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 updates:
Google and Barnes and Noble Partner to Take on Amazon
Earlier in the week, the New York Times reported (tiered subscription) that Google and Barnes and Noble are joining forces on for fast, cheap delivery of books. According to the report, buyers in Manhattan, West Los Angeles and San Francisco Bay locales will be able to get same-day delivery of books from local Barnes and Noble retail stores via Google Shopping Express, beginning this week. The effort is billed as a competitive response to Amazon’s same-day delivery services.
Google Shopping Express already allows online shoppers to order products from 19 retailers including Costco, Walgreens, Staples and Target and secure same-day delivery. As noted in a previous Supply Chain Matters News Capsule, the Google Shopping Express strategy is to become an ally and complement a retailer’s local brick and mortar presence, relying on inventory from local retail outlets rather than the deployment of a larger network of fulfillment centers.
Airbus Completes Test Trials of the A350
Airbus completed the route-proving certification phase for operational testing of its new A350-900 model commercial; aircraft, approximately two months after completing the maiden flight of this aircraft. During this completed phase, engineers had to demonstrate to safety and regulatory agencies that the aircraft is ready for commercial service. A Vice president in charge of flight testing for Airbus declared; “The airplane is perfectly fit to go into service tomorrow.” The A350 was designed to compete against the current operational 787 Dreamliner and the 777 aircraft. Bookings for the A350 have surpassed more than 700 aircraft.
It has been noted that 7000 engineers worked on the development of the A350, with roughly half of these engineers stemming from key suppliers. Important learnings have included the need for a singular Product Lifecycle Management (PLM) software system, creating a single electronic rendering of an aircraft that every program engineer can reference or modify when needed.
Administrative reporting to various agencies remains a milestone before this aircraft can be officially certified for commercial use. Meanwhile, the Airbus supply chain ecosystem continues preparations and scaling to support planned production levels of 10 A350’s per month by 2018.
Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain
Supply Chain Matters has posted numerous commentaries related to Boeing’s commercial aircraft focused supply chain ecosystem, faced with a dual challenge of having upwards of 8-10 years of customer order backlogs while continually being challenged to reduce costs.
Boeing’s defense businesses have a far different problem. Cutbacks in military and government spending programs have led to declining business, and a supply chain oriented to engineer-to-order specialized aircraft and spare parts. Early this week the head of Boeing’s defense, space and security business unit called for an additional $2 billion in cost cutting, two-thirds of which is being targeted among suppliers. Boeing has already cut $4 billion in spending related to its defense businesses. The unit chief called on suppliers to note efficiencies that have been gained in Boeing’s commercial aircraft programs.
Hewlett Packard Announces Smaller, Less Costly Cloud Platform
Hewlett Packard announced what it is communicating as a less costly cloud based IT platform under the Helion brand name.
Helion Managed Virtual Private Cloud Lean is being targeted for use by small and medium sized businesses looking to move applications development, software testing and workplace collaboration onto a Infrastructure as a Service platform. According to HP’s announcement, the new service offering can further provide services around SAP’s HANA in-memory systems.
With the new service offering, HP’s goal is to provide the same level of large enterprise services but at a lower-priced alternative. Pricing for this announced service is noted as $168 per month for a small virtual service configuration. A pilot trial service also is available for customers who want to certify an application to run in the cloud with the full support of the HP team.
U.S. Job Openings at a Thirteen Year High
Talent management, retention and skills development has been a constant theme among supply chain management forums and indeed many Supply Chain Matters commentaries. Executives and team leaders constantly lament on how difficult it is to find people with the right level of skills. Current forces of supply and demand in the U.S. labor market are not going to help in overcoming this challenge.
The number of job openings across the U.S. reached a 13-year high in June with U.S. employers announcing 4.7 million job openings. Reports indicate that employers additionally hired 4.8 million workers in June; an indication that the U.S. labor market is showing new momentum. With this increased level of hiring activity, existing workers have showed increasing willingness to seek other opportunities, given the level of new opportunities. A reported 2.53 million U.S. workers quit their jobs in June, up from 2.49 million in May.
The Asian editions of the Wall Street Journal report (paid subscription or free metered view) that Amazon is taking a long view on the growth opportunities for online commerce in India.
The online juggernaut is reported to be prepared to invest $2 billion in India for developing a nationwide delivery system along with technologies tailored to serve India’s consumers, most of which don’t have computers but do have mobile phones. Amazon reportedly obtains 35 percent of its current India business via mobile phones. Thousands of merchants must be trained to utilize Amazon’s web site and logistics services.
In its reporting, the WSJ notes that analysts were surprised by the large investment. India’s e-commerce market is likely to grow to more than $30 billion in next six years, much smaller than prospects in China. Once more, Amazon will have to compete with existing India based, or other foreign-based e-commerce providers.
This author has penned a number of prior Supply Chain Matters commentaries offering evidence that fundamental structural changes related to consumer shopping habits are occurring in multiple retail sectors. Yesterday, the Wall Street Journal published a report: Shoppers Flee Physical Stores. The most important and compelling takeaway from the article was a citation of Shopper-Trak data indicating that: “physical shopper visits have fallen by 5 percent or more in every month, for the past two years.” Further noted: “Online sales have grown more than 15% every quarter for the past two years and are having a big impact on the way many companies are looking at their brick-and-mortar stores.”
These are compelling trends that provides a ton of implications. I recently read a commentary that noted that in retail, the supply chain has moved from the back office to the online front office.
As noted by the WSJ, shoppers would rather research online than wander the aisles making impulse purchases. Rather than physical merchandising and goods placement strategies the new emphasis is on online merchandising and social-media enabled product promotion. Rather than networks of distribution centers and fleets supporting individual physical stores, the new emphasis will be on high-volume online fulfillment supported by combinations of fulfillment centers and multi-purpose retail outlets.
This author has argued that there are two leadership competencies that will differentiate tomorrow’s executive leaders in retail. They are a deep understanding of social-media fueled marketing and Internet focused retailing, and a deep awareness, understanding and appreciation of end-to-end supply chain inventory deployment and fulfillment capabilities. From our lens, recruiting for retail C-level executives has been too focused on classic merchandising, finance or traditional brand marketing. Tons of money and effort are invested in online presence and consumer intelligence without consideration for the impact on supply chain response needs.
After many months of searching, Target has announced Brain Cornell as its new CEO. The retailer elected to select an external executive candidate with experience in consumer goods supply chains including Pepsico and Tropicana, along with retail experience acquired in a stint at Wal-Mart. According to reporting by the Wall Street Journal, Cornell was an outside contender to succeed current PepsiCo CEO Indra Nooyi. Target was willing to compensate its new CEO with over $19 million in equity grants to convince him to join the retailer.
Of more interest is that Mr. Cornell should obviously understand the important contribution that supply chain will have in the new era of retailing. Time and events will tell the next chapter for Target.
There are many other executive recruiting efforts underway among retailers including JC Penny. The time clock continues to tick and the retailers and leadership teams that internalize the permanent changes in shopping and customer fulfillment will outshine those that do not.
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.
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.
We call reader attention to a rather provocative but revealing expose published by the Wall Street Journal this week regarding U.S. based retailer Target Stores. The article: Retailer Target Lost Its Way under Ousted CEO Gregg Steinhafel (paid subscription required) outlines a story that portrays a sequence of events, even prior to last November’s massive credit card security breach, leading-up to several of the retailer’s executive team delivering a message to Target’s board. “If Mr. Steinhafel didn’t leave immediately, others would.”
The article observes that Target’s core hip image of creativity in merchandising, affectionately dubbed “Tar-zhay” took a back seat to rigid performance metrics under the leadership of CEO Steinhafel. The premise outlined was that Target’s retail selections became more commonplace, similar to arch competitor Wal-Mart. Under the tenure of Steinhafel more retail store space was allocated to produce and grocery items as a sales growth tool.
For Target’s supply chain and online B2C strategies, suppliers, including smaller-sized ones, describe added pressures from Target’s buyers to wring-out additional costs. Target’s buyers stressed a placement system that awarded prime shelf space to highest and most cost attractive bidders. The retailer reportedly was slow to embrace online fulfillment and in 2001, outsourced its online web fulfillment operations to Amazon.com, only to bring it back in-house in 2011 after a two year internal development effort. Shortly after taking online B2C fulfillment in-house, the retailer suffered a series of highly public failures among highly marketed and promoted merchandise programs.
The article also points to Target’s 2013 feud with long time loyal supplier Procter & Gamble after discovering that Amazon was collaborating in establishing its Vendor Flex online fulfillment for Pampers diapers directly within P&G warehouses. When learning of the Amazon arrangement with P&G, Steinhafel ordered that P&G products be given less than ideal placement in Target stores for a period of a few months. That sent a buzz across the industry.
The WSJ further describes an ambitious but poorly executed move into Canada, opening 127 stores over a one year timeframe that has led to continued operating losses. In its most recent quarter, Target’s profits fell 16 percent having to ramp-up discounts to recover from consumer abandonment as a result of the recent massive credit card security breach. Lagging sales across newly opened outlets in Canada racked up an additional $211 million in losses. Target has experienced over a year and a half of declining store traffic while its online presence remains troublesome.
And then there was the coup de grace, with the highly visible credit card security breach involving the personal data of upwards of 70 million shoppers, which other media reports conclude could have been avoided from early warning signals and the company’s own installed security software.
Like any of these types of situations, there is always two-sides regarding perception of events. Steinhafel himself had 30 year tenure at Target and likely had full knowledge of the retailer’s corporate culture and management practices. After the massive and highly visible cred-card security incident, he might have been a convenient scapegoat for the retailer’s series of missteps. What astounded us was the action of Target’s board in accepting the direct feedback of many others of the existing senior management team in the midst of this crisis environment, in essence allowing for anarchy from the management ranks. Too often when this situation occurs, it takes a very long time for a new CEO to establish his or her’s leadership presence and overcome parallel lines of communication to board members.
We applaud the WSJ for its in-depth and candid perspectives on Target’s senior management missteps. However, it may not help this retailer in timely efforts for recruiting a strong CEO leader who can establish a new direction.