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 late March, Supply Chain Matters called our reader’s attention to a rather visible and potentially expensive supply chain related snafu involving Canada based yoga apparel retailer Lululemon Athletica. This retailer was forced to both recall and stop selling its most popular line of yoga pants after discovering that the “sheerness’ of the fabric allowed too much to be seen underneath. The CEO had to publically apologize to customers for the problem. The affected product, which sold for a premium price, accounted for nearly 17 percent of all women’s pants sold by the company. This glitch involved a proprietary signature fabric which is termed Luon which apparently was the center of the quality problem.
This week, roughly three months after this highly visible incident, the company appears to have overcome its crisis, but the fallout has been some leadership changes. Yesterday, Lululemon reported fiscal first quarter 2013 financial results that included a 21 percent increase in revenues but a 10 percent decline income from operations. In the earnings briefing, CEO Christine Day described the recent quarter as “one of the most important in the company’s history.” To Lululemon’s credit, supplies of its Black Luon yoga pants are beginning to be made available but full inventory recovery is not expected until end of the company’s fiscal second quarter.
Day further announced that she has decided to step-down as CEO of the company after over five and one-half years because of personal reasons. Day will stay-on until her successor is in-place. There were also previous reports that a high level product manager had been dismissed shortly after the incident.
During the earnings briefing, executives indicated a new awareness as to the importance of end-to-end supply chain quality control and the running of a tight sourcing operation. CEO Day described that the company has to become an in-depth expert on all of its technical fabric specifications, not relying on suppliers to be the total experts. More tests have been added at the raw material stage and tolerances have been tightened with producing factories. Investments described as $4.5 million are now being made in these areas including the hiring of raw material teams and separate executives to lead both product design and merchandising and supply chain functions. This retailer also described a roadmap involving heavy IT investments that began in 2012 and will continue in the coming months.
It was disclosed that the product recall contributed to a 510 basis point decrease in gross margin due to a $17.5 million write-off of unsellable inventory. Executives stressed that the company will continue to work with a relatively small group of suppliers. Executives also describe a recent labor strike involving a Cambodia based supplier, but stressed that this supplier has been a leader in raising worker wages and benefits.
A more important learning for this retailer has been the loyalty of customers to the brand, in spite of the snafu. Loyal customers apparently applauded the decision to remove poor quality and were willing to wait for the replacement inventory. Executives described a much higher level of web-based inquiry activity by customers, apparently checking status of the quality issue, by a frustration that heightened web activity did not lead to significant web-based sales increases. However, a Wall Street Journal opinion column points out that market competition, specifically the Athleta chain of Gap Inc., is similar in look and feel and undercutting Lululemon on price.
Investors did not seem pleased with the latest earnings and announcements. As we pen this commentary, the Lululemon stock is tracking down by over 16 percent, a significant negative response. The stock had been trading at a level of over 40 times earnings of-late.
More work and additional supply chain leadership efforts remain for this unique retailer but for the time being, brand loyalty and reputation seem to have overcome severe financial fallout from the supply chain snafu. Investors however, are reserving judgement.
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.
It has been six days after a tragic building collapse involving multiple garment factories in Bangladesh. The death toll continues to rise as hopes of finding any remaining survivors is fading. The final death toll could be staggering.
We again join other voices in the shock and sadness of this incident.
Our Supply Chain Matters initial commentary this latest incident noted an environment of see no evil, tell no evil among retailers and other contractors for apparel sourced across Bangladesh. We joined other voices in urging the apparel industry to initiate a serious call to action regarding current global sourcing practices and supplier standards.
Since that time, business and global media has provided much more attention to conditions and challenges involving the apparel industry and its current sourcing practices. On Tuesday of this week, the Wall Street Journal published an article (paid subscription or free metered view) that indicated that the factory owners involved in the recent building collapse were under enormous pressures to produce orders because ongoing political unrest and work stoppages has scared off buyers. It quoted the Bangladesh Garment Manufacturers and Exporters Association as indicating that $500 million in orders had been lost as a result of the earlier turmoil. It described how retailers and customers, as in previous incidents, were denying that valid orders ever existed for the subject factories. Italy’s Benetton Group initially denied any connection to a destroyed factory but later had to acknowledge a relationship after labor groups found labeled clothing and production documents in the damaged building. Other global based retailers and customers were also mentioned, some in denial.
However, we would like to call special attention to our readers to an Opinion column published in today’s edition of The Financial Times which is titled Business must take the lead on Bangladesh’s Working Conditions. (Paid subscription or free metered view) This opinion piece penned by John Gapper is in our view, is well written. It urges western companies to not take the current easy path to withdraw sourcing from the country but instead come together to collectively raise overall standards. Gapper notes that it is easy to forget that even in the U.S., there was a previous history of inferior working conditions and garment factory fires, which helped to establish the International Ladies” Garment Workers Union and subsequent improved health and safety laws.
He calls for retailers to stay in the country and keep providing jobs for women which has helped to collectively raise the poverty levels across Bangladesh by almost 30 percentage points. Workers in the country earn an average of $37 a month, and are a bargain based on current global rates. The World Bank estimates that productivity among the most run-well factories is on par with China, while wages are one-fifth of China’s average. There are far more garment factories in the country and Gapper quotes a McKinsey survey that indicates that 50 to 100 of the total 5000 garment factories have “very high” compliance standards and he argues that this presents an opportunity to improve standards without threatening overall global competitive advantage.
The editorial outlines two other actions including retailers banding together to push the Bangladesh government to overcome corruption, and to open the doors to labor unions. That latter imperative is arguably going to be the most controversial and contested.
The argument presented by this FT editorial s that the industry itself can play a big role in getting the country out of severe poverty, while developing a safer environment of working conditions. It is unacceptable for hundreds, and perhaps thousands of workers to perish in preventable industrial tragedies.
For our part, we do not dispute the difficult challenges that lie in apparel sourcing within low-cost manufacturing regions. But, at the same time, retailers and contractors cannot continue to turn a blind eye or hide behind sub-contracted chain of custody regarding unsafe working conditions. Neither can global social responsibility standards continue to be ignored.
As consumers of apparel and clothing, we need to insure that we are willing to pay a higher retail price to retailers who adhere and enforce safe working conditions in global factories that they do business with. We need to stick with brands committed to helping factory workers to work their way out of severe poverty and provide for their families, while working in safe factories or distribution centers.
As a supply chain community, we need to get more serious about our responsibilities to foster more diligent and dedicated labor social responsibility practices across the globe and to stand for good practices vs. a few additional points of product margin, or giveaway promotions.
It would be a real shame if the industry walks away from Bangladesh because it is the easier solution.
Broad based global and business media are rightfully providing wide scale coverage of the latest factory tragedy within Bangladesh. On Wednesday of this week, the eight story Rana Plaza factory complex, located in Savar, which is 30 kilometers outside the city of Dhaka, suddenly collapsed trapping thousands of workers.
As we pen this Supply Chain Matters commentary, the death toll has reached 161 with reports of upwards of 1000 injured. Rescue workers continue the frantic search for any additional survivors that may still be alive among the massive rubble. Many of the garment factory workers are once again believed to be women.
We obviously join other voices in the shock and sadness of this incident.
This latest disaster comes less than five months after the factory fire that killed 112 people and underscored the unsafe conditions faced by Bangladesh’s garment workers, who produce clothes for global brands worn around the world. That incident caused global retailers including Wal-Mart to deny that their orders were being sourced at the factory.
According to various media reports, workers at the complex indicated that large cracks had appeared in the lower floors of the building complex earlier in the week but assurances were given that the building was safe to work in. Bangladesh government officials are now threatening criminal charges directed at the owners of the complex.
A published CBS News report indicated that among the textile businesses in the building were Phantom Apparels Ltd., New Wave Style Ltd., New Wave Bottoms Ltd. and New Wave Brothers Ltd., which make clothing for major brands. A Reuters article adds Ether Tex Ltd to the listing. Both AP and Reuters reference the web site of New Wave listing 27 buyers, including firms from Britain, Denmark, France, Germany, Spain, Canada and the United States. Retailers mentioned as potential customers are issuing various statements of shock and condolence while some are denying any direct work exists. The CBS News story quotes a spokesman at Wal-Mart Stores, the second-largest clothing producer in Bangladesh, indicating that the retailer is investigating to see if a factory in the building was currently producing for the chain. As this latest incident becomes more visible, global labor rights groups are again calling for more accountability and proactive remediation programs for the working conditions that are fostered
This latest tragic accident is again reigniting questions about the often lethal conditions in the country’s garment industry, and the buying practices of large customers who seek lower cost apparel with perceived insensitivity to worker welfare and safety. After the tragic Tazreen Fashion, Wal-Mart announced new supplier sub-contracting policies while Gap announced a fire-safety program across the country.
As we have noted in earlier commentaries, an environment of see no evil, tell no evil becomes predominant across the world’s number two exporter of apparel products until tragedy occurs. Sadly, there have been multiple tragedies, and one wonders how many more until serious attention is brought to what has caused factories to be so lax.
We join other voices in urging the apparel industry to initiate a serious call to action regarding current global sourcing practices and supplier standards. Our world is much more visible, and the images of these events speak for themselves.
Late last night, while monitoring Twitter, we picked-up on breaking news “tweets” reporting that a major 6.1 magnitude earthquake had occurred in the vicinity of central Taiwan. While earthquakes often occur in this region, a strong tremor that occurs at a shallow depth can be a cause for considerable concern. Knowing that this area in the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on-alert to both the event and the potential for disruption.
Fortunately, for those residing in the impacted area, damage was reported as minimal. Tragically, one fatality occurred along with some injuries. As we pen this commentary, there is a report that a number of large production facilities had to be quickly evacuated. They include two separate facilities operated by the world’s largest semiconductor fab producer, Taiwan Semiconductor Manufacturing Company (TSMC), but according to the company, no interruption in production schedules is expected. Three other companies with operations in Taiwan–chipmaker United Microelectronics, flat-panel maker Innolux, and liquid crystal display manufacturer AU Optronics each indicated in public statements to Bloomberg that they expected no impact from the quake.
These names, along with others, should be very familiar to our readers since they are each key strategic partners to large and smaller global high tech OEM’s. Any disruption involving any of these suppliers would probably have a significant supply chain impact without a supply chain risk mitigation plan.
Earlier this month, we were alerted to a startling report from Japanese media. A Japanese government panel predicts that if a magnitude 9.1 earthquake, similar to the size of the quake that struck the northern coastal region in 2011, were to hit off the southern coast of Japan, it could cause upwards of $2.3 trillion in economic damages, ten times the economic impact of the 2011 Great East Japan Earthquake. That would equate to 40 percent of Japan’s current GDP. This estimate regarding a worst-case scenario is sensitive because of a long-expected quake potentially occurring along the Nanki Trough, a roughly 4 kilometer deep depression on the seabed that extends from Suruga Bay to areas off eastern Kyushu.
Think for a moment about what occurred in 2011, and the impacts incurred on aerospace, automotive, high tech, industrial and other supply chains. The impact to supply and brands was enormous and far-reaching.
These are all timely reminders of the realities of supply chain related risk, and the critical importance for having active supply chain risk mitigation and business continuity processes.
What’s the status in your organization?
Added Note: This author will be speaking on this timely topic at an upcoming monthly meeting of the Central Pennsylvania APICS organization in Harrisburg Pennsylvania on Wednesday, April 17. The meeting will be held at the Holiday Inn Harrisburg East beginning at 5:30pm. For further information and registration, please email registration <at> apics-cp <dot> org.