Throughout the summer months, Supply Chain Matters as well as other supply chain management focused media have been monitoring the ongoing threat of potential west coast port disruptions. The primary threat resulted from the expiration of the labor contract among the Pacific Maritime Association, representing 29 U.S. west coast ports, and the International Longshore and Warehouse Union (ILWU).
During July, a Supply Chain Matters commentary cited a published report in Logistics Management made the observation that the threat of U.S. West Coast port disruptions raised an open question as to “peak shipping season” this year. Logistics Management further conducted a reader poll of 103 buyers of freight transportation and logistics services. That survey indicated 68.1 percent of respondents expecting a more active peak shipping season this year. Some respondents were reported to be concerned about potential transportation lane disruptions in the fall. Perhaps, in retrospect, that was insightful thinking by some.
In September, there were reports of significant progress in labor talks with a tentative deal reached on the critical knotty issue of healthcare benefits. The other remaining issues involving compensation, job security and workplace safety implied that contract negotiations would continue for several additional weeks.
As we pen this latest Supply Chain Matters, reports indicate that congestion within the critical Ports ofLos Angeles and Long Beach has reached levels not seen since 2004. A report published on Friday by the Los Angeles Times (paid online subscription or free metered view) describe a logistical nightmare that could undermine the best laid plans for supporting the all-important holiday fulfillment surge. As on Friday afternoon, there were a reported seven container ships anchored and queued off the coast awaiting to be unloaded at both ports.
In a situation which one trucking firm executive describes as “a meltdown on the harbor”, and what LA’s Port Director describes as “a perfect storm”, the unloading and throughput of goods from both ports is now taking 7 to 10 days, and perhaps longer. Four of the seven container terminals in Los Angeles are reported to be currently operating above 90 percent capacity.
Concerns are raising that apparel, toys, electronics and other holiday merchandise may not arrive in time to meet holiday promotional windows. While retailers are initially optimistic that consumers will open their wallets in the coming weeks, this threat for inbound supply delays adds more challenges for retail focused sales and operations planning teams. Already, manufacturers and retailers are being forced to ship critically needed goods via alternative but far more expensive air cargo methods.
The current severe port bottlenecks are being attributed to a combination of factors. They include the increased use of mega-container ships which take longer to unload, a shortage or misbalancing of trailer chassis required for unloading and transporting loaded containers to destinations. Shipping lines have for the most part excited the ownership of trailer chassis to third-party leasing companies. While the operators of the two ports have offered the use of extended free storage time and overflow storage yards, there are little takers due to confusing work rules. Accusations of work slowdowns as a result of a lack of a signed labor contract have reportedly added to the current congestion and calls for acceleration towards a final labor agreement. It is indeed the “perfect storm” scenario that is unfolding.
Supply Chain Matters recently re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is the traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year. For the three months, 2014 TEU inbound load volumes this year were trending up roughly 6 percent from 2013 levels, thus, some retail S&OP teams were planning for a potential disruption scenario. However, it seems now that there were other bottlenecks and choke points beyond the threat of a work stoppage or slowdown.
Retail supply chains are deep into the holiday execution window and there is now little tolerance for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, the ratification and sign-off process will do little to salvage the current port condition. This is a time for creative action.
The optimistic holiday retail sales forecast scenario can well be in jeopardy or compromised by late arrival of needed holiday inventories. Need we further mention the other doomsday scenario- that retailers now delay their most aggressive promotions under the very last days before the Christmas holiday when inventory is in-place.
We will all have to wait and observe as one disruption cascades through the remainder of retail fulfillment channels.
There are many ways to remediate a perceived supply risk management problem and Constellation Brands has just exercised its bold and approach.
The beer and spirits producer recently reported fiscal 2015 second-quarter results. While total revenues increased 10 percent, the company had to reverse approximately $37 million of net sales in the quarter as a result of a product recall at the height of the seasonal beer consumption period in August. This recall was prompted by the discovery that some glass beer bottles contained tiny bits of glass. In what the company describes as an abundance of caution regarding these glass bottles, two million case shipments of Corona Extra branded beer were recalled from wholesalers and retailers during several weeks in August. Perhaps some of our readers experienced the effects of this recall, not being able to drink their favorite beer brand. According to Constellation, there have been no reported injuries due to the defective bottles.
The supplier of the subject beer bottles was Anheuser-Busch In-Bev, specifically a bottle producing plant located at its Mexican based subsidiary. Beer drinkers may recall that the Corona brand was sold to Constellation in order for In-Bev to conform to regulatory restrictions for one of its product acquisitions.
To alleviate this type of problem in the future, Constellation additionally announced its intent to acquire from Anheuser-Bush InBev’s glass plant and associated warehouse facility that was associated with the prior recall. This bottle producing facility sits adjacent to the Corona brewery in Nava Mexico.. The company is investing the sum of $300 million in a vertical supply strategy to gain more control of quality conformance processes and to boost production. The deal further calls for a 50-50 joint venture ownership with Owens-Illinois to own and operate both the Mexican bottling facility and to source Owens-Illinois as a secondary glass bottle supplier.
According to the announcement, the glass plant currently has one operational glass furnace and plans are in-place to scale to four furnaces over the next four years at an additional cost of $300-$400 million, costs that are expected to be equally shared by Constellation and Owens-Illinois. When fully operational, the Nava Mexico bottle facility, operating under the leadership of Owens-Illinois is expected to supply more than 50 percent of the glass needs for Constellation’s U.S. beer business. Constellation also has a long-term bottle supply agreement with bottle supplier Vitro.
While we can all speculate that some of these plans were in the works leading up to the bottle recall, Constellation has indeed taken a bold step in assuring long-term bottle sourcing supply along with added assurance of quality conformance.
General Mills Reports Another Disappointing Quarter While its Supply Chain Remains Challenged with Conflicting Goals
Within our Supply Chain Matters 2014 Predictions for Global Supply Chains published in late 2013, we specifically called out the existence of extraordinary challenges for Consumer Product Goods supply chains in 2014, which is indeed playing out in many dimensions. Economically distressed but more health conscious consumers continue to drive fundamental challenges involving product demand, especially in specific meal, nutritionally based or convenience categories.
In an August posting, Supply Chain Matters highlighted a number of blunt statements from CPG industry CEO’s amidst continued disappointing financial and operating results. Such results are triggering additional cost saving directives for respective supply chain organizations, cutting more flesh from previous cost reduction efforts. In some cases, such cost savings are being applied to fund accelerated product development, sales and marketing efforts to more aggressively promote additional product demand.
While all of this is occurring, packaged food and beverage supply chains have been called upon to support higher levels of product innovation, SKU growth, and aggressive product promotional campaigns that are having mixed results.
Last week provided yet more evidence of this spiral. General Mills, a diversified CP products company behind such brands as Cheerios, Total and Wheaties cereal, Betty Crocker, Pillsbury and Bisquick in baking, Green Giant frozen vegetables and Progresso soups reported earnings for the period ending in August. Included in the results were a 2.4 percent reduction in overall sales, an additional 5 percent reduction in U.S. retail revenues and a near 25 percent reduction in total profits. A week prior to its earnings report, the company announced an $820 million acquisition of Annie’s Inc., an organic and natural foods provider. The company was willing to pay what has been described as a 37 percent market premium to add additional product and brand innovation in the area of organic foods. Also during the recently completed quarter, the company introduced 145 new products, described as a pace of 20 percent higher above the year earlier period.
In the earnings briefing, General Mills CEO Ken Powell exclaimed to analysts:
“The operating environment for food and beverage companies remains quite challenging and trends weakened for some markets in the latest quarter.”
Much more noteworthy, something that Supply Chain Matters has rarely observed was that John Church, Executive Vice President for the Global Supply Chain was invited to be an executive participant in the earnings briefing.
Mr. Church’s statements included the following:
“We’re continuing to deliver strong HMM (Holistic Margin Management) levels each year. Back in fiscal 2010, we set a goal of achieving a cumulative $4 billion in COGS HMM through fiscal 2020. I’m pleased to say that we’re already halfway to our goal. We are targeting another year of strong HMM delivery in 2015, with more than $400 million in COGS HMM in this year’s plan. I have great confidence that by the time we get to 2020 we will have met or possibly exceeded our $4 billion goal.”
Obviously, Mr. Church has described a supply chain being driven by a strategy of cost reduction or cash transfer to fund other strategic initiatives. This has become a common pattern for many CPG supply chains. By our lens, it is another form of financial engineering. None the less, it provides a conflict in capabilities which current supply chain leaders must deal with.
Mr. Church went on to describe that 2015 plans include contributions from all areas of the supply chain and will include involvement of external partners through an initiative termed GEOS or General Mills End-to-End Optimization Solutions. He further described Project Century whose objectives are directed at streamlining and simplifying North American operations and positioning the supply chain for future growth. (aka: Emerging market areas) This effort includes targeting an additional $100 million in cumulative cost savings by fiscal 2017 with material savings realized in beginning of fiscal 2016.
To support these efforts, the company further announced its decision to close a cereal plant located in Lodi California, which employs upwards of 400 people, by the end of 2015, subject to labor union negotiations. Also announced was the closing of a yogurt production facility, located in Methuen Massachusetts, which employs upwards of 100 people, in the summer of 2015.
In the question and answer period, a JP Morgan equity analyst asked whether the industry has reached a self-destructive period of heavy promotional marketing spending with marginal revenue growth payback. Management’s response was that product innovation and capitalizing on consumer trends would fuel higher levels of growth. Thus, the acquisition of Annie’s.
Thus presents a further ongoing challenge to the General Mills supply chain team, namely supporting higher levels of product innovation and market responsiveness. In a previous Supply Chain Matters commentary, we praised a conference keynote delivered by Steven Melnyk, Professor of Operations and Supply Chain Management at Michigan State University, whom this author has long admired. Professor Melnyk expressed a supply chain in harmony as being:
- Supportive of corporate objectives while making achievement of desired business outcomes inevitable
- A strategic asset to the business
- Helping in the identification and support of new business opportunities
Especially insightful was Professor Melynk’s differentiation of output-driven, such as reduced costs, vs outcome-driven supply chain strategies. His observation: “too many supply chains are driven by output-driven perspectives.” He instead defines five possible supply chain outcome models, each requiring different skill and leadership requirements. According to Melnyk, a supply chain can be either: responsive, security, sustainable, resilient or innovative driven. Each of these outcomes is not mutually exclusive, but rather blended according to market or business needs.
For General Mills, it would appear that its supply chain may well be challenged by the conflicts of aggressive cost cutting (output-driven) initiatives required to support and fund product transformation support (outcome-driven) business outcomes. This is yet another specific example of the challenges currently underway among today’s consumer product goods supply chains.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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?