This past August, this author penned a Supply Chain Matters blog commentary: The Newest Phase for Elongated Supplier Payments- More Aggressive Push Back. The essence of that commentary was that with many more multi-industry procurement teams extending supplier payments under the umbrella of working capital savings, suppliers themselves are now more aggressive in pushing back, especially when their own financial performance takes a hit from a key customer. In some cases, such suppliers utilize the threat of supply disruption to force more timely payments.
We cited supplier aggressiveness examples related to AB In-Bev, Boeing, General Motors, Tesco and Volkswagen.
Today, The Wall Street Journal reports (Paid subscription required) on yet another example, this time involving retail firm Sears Holding.
Jakks Pacific the fifth largest designer and marketer of toys and consumer products featuring a wide range of popular branded products and children’s toy licenses announced the suspension of supplying products to retailer K-Mart, part of Sears Holdings. The stated reason, according to reports, was concerns related to the financial health of the retail chain and to minimize risks of not being paid for inventory. While Jakks senior management did not initially disclose the name of the a stated “major retailer”, business media digging confirmed the identity of that retailer.
Normally, supplier pushback on concerns for delayed payments are not extraordinary news. Sears Holding itself has been itself financially challenged as a result of declining sales and profits and subsequent business restructuring and store closings. Sears CEO Edward Lampert had to recently respond to speculation that the K-Mart franchise was about to close in the light of previous decisions to shutter upwards of 130 K-Mart retail stores. In a blog posting featured on the firm’s SHS Holdings blog, Lampert indicated that there are no plans and there have never been any plans to close the Kmart format. He further calls into question whether intended parties seek to do harm to the retailer for other gain.
By our lens, the extraordinary aspect is the overall timing of the supply suspension, coming just before the all-important and business critical holidays fulfillment period. The vast majority of sales related to children’s toys occur during the Christmas holiday season. The other aspect to timing relates to the Wall Street community’s concerns as to whether other key suppliers will take the same actions related to Sears and K-Mart.
The CEO of Jakks indicated to the WSJ that the decision impacted his firm’s financial performance during the recent quarter as revenues fell by 10 percent, and the company’s stock value plunged by 15 percent. Reviewing the toy supplier’s latest third quarter financial results, we indeed noted the citing of suspended sales “to a major customer that is experiencing challenges” but there is mention to other causal factors such as the impact of Brexit and negative foreign currency effects. A balance sheet review indicates that there has been a nearly $109 million increase (63 percent) increase net accounts receivable over the past nine months. Working capital balances have eroded by nearly $24 million over the last year.
On its part, K-Mart management reinforces that it has an active and long-standing relationship with Jakks and that it continues to receive inventory from this supplier. One wonders whether that implies that compromises are already at-play. The SHS Holdings blog further weighed in a blog commentary from is CFO: Just the Facts- Vendor Relationships. It states in-part:
‘We can tell you that we have had a longstanding relationship with Jakks as we do with our tens of thousands of other suppliers and vendors. Despite the speculation and rush to report the negative, we have always paid our vendors for orders we have placed and as part of the normal negotiations between retailers and vendors, there are occasionally disputes over prices, allocations of product and other terms.”
That latter statement regarding occasional disputes can be interpreted in various ways depending on the perspectives of supplier or major customer. The tone of the commentary can have different interpretations as well. The transfer of the burden of working capital management or cash flow ultimately comes with certain consequences which need to be managed.
Regardless, the overall trending of increased supplier aggressiveness is prevalent, especially when such suppliers perceive their own financial and operational harm.
Remain Cautious of Overly Optimistic Retail Sales Forecasts Regarding the Coming Holiday Fulfillment Quarter
Last week the National Retail Federation (NRF) issued its annual forecast concerning holiday related spending which painted a very optimistic picture regarding the upcoming holiday sales period. We advise B2C and B2B retail planning teams to be very cautious and diligent regarding the applicability of such data. Actual retail sales activity pegged to each channel, coupled with end-to-end supply chain visibility and agility as to sudden shifts in demand will be far more important to planning and execution.
The NRF forecast indicates that it expects this year’s holiday sales, excluding automobiles, fuel and restaurant sales will increase 3.6 percent above last year’s levels. That amounts to approximately $656 billion in physical store and online retail sales. Keep in-mind that the NRF is a trade organization made up of retailers, and thus has a track record for being fairly optimistic. Last year, the organization predicted holiday related retail sales to grow by 3.5 percent, but the actual number was closer to 3 percent. Once more, the organization literally missed on gauging the increased dependence of consumers towards online holiday sales, which grew dramatically last year. From the period of November 26 thru December 20 2015, one forecasting firm had indicated that online sales grew nearly 12 percent in just that period.
Retailers are betting that current levels of low inflation and dramatically lower costs of gasoline and heating oil will drive more optimistic holiday buying. That was relatively the same assumption as last year. However, we continue with our stated belief late last year that consumers have already fundamentally shifted their retail buying habits in favor of online purchases. Even the NRF acknowledges that consumer spending patterns are shifting, favoring more personal based experiences such as travel and customized unique experiences. Unless online buyers are provided an incentive for visiting a brick and mortar store, there will be little incentive for impulse buying. In August, we issued our Research Advisory, The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, that in essence questions the long-term presence of existing brick and mortar storefronts.
Operationally, the retail industry as a whole is struggling with high levels of inventory. Muted U.S. economic growth and consumers’ increased desire for immediate availability and delivery on online goods have driven such trends to-date. If you have recently visited a physical retail store of late, you will see a visual manifestation of that challenge with lots of merchandise on the shelves but little of it moving. Our recent mall visit provided such evidence as to markdown sales or sales promotional activities especially concerning clothing and accessory items.
Retail focused sales and operations planning, along with respective supply chain planning teams therefore need to constantly be diligent in their context of current optimistic retail sales forecasts for the upcoming holiday fulfillment holiday surge period. Evidence continues to indicate that costs of online fulfillment continue to rise and thus planning resources by means of sales forecasting expectations could well lead to more margin erosion and lost profits.
Transportation and logistics challenges will be yet another concern since major parcel carriers FedEx and UPS continue to experience some of the flaws of major hub and spoke networks during periods of high volume, as was experienced gain last year. Similarly, Amazon continues to build out its own transportation and logistics fulfillment capabilities to support massive holiday surge volumes, placing more pressure on the major parcel carriers to make their profit goals as the expense of shippers.
In all cases, being product demand driven vs. forecast-driven is fast becoming table-stakes. Advanced inventory management pegged to Omni-channel product demand levels and broader visibility to supply chain wide inventory exposure applies. Once again, when multi-echelon inventory optimization is supported by higher and deeper levels of supply chain wide inventory visibility, better informed planning and supply chain wide decision-making can help in determining the various impacts on financial line-of-business business outcomes such as margins and profitability.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Muted U.S. Economic Growth Levels Point to Needs for More Advanced Inventory Management Capabilities
This commentary represents the fourth of our ongoing Supply Chain Matters- Llamasoft market education series directed at clarifying needs and requirements addressing supply chain wide visibility.
Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends. In a prior blog posting earlier this month, our research suggested there was indeed an inventory overhang with two potential causes. Of the three potential causes, one was that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the transition to support the explosion of online.
Last week, the U.S. Commerce Department released adjusted data regarding U.S. economic growth levels that occurred in Q2. US GDP growth was adjusted downward to a 1.1 percent annualized growth level in Q2. There was other data relative to inventory levels in the economy.
Overall, the messages delivered were that consumer related spending jumped to an annualized 4.4 percentage rate in the April to June period, the strongest gain since Q4 for 2014. However, business spending on equipment and other items declined at a 0.9 percentage pace following drops in the prior two quarters. In essence, consumers drove spending levels in Q2 rather than B2B activity. That was reflected in remarks from U.S. Federal Reserve Chairwoman Janet Yellen who also contrasted solid growth in household spending with soft ongoing business investment. The result is that overall corporate profitability rates which are reported by Commerce are now trending down 2.2 percent compared with the year-ago period.
Regarding inventories, The Wall Street Journal quotes PNC Financial Services’ Chief Economist as indicating: “Inventories were a major drag on growth in the second quarter, but now that businesses have better aligned inventories with demand, that should lift and inventories will add to growth in the near term.” Another chief economist is quoted as indicating that profit margins are past their cyclical peak and are set to decline further over the coming quarters. Thus, the usual contrasts and challenges regarding the ongoing management of supply chain wide inventory visibility.
For supply chain executives and strategists overseeing product demand and fulfillment activities focused on U.S. market segments, the message is that inventory hangover and management is very much associated to either a B2C or B2B market segment.
The numbers would indicate that optimistic consumer spending will continue in the current quarter, and perhaps into the final B2C holiday focused fourth quarter, bar the results of the U.S. Presidential Election in early November. Inventory management in B2C and Omni-channel retail would thus be a reflection of the hottest consumer products and quick responses and calibration to weekly market trends. However, as we all know, B2C product margins are very thin and the overall costs for online fulfillment are rising.
However, in the B2B sector, more cautionary inventory management remains prudent, since many businesses remain in a period of uncertainty with reluctance to spend. The current depressed state of the oil and gas industry coupled with election year and interest rate uncertainties obviously remain as pressures on businesses to reduce further costs and maintain expected profitability.
Thus supply chain inventory levels will remain in the crosshairs of the CFO both for the remainder of the year as well as into the future. Suppliers should anticipate continued pressures to absorb inventory costs.
In all cases, advanced inventory management pegged to item-level actual product demand levels, and broader visibility to supply chain wide inventory exposure applies for all supply chain planners for the foreseeable future.
As noted in our prior commentary related to this market education series, from the user lens, significant challenges in creating a unified view of all supply chain inventory data and information remain as unfulfilled. However, new Cloud or on premise in-memory, data visualization and data cleansing information technology tools now coming to market continue to improve and will better assist in this effort. In particular, the combination of advanced in-memory coupled with data visualization and analytics will add augmented computing power and a more enhanced user-interface.
A further ever important capability has become multi-echelon inventory optimization practices. Such inventory optimization techniques allow the flexibility in the use of what is termed “service classes” which are equated to customer fulfillment service needs. Inventory optimization techniques in essence, calculate “stock-to- service” curves, optimizing individual service and safety stock levels to an inventory location. Such capability is especially pertinent to producers of consumer focused goods which are increasingly being planned n Omni-channel fulfillment. Trying to plan such landscapes with traditional ABC inventory management techniques is sub-optimal and inefficient in terms of overall inventory management.
When inventory optimization is supported by higher and deeper levels of supply chain wide inventory visibility, more informed planning and supply chain wide decision making can be enabled as to various impacts on financial business outcomes such as margins and profitability. An overall inventory dashboard capability provides the means of alerting to average daily inventory levels by distribution segment, product demand that is consuming the bulk of available inventory or important trending in inventory vs, days of supply for key products.
Muted economic growth and high levels of business uncertainty indeed point to needs for end-to-end supply chain visibility augmented by more sophisticated, analytics-enabled inventory management
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Disclosure: This educational series related to supply chain wide visibility is sponsored by LLamasoft.
Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends.
We at Supply Chain Matters decided to have a detailed look at the data to extract some insights
The most accepted and readily available measure of any inventory overhang is the inventory-to-sales ratio. The generally accepted definition of this ratio equates to the amount of total amount of inventory that businesses report has compared with the amount of goods that they have sold in a particular period of time. In essence it represents total business inventories divided by total business sales. A ratio value in excess of one would indicate how much more inventory is available to support existing sales levels. During times of severe recession, such as which occurred during the years 2008-2009, the ratio is high. During good economic times when sales are robust, the ratio should be lower.
For U.S. related activity, the U.S. Census Bureau calculates and reports this ratio. We downloaded adjusted historic data with a start year of 2008, just prior to the prior severe global recession, with values up to and including May of this year. (The last reporting value).
There are three different variants available from the U.S. Census:
Total Business (Adjusted)
Total Manufacturing (Adjusted)
Total Retail Trade (Adjusted)
For purposes of our analysis, we elected to analyze and share Total Business and Total Retail Trade. However, we elected to sort and present this trending data by month, which we believe would be far more of interest to our supply chain, manufacturing and product management reading audience. This is because inventory is managed continuously in daily, weekly or monthly dimensions.
Indeed, the data does present some insightful trends.
Our first figure is Inventory to Sales Ratio-Total Business Activity (Adjusted), 2008 to Date.
First, notice the distinctive spikes in the ratio for the early and late months of 2009, when the global recession took a severe toll on businesses. The average ratio across all of 2009 monthly values was 1.34, with the highest values ranging from 1.48 to 1.43 during the first-half of that year. What we further noticed was the ratio began a steady creep upwards beginning in November 2013 (1.33) thru May 2016. The average ratio value for the five months of 2016 was 1.41, rather close to the spikes in early 2009. Notice further that the spike in the ratio extends across all months
So what happened?
Again, we do not portend to be trained economists but it would seem by our knowledge of supply chain events that there were two rather significant events that occurred in the designated latter period. One was the U.S. West Coast port disruptions that extended from the latter-half of 2014 well into the first-half of 2015. The other was the ongoing boom of online commerce that has impacted retail channels, resulting in a boom in the construction of new online fulfillment distribution centers.
We further analyzed the ratios for Total Retail Trade (Adjusted) for the same period of 2015 and the first five months of 2016.
Notice that the 2009 spike was far larger and that a somewhat similar pattern of current creep is manifest in the 2015-2016 data. The average ratio for Retail Trade was 1.46 for 2015, and 1.52 for the five months in 2016. While not to the 1.6 levels of 2009, the trend is indeed worrisome.
We therefore suggest that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the explosion of online.
We conclude with the following takeaways:
- There is indeed strong evidence of a building overhang in inventory levels. Supply chain, procurement and sales and operations teams need to take a hard look at inventory trending in relation to supporting expected sales volumes.
- The U.S. West Coast port disruption appears to have provided its own impacts in ongoing inventory management. Whether that resulted in increased safety stocks, changed global transportation patterns or continued concerns, the ratio creep correlates in timing.
- The ongoing explosion of online commerce, online consumer demands for immediate availability, and the added build-out of new fulfillment centers seems to have a direct correlation to ratio creep timing, however there may be other factors at-play. Bottom-line, inventory levels are indeed creeping up to concerning levels, despite all the current advanced planning and technology tools currently available. It may further explain why global PMI indices have trended more toward contraction levels.
We encourage our readers, particularly those of economic and/or academic backgrounds to weigh-in on the above. What do conclude from the current high levels of inventory overhang?
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
Yesterday, Apple reported its fiscal third quarter financial performance for the period that ended in June and the results were somewhat concerning from both a financial and supply chain strategy perspective.
On the financial side, the business media headlines reflected the first prolonged slump in iPhone sales since that product was introduced in 2007. That is especially concerning since the iPhone is the prime revenue and profit generator for this prominent consumer electronics producer. Total revenues declined 14.6 percent while net income decreased nearly 27 percent or $2.9 billion from the year-earlier quarter. Gross margin for the recent came in lower at 38 percent, primarily attributed to the introduction of the lower-priced Apple iPhone SE model. The average selling price for the company’s iPhone lineup dropped to $595 from $662 in the year earlier quarter.
From a supply chain volume perspective, the company indicated it sold 40.4 million iPhones and close to 10 million iPads in the quarter. Regarding the former, CEO Tim Cooke indicated that sales interest in iPhones was higher but was constrained by a decision to reduce four million units of overall iPhone inventory in its various retail channels. Regarding the latter, iPad volume has now dropped for 10 consecutive quarters with the latest 9 percent volume decline. From a global perspective, more concerning was a 33 percent drop in sales within Greater China that includes Hong Kong and Taiwan in addition to the mainland. Smartphone sales in this region continue to increase and have benefitted other domestic and foreign producers.
In its reporting, The Wall Street Journal opined that the company’s main hardware products remain in decline and that new products are not successful enough to pick-up the slack. Further indicated is a concern that Apple may have lost its innovative touch.
Thus, Apple’s current new product development and product release phase looms even larger to convince investors and the market as a whole that Apple will retain its innovative edge. Once again, the Apple supply chain must deliver on both higher expectations and now, new pressures to reduce costs along with smarter management of overall inventories. With a continued decline of the company’s traditional hardware products added to what is likely to be highly optimistic forecasts and expectations for pending new products, Longer-term, expectations remain high for Apple’s entry into other markets such as electric powered vehicles.
Apple’s sales and operations team members have yet another challenging 6 months in planning for the all-important year-end holiday period where sales and profitability needs are so important. Compounding this problem is yet another shift in supplier strategies and constant information leaks across the supply chain.
Indeed, Apple has reached an interesting crossroads. The again, there could well be other interesting developments in the weeks to come given Apple’s massive cash balance and propensity to generate considerable profits. We should all not be surprised by other strategic moves.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.