We continue with our series of postings reflecting on our 2014 Predictions for Global and Industry Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As has been our custom, our scoring process will be 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.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014. In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
We now revisit Prediction Five.
For the past few years, our annual predictions have specifically addressed particular industries that we felt would undergo extraordinary challenges during the calender year. For 2014, we identified B2C Retail, Consumer Product Goods (CPG) and Aerospace industry supply chains as undergoing special challenges.
Retail and B2C Supply Chains
We predicted challenges for both the consumer demand and supply fronts. On the demand side, many lessons were learned during the final stages of the 2013 holiday surge, not the least of which was consumers waiting until the very last minute to initiate their holiday purchases. At the conclusion of 2013, many studies concluded that retail consumers were permanently altering their shopping habits in favor of online options with less visits to physical stores.
Throughout 2014, parcel firms FedEx and UPS concentrated on efforts to avoid being “thrown under the bus” which occurred during the final days of the 2013 holiday period. FedEx, and especially UPS, re-examined their delivery network infrastructure practices for maximum peak surge periods. UPS itself invested $500 million in augmented network infrastructure. For the first time in the parcel shipping’s firm’s 107 year history, UPS operated full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge.
Retailers themselves entered the 2014 holiday period with higher expectations regarding consumer spending. Both FedEx and UPS re-doubled efforts to influence major B2C volume retailers to stagger promotional programs during the 2014 holiday surge and increase two-way visibility into that status of last-mile delivery networks. The U.S. Postal service stepped-up its efforts in offering retailers a new alternative for Sunday delivery along with more price competitive shipping rates. As we pen our prediction rating, preliminary reporting data surrounding the four day Thanksgiving and Black Friday holiday shopping period for 2014 indicates that consumers have indeed shifted even more buying preferences towards online channels with some online sites suffering periodic outages.
On the supply side, the “perfect storm” scenario unfolded among U.S. west coast ports starting in August. A combination of factors: stalled labor contract renewal talks among the Pacific Maritime Association and the longshoremen labor union, a shortage of inter-modal truck chassis, the appearance of much larger container vessels, along with efforts by independent truckers in seeking added wages and benefits all converged to bring port unloading and loading operations to a near standstill. The backlog poses a major threat for retailers and exporters in fulfilling revenue and profitability targets for the December ending quarter.
By our lens there is no doubt that B2C retail industry supply chains have indeed encountered extraordinary challenges in 2014.
Consumer Product Goods Supply Chains
In 2013, permanent changes in shopping habits among the majority of consumers were already evident and our prediction called for CPG industry supply chains to be especially challenged with the effects of these actions in 2014. Our prediction further noted the heightened influence and actions of short-term focused activist investors, applying dimensions of financial engineering to one or more CPG companies as continuing to have special impacts. CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply networks.
Most all of these forces were in-effect during the year.
In February, we highlighted supply chain implications presented at Consumer Analyst Group of New York (CAGNY) Annual Conference by CPG firms Campbell Soup, General Mills, Hershey Company, Mondelez International and PepsiCo. Campbell Soup CEO Denise Morrison described market conditions as “tumultuous” “persistently challenging” adding that “a new normal is coming to food.” … “The winners will be the companies that adapt successfully to a changing world.” Kraft CEO Tony Vernon described the industry challenge: “Our customers (are) coming to terms with changing shopping patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices. In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. In the short-term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base.”
By mid-year, multiple CEO’s from well-noted CPG branded companies were each describing the blunt realities of a rapidly changing industry scenario where revenue growth was at a premium and profitability pressures dominated. In August, Procter & Gamble announced a re-structuring of its businesses to once again shed under-performing brands. Similarly, Coca-Cola, Mondelez, General Mills embarked on a business re-structuring efforts to boost sales and shed costs with a multi-year cost savings initiatives. Some CPG firms such as Kellogg, elected to acquired other smaller firms in growth segments.
Entering the closing month of calendar year 2014, many CPG supply chain organizations find themselves navigating the need to once again reduce long-term cost structures to free-up funds for strategic business initiatives while being called upon to be more nimble to rapidly changing consumer preferences and tastes. For some, these goals continue to add extraordinary challenge.
Aerospace Supply Chains
The unique challenges within aerospace supply chains have stemmed from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limitations have stretched into multi-year customer delivery windows to airlines and aircraft lessors. The literal duopoly of Airbus and Boeing did indeed dominate industry news in 2014 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. After publishing our prediction concerning continued unique challenges for aerospace in December, we were pleased to note a published Bloomberg report in late January, With Epic Backlogs at Airbus and Boeing, Can Business Be Too Good?. Bloomberg pretty much mirrored our prediction.
By mid-year, Airbus and Boeing reported first-half delivery performance that would slightly exceed 2013 levels, but not at the pace required to step-up production momentum for the coming years. Once more, the latter part of 2014 featured considerable reductions in the cost of aviation fuel, and the open question is whether this will help or hinder the pressures for increased capacity and production of aerospace component supply chains. Airbus completed international certification test trials for its new carbon fibre A350 XWB aircraft program as well as the maiden flight of the new A320 Neo in September and both programs are reported to be on-track for initial delivery of first operational aircraft to launch customers. The A350 launch will represent a competitive offering to the Boeing 787 Dreamliner for wide aisle, long-distance travel, while the Neo version of the A320 will continue to compete with Boeing’s next generation 737.
Throughout 2014, Boeing announced a series of strategic, multi-year supply agreements to ensure supply of critical materials and components. The most notable involved strategic supply of material required for producing titanium, in a long-term supply agreement announced at the height of hostilities among Russia and Ukraine. The most recent announcement involved a 10 year agreement to supply carbon fibre composite material from a key supplier in Japan.
Other smaller industry OEM’s such as Bombardier, COMAC and Mitsubishi Industries continue to compete for smaller niche aircraft segment needs, and each of these players faced setbacks during 2014 as they dealt with the realities of more complex, globally dispersed suppliers sharing in product innovation. Bombardier encountered a significant program setback concerning its C-Series program as pre-maiden flight tests encountered an engine malfunction. Reports indicate that China based COMAC is also dealing with some unspecified setbacks.
Thus, the commercial aerospace industry did indeed manifest its own unique set of industry supply chain challenges this year, challenges that other industry teams would perhaps envy. Order backlogs extending beyond 10 years, technology innovation as a driving force, and supply chain scale-ups remain critical challenges in the months to come and commercial aerospace may indeed appear as an extraordinary challenge for 2015.
This concludes Part Three of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess the remainder of our 2014 predictions in follow-on postings.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Various surveys and actual data focused on this weekend’s all important shopping behaviors indicate a mixed bag of results. The challenge for most of the collected data at this point is that there are different assumptions and context related to reported results and thus readers need to view the data as initial trending indicators. However, for retail and B2C focused supply chains, the implication is that last year’s scenarios of last-minute promotional and shopping activity may well repeat during the few weeks remaining in the 2014 holiday shopping period.
The Thanksgiving Weekend Spending Survey conducted by the National Retail Federation (NRF) indicates that spending over this weekend’s 4 day period fell 11 percent from the same period last year. The report estimates that shoppers spent an average of $380.95, down 6.4 percent from the $407.02 recorded in the 2013 survey. Overall shopper traffic was estimated to have dropped by 5.2 percent. According to the NRF survey, Black Friday still drew an estimated 86.9 million of both online and brick-and-mortar shoppers.
During this weekend Supply Chain Matters also reviewed results of IBM’s Digital Analytics Benchmark report that analyzes actual online buying activity as it occurred. That report indicates that online sales during the Thanksgiving holiday was up 14.3 percent, while Black Friday sales were up 9.5 percent over 2013 levels. The IBM analytics data indicates that online shoppers spent on average $121.91 per order on Black Friday and that consumers continue to trend towards online buying preferences. We include some infographics generated by IBM’s online analysis.
According to the IBM survey, for the first time, traffic from mobile devices is outpacing traffic generated from desktop devices. We believe that is a strong indicator that the mobile based consumer is the new shopping paradigm.
Regarding specific item categories, the NRF survey points to:
Apparel- up 54.5 percent
Toys- up 32.6 percent
Electronics- up 34.2 percent
Home Décor – up 20 percent
The IBM online analytics data provides some correlation to the above categories and indicates that the Health and Beauty category was the top destination for online shoppers, increasing 56.9 percent from 2013 levels.
For retail and B2C focused merchandising, sales and operations (S&OP) and supply chain fulfillment execution teams, the implication of data at this point implies that last year’s scenarios of last-minute promotional and shopping activity may well have to repeat during the few weeks remaining in the 2014 holiday shopping period. That trend is obviously further compounded by goods that may be hung-up in U.S. west coast ports and inter-modal networks making their way to available inventory. A continuance of severe winter weather storms are another open question. For carriers such as FedEx, UPS and various 3PL’s, prior plans to augment last-minute and last-mile delivery networks may well come to the forefront in the remaining weeks of 2014.
Retailers will shun senior leadership or organizational changes within the critically important holiday sales period to avoid distraction or disruption to all-important operational execution. That apparently may not be the case for global retailer Wal-Mart’s U.S. operations.
The Wall Street Journal reports (paid subscription) that the global retailer’s chief merchandising officer for U.S. operations, Duncan Mac Naughton will be leaving amidst an apparent shake-up involving U.S. retail merchandising. According to the report, Greg Foran, chief executive of Wal-Mart U.S., informed employees in a memo that Mac Naughton decided to leave the company “to pursue new opportunities,” effective immediately. The publication cites unnamed internal sources as indicating that Mac Naughton’s departure was prompted by being passed over for the U.S. CEO role this past summer.
The company also announced it will replace its U.S. head of grocery operations, Jack Sinclair. Steve Bratspies, who leads the general merchandise division, will take over as executive vice president of food merchandising. Mr. Sinclair will be taking another role within Wal-Mart to be announced at a later date.
According to the WSJ, Wal-Mart won’t name a new U.S. chief merchant at this time and executives in charge of food, general merchandise, apparel and several other business lines will report to U.S. CEO Duncan directly as he examines merchandising more closely.
This news obviously comes just prior to the celebration of the Thanksgiving holiday and kickoff of the Black Friday retail sales holiday and could be a sign of other operational changes within U.S. retail operations in the weeks to come. In its reporting, the WSJ makes reference to Wal-Mart’s recent announcement to spread out Black Friday holiday promotions and in-store availability of fresh grocery and other items as potential issues that might have led-up to these leadership changes. A Wal-Mart spokesperson indicated to the WSJ that any potential organization disruption was minimal since the bulk of holiday related merchandising plans were already in-place and that is was now up to operations to execute the holiday focused merchandising plan in the coming weeks.
From our Supply Chain Matters lens, recent holiday surge periods have featured very dynamic changes in merchandising plans as retailers maneuvered to capture consumer wallet interest with the most attractive and well-timed promotions. With the current looming uncertainty for what inbound inventories will remain hung-up in west coast ports or U.S. transportation networks, dynamic merchandising may well be a more prominent tactical response in the coming weeks.
This development is significant, one that will have further implications.
In March of 2012, Amazon agreed to acquire privately-held warehouse automation and robotics provider Kiva Systems in an all cash deal of $775 million. At the time, there was much speculation regarding Amazon’s strategic intent in acquiring this warehouse and distribution center robotics automation provider at such a hefty price. Speculation primarily centered on what was Amazon’s strategic intent. That speculation changed shortly thereafter when external sales of Kiva based technology was no longer offered to new external customers. In essence, Kiva was to become an in-house fulfillment center automation innovator for Amazon.
In June of this year, Supply Chain Matters highlighted reports noting that at Amazon’s annual investor meeting, founder Jeff Bezos indicated that the Internet retailer would have upwards of 10,000 Kiva based robots deployed by the end of this year.
Last week, The Wall Street Journal reported (paid subscription or free metered view) that during the current surge of holiday orders across the Internet retailer’s 80 distribution centers, Amazon will be able to now leverage its Kiva deployments. Readers further have the opportunity to view information relative to the results of some deployments.
According to the WSJ, in the first nine months of this year, Amazon’s fulfillment costs averaged 12.3 percent of net sales compared with 8.9 percent in 2009. Wall Street investors are obviously quite concerned with the size and current growth of that number. But, with full deployment of robotics, fulfillment center workers who previously recorded upwards of 100 order picks-per-hour are expected to average 300 picks-per-hour. A security equities analyst is quoted as indicating that Amazon could reap $400-$900 million in annual cost savings as a result of Kiva technology deployment. If those savings are accurate, they more than justify the original acquisition cost and would provide some buffering to the growth of Amazon’s fulfillment costs.
In our June commentary, our view was that Amazon has a broader strategy, one that allows robotics to buffer the often perplexing need to flex fulfillment center human resource requirements during seasonal peak periods. For the current 2014 holiday fulfillment surge, Amazon has brought in 80,000 temporary workers, an increase of 10,000 from the 2013 period.
In September, Supply Chain Matters called reader attention to Amazon’s efforts in testing deployments of new sortation centers to mitigate shipment delivery congestion and provide added flexibilities in the selection of last-mile delivery carriers.
Amazon’s supply chain leadership has numerous technology enablement strategies underway and we will all have the opportunity to observe the initial results of these efforts over the next few weeks.
In last week’s Update Three commentary regarding the current crisis involving the near paralysis among the U.S. West Coast ports of Los Angeles and Long Beach, Supply Chain Matters highlighted that conditions on the ground were not showing any signs of improvement. As this week draws to a close, the situation appears to be deteriorating even more, and now involves clear impacts and continued disruption for both U.S. exports as well as imports.
Last week, the National Retail Federation (NRF) published an editorial with the statement: “The sudden change in tone is alarming and suggests that a shutdown of the ports — either from a walkout by labor or a lockout by management — is imminent.” The NRF has since been joined by other industry associations including the National Association of Manufacturers (NAM) the U.S. Chamber of Commerce, and 60 other organizations representing agricultural growers.
Agricultural exports such as apples, forest products, potatoes and other crops are now jeopardized. Growers indicate that Far East buyers are now cancelling orders and moving to alternative sources of supply. According to a report from industry trade group, Agriculture Transportation Coalition, the consequences of the current port congestion are being felt throughout the United States. The railroads are unable to bring agriculture products from the Midwest and the South to West Coast ports because of the port congestion crisis. In addition, ocean carriers continue to attempt to pass on their increased costs by imposing draconian congestion surcharge fees on U.S. exporters and importers.
A published report in American Shipper (registered sign-up or paid subscription) now indicates that formal labor negotiations among the lead negotiators of the international longshoreman’s union and the Pacific Maritime Association (PMA) are currently in recess and not expected to resume until December 2. The publication characterizes this development as: “bad news for importers and exporters hoping for a quick agreement and rapid restoration of normal operations at West Coast ports.”
A new wrinkle concerning labor work stoppages expanded earlier in the week as independent truck drivers contracted by trucking firms serving both ports initiated multi-day job actions seeking fair wages and better working conditions. These job actions expanded to five trucking firms serving the port complex as of Monday. Truck drivers, mostly hired as independent contractors, have had longstanding grievances with local trucking firms and now the Teamsters labor union has taken the current port crisis as an opportunity to leverage driver demands to be recognized as full-time employees.
We again echo our Supply Chain Matters advice that industry supply chains impacted by the current west coast port disruption should be in full response management mode and seeking alternative options for both imports and exports from these ports. The situation is such that there appears to be little indication of improvement and further indications of shutdown, lock-out or government imposed mediation. Response time to save holiday revenue budgets is in critical stages, too late to save the Black Friday-Cyber Monday holiday weekend, and essential to save customer December and January holiday fulfillment commitments.
We may well observe that the winners and losers of the 2014 holiday buying surge were those individual industry supply chain teams that demonstrated the most resiliency and responsiveness to the west coast port debacle.
We are a mere two weeks before the Black Friday holiday shopping kick-off, and a mere six weeks before the actual Christmas holiday and the severe congestion that is crippling U.S. west coast ports essentially remains the same.
In last week’s Supply Chain Matters commentary we described what many are calling the “perfect storm” of supply chain disruption. Another week later, the crisis is cascading across industry and transportation channels, affecting both imports as well as time-sensitive exports. An NBC News broadcast in the U.S. notes that as of yesterday, 13 ships are anchored off the coast waiting to be unloaded and describes container shipping at “full stop”. While that may be a bit of journalistic sensationalism, it is descriptive.
The on-the-ground realities seem little changed from last week’s situation.
Public finger-pointing among the ILWU labor union and the Pacific Maritime Association (PMA) has become a public spectacle vs. any perceived constructive progress. Union officials continue to point to chronic shortages of truck chassis, the impact of having to unload far larger container ships and rail bottlenecks. Meanwhile, at least one container shipping line, U.S. Lines, is placing a Port Congestion Surcharge, effective November 17, amounting to $800 for a twenty-foot container and $1000 for a 40-foot container. That is sure to add additional heartburn for retailers and manufacturers alike.
A published report from the Journal of Commerce reports that air freight forwarders with operations in the Asia Pacific region are observing space shortages with shipping costs rising dramatically. That should not be a complete surprise considering that Apple and other consumer electronics providers had previously locked-up air freight capacity to overcome their own production backlogs.
The National Retail Federation (NRF) continues to lobby for the personal intervention of President Obama but that effort, even if it did occur, is unlikely to relieve the current congestion any time soon.
As we stated last week, regardless of the finger-pointing, the situation is indeed the perfect storm scenario that many had feared and industry supply chains need to deal with the current realities. Noted in this week’s Wal-Mart commentary, retailers have already kicked-off holiday promotional merchandising and are de-emphasizing the singular Black Friday shopping event in favor of a steady stream of promotions extending through the end of November and probably well into December.
Last year, UPS, and to some extent FedEx, were thrown under the proverbial bus by retailers for non-performance at the most critical time period. In 2014, the creditability of west coast ports and indeed the surface shipping industry is inching closer to being the Grinch’s of Christmas.