In our Supply Chain Matters 2014 Predictions Research Report (full research report available for complimentary downloading in our Research Center) we specifically addressed consumer product goods supply chains where combinations of external forces are providing unique challenges. These forces include, among others, contraction of global growth rates and margins from previously expanding emerging markets, a certain group of activist investors demanding more cash value, and now, increases in key commodity costs.
While we have already provided a previous specific CPG supply chain commentary, an event held last week provided stronger evidence for additional thoughts.
One of the premiere events for consumer product goods companies is the Consumer Analyst Group of New York (CAGNY) Annual Conference, traditionally held in February. For those unfamiliar with CAGNY, it represents an organization of Wall Street analysts, investment bankers and others whose focus is specifically on CPG industry investment and performance. The conference which was held last week, is where a number of CPG senior executives provide a detailed business overview of their companies’ strategic goals.
Since 2008, Supply Chain Matters has utilized the content presented at this conference as reliable indicators for the upcoming challenges for CPG supply chains, and this year was no exception.
Thus far, we have reviewed presentations from Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We elected this initial grouping because these firms are exercising product growth strategies predicated on higher growth and margin businesses such as snacks, and because this grouping represents differences of corporate size, culture, as well as different perspectives, positive or otherwise, on supply chain challenges, capabilities or accomplishments.
Our initial analysis was to screen for common messaging regarding industry challenges and required business outcomes. That was not difficult, at all.
Mondelez, which has its sole business focus on a global snacks business, addressed the potential of a $1.2 trillion global snacks market, yet has experienced some realities of declining growth rates among snack categories in 2013. Hershey, a company that traditionally has been grounded in North American markets addressed a growth plank indicating that geographic expansion will be the key to growth and become Hershey’s #2 market by 2017. Campbell Soup, a company demonstrating positive results of late, stated its goals as growing faster in snacks and healthy beverages and expanding international presence.
As each CFO addressed his or her company’s segment it was clear that current signs of slowing growth among emerging markets has placed a pointed emphasis on improved operating margin and cost savings. Once more, such savings are to be re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand. A clear common message was increasing stockholder value and operating cash flow, the obvious response to activist investors circling the industry. As examples: Mondelez expects to deliver an additional $3 billion in gross productivity savings, $1.5 billion in net productivity, and $1 billion in incremental cash; Campbell Soup stated its restructuring programs have yielded $160 million in annualized savings.
That leads to the stated priorities for each company’s supply chain.
Mondelez addressed four current supply chain priorities:
- Step change in leadership talent and capabilities, articulated as changing 40 of 115 key leadership roles;
- Transform global manufacturing platforms with an emphasis on new biscuit, chocolate and gum platforms across a global presence;
- Redesign the supply chain network- with 30 plants already “streamlined”, closed or sold and 3000 FTE’s reduced; and
- Drive additional productivity and margin improvement programs to fuel growth.
Hershey, which has demonstrated positive supply chain successes to-date, addressed its supply chain goals as:
- End-to-end supplier integration focused on increased on-shelf availability, improved freshness, and localized regional production;
- Strategic procurement partnerships for product innovation, sustainability and cost control;
- Insights-driven supply and value-chain stressing deeper analytics; and
- Global shared-services
Campbell Soup and Pepsico similarly articulate expansion of on-shelf availability, innovative direct-store delivery programs, leveraging direct online commerce and expansion in faster growing markets as supply chain priorities.
We highlight CPG industry challenges because our industry readers need to quickly internalize the implications, both for their organizations and for their careers.
CPG supply chains have always been driven by sales and marketing, along with efficiency and responsiveness. That is not, obviously, going to change. What is changing is the need for bolder leadership skills which is now articulated by talent management being ranked as a top goal. There are many implications to talent management, too many to articulate in this singular commentary. Suffice to state, it implies a far broader set of management skills that span international business markets, translating required business outcomes for margin improvement into prioritized strategies, and in-depth understanding of what is required to be both market and business outcomes driven.
Emerging CPG supply chain leaders will require more depth in the tradeoffs of incremental business process improvement with cost-conscious information technology investments that enable the best end-to-end network response capabilities grounded in more predictive insights as to what to expect. They will now have to manage with less fixed capital and resources, with no choice but to have more reliance on partners and suppliers, including third-party logistics providers. That unfortunately, will lead to the dynamic of passing more cost and risk burden lower into the supply chain. We maintain that this will require total visibility to what’s occurring across the global supply chain, and that implies an end-to-end B2B platform integrating suppliers, contractors, trading partners and other key value-chain participants.
The notions of striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut, and are a relic of the past.
We, as thought leaders and/or consultants, need to stop feeding these fallacies and deliver more straight talk on what skills and competencies supply chain leaders, and their teams, need to be more successful in their efforts, keep teams motivated as well as enjoy coming to work every day. Technology vendors need to stop the endless re-purposing of supply chain visibility or competency acronyms and get to the essence of supporting CPG supply chains with more cost-effective and responsive solutions to immediate needs.
Finally, CPG firms themselves in need to quickly come to the realization that the supply chain leaders and individuals they require, today and in the future are indeed scarce, and be willing to recognize such leadership and technology savvy skills in compensation, incentives and management development and mentoring opportunities.
Throughout 2014, Supply Chain Matters will do our part in hard-hitting straight-talk commentary.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.
There is yet another supply shortage occurring in pharmaceutical supply chains.
A combination of factors including a heightened flu season and supply imbalances have precipitated an apparent severe shortage of intravenous saline solution commonly used to hydrate patients being treated for dehydration and other symptoms. Reports indicate that hospitals and healthcare providers are managing short supplies by administering these fluids to only the most seriously ill patients. The U.S. Federal Food and Drug Administration (FDA) is involved in helping to alleviate the current shortage.
Producers Baxter International, Hospira and B. Braun Medical are stepping up production volumes to respond to the current shortage. According to an FDA spokesperson, manufacturers first notified the FDA late last year that they expected delays in filling orders, but an increase in hospitalizations two weeks ago partly due to rising numbers of flu cases has exacerbated the problem.
To cope with the shortage, healthcare providers are using substitute oral hydration products.
According to a Reuters syndicated report, a quote from a registered nurse with Novation, a supply chain company that works with hospitals and other healthcare providers indicates that it could be another two months before the current shortage is resolved. The FDA is also looking into alternative international supply sources to resolve the current shortage.
Bob Ferrari, noted supply chain thought leader and Executive Editor of Supply Chain Matters continues with a current series of guest postings on the Chainalytics blog. The latest guest posting, The Implications of Omnichannel Commerce Have Become Profound, cites recent business media and executive viewpoints that now conclude that there has been a permanent shift in consumer buying habits with profound implications.
The important takeaway for retail, CPG and other consumer-facing industry supply chain leaders is to internalize the reality that permanent changes in shopping behavior are underway and to proactively educate the rest of the business to the supply chain strategy and potential re-alignment implications.
Earlier this week the Detroit Auto Show occurred, an annual event that provides industry players and business media the opportunity to feature multitudes of commentaries regarding the state of the industry and the state of automotive supply chains.
The year 2013 was a good one for the U.S. automotive market as sales rose 7.6 percent to 15.6 million vehicles. That is quite a comeback from the levels of 2009-2010 when severe recession all but forced the bankruptcy of both Chrysler and General Motors and caused many other automakers severe cutbacks in revenue and profits, not to mention jobs.
As we begin 2014, the U.S. market is now the target for most of the globe’s auto makers as the U.S. economy continues its steady rebound and U.S. consumers are much more inclined to replace or buy a new vehicle. The latest estimates for auto sales in 2014 hover in the 16 million vehicle range, a slight improvement.
Yet, in reading certain news reports, we wonder aloud if the industry has learned some operational lessons regarding inventory management, specifically finished goods inventories management.
On Wednesday, the Wall Street Journal published two articles on the industry. One of the articles made note that many automotive OEM’s are now considering even more investments in added capacity. Yet, some seasoned CEO’s such as Sergio Marchionne, CEO of Chrysler and Fiat openly states his constant concern regarding excess inventories. He was quoted as indicating that he watches inventory like a hawk. He should know, since he has been responding to that problem in the European market. Auto makers are augmenting North America production capacity not only to serve the domestic market but export markets as well. Today’s more prevalent common platform design strategies coupled with more sophisticated levels of factory automation allow auto makers to exercise far more flexibility in production options from any given plant.
What did catch our attention were reports of current finished goods inventories across various U.S. automotive retailers. According to Autodata Corporation, auto dealers had 3.45 million cars and trucks in inventory at the end of 2013, which is reported as the equivalent of 63 days of finished goods inventory at roughly $100 billion in value. That number is reported as being considered “optimal” by the industry. Keep in mind that automotive OEM’s book revenue credit at point of shipment to dealers, thus their metrics of revenue are fulfilled, but dealer metrics of unsold vehicles being financed is a different story.
The WSJ published a sidebar article indicating that Mike Jackson, the CEO of AutoNation, one of the largest retail auto dealers in the U.S. was indeed concerned about finished goods inventory levels. Jackson is of the opinion that inventories are much higher, closer to 90 to 120 days of supplies if cars sold to fleets is excluded from the selling rate equation. Thus the value of sales rate is combined for fleet sales and private sales which skews the specific type of product demand.
We applaud Mr. Jackson for his candor. It strikes us that since 2009, the industry should have learned some very important lessons regarding unsold inventories and conflict of metrics among OEM’s and retail dealers.
Today more than ever, auto markets are driven by a B2C online presence. Consumers can literally shop and price any make or model vehicle and view current inventory levels from the majority of OEM online sites. Auto dealers can now view finished goods inventory across wide geographic regions and can electronically swap inventory with other dealers. Some of the luxury OEM’s such as BMW or Mercedes allow consumers to actually order a vehicle to be built at the factory and then arrange to pick up that vehicle when completed.
Now more than ever before, OEM’s and their retail dealers have information available as to what models and options consumers are most interested in and from what specific geographic regions product demand is coming from. They also have the ability to select and utilize a wide variety of advanced software applications directed at item-level inventory management and optimization that are delivering bottom-line savings in more efficient overall management of inventories. Technology should not be an issue.
Why then is 60 days of unsold inventory viewed as an acceptable norm?
We obviously suspect it has more to do with conflicting metrics, namely revenue recognition or output performance. If OEM’s receive some revenue recognition at every shipment, they consequently only care when the pipeline gets bloated. They then turnaround and offer retail dealer’s additional cash selling incentives to motivate them to sell unsold inventory more aggressively. Our household bought a brand new Honda in 2013 and it was very clear that the salesperson was highly motivated to offer the most attractive price if we opted for a vehicle in dealer inventory.
This problem has been the bane of the industry and it is shocking that it continues with so many other options in product demand and inventory management now available.
Supply Chain Matters is therefore seeking input from those within the industry- why does this situation continue? Is the adage of “push it down the pipeline” still an acceptable norm with so many other alternatives now available? It seems to us that there has got to be a better way of channel distribution.
What are your observations?
We pen this Supply Chain Matters posting on Sunday, December 22, on the very last weekend before the Christmas holiday. This is the absolute peak of the holiday buying surge, as online shoppers make their last minute purchases, assuming that delivery prior to Christmas is a given.
This is the weekend that all of us, supply chain or consumer alike, need to extend a huge shout-out to all the logistics, transportation and delivery professionals who have again performed in an extraordinary manner. Included in that recognition are the planning and inventory management teams that have scrambled to deploy inventory across various fulfillment channels.
This has been an especially challenging year. The period between the Thanksgiving holiday and Christmas, where the bulk of holiday buying occurs, was shortened by one full week from previous years. In the United States, severe winter storms impacted many parts of the country, causing transportation delays and perhaps motivating other shoppers to perform the remainder of their holiday shopping online. That has stressed and already highly stressed logistics infrastructure. Even as we pen this posting, an ice storm is moving along the northeast United States threatening to cause additional delays. The timing could not be worse.
The latest edition of Bloomberg Businessweek features a timely cover story, Can UPS Save Christmas? The article profiles Scott Abell, the director of Peak planning for UPS, who is known internally as “Mr. Peak.” Abell is responsible for insuring the all of UPS resources are adequately planned to handle any expected holiday rush. As the Bloomberg authors note: “Mr. Peak’s job, in effect, is to fulfill the Internet’s promise of instant gratification.”
That says it all.
Assisting Abel and his planning team is the UPS Contingency team headed by Steve Merchant. That team has to respond when all of the best laid plans are upset, or when weather or unplanned needs cause glitches. The contingency department has 18 planes positioned that can take off on 30 minutes’ notice to plug holes in delivery schedule commitments or accommodate last-minute requests from shippers.
Tomorrow, UPS could process and handle as much as 3.2 million packages, nearly twice that of any other period. The current bad weather is not going to help, nor will last-minute requests from retailers to ship goods overnight. This very weekend, and perhaps the next two days, the UPS Worldport will be working double shifts to accommodate our needs as consumers for instant gratification.
Beyond UPS are other professionals working at FedEx, the U.S. Postal Service and other logistics and transportation carriers, who often do not get the recognition they deserve. They all collectively work their butts off so that consumer’s young and all can celebrate with gifts, holiday cheer and special foods.
We at Supply Chain Matters extend a huge shout-out to all logistics and customer fulfillment professionals who consistently perform beyond all expectations, in cold weather, winter storms, and among crazy holiday drivers and traffic jams, to insure that the goods are delivered for the holidays. They are all clearly distinguished supply chain management professionals.
While you go about your business and enjoy the holiday events these next few days, if you encounter these professionals on the roads, sidewalks or business establishments, please acknowledge them with a hearty “thanks” and a huge “Thumbs-up”.
This year, they deserve it more than ever.
Bob Ferrari, Executive Editor
Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions. In this posting, we explore our first two predictions, which traditionally focus on what to generally expect in global economic and procurement dimensions.
An Optimistic yet Uncertain 2014 Global Outlook with Consequent Impacts on Industry Supply Chains
As has been noted in our annual predictions since 2011, the global economy continues to present an environment of uncertainty in many dimensions. However, economic forecasts concerning 2014 are a bit more optimistic but come with many cautions or caveats.
Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) forecast some growth in the global economy in 2014 but both agencies point to notable downside risks. The IMF forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.9 percent in 2013. It attributes much of the anticipated growth to be driven by the advanced economies. Emerging market growth is expected to be weaker while the Eurozone region is expected to gradually pull out of recession, but at a rather modest 1 percent pace. Growth in China is anticipated to level off to the 7 ¼ to 7 ½ percent range.
The OECD also forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.7 percent in 2013. The OECD has also downgraded growth projections for emerging economies, citing slower trade, subdued investment levels and potential further negative shocks that could impact these economies. In August of 2013, business media featured reports indicating that the BRIC honeymoon was over after the OECD declared that their data reflected slowing economic momentum for Brazil, Russia, India and China
Both organizations reinforce the existence of rather fragile consumers. Job growth remains tepid with unemployment levels especially high among young professionals in Europe and little improvement in the United States. Weakness in the European banking system and the cumulative effect of two years of recession does not add to the confidence levels of European consumers. The past shutdown of the United States government and continued brinkmanship actions over fiscal policy continues to spook consumers and is reflected in their spending levels. Each quarter, analytics firm ComScore polls a select group of U.S. consumers regarding their rating of economic conditions. For the past three quarters, consumer responses of poor economic conditions have consistently averaged between 40-42 percent. Similar sentiment continues across the Eurozone. The implication is that any product or retail focused supply chain focused on demand from direct consumers will continue to experience the effects of consumers who will be cautious in spending, and will be highly sensitive to price and value.
In 2014 industry supply chains will continue to be constantly challenged and must further enhance capabilities to be able to plan, sense, respond or adjust to product or services demand. Industry supply chains and their planning and S&OP teams who had previously planned on aggressive growth and product fulfillment in emerging markets need to be more diligent in the coming year. Overall, the ability to sense and respond to changing markets at the discrete region or country level will prove beneficial. Supply chain wide visibility to inventory, or exceptional supply and demand imbalances at the regional level will prove important as a differentiator to other competitive players.
Stable Inbound Commodity and Component Prices with Certain Exceptions
Commodity costs moderated significantly in 2013. As of mid-November 2013, the Standard and Poor’s GSCI Commodity Index was down approximately 5 percent year-to-date. Prices in certain sectors were down considerably, for example grains down 22 percent, industrial metals down 13 percent and agricultural products down 20 percent. The IMF forecasts that most commodity prices should remain flat or fall over the next 12 months. Some upside price risks were forecasted in corn coffee and wheat products.
In the all-important area of energy and fuel, both the IMF and the U.S. Energy Information Administration (EIA) are forecasting that oil prices are expected to stabilize at the levels incurred in late 2013. The EIA is currently forecasting a 2.8 percent drop in the price of West Texas Intermediate (WTI) crude oil for 2014, with both a 5.9 percent reduction in the per gallon cost of diesel and a 3.2 percent reduction in the per gallon cost of gasoline. Of course, any significant political or terrorist-related event in proximity to oil-producing regions changes the equation altogether. There are some upside price risks in the cost of U.S. natural gas in 2014 due to expected demand surges.
While commodity price pressures will generally moderate in 2014, we continue to believe that certain emerging market regions will be challenged by locally based commodity price pressures brought about by either localized economic, currency or other political factors.
Component pricing trends remain dependent on specific industry demand and supply developments, and will obviously continue to be dynamic. As always, industry supply chain dominants with the largest volume scale and long-term financial resources will garner attractive pricing. Small and mid-sized manufacturers and retailers should continue to benefit from buying consortiums or networks that provide scale.
In the area of procurement of services, trends will again be dependent on supplier relationships, buying scale or influence along with specific geographic regional specific trends. As always, the ability of procurement teams to obtain a deep understanding of spend patterns enterprise-wide requirements, with savvy contract management and supplier intelligence, will benefit in contributing to cost savings.
Bottom line, an easing of inbound pricing pressures should allow procurement executives to re-allocate their teams towards an increased focus on overall strategic needs for deepening supplier based collaboration in products and services, and in nurturing a deeper focus on joint supplier focused sustainability programs that deliver both innovation and cost avoidance opportunities.
Keep your browser focused on Supply Chain Matters as we continue with this 2014 Predictions series.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
A complete and more detailed research report that includes all of these predictions will be available for no-cost downloads in January.
© 2013 The Ferrari Consulting and Research Group LLC, and the Supply Chain Matters Blog. All rights reserved