Yesterday, this author had the opportunity to view ComScore’s Quarterly State of the Online Economy webcast. Any team or individual professional with responsibilities to plan supply chain or online business should consider signing-up for this series of quarterly webcasts since they are very good. Yesterday’s session included a review of Q3 online activity, a re-visit of online fulfillment results from the 2012 holiday buying season, and ComScore’s preliminary projections for this year’s 2013 holiday buying season.
In 2012, according to ComScore, online E-commerce sales rose by 14 percent. More importantly, analysis of all of the various online data indicated that consumers had concerns about the state of the economy and events occurring in Washington, and thus online sales clearly peaked at the very latter stages of December. Consumer buying patterns reflected high sensitivity to price and thus high promotional events such as Thanksgiving, Black Friday, and to some extent, Cyber Monday, all reflected spikes in buying activity. In terms of a pattern of one-day sales growth, Thanksgiving Day has grown the fastest over the past five years, growing a cumulative 201 percent on five years. It should therefore be no surprise that more and more brick and mortar retailers plan to open early on Thanksgiving to counter online buying promotions. Contrary to broad misconception, ComScore’s analytical data indicates that Green Monday, which occurs 10 days prior to the Christmas holiday, exceeded Cyber Monday in online sales, which is another indicator that consumers waited until the latter period to make online purchases. Also In 2012, there were 12 days of greater than $1 billion in online sales activity.
The ComScore team cautioned that 2013 reflects a much shorter shopping interval between the Thanksgiving and Christmas holidays in the U.S. , which reflects a mere 26 days. Growth in online activity involving mobile devices is projected to be $10 billion during this period, which is another reinforcement of a price sensitive online shopper equipped to price compare on a real-time basis. This online analytics firm additionally predicts that 25 percent of buying activity will occur after December 15th, with the period from December 15-20 being very crucial. And get this- they have further predicted that in one Monday to Friday week, there could be as much as five consecutive $1 billion dollar online fulfillment days.
Reviewing all of this data, it struck us that supply chain, Sales and Operations Planning (S&OP) and online fulfillment teams will again be put to the test in 2013. More than ever, advanced capabilities in inventory management and responsive replenishment will separate leaders from laggards. The ability to have real-time visibility and be able to pool inventory needed to support the breadth of omnichannel fulfillment needs is part of that differentiation. In 2012, we advised retailers to tear down the functional walls between traditional and online supply chain organizations. In 2013, we will again observe and teams will experience how important that becomes.
Consider a situation where the usual peaks will occur during the Thanksgiving holiday and Cyber Monday, but an even greater surge possibly occurring in the ten day widow prior to Christmas. Consider the ability of the supply chain to respond to five consecutive days of greater than $1 billion in sales, where the need for inventory and logistics will peak across multiple areas. Consider a consensus of predictions that consumers remained rather concerned about the future, and especially what is happening or not happening in Washington, a far more price-sensitive consumer whose holiday buying may be tempered or at least more focused toward specific needs.
The notion of “all hell breaking loose” will indeed take on a new dimension, and S&OP teams had better have clear communication with sales and marketing as to which specific product promotions are planned and how the supply chain will respond. Holidays in Asia and other parts of the world also follow in early January, which is another overlooked aspect to responsive inventory positioning and management.
Thus, a clear understanding and early detection of demand patterns among products, having deep visibility of the end-to-end supply chain, along with a responsive collection of key suppliers will obviously provide differentiation among your competitors in the market. Needless to state, supply chain teams are going to be very busy in the next few weeks, perhaps skipping Thanksgiving and working several weekends. S&OP teams will more than likely be having frequent added meetings to deal with any supply and demand imbalances that are bound to present themselves.
Another takeaway regarding what to expect in the coming few weeks are the critical role that logistics and transportation planning and execution capabilities will play in the coming weeks. ComScore’s analytical data continues to reinforce that the online consumer, given a choice, shops where free shipping is offered. The offering of free shipping clearly correlates to buying preferences. Secondly, Supply Chain Matters has frequently alerted our readers that the flexibilities in transportation services have become rather constrained as carriers and service providers respond to a far more cost sensitive pattern of normal demand for transportation services. Thus, the ability to take advantage of seasonally based flexible capacity will be a function of how responsive teams have become in planning and anticipating the specific surge periods of demand, as well as having solid and longstanding relationships with particular logistics and transportation service providers. Global providers such as FedEx and UPS have outstanding planning capabilities and are already predicting the specific days of expected peak shipment activity, and are planning flex capacity around such days. But, this year more than previous, there is finite capacity that can be deployed, and advertised delivery times will vary. Compound that with the need to responsively replenish inventories or have a supplier fulfill a last-minute need for added inventory, and the global network can become taxed. It will be interesting for our community to observe how global transportation and logistics responds to the 2013 pattern of peak periods for both fulfillment and last minute replenishment.
The bottom line from our lens is that the 2013 holiday buying surge will provide another test of how prior investments in responsive business processes, logistics and transportation planning and end-to-end visibility, and advanced technology differentiates the winners. For retailers and online fulfillment,the tearing down the prior functional walls among traditional retail and online inventory and fulfillment management should provide benefits.
We will all see how this plays out.
Supply Chain Matters calls attention to what we would characterize as a rather disturbing account of the state of hiring practices in the lower tiers of high tech and consumer electronics supply chains. It is yet another reminder of the existing gaps in social responsibility practices in certain industry global supply chains.
The Bloomberg Businessweek article, An iPhone Tester Caught in Apple’s Supply Chain penned by Cam Simpson, paints a disturbing web of subagent migrant labor brokers who feed off the high-tech industry’s culture of excessive demands for high-volume production ramp-up by locating large numbers of workers and charging these workers excessive broker fees. A quote from the article states: “Companies tap an informal, largely unregulated and transnational network of thousands of recruiters. They fan out, often hiring subrecruiters, into the farm fields and impoverished cities of Indonesia, Cambodia, Myanmar, Vietnam and even into the Himalayas in Nepal. The positions they’re trying to fill are so coveted that they’re not merely offered, they’re sold.”
The article itself tells the story of a migrant farmer in Nepal who was recruited to work at a Flextronics contract manufacturing factory south of Kuala Lumpur in Malaysia. According to the article this worker was compelled to pay $1000 in broker retention fees just for the opportunity to interview and work at a contract manufacturing facility. A recruited worker’s passport is retained by the employer to insure the worker does not flee and brokers tell recruited workers never to reveal the arrangements in the fear of being charged and punished.
The article reports that in 2008, Apple discovered in its factory audits that worker passport were being confiscated, and that this practice smacks of bonded labor or a modern day form of indentured servitude. According to Bloomberg, last year, Apple’s own audits uncovered up to $6.4 million in fees paid by workers beyond prescribed limits, compared with $6.7 million paid in the previous combined four years. That obviously points to a growing and disturbing pattern, one that can no longer be swept under the rug as an unspoken or tolerated state of affairs.
Bloomberg further reports that in response to its reporting, Flextronics has indicated that it has commissioned an outside group to conduct forensic audits on labor fees paid by temporary workers. The company further states that it will reimburse those employees that have been charged excessive fees by labor agencies.
In the article, a spokesperson for Apple is quoted as indicating that they were the first in the industry in uncovering and preventing abuse of migrant workers, dating back to at least 2008, and that Apple continues to aggressively investigate any claims of bonded labor. The article also states that the subject Flextronics facility is no longer in Apple’s supply chain.
In September of 2012, this author penned a guest blog commentary, Time to Factor the New realities for Low Cost Manufacturing and Supplier Social Responsibility. In that commentary, we opined that social responsibility change and reform is long overdue. The industry and our community can no longer turn a blind eye to labor practices occurring in the contracted supply chain. The notion that an OEM, in the midst of the latest new product launch, preparing for a peak consumer buying period or extraordinary market opportunity can continually dictate unplanned changes, insist that virtual capacity exists without ramifications to social responsibility practices no longer suffices. While this Bloomberg article specifically addresses Apple and the consumer electronics supply chain, challenges also exist in the apparel and other industries.
As noted, when dominants such as Apple, with the sheer buying buyer and dominance that this OEM possesses, continues with actions in resolving these unacceptable business practices, than the industry and our community needs to acknowledge that practices need to change.
Apple has initiated a supply agreement with GT Advanced Technologies Inc. to supply sapphire based materials to the consumer electronics provider. According to a Bloomberg published report. Merrimack New Hampshire based GT Advanced Technologies has entered into a multi-year supply agreement to provide the furnaces required to produce sapphire based materials. Apple will front-end a $578 million investment for a new plant to be located in Mesa Arizona that will produce these materials. The new plant is expected to generate at least 700 manufacturing-related jobs while an additional 1300 jobs are expected in plant construction. Bloomberg quotes IHS as indicating that Sapphire material was utilized for the camera lens cover in 2012 and currently the home button on the iPhone 5s model.
This investment represents the second new investment in U.S. based manufacturing. The first was the assembly of Apple’s new Mac Pro’s at a facility in Texas.
Speculation indicates that the sapphire based lens material will eventually be utilized in Apple’s line-up of smartphones and electronic tablets, with further speculation that the first application might be Apple’s rumored new smartwatch product rumored to be coming sometime in 2014.
This new announcement is consistent with Apple’s strategic sourcing strategies, namely expending up-front monies to secure strategic multi-year supply agreements for key materials and components along with up-front investment in capital equipment and tooling. Much of Apple’s investments in manufacturing process equipment are held at certain of its outsourcing partners. Apple utilizes this strategy to lock-in supply as well as supplier loyalty in areas such a processor chips, DRAM, LCD displays and other key components. However, the company’s 10K securities filing is quick to note: “Therefore, the Company remains subject to significant risks of supply shortages and price increases that can materially adversely affect its financial condition and operating results.”
There is nothing better than hedging your strategies, both in supply and with investors.
Yesterday, an earthquake measuring 6.3 magnitudes struck eastern Taiwan and it adds more food for thought in terms of having active supply chain risk mitigation plans.
This latest major quake was reported to have struck at a depth of 19.5 kilometers and the epicenter was reported as 52.9 kilometers south of the coastal city of Hualien.
This tremor shook buildings in Taipei and according to a published Bloomberg report, caused the temporary evacuation of one of world’s largest semiconductor fab facilities. Limited damage was reported to the international airport.
Taiwan Semiconductor Manufacturing Company (TSMC) temporarily evacuated three separate fab facilities, but workers returned to their areas shortly thereafter. Another semiconductor producer, United Microelectronics Corp (UMC) temporarily suspended its operations and work was reported to have resumed after a few hours. According to Bloomberg, the administration of Hsinchu Science Park, where many of Taiwan’s high-tech companies reside, reported no reports of damage nor did the island’s 62 industrial parks. However, quite a number of aftershocks have occurred on the island.
This is not the first time that Supply Chain Matters has highlighted severe tremors in this region. Our last was in March of this year. Regarding yesterday’s occurrence, we were interested to read the U.S. Geological Service summary of this latest earthquake incident. The report notes: “This region of Taiwan is familiar with moderate to large earthquake activity, and has hosted over 60 events of M6 or greater within 250 km of the October 31 event in the past 40 years.”
Interesting read when you consider that a considerable amount of the globe’s semiconductor chip fab capacity is located in the region. In August, we highlighted a study from a supply chain risk consulting services provider which identified that within certain automotive and high tech supply chains a vast majority of suppliers are dependent on component supply from just four semiconductor suppliers. Guess where many of their fab facilities are located?
And, if the Taiwan incident is troubling, consider that yesterday, a magnitude 6.6 tremor occurred in Chile. The two countries was the largest reserves and mining capacity for lithium, which is now rather important for automotive and alternative energy related product supply chains, are Bolivia and Chile. Chile was hit by a 8.8 magnitude quake in 2010.
The Wall Street Journal reports (paid subscription or free metered view) that Google is in talks with Asian suppliers to begin high volume manufacturing of a smartwatch product that could be available to consumers in months.
According to the report, this new device is in late stage development and will operate on Google’s Android operating system. The company has reportedly worked on addressing what is perceived as two limitations of current smartwatches, reducing power consumption within this new device, offering the attraction of less battery charging, and broader functionality. This watch will reportedly be able to communicate with electronic devices such as other smartphones, and will be integrated with Google Now.
This announcement is significant because it is yet another indication that consumer electronics providers are making big bets that a smartwatch will be the next focus of innovation. In September, Samsung announced its Galaxy Gear smartwatch in an attempt to gain first-mover advantage in the market. That announcement somewhat upstaged announcements from Qualcomm and Sony for their respective smartwatch products, which was a credit to their respective product development and supply chain teams.
There have been numerous reports and rumors indicating that Apple has been working on development of its smartwatch product and some Apple watchers were expecting an announcement of such a product this year. This published news that Google is in late-stage development is a strong indication that Google intends to stake its presence in this market segment and will most likely add additional pressure on Apple and its supply chain for time-to-market in this product segment. In is uncharacteristic for Apple to be a late entrant in a new consumer electronics market segment and with this news regarding Google’s expected entry, the pressure is indeed mounting.
Supply Chain Matters provides an update to our previous commentary regarding a devastating September fire at a SK Hynix DRAM production facility in China. At the time of the incident, there was widespread speculation that the interruption of supply would spike DRAM component prices, especially since Hynix is a major memory chip supplier for Apple.
This week, SK Hynix posted a record quarterly profit as increased memory chip prices provided a cushion to reduced output following the China fire. Revenue for the quarter jumped 69 percent. However, according to a syndicated Reuters report published on the CNBC Business network, earnings are expected to dip in the current quarter due to anticipated slow recovery in the affected plant’s production rates. The report indicates that Hynix is yet to completely restore operations at the damaged plant in China which accounted for an estimated 15 percent of global demand for memory chips. Since the fire, average prices for Hynix’s DRAM chips have risen 5 percent. As we speculated in our original commentary, the impact of this price increase is more likely being felt by consumer electronics manufacturers that do not have the clout or volume scale of Apple.
Thus, while the market implications of the fire worked in Hynix’s favor in its most recent quarter, restoring full production in the impacted China plant remains an important priority for Hynix. Meanwhile, competitors Micron Technology, Samsung Electronics and Toshiba gain benefit from increased market prices and reduced supply.