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Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Supply Chain Matters Commentary on Apple’s Fiscal Q2-2017 Performance

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Apple formally reported its fiscal Q2-2017 financial performance this week, and continuing our Supply Chain Matters tradition, we add some supply chain perspectives to this latest performance. The world’s most admired and most watched supply chain warrants continual observation.  Apple Logo Supply Chain Matters Commentary on Apples Fiscal Q2 2017 Performance

Revenues

The Company posted quarterly revenue of $52.9 billion compared to revenue of $50.6 billion in the year-ago quarter. International sales accounted for 65 percent of the quarter’s revenue, which is continued reinforcement of where Apple’s growth markets reside. However, reviewing detailed performance for key growth regions reflects concerns for sales momentum:

Greater China– a 14 percent year-over-year sales decline as well as a 34 percent decline from fiscal Q1.

Rest of Asia Pacific– a 35 percent decline from fiscal Q1

Japan– a 22 percent decline from fiscal Q1

Wall Street research reports such as Seeking Alpha report that China local smartphone manufacturers Oppo and Vivo have had robust sales growth at lower price points which are attributed to Apple’s declining momentum in the country. Some in investment circles question whether Apple has a viable growth strategy for China, given the level and price and performance points among local competitors.

On a positive note, the category of Other Revenue which makes-up the iWatch, AirPods and other hardware grew 31 percent year-over-year. Regarding the latter, indications are that supply remains constrained. Services generated $7 billion in revenues an 18 percent year-over-year increase.

A couple of years ago, this author put forth the premise that Apple’s supply chain serves two primary purposes- one being customer needs, the other being the fuel to sustain the growth of services and content related revenues. That strategy is obviously working.

Unit Volumes

iPhone volumes in the latest quarter were reported as 50.8 million vs. a 51.1 million performance in the year-earlier quarter. Apple reported that during the recent quarter, channel finished goods inventory was reduced by 1.2 million units, compared to a channel reduction of 250,000 units in the year earlier period. That action likely implies that supply chain planners are preparing for the introduction if the highly anticipated 10th Anniversary Edition iPhone later this year, and thus are trying to ensure that channel inventories do not exceed new product introduction targets. Apple reported exiting the quarter well within the target of 5-7 weeks’ channel inventory.

To offset volume declines, average ASP was reported as $655, up from $642 in the year ago quarter. That reflects a sales execution strategy that continues to prioritize margin performance.

In the briefing to analysts, Apple executives further indicated that the product mix planning imbalance involving the iPhone 7 Plus and the iPhone 7 that occurred in the holiday quarter took some weeks to resolve, but balance was restored in the latest quarter.

The other closely watched iPad volume performance reflected 8.9 million units sold vs. 10.2 units sole in the year earlier period. Apple recently made price adjustments to the iPad product line-up to spur added sales volume. In the financial performance update with analysts, Apple indicated that there were some supply constraints with the product during the quarter. Channel inventories were reported as flat during the quarter.

Profitability

Operating income was reported at $14 billion while net Income grew 5 percent year over year to just over $11 billion. The takeaway headline for business and Wall Street media was the overall cash position, which reached $256.8 billion in the recent quarter, a sequential increase of nearly $11 billion. That overall number rivals that of some foreign countries, as well as very large corporations, and continues to fuel lots of speculation regarding Apple’s next strategic move. And, a good majority of this cash sits in overseas accounts, forcing Apple to borrow money to fund existing U.S. investments.

Political and Market Spin

If you have been keeping-up with our various Supply Chain Matters blog commentaries related to Apple over the past few years, you would likely get the impression that the supply chain strategy is to strive to have the lowest cost, yet market to be the premium brand. That includes leveraging its vast unit volumes to continuously extract price concessions from suppliers, and to source all volume manufacturing within China where direct labor costs, although increasing, are still quite attractive over developed market regions.

In this latest quarterly financial report, Apple went out of its way to stress its ongoing investments in the U.S. economy, indicating that the company spent more than $50 billion among U.S. suppliers, developers and partners and supported more than 2 million jobs, including the 80,000 with the Cupertino area. That is a wide swath of data collection. One wonders what the total jobs number is across China and other lower-cost regions.

In a move, likely to placate the current Trump Administration political environment, CEO Tim Cook disclosed shortly after the report of financial results that his company would later this month formally announce the creation of a $1 billion fund to promote advanced manufacturing jobs in the United States. He further indicated that the May announcement will include identity of the first company chosen to invest in.  Do not be surprised if that company turns out to be an existing contract manufacturer.

Let’s also keep this announced investment in some perspective, namely that it represents a rather small percent of existing cash. To draw just one comparison, in the recently completed quarter, the company allocated a total of $10 billion to repurchasing of its stock and on dividend payments. That is just one quarter’s investment. According to a report by The Wall Street Journal, since 2012, Apple has allocated $200 billion of cash to shareholder interests.

Apple further stands to gain if the U.S. Congress passes a corporate tax reform plan that includes an attractive rate to re-patriate cash held overseas.  Perhaps Apple can add to its initial $1 billion investment sometime next year.  Perhaps Apple can buy another manufacturing company such as Tesla, that is also investing in advanced manufacturing techniques.

Above comments aside, we do compliment Apple on its advanced manufacturing investment decision.

Looking Ahead

Turning our lens to the remainder of 2017, all eyes will be turned to product development efforts related to the highly anticipated 10th Anniversary Edition iPhone, with many industry observers anticipating lots of consumer pent-up interest to upgrade to this edition.  That again places more challenges on both product development and the supply chain teams. Product development is likely being influenced to pack as much new innovative technology, such as OLED screens and new software features such as augmented reality into the new models. Supply chain teams want to ensure that product designs were factored for design for supply chain considerations and to avoid the product mix planning snafus that occurred with the introduction and actual sales trending of the iPhone 7 Plus. As we have continually observed, the supply chain has continuously had to overcome initial manufacturing yield challenges with component designs that push the technology envelope. The next three quarters will likely be no different.

Obviously, more chapters to be written in the case study of Apple.

Bob Ferrari


Another Sobering Warning for Retail Industry- This Time from a Major Industry Supply Chain Influencer

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In a 2013 article, the New York Times had described Li & Fung as follows:

Li& Fung– the most important company that most American shoppers have never heard of- has long been on the forefront of globalization, chasing cheap labor to garment factories first in China, then elsewhere in Asia including Bangladesh.”

A lot has changed in four years but indeed, Supply Chain Matters has often referenced Li & Fung as the most influential player among global-based apparel supply chains and in supporting many major branded retailers in their apparel and other goods sourcing, merchandise selection and inventory procurement needs.

This week, the Asian based company reported a 47 percent decline in 2016 net profits, coupled with an 11 percent decline in annual total revenues. Further communicated was an indication that ongoing challenging conditions across the global retail industry would place additional challenges on its own business operations.

What caught our eye was these statements from the firm’s CEO as reported by Reuters:

I expect an unprecedented number of bankruptcies and store closures in the years to come. I remain cautious as (the) operating environment is deteriorating.

Li & Fung, being the largest influencer of apparel sourcing offering retailers access to tens of thousands of global suppliers in over 60 countries implies a large purview of business intelligence as to retailer buying practices, supplier payments and order volumes.

This is what makes the above Li & Fung statement so significant and rather sobering.

Our specific 2017 predictions and other research advisories specifically focused on the global retail industry continues to echo the unprecedented business challenges confronting retailers, driven from the implications of permanent consumer shifts to online shopping practices. These permanent forces will continue to present ongoing challenges, and retailers, and their respective supply chains, must adapt or suffer the consequences.

The casualties of retailers that have succumbed is building and so are the reports of bankruptcies and significant reorganizations in this year alone. Wal-Mart, one of the largest global retailers recently enacted job cuts and executive realignment directed at integrated online and physical store customer fulfillment. Last week, a sobering warning from Sears Holdings evoked added concerns and actions among retail suppliers and partners.

Now, one of the most influential players in merchandise and supply chain sourcing is communicating a similar sobering message.

The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-suite executives, all trying to sort out different strategies to compete in an online and Omni-channel driven retail industry environment. The changes impacting retail continue to be described as unprecedented.

Supply chain leaders must get on board with fostering integrated online and physical store planning and customer fulfillment. Once again, the retail supply chain is not a collection of cost center activities to essentially support inventory procurement, warehousing and store replenishment. In today’s online fulfillment-driven retail model, the supply chain is a collection of capabilities directed at Omni-channel customer fulfillment and customer services capabilities. In 2017 and beyond, the alternatives are in-house, outsourced or hybrid supply chains.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


A Statement That Evokes Special Concerns and Actions Within Retail Supply Chains

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Earlier this week, Sears Holdings, operator of Sears and Kmart branded retail stores in issuing what is termed a “going-concern” warning to the company’s investors, evoked special, and added concerns among its supply chain partners. In its annual report, the retailer indicated “substantial doubt exists related to the company’s ability to continue as a going concern.”

That message alone precipitated a 12 percent selloff in the company’s stock on the news of this statement.

The retailer’s CFO moved to calm the waters in a blog post that indicated that such a disclosure was in line with new FASB regulatory reporting requirements and did not reflect management’s expectations for the near-term health of its business operations. Declared was that “We (Sears Holdings) are a viable business that can meet its financial and other obligations for the forseseeable future.”

Unfortunately, this week’s required statement will cause other reactions and added concerns.

After several years of cumulative billion dollar operating losses coupled with selling off valued real estate and associated branded businesses such as Lands End, Sears Hardware Stores and the Craftman’s tool brand itself to compensate for operating losses and maintain working capital needs, landlords, suppliers, services provider and indeed, consumers, will make individual judgements.

Any of our readers who have experienced similar types of financially strained environments can well relate to how quickly the supply chain begins to respond to financially concerning news regarding a key customer’s ability to pay debts. They do so because in retail, suppliers take on a considerable burden in inventory ownership and elongated payments for such inventory. Recent actual bankruptcy declarations from other retailers such as Sports Authority in 2016, had certain suppliers scrambling to recover existing consigned inventory located in actual stores. The controlling private equity owners of that retail chain filed lawsuits with more than 160 suppliers challenging supplier claims to consigned inventories. According to reports at the time, upwards of $85 million in shoes and other gear that were on the shelves in retail stores were contested. The supplier lawsuits were a means to challenge who gets the bulk of compensation when consigned goods are sold in store closings or in discounted sales. Courts subsequently ruled in favor of some supplier claims.

In an October 2016 blog posting, we called Supply Chain Matters reader attention to 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, announcing the suspension of supplying products to retailer Kmart. The stated reason was concerns related to the financial health of the retail chain and to minimize risks of not being paid for inventory. Yesterday, a published report by Reuters indicates that suppliers are doubling down on defensive measures including reducing unit shipments, asking for better, or up-front payment terms or refusing to accept expanded volume orders. In one example cited, a Bangladesh apparel firm, working on production needs for the 2017 holiday period later this year, has already scaled-back production lines working on Sears orders. Insurance companies that once provided policies to Sears vendors to protect for nonpayment are no longer doing so.

Suppliers become very concerned and word spreads to transportation and logistics providers supporting a financially distressed retailer. Inventory, and inventory movement becomes static or disrupted.  If readers have had the opportunity to visit a Sears store recently, as we have, you may have noticed that holiday merchandise such as jewelry and shoes from the past holiday season remains in stores, yet to move off the shelves, despite markdowns.

And so, it goes in a cascading sequence of events.

Sears Holdings may indeed have a viable plan to mitigate and resolve its latest warning, but that plan needs to address managing the effects among its retail supply chain.

In the end, consumers and shoppers will serve as the ultimate judge and make their own judgements regarding Sears and Kmart. Obviously, the financial numbers would indicate that some consumers have turned elsewhere.

Suppliers and trading partners should not be faulted for protecting their own financial interests, especially in light of today’s retail industry environment of consumer’s permanent shifts towards online buying. Bankruptcy declarations among retailers have taken yet another toll since the 2016 holiday period.

Once or twice burned, the new word for suppliers vigilant and protective to self-needs.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Hospital Supply Chain Survey Points to Needs for Broader Education and Alignment Across Healthcare Delivery Support Supply Chains

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Global integrated healthcare services and products distribution company Cardinal Health has released findings of a recent Hospital Supply Chain Survey and the results once again reinforce the need for far more supply chain management focused efficiencies among hospitals, along with broader stakeholder alignment across healthcare delivery supply chains.  DSC0083 300x245 Hospital Supply Chain Survey Points to Needs for Broader Education and Alignment Across Healthcare Delivery Support Supply Chains

The survey, conducted in late October 2016 included responses from slightly over 400 doctors, nurses, service line leaders or supply chain administrators. What especially caught our Supply Chain Matters interest were the findings indicating that 57 percent of physicians did not have the right products needed during a planned procedure. The study highlighted that one in four hospital staff have observed or heard of an expired product being used on a patient and 18 percent have observed or heard of a patient being harmed due to a lack of necessary supplies at the right time. The responses further indicate that nearly 20 percent of front-line caregiver time is consumed by supply chain management expediting or follow-up which then amplifies further to service line and other administrators.

A fundamental tenet of our community is that the supply chain exists to serve the needs of the end-customer, and in the case of healthcare, patients and frontline caregivers. Ladies and gentlemen of the healthcare focused supply chain community- these findings point to continuing systemic issues in your supply chain processes and they well should be garnering added calls-to-action.

Then again, from our lens, it is yet another indicator of the current stakeholder misalignments across healthcare supply chains. While most care givers, those on the front lines for delivering quality patient care and managing healthcare delivery costs, believe that the seamless operation of the supply chain is critically important, the other supply chain participants seemed aligned to other conflicting interests.

For the first time, we included pharmaceutical and drug supply chains in our industry-specific predictions for 2017. The principal reasons were twofold and somewhat inter-related. The increasingly global reach of the industry’s various supply chains is adding continued possibilities for risk and disruption. According to the U.S. Department of Commerce, the United States is now the biggest importer of pharmaceuticals from other countries. Pharmaceutical and drug production is now global in scope. Incidents of counterfeit drugs and medicines have been a constant challenge and lately, conformance to generally accepted production practices have become troublesome. Second, within the U.S. especially, there remains an enormous groundswell of political and social backlash directed at what is perceived as artificially high and inflated pricing stemming from conflicting buyer self-interests across the industry’s extended supply chain. Pharmacy Benefit Managers (PBM’s) negotiate pharmaceutical and drug prices on behalf of heath insurance plans and de-facto now include a far higher share of control over the supply network. The latter challenge alone is beyond explanation in a single blog commentary.

Latest Survey Responses

Survey responses from this latest Cardinal sponsored survey indicate a fair to poor rating among 52 percent of respondents for having the right product when needed, 53 percent indicate a fair to poor rating for the ability to keep track of recalled products or tracking product expirations, and 56 percent a fair to poor rating for the ability to manage inventory volumes. The full details of this hospital supply chain survey report can be downloaded at this Cardinal Health web link.

Let us be blunt and to the point. Processes for supporting timely supply of right product with the ability to manage updated and timely product information have proven business process solutions that have been acquired both in healthcare process pilots and from many other industries. Likewise, the technology needed to support accurate and timely product data is available today in either new product labeling, active item-level chip or other Internet of Things (IoT) enabling technology.  The missing element seems to always come back to the alignment of stakeholders across the extended supply chain and to leveraging process and technology investments consistently across the healthcare supply chain. Buying influence is a big determinant as well, especially when state and federal government are factored as buyer influences.

Frontline care givers should not be having to constantly manage supply and inventory tasks and similarly, hospital supply chain administrators should be allocating time to occasional supply and demand alignment exceptions. As the survey responses and the Cardinal report findings reinforce, such time is better freed-up for patient time.  Once more, today’s integrated supply chain planning and customer fulfillment systems are up to the task for planning healthcare supply needs.

We agree completely with the conclusion that improvements are long overdue and they are centered on the current conflicting stake holding interests. However, supply chain inventory management is basic and has proven solutions.

Again, by our lens, hospital teams should be viewing these challenges as both local supply chain management education and in external supply chain network-wide process alignment perspectives. Seek out supply chain management business process and technology experts for education. Work with your major supply distributors and PBM’s on the most efficient and cost affordable means to align with existing automated supply response management processes that link both manufacturers, distributors, and your local facilities in extended supply chain inventory supply visibility.  As we have noted in a prior Supply Chain Matters commentary, Cardinal Health supports its own supply chain innovation laboratory. Likewise, other distributors and manufacturers are willing to collaborate on overall supply chain visibility and addressing more automated local supply chain processes and decision-making needs.

This blog and this Editor is willing to do our part in broadening industry education and in visibility to new, more cost affordable technology or business practices. However, we as healthcare consumers, along with frontline healthcare providers need to be far more vocal in influencing the broader industry that local supply chain management supply and decision-making needs need to be far more intelligent and far more simplified for hospitals and services providers.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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