Supply chain management teams involved with consumer goods are all too aware that one large and dominant customer, particularly a retailer with the scale of a Wal-Mart, can determine the fortunes of a manufacturer.
The latest reminder of this fact comes with news that Exide Technologies, a producer of lead-acid batteries for automotive, marine, recreational and other purposes, filed for Chapter 11 bankruptcy protection for its U.S. entity earlier this week. While its customers included automotive OEM’s, parts suppliers and retailers, it biggest customer was Wal-Mart. In its formal filing, Exide attributed Wal-Mart’s decision in 2010 to change its sole supplier for automotive and other battery needs to Johnson Controls as the primary supplier amounted to a loss of about $160 million in annual revenues for Exide. Obviously, that is a significant hit.
In its reporting, the Wall Street Journal points out that Exide was also dealing with issues associated with a California lead-recycling facility that supplies a “significant portion” of its domestic lead supply. The manufacturer was forced to suspend operations at this Vernon California based facility in April, and further claims that this development will eliminate about $24 million in projected pre-tax earnings.
Exide has six months to develop an acceptable business plan and nine months to file a restructuring plan that lenders can approve. Exide’s CEO has indicated to business media that there are no current plans to close additional facilities but at that same time, would not rule out layoffs.
Wal-Mart can carry a big stick, especially when a manufacturer becomes a sole supplier of a product category. That stick comes with obvious circumstances without offsetting businesses and customers.
In our Supply Chain Matters perceptions of this year’s ranking of the Gartner Top 25 Supply Chains, we noted how pleased it was that Unilever had finally made top-five recognition and how this global consumer goods provider actually garnered the highest score among the Gartner analyst community More than many consumer goods supply chains, Unilever has demonstrated agility in supporting expanded revenue growth tapping emerging global markets and agility in managing its extended value-chains.
The June 10th edition of Fortune provides more evidence of Unilever’s stature as a global supply chain leader. The article paints a broad portrait of CEO Paul Polman, and specifically his charge that sustainability goals will not trump traditional goals such as shareholder return. Fortune declares that Unilever “has gone beyond big U.S. companies like GE, IBM, and Wal-Mart by putting sustainability at the core of its business.” Polman iterated to Fortune: “The essence of the plan is to put society and the challenges facing society in the middle of the business.”
While some may be skeptical of these statements, the business results certainly speak for themselves. Since taking over as CEO, Unilever has increased revenues by 30 percent, made larger penetrations in emerging markets and is giving competitors such as Nestle and P&G a run the money. The article points out that last year, despite the severe economic crisis impacting Europe along with rising commodity costs, Unilever posted record revenues and profits. Its revenues grew in every region while it was successful in reducing the costs.
Unilever translates its passion for sustainability in many phases of its direct consumer marketing as well. Fortune points to one examples of a campaign related to the Axe brand of grooming products that challenges young men to save more water by showering with a friend. Last year the company rolled out a program to begin the rollout of new, climate-friendly ice cream freezers in the U.S.. Ben & Jerry’s ice cream, along with other Unilever ice cream brands like Breyers, Good Humor and Klondike, are to be kept in freezers that use at least 10 percent less energy and replace harmful “F” gas coolants with hydrocarbon (HC) refrigerants.
From a supply chain lens, the company is driving farmers and suppliers to be certified as sustainable or else risk losing Unilever’s business. Unilever’s plan includes 60 targets with targets related to chickens, cows, cocoa, use of paper harvested from manageable forests and consumption of water. Fortune points out that: “Unilever’s sustainable sourcing program is intended to ensure that the company will have access to affordable raw materials as logs as it needs them.”
Of little surprise, Fortune cites that the company is one of the five most-searched-for employers on Linked-In.
Full Disclosure: This author is impressed- I am a current Unilever stockholder.
Prediction Seven in our annual Supply Chain Matters 2013 Predictions for Global Supply Chains (available for no-cost download in our Research Center) noted that Chinese based manufacturing and service firms will markedly increase their presence in global supply chains. We based that prediction on reports that China’s leaders were encouraging industry to buy assets overseas and build more internationally focused businesses. A further strategic goal in this strategy was industry supply chin penetration, particularly at the lower but critically important tiers of industry supply chains. Up to this point, these deals have included energy production, mining and automotive components sectors.
Today, business and other media are buzzing with the headline that China’s largest meat processor, Shuanghui Group intends to acquire U.S. pork products provider Smithfield Foods, a global leader in hog farming and pork production for approximately $4.7 billion. Smithfield’s brands include Armour, Farmland and Health Ones. This deal is headlined as the biggest Chinese takeover of a U.S. based company to-date and is subject to all-important approval by the U.S. Committee on Foreign Investment. Shuanghui’s offer was a healthy 31 percent premium to Smithfield’s closing stock price yesterday and represents a premium of 17 times earnings. Smithfield however, has been experiencing some financial challenges of late with profitability declining by over 30 percent since 2011, with an activist investor, Continental Grain Company actively lobbying for a break-up. Smithfield must also convince its key customers on the strategic benefits of this deal and that important domestic supply will not be re-routed to China’s massive market. Smithfield’s eroding margins have been caused by a squeeze in rising feed and commodity costs vs. an economically stressed U.S. consumer unwilling to pay higher prices for pork products.
According to statements from the parties involved, the primary purpose of the deal is to foster more export of Smithfield products towards China’s booming market. China’s pork consumption is estimated to be over 52 million metric tons and some analysts point to facts that the country does not have enough current arable land to sustain further growth of that market. The parties have been openly declaring that this deal does not involve the import of Shuanghui products into the U.S. market. In its reporting, the Wall Street Journal and other outlets have cited 2011 incidents in which Chinese health inspectors discovered the food additive substance clenbuterol which speeds muscle growth in hogs but is harmful to humans among pork products produced by a subsidiary of Shaunghui. That substance is banned in both China and the U.S. Further, many in social and other media have probably witnessed the recent graphic photos of thousands of dead pigs dumped by Chinese farmers in rivers surrounding Shanghai.
Chinese consumers remain highly distrustful of Chinese food producers, thus a deal such as this which can increase availability of U.S. bred and produced pork products across China at a potentially premium price has strong benefit for Shaunghui. Other food producers in China have come to the discovery that to insure consistency in product quality and overcome corrupt practices, they need to control the entire food supply chain from seed to consumption. In a Supply Chain Matters commentary penned in March, we observed how New Zealand based Fonterra was turning supply chain risk into opportunity by re-entering China’s infant formula market via a strategy of controlling the entire milk and formula supply chain.
The WSJ reported that the idea of a deal was first broached over four years ago but that price and value was a continual issue in these discussions. In separate reporting, the WSJ notes that the U.S. political approval process may get rather interesting since agribusiness interests have been lobbying for food companies to scale and pay more attention to growing global markets. Thus these business interests may lobby for regulatory approval. U.S. politicians however, hearing the voice of farmers and consumers, may balk at the deal. One editorial penned by John Bussey in the WSJ calls for legislators to seek quid pro quo from Chinese leaders in lifting current restrictions for imports of U.S. food products and on opening-up further markets to U.S. companies. Thus, the political approval process can get dicey regarding this deal. Smithfield’s CEO has indicated to business media that are at least two other suitors waiting if the Chinese deal does not come to pass.
If consummated, the implication is that a major Chinese food producer will have a presence and voice in the U.S. pork products supply chain. The Chinese will have a major U.S. presence and their bacon, if you pardon the analogy. Management philosophies and policies could follow unless Smithfield management is provided an independent voice in running its operations.
Chinese companies are indeed shopping for international deals and they are exercising savvy in global supply chain influence. We may well observe other deals in the months to come.
Last week, in conjunction with its Supply Chain Executive Conference, Gartner announced its annual Top 25 Supply Chains rankings for 2013. As has been our tradition, Supply Chain Matters provides our readers with some of our perceptions in the context of both this year and previous year’s rankings, along what we have observed in multiple industry settings. We do this not in the context of positioning our own proprietary ranking process or flattering potential or existing clients, but as the voice of an experienced global supply chain industry observer and influencer.
We begin with the listing of Gartner’s 2013 ranked supply chains coupled with previous history.
For the fourth year in a row, Apple again topped this year’s ranking. While not a surprise, Wall Street moguls and the investment community have not been all that flattering towards Apple in 2013, driving a perception that Apple may have peaked. This year, Gartner added more transparency by providing the detailed scoring results that make-up the composite ranking score. Notice that Apple garnered an overwhelming #1 from Gartner’s peer group panel voters but it company not gain the highest ranking score among Gartner analyst opinion. The highest Gartner analyst score was garnered by Unilever, and Supply Chain Matters applauds that view. More than many consumer goods supply chains, Unilever has demonstrated agility in supporting expanded revenue growth tapping emerging global markets and agility in managing its extended value-chains.
This year’s top five ranking from included three from last year, Apple, McDonald’s and Amazon. We continue to question how a restaurant services firm such as McDonald’s can be consistently ranked in the top five given a far different supply chain services model that is less asset intensive. While Samsung Electronics re-entered the top ten, its performance in global supply chain scale and product innovation, by our view, merits a top five ranking.
We were pleased to observe the addition of Lenovo and Qualcomm to this year’s Gartner rankings, with each well deserved. In last year’s Supply Chain Matters commentary related to the Top 25, we cited Lenovo as the best turnaround candidate. We were surprised to observe the addition of Ford, given that the company has incurred quality prone new product introductions among key models, as well as being rather late to invest in production capacity in China’s exploding auto market. We continue to be disappointed by the lack of recognition toward Hyundai, who continues to make notable strides in product introduction and market share gains, supported by a supply chain vertical integration strategy.
This year, along with Amazon, three other global retailers, Inditex, Wal-Mart Stores and Hennes & Mauritz (H&M) made the top 25 ranking as opposed to six in the 2012 ranking. Wal-Mart, a previous supply chain icon, has slipped from the number 4 ranking in 2010 to number 13 in 2013. While it still garnered a rather high peer group ranking, the Gartner analyst vote and business results paint a different picture. The Amazon effect is very real and very concerning.
Dropped from the Top 25 ranking this year was Hewlett Packard, Kimberly-Clark and Research in Motion. Just making the number 25 ranking was Johnson & Johnson, which slipped an additional three ranking spots. As was the case in our observation last year, we again believe that J&J has not demonstrated a capability to be ranked in any Top 25.
The unfortunate aspect of Gartner’s Top 25 ranking remains the relatively high threshold of corporate revenues, too much of a dependency on Return on Assets which favors firms who elect to outsource the bulk of their supply chain activities. Supply Chain Matters does not subscribe to an opinion that financial metrics should be the majority driver for recognizing supply chain performance. It precludes noteworthy turnarounds in performance, overall supply chain process innovation and abilities to rise to a challenge in rather difficult industry settings. Privately-held companies and those from emerging markets are often precluded from rankings that place the majority of emphasis on financial metrics.
Today’s edition of the Financial Times features a headline article on the growing threat of organized cyber threats on corporate systems. (paid subscription required or free metered view) It outlines how criminal networks have increasingly been stealing information and extorting money not to release that information.
One of the examples cited was a 2008 hacking attack directed at today’s global leader in contract manufacturing, Foxconn, who happens to be Apple’s predominant manufacturing services provider. The same contract manufacturer performs manufacturing for some of the world’s premiere high tech companies including Dell, HP, IBM and others. FT cites sources with direct knowledge as indicating that hackers breached the contract manufacturer’s email system to exploit Foxconn’s then head-to-head rivalry with battery maker BYD. Both companies at the time were intensely competing in the design and manufacturing of alternative energy components. The plan was apparently to blackmail both parties with the threat of releasing the hacked information, but was aborted. Both companies declined FT’s requests to confirm this attack.
The article also cites reports late last year that heavy machinery producer Sany hired hackers to spy on its industry rival Zoomilion. Three Sany executives were arrested as a result of this case.
A supply chain risk mitigation plan needs to umbrella, among other areas, the increased threat of cyber information attacks. As is often the case, the weakest links in global supply chains, namely supplier networks, can sometimes be the target of such attacks. Insure that your supplier audits involving strategic suppliers include some basis of insuring that adequate information security measures are in-place.
Supply Chain Matters has logged previous commentaries regarding the profitability and supply chain challenges of consumer electronics manufacturer Sony. Last year at this time, Sony had slashed its earnings outlook four times during the fiscal year, For the fourth time in less than a year and announced the deepest financial losses in the company’s history, along with the fourth straight year of non-profitability.
We were therefore quick to note that The Financial Times reported today that forty of Sony’s top executives, including its CEO, will forgo end of year bonuses amounting to 30-50 percent of their compensation because the company failed to keep a promise to return the group’s consumer electronics division to profitability for the current fiscal year that ended March 30.
How refreshing is that!
It seems of late that many CEO’s and top executives are very comfortable with awarding themselves large bonuses and double-digit increases in total compensation in spite of operating results. Some have done so while taking major cost cuts from supply chain related operations.
How many would take the same action that Sony’s executives have taken?
In Sony’s case, the bonuses amounted to $10 million which is not a large number in the grand scale of compensation among 40 senior executives. Sony is actually forecasting that it will earn overall profitability for the first time in five years. Sony formally reports earnings next week. According to the FT article, most of the profitability stems from gains in Sony’s financial businesses in Japan vs. manufacturing of consumer electronics.
None the less, Supply Chain Matters is of the view that Sony executives should be praised for their sacrifice and gesture. We sincerely wish other executive teams with similar business challenges would do the same. Then again, this is the period of “the new normal”.