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.
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 Friday– Cyber 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.
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.
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.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
Wal-Mart, IBM and Tsinghua University Announce Joint Collaboration on Food Safety Tracking Technology
This week, global retailer Wal-Mart along with IBM and Tsinghua University announced a joint effort to improve the tracking and movement of food products across China in an effort to improve overall food safety. The government of China has identified food authentication and supply chain tracking as a critical concern to quickly find and eliminate sources of food contamination within the country.
This announcement bears watching among consumer goods focused supply chains since this new effort will be leveraging what is termed as blockchain technology. This form of technology is increasingly being identified by supply chain focused technology providers for applicability in providing higher levels of intelligence regarding the movement of materials across a supply chain or B2B network. In essence, it fosters the sharing of data and information across a network of computers and as noted in the announcement, is gaining broader recognition due to its applicability in recording and keeping track of assets and materials. This form of technology currently powers digital bitcoin currency use.
According to IBM, when applied to the food supply chain, product information such as farm origin details, batch numbers, processing data, expiration dates, storage temperatures and shipping details can be digitally connected to food items, and the information is entered on the blockchain at every step of the process.
The technology can further aide retailers such as Wal-Mart in managing the shelf-life of products within individual stores and in having access to the traceability aspects of the product’s supply chain. In the specific applicability to Wal-Mart, the announcement indicates that the retailer plans to utilize IBM Blockchain based on Linux Foundation’s Hyperledger Project, which is an open source software project approach that builds on blockchain tools.
Obviously, the closest applicability for the leveraged use of blockchain technology is in current B2B EDI messaging networks that record various movement and transactions among various supply chain trading partners. While attending the recent IBM Empower 2016 conference, executives made mention of upcoming announcements related to IBM’s Sterling Commerce B2B technology and future applicability for this technology.
OpenText, another major B2B technology network provider has also indicated a development direction that augments existing EDI and transactional messaging with broader analytics capabilities.
The takeaway for readers is to begin to consider the possibilities for utilizing EDI messaging and other transactional, content, and unstructured data passing along B2B trading networks as sources of broader supply chain intelligence and analytics related to needs in regulatory compliance, traceability and reduction of waste.
We believe there will be more initiative announcements forthcoming such as the one from retailer Wal-Mart, initiatives that will leverage B2B trading network information towards efforts to integrate value-chain physical flows with needs for broader intelligence and analytics related to more-informed and timely decision-making.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The Associated Press and other media outlets today reported that AB InBev expects to cut approximately 3 percent of its total global workforce, the equivalent of thousands of jobs, once the giant consumer goods conglomerate complete it latest $110 billion mega acquisition, that being rival beer brewer SABMiller.
The AP report notes that with a combined global workforce of roughly 230,000 employees, the 3 percent cutback could amount to around 6600 employees over a three-year period.
Such news should not at all be surprising, given the track record of performance from InBev’s controlling investor 3G Capital. The Brazil based private equity firm is noted for its zeal for zero-based budgeting techniques, along with a formula for the shedding of thousands of employees and across the board cuts in all forms of “unnecessary” expenses. Such zeal includes the extension of payment intervals involving suppliers which have been reported to average in the hundreds of days.
In our October 2015 Supply Chain Matters commentary, Are Mega Acquisitions Toxic for Product Process and Supply Chain Innovation, we observed that the sheer size and scope of bringing together two global beer giants is sure to provide added challenges in rationalizing product innovation, consolidation of business systems, supply and demand fulfillment capabilities on a global scale. Thus, today’s report is not at all surprising.
This week’s report additionally notes that InBev is yet to evaluate “front-office supply departments, for which integration plans are not completed.” By our lens, that is the indication of even more cuts to come along with other potential consolidations in the above noted areas.
In October, we observed that acquisitions of the dizzying scope and magnitude of-late have led to months of organizational disruption and changing management focus. That is especially pertinent in industries such as food and beverage and consumer goods, where consumer preferences and buying trends have caused upheavals among existing players and have led to current consolidation or growth via acquisition. Many of such past mega acquisitions have admittedly mixed results as to overall long-term success.
The open question is whether such acquisitions are likely toxic for required needs for product, process and supply chain focused innovation, agility and capability efforts, not to mention enhanced collaborative relationships with value-chain partners.
We have our views, but the ongoing new AB InBev consolidation efforts may provide different evidence.
Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow. However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.
To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.
Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.” In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.
Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.
The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.
And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.
The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.
In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.
In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.
Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.
The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.
Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.
In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.
Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.
We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.
The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers. They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
From time-to-time as developments warrant throughout the year, we publish various succinct research advisories to clients and blog readers focused on specific industry, line-of-business, functional or technology trending that warrant specific attention for both management teams and supply chain management professionals. Normally our advisories are included within regular blog posts, but when significance warrants, and content length dictates that we provide deeper insights, we will now provide these advisories in our Research Center as complimentary downloads.
There have been several phases related to the ongoing explosion of online commerce and its impact on retail and B2C focused industry supply chains. Take note that 2016 marks the beginning of the newest phase, namely impacting the long-term presence of brick and mortar retail.
The watershed events have been recent Q2 financial performance results from various retailers, and more specifically, last week’s public acknowledgement by broad based merchandise retailer Macy’s that declining foot traffic makes the cost or value of real estate and physical store operations a new determinant of long-term strategy. The initial shockwave came in January with Wal-Mart’s announcement that it would close 260 stores globally, including 154 across the United States as part of comprehensive strategic alignment of strategy. By June, there is additional discernable evidence of this new phase.
In our Ferrari Consulting and Research Group Research Advisory– The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, we address background, the iteration of phases and including the tenets of this new phase, along with actions to consider.
Our only requirement for this complimentary research advisory report is that readers fill-out an electronic download form that requires some basic information. To download the report, access our Research Center from the top menu, double-click on the words Research Advisory- August 2016 on the right-hand side and complete the form.