figures have been shared regarding the cost aspects of this plan.
Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs
One of our predictions for 2014 (available for complimentary download from Research Center above) called for stable commodity and supplier prices with certain exceptions. One of those exceptions is turning out to be both the cost of cocoa and transportation.
Citing current and expected higher commodity, packaging, utility and transportation costs, Hershey announced last week an increase in wholesale prices by a weighted average of 8 percent, which is rather significant. That was followed by an announcement from Mars Chocolate North America this week that it will institute price hikes amounting to seven percent. A Mars statement issued to the Wall Street Journal indicated that it has been three years since the last announced price hike and that Mars have experienced a dramatic increase in the costs of doing business.
According to the WSJ, cocoa grindings, a key gauge for chocolate product demand, has surged over 5 percent across Asia and 4.5 percent in North America.
By our lens, the next move will more than likely come from Mondalez International.
For consumers, indulging in Hershey Kisses, M&M’s and Snickers will be more expensive.
Pratt and Whitney and IBM Embark on Predictive Analytics Initiative
Another of our 2014 predictions called for increased technology investments in predictive analytics. One indication of that trend was an announcement indicating that aircraft engine provider Pratt & Whitney is partnering with IBM to compile and analyze data from upwards of 4000 commercial aircraft engines currently in service. This effort is directed at developing more predictive indications of potential engine maintenance needs. According to the announcement, each aircraft engine can generate up to a half terabyte of operational performance data per flight. According to an IBM statement: “By applying real time analytics to structured and unstructured data streams generated by aircraft engines, we can find insights and enable proactive communication and guidance to Pratt & Whitney’s services network and customers.”
Previously, Accenture announced a partner effort with General Electric’s Aviation business to apply predictive analytics in areas of fuel-efficient flight paths.
U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil
As a response to heightened calls for increased safety of trains carrying crude oil across the United States, the U.S. Department of Transportation announced this week a set of comprehensive new rules for the transportation of crude oil and other flammable materials such as ethanol. The move follows similar efforts announced by a Canadian transportation regulatory agency.
The new rules call for enhanced tank car standards along with new operational requirements for defined high hazard flammable trains that include braking controls and speed restrictions. The new rule proposes the phase-out of the thousands of older and deemed unsafe DOT 111 tank cars within two years. Rail carriers would be required to conduct a rail routing risk assessment that considers 27 safety and security factors and trains containing one million gallons of Bakken crude oil must notify individual U.S. state entities about the operation of such trains. Trains that haul tank cars not meeting enhanced tank car standards are restricted to 40 miles-per-hour while trains carrying enhanced tank cars would be limited to a 50 miles-per-hour speed restriction. Further under the proposed new rules, the ethanol industry will have up to 2018 to improve or replace tank cars that carry that fuel.
The proposed new rules are now open for industry and public comment over the next 60 days and are expected to go into effect early in 2015. According to various business media reports, there are upwards of 80,000 DOT-111 rail cars currently transporting crude and ethanol shipments. When the new U.S. and Canadian rules take effect, there is likely to be a boon period for railcar producers and retro-fitters.