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.
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.
In this capsule commentary, we include the following topics:
- UPS Memphis Facility Expansion
- Foxconn Plans for New Plant in China’s Guizhou Province
- Mondelez Continued Re-Structuring,
- A New SCRM Standard,
- Typhoon Impacts the Philippines
UPS Kicks Off Expansion of Memphis Facility
Global transportation and parcel giant UPS indicated this week that the services provider has kicked off construction related to the expansion of its Memphis Tennessee package distribution facility. According to the announcement, the expansion will add an additional 140,000 square-feet of building space with an estimated cost of $70 million. The UPS Memphis facility controls processing of air and ground gateway hub operations processing and reports further indicate that UPS is leasing upwards of 27 acres from the Memphis Airport Authority to support an 80 percent expansion in package processing. Early improvements are expected to be operational by November, to accommodate expected holiday peak shipment volumes.
Readers will recall that on the day before last year’s Christmas holiday, UPS was thrown under the bus for its admission that its network was overwhelmed and unable to deliver all of parcels in time for the holiday. While the Worldport facility was the prime focus at the time, the announced expansion in Memphis is an obvious response to have more capacity in place for the upcoming peak holiday shipping period.
Foxconn to Build New Environmentally Friendly Production Facility in Interior China
Global contract manufacturer Foxconn Technology has disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek report, a 500 acre park will be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang.
Plans call for an environmentally focused facility to produce smartphones, large-screen televisions and other products that will employ upwards of 12,000 workers. Production processes within this new plant will include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The facility will also include a 2160 square-meter state-of-the-art data center that will be cooled by prevailing natural winds. Bloomberg makes no mention of advanced robotics for assembly but we suspect that may also be included.
This facility will also be constructed from 100 percent recycled steel and include patent protected heat-reflective glass that was designed by Foxconn. The plant is scheduled to be operational by March of 2015.
Mondelez to Separate European Cheese and Grocery Unit
In late January, we noted in a commentary that an activist investor was granted a board seat a global snacks and foods provider Mondelez. The Wall Street Journal reported at that time that Mondelez management agreed to this move to quell public criticism of the company as well as avoid a public proxy fight. Having a board seat, activist investor Nelson Peltz could escalate his calls for added profit margins.
Last Friday, the company announced that it would separate its European cheese and grocery products groups into separate business units as it prepares to jettison its coffee business into a new company. Rumors among the Wall Street community reflected on eventual sale of the European grocery and cheese businesses as well. According to reports, both European groups represented 3.9 percent of total sales.
ASIS Releases New Supply Chain Risk Management Standard
ASIS International, a society of global security professionals released a new supply chain risk management standard to assist organizations to address operational risks within their supply chains. This standard was developed by a global cross-disciplinary team in partnership with the Supply Chain Security Council. An Executive Summary of this new standard can be viewed at this web link.
Typhoon Strikes the Philippines
Typhoon Rammasun barreled across the Philippines this week, killing at least 38 people and leaving the capital city of Manila without power most of Thursday. The eye of the storm passed just south of Manila after impacting the island of Luzon. The storm was reported to have destroyed about 7,000 houses and damaged 19,000, with more than 530,000 being evacuated. Offices and commerce were expected to reopen by late week.
Meanwhile, southern China and Northern Vietnam are bracing for the arrival of the Typhoon on Friday, with wind gusts expected to surpass 140 kilometres per hour.
Among consumer goods and services focused supply chains, Wal-Mart clearly warrants special attention. The global based retailer continues to provide clout and sheer scale of operations that any producer, manufacturer, direct competitor or supply chain cannot ignore.
This week, and for the first time ever, this retailer is hosting more than 500 manufacturers to spur more “Made in the USA” products that can be offered across Wal-Mart’s outlets. The retailer has committed upwards of $250 billion over the next ten years to support more domestic sourcing of products, and is one of very few companies with the clout and influence to make something happen in this area. Supply Chain Matters has previously complimented Wal-Mart on this initiative and we trust others will as-well. More on this topic in a later commentary.
Business media and indeed Supply Chain Matters have also called attention to troubling signs involving lagging sales growth in the U.S. along with other more visible issues. The retailer recently reported its fifth straight quarter of negative U.S. sales and reduced traffic.
For an in-depth perspective on what is really occurring behind the scenes, along with a renewed sense of urgency, we call reader attention to this week’s Wall Street Journal front-page article: Wal-Mart Looks to Grow By Getting Smaller. (paid subscription required)
This article specifically profiles the retailer’s new CEO, Doug McMillon, described as a “Wal-Mart lifer” and his uncharacteristically new efforts directed at altering prior Wal-Mart business models in favor of more innovative approaches. In essence, the WSJ concludes that McMillon is looking beyond a traditional short-term focus in a concerted two-fold effort to bring the retailer into the next century of retailing. These efforts have considerable supply chain and B2B business network implications in the months and years to come.
Described is a new sense of urgency instilled across the entire executive leadership team which includes increased piloting of new ideas. “For the first time in its history, Wal-Mart will open more smaller grocery and convenience-type stores than supercenters.” The WSJ cites internal sources as indicating that the retailer is evaluating plans to open free-standing liquor stores and adding more gasoline service stations in certain states. A test store near Denver allows shoppers to order groceries online and pick-up that order in a drive-thru. The notion of “everyday low prices” is giving way to “dynamic pricing” based on competitive market data.
In its latest fiscal year, the retailer plowed $500 million into its new online E-commerce business, including the addition of three new online fulfillment centers, and has plans to invest an additional $150 million in the current fiscal year. Last year, the retailer was cited as having the highest online sales growth, 30 percent compared to Amazon’s 20 percent gain. Wal-Mart now has upwards of $10 billion of total revenues coming from its online channels.
McMillon’s focus further remains on day-to-day operations of stores including smarter merchandising and in-stock inventory management along with cleaner stores. The article notes that at a recent annual meeting of store managers, an executive admonished store managers to take more active ownership of stores and clean-up their operations. If you have, as this author has, visited a Wal-Mart store of-late, you may have observed that stores are more disheveled with associates that exhibit a lack of caring about shoppers needs. Wal-Mart also has to come to grip with its ongoing labor management practices. The WSJ makes note that earlier in the year, the National Labor Relations Board accused the retailer of unlawful retaliation against workers who took part in protests over working conditions.
Our community can well relate to the fact that keeping shelves adequately stocked was the primary emphasis of Wal-Mart’s prior RFID item-tracking initiatives, which yielded minimal impact and continual resets.
Whether Wal-Mart will succeed in all tenets of its current two-fold business strategy is certainly fodder for added speculation and water cooler debate. However, the continued clout and influence of the retailer on the ultimate success of supply chain and demand fulfillment initiatives is unmistakable, and thus, cannot be ignored. As a participant in Wal-Mart’s supply chain, your organization will again be tasked with many short and longer-term initiatives in support of these parallel efforts.
Keep in mind what is going on behind the scenes as a giant retailer attempts to change its culture and business models to meet the realities of the new era of retailing and customer fulfillment.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Within our Supply Chain Matters 2014 Predictions for Global Supply Chains, (full research report available for complimentary downloading in our Research Center) we specifically addressed extraordinary challenges for consumer product goods supply chains during 2014, where combinations of external forces are fueling these challenges. These forces include, among others, an economically stressed global consumer leading to contraction of global growth rates and margins, intense competition from private brands as well as a certain group of activist investors demanding more cash value for their investments in CPG companies.
In our most recent CPG industry supply chain posting in February, we analyzed recent supply chain directional indicators from CPG companies Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We analyzed 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. Once more, such savings are generally re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand.
More evidence of CPG industry supply chain stress comes from an announcement yesterday from General Mills indicating that that amid a slowdown in U.S. sales and consequent stalled earnings growth that company must initiate more aggressive cost savings specifically directed at North American supply chain operations. Revenues from the company’s latest quarter fell 2.9 percent from the year earlier period. While earnings rose, they reportedly missed analysts’ expectations.
The company indicated that it will initiate a strategic review of manufacturing and distribution to identify potential cuts in capacity and overhead costs. According to various media reports the initiative would likely lead to a series of required cost cutting initiatives directed at North America with a consequence of closing production lines and/or plants, to reduce costs in order to improve margins.
Like others in this industry of-late, the company has made large bets that international growth would improve margins. General Mills CEO Ken Powell has indicated: “Our No.1 objective in the new fiscal year is to accelerate our top-line growth.” He described sales and operating profit results as disappointing while marketing related promotional spending in developed markets has been less effective than planned. Commodity costs were slightly above forecast while one media report indicates that the company’s commodity costs increased 3 percent.
According to reporting from the Wall Street Journal, each year for the past decade, General Mills outlines its Holistic Margin Improvement program. In the new upcoming fiscal year, the company has targeted $400 million in margin savings, and apparently, much of it will come from supply chain related operations.
With the latest developments and evidence concerning General Mills, Supply Chain Matters re-iterates our prior insights regarding the unique challenges occurring across CPG focused supply chains. The notions of “business as usual” striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut with today’s rapidly changing industry dynamic. They are now are a relic of the past.
CPG firms and supply chain leader’s need to quickly come to the realization that the supply chain changes being sought require hands-on leadership, empathy and understanding to the tradeoff of such changes to areas such as supply chain disruption, quality management and morale. There can no longer be a tolerance for supply chain functional stovepipes and pet initiatives. It is now about evidence-based decision-making, smarter and more response-focused capabilities. Monetary incentives to reward required changes cannot be solely limited to the executive suite
We, as thought leaders and/or consultants, need to stop feeding the fallacies of the past CPG industry and deliver more straight talk. The notion of multi-year focused supply chain maturity timetables do not cut it when industry C-level executives are under the gun to deliver short and long-term top and bottom-line results.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.
Supply Chain Matters has been following recent developments in the area of smart labeling, specifically a series of announcements from Norwegian based printed electronics technology provider Thin Film Electronics ASA. This technology provider’s latest announcement is the most significant to-date, with profound long-term potential benefits for certain industry supply chains.
In an October of 2013 Supply Chain Matters posting, we called reader attention to the announcement that Thinfilm had successfully demonstrated a fully functional, stand-alone, integrated printed electronic temperature tracking Smart Sensor Label. The label was described as being built from printed and organic electronics with low power requirements with potential application to track and monitor temperature and environment for pharmaceutical products or to monitor the shelf-life and food safety of perishable products. In early April of this year, we updated readers on two other strategic partnership announcements involving Thinfilm’s smart label product development plans. One included a partnership with Temptime, for potential cold-chain tracking applications for pharmaceutical products, and another with PakSense Inc., in the development of intelligent sensing specifically designed to monitor perishable goods.
This week, yet another rather noteworthy announcement has been made, namely that Thinfilm has successfully demonstrated an integrated system product that combines printed electronics technology, real-time sensing and near-field communication (NFC) functionality. The significance of this announcement concerns technology that enables high‐performance transistors to support the high frequency RF circuitry required for NFC communications in Thin film’s labels with the potential to support a potentially wider range of sensing needs. A video depicting the proof-of-concept is included in the announcement on Thinfilm’s web site.
Last week, this author had the opportunity to speak with Thinfilm’s Executive Vice President and head of North America practice, Jennifer Ernst. in anticipation of this week’s announcement. Jennifer explained that the addition of NFC opened opportunities for the sensing label to be paired with a mobile device such as a smartphone, where GPS focused or other mobile and RF related functionality can be incorporated into item-level sensing. As an example, the receipt of a truckload shipment of perishable products can be monitored and tracked along its journey. The notion of item-level tracking from farm to fork becomes closer with such capabilities. The fact that an infrastructure of mobile broadband and cellular networks already exists in many geographic regions, potentially removes the infrastructure cost burden that hampered previous efforts of RFID enabled item-level tracking. The smart labels will further support protocols to communicate with hand-held readers. We specifically asked the very obvious question: What about the individual cost of a label? The response we received was that Thinfilm’s goal is to target a cost that is significantly below that of current RF-based temperature monitors. Of course, the industry will have to await the real result, but we did get a sense that Thinfilm is driving toward a compelling cost-benefit proposition.
According to this latest announcement, Thinfilm anticipates delivering commercial samples of smart labels to key partners in 2015.
We continue to bring reader attention to specific smart label enabled developments because they represent, from our view, the dawning of a new era of item-level tracking, one that can harness the potential of the “Internet of Things”, namely a sensing label, with predictive analytics capabilities. Consider the possibilities that near real-time information concerning the environmental or shelf-life condition of the physical product can be integrated with supply planning, inventory management and customer fulfillment needs. Consider the possibilities in anti-counterfeiting, drug and food safety as well as avoidance of waste, spoilage and obsolescence.
This is exciting stuff. It provides evidence as to how convergence of technologies are now leading to the achievement of the goal for integrating physical and digital supply chain information and more predictive decision-making capabilities.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
This commentary is an update concerning our prior Supply Chain Matters coverage of the acquisition of U.S. pork producer Smithfield Foods. In May 0f 2013, China based Shuanghui International announced its $5.7 billion acquisition of this U.S. based producer. Smithfield food brands include Armour, Carrando, Farmland, John Morrel and Health Ones among others. This acquisition was primarily about access to a more trusted U.S. brand and food-focused supply chain since China’s consumers remain distrustful of Chinese-based food supply chains. Since the acquisition announcement, Shuanghui International has now been renamed to WH Group.
As noted in our October 2013 commentary, both companies had already begun the process of integrating their international sales staffs in an effort to accelerate the global expansion of Smithfield brands. Further reported at that time was that Shuanghui has plans to unveil a new line of premium ham, shoulder meat and other muscle cuts of pork products targeted at China’s growing middle class consumers, thus wasting little time on reaping the strategic benefits of this acquisition.
This month, Smithfield Foods reported its financial results for its first fiscal quarter and those results were record-breaking. Overall profitability increased nearly sixfold as the combination of dramatically higher pork prices in the U.S. coupled to increased international based revenues led to Smithfield’s CFO declaring: “We’ve never had a better January to march period.” Overall revenues increased 3 percent to $3.4 billion while international operating profit increased over 157 percent to $36.9 million. Export sales volume increased by 17 percent. A recent merger of two previous independent operating entities, Smithfield Packing Company and Farmland Foods has further contributed to decreased costs.
Industry supply shortfalls attributed to the porcine epidemic diarrhea (PED) virus that affected young pigs caused live hog prices to increase by 16 percent during the period which also helped to boost results. The earnings press announcement notes: “The strategic merger with WH Group yielded synergies with exports up double-digits on significantly higher volumes to China, among other markets.“
Going forward, Smithfield’s outlook currently calls for reduced hog and pork supplies coupled with organic growth to fuel significantly year over year results. Plans call for as many as four new production plants to be constructed in China over the next 18-24 months that will produce branded pork products from animal products sourced in the U.S. farm supply chain. According to a published report from Tidewater Daily Press, the company has made overtures to restaurant chains such as McDonald’s, Subway and Yum Brands to help these chains grow their revenues and supply sources for China based outlets. This year, Smithfield additionally plans to open more than 20 branded stores across China, many to be operated in kiosks within larger stores.
Thus, a somewhat “perfect storm” of reduced pork supply, higher yield, coupled with a huge China consumer market potential are already beginning to bear positive momentum. Supply Chain Matters will continue to monitor Smithfield’s efforts to ascertain how the rest of this year’s financial results stack-up in the light of industry forces.