Streaming reports over the past several weeks provide every indication to Supply Chain Matters that supply chain teams need to be prepared for highly competitive, promotional-driven online buying activity in the upcoming holiday buying surge. If there were thoughts that last year’s period was stressful, we venture that this year will bring similar stress. As we have further noted in prior commentaries, the evidence is growing that shoppers have permanently altered their shopping habits in favor of online. Thus, this year will provide interesting online challenges and we predict another round of blame games.
Similar to last year, the period between the Thanksgiving and Christmas holidays is relatively short. If the combination of bad weather and savvy online consumers plays out again when online consumers waited for the most attractive last-minute deals, online business results will be factored by which online retailer offers the best promotions as well as free shipping.
Let’s reflect on some current data points.
UPS, which was literally thrown under the bus as the Grinch that stole Christmas in 2013, recently announced an all-out effort to augment its operational capabilities during the peak holiday shipping period. These efforts result from a $500 million investment by UPS after last year’s incidents were evaluated. Included is that for the first time in the parcel shipping’s firm’s 107 year history, UPS will operate full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge. A complete detail of the UPS surge effort can be garnered from this published DCVelocity article.
No doubt parcel delivery giant FedEx will also have augmented capabilities and as noted in our recent commentary, the U.S. Postal Service has aggressively jumped-in offering both Sunday delivery and more aggressive small parcel shipping rates.
Retailers have also had to implement contingency ocean container transport plans amid the ongoing threat of west coast port disruptions prompted by ongoing labor negotiations. That may lead to earlier product promotions to offload bloated inventories.
Many online retailers have garnered their own online marketing and customer fulfillment learning from 2013. Some examples: Staples announced a series of enhancements to the omnichannel experience for its customers, including the ability to buy online and pick-up purchases at a local retail outlet that same-day. According to the announcement, Staples.com will automatically display the inventory available at the three closest retail brick and mortar stores, and indication that such stores now become online mini distribution sites. Customer have the continued option for shipping their online purchases direct to a local store with free shipping. In late August, Macy’s announced its $1 billion technology and infrastructure investment in omnichannel capabilities. That effort now includes the ability for online consumers to order online and pick-up their merchandise within 675 full-line stores. Wal-Mart has plowed $500 million into its new online E-commerce business, including the addition of three new online fulfillment centers, and had 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, and no-doubt this aggressive retailer will be offering consumers attractive online offers.
Other online retailers such as Best Buy, recovering from previous stings with balancing brick and mortar and online capabilities are also preparing for more aggressive omnichannel support capabilities.
In a prior Supply Chain Matters commentary stemming from the IBM Smarter Commerce event, we highlighted what IBM described a “dark store” which is one that can serve as a localized fulfillment entity for limited volumes, or be able to convert to a broader based customer shipment fulfillment entity after retail closing hours. We may well observe some pilot applications of this capability in the coming period.
And then there is the gorilla of online fulfillment, Amazon, which continues to provide indications that it will again be prepared to offer aggressive product promotional and free shipping capabilities, including same-day delivery orchestrated by Amazon’s own package delivery network. There have been published implications that Google and its Google Shopping Express will offer retailers added options for online promotional activity including same-day or Sunday delivery.
B2C focused marketing and supply chain teams have planned all year for the upcoming holiday buying surge. No doubt, there have been budget dynamics as to which segment received the bulk of investments, the online marketing and promotional side, or the back-end online customer service and fulfillment. Preparations have been made and the ultimate test comes in but a few weeks. New learning as well as finger-point will be ever more interesting to observe.
Keep your web browser connected to Supply Chain Matters for our continued coverage of B2C/B2B omnichannel commerce learning during the 2014 holiday surge.
Business owners in the Napa Valley area of California woke up today to the after-effects of the 6.0 magnitude earthquake that struck the region on Sunday. The Napa Valley was very close to the epicenter of this earthquake and we all know and appreciate what this region’s most important commercial product is, namely great wines with global brand identity.
Reports indicate that the wine industry may have suffered some significant damage as a result of the quake and its aftershocks. A report produced by business network CNBC features video and reports of damaged wine caskets and bottled inventory among growers and distributors, some of very expensive varieties. According to a report by CNN, the damage was isolated, some wineries being hit very hard, others not so. Wine producers and wholesalers are in the process of assessing overall damage along with trying to save stored aging wine. Wine within damaged barrels will need to be transferred to other safe, secure, temperature-controlled facilities and the challenge is securing both additional barrels and available controlled storage that was not damaged. While insurance can compensate for lost inventory, exquisite wine cannot be replaced, and the harvesting and aging process must begin anew. Larger producers may be in the position to sustain losses than smaller, specialized producers. That may well leave a hole in future revenues or cause a supply and demand imbalance, depending on the varietal product. The market for wine itself has its own challenges and is very much dependent on variety and brand.
Last week, we ran across a a syndicated AP published story regarding the bourbon industry. Similar to wine making, it is an industry where long-term bets are made concerning current and future market demand. Distillers fund inventory aging for millions of gallons of product over a 2-5-10-15 year horizon. Super premium brands, currently the most popular, can often fetch large profits, but have to age 6 years or more. The overall market for bourbon is booming, and distillers and distributors are banking on the continued boom in international demand to continue over the longer-term horizon. Imagine your supply chain’s overall inventory averaging over multiple years. We observed that dynamic when earthquakes impacted the parmesan cheese producing areas of Northern Italy in June of 2012.
Wine and spirits supply chains feature unique challenges in long-term inventory management and associated supply and demand pricing strategies. Risk is an inherent factor, and major supply chain disruption caused by a natural disaster can be devastating to short and longer-term business results. They also add a new and far different aspect of product demand management challenges.
Napa wine producers will continue to recover from this natural disaster and hopefully, all producers, large and small, will be able to recover. However, our community has yet another reminder of the fragile nature of today’s industry supply chains which can be significantly disrupted by a single natural disaster or event.
Commercial aerospace and aircraft producer Boeing has recently initiated some supply chain risk mitigation and strategic sourcing moves which demonstrate responses to important business needs.
Many headlines of late report on the continuing tensions among Russia and the United States concerning ongoing events in the Ukraine. Today’s Wall Street Journal reports (paid subscription or metered view) that certain aerospace manufacturers, namely Boeing and United Technologies, have been augmenting safety stock supplies of titanium, a critical material utilized in the fabrication of critical aircraft components. One of the world’s largest producers of this material is VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. VSMPO is reported as supplying upwards of 30 percent of the total volume requirements used in the aerospace industry each year. Ukraine, currently involved in political and social unrest, provides almost all of the concentrates used by VSMPO. The combination of severe economic sanctions being placed on the Russian economy and the unrest in Ukraine has logically prompted concerns about the continuity of titanium supply.
In its reporting, the WSJ cites sources as indicating that Boeing and UA have been stockpiling as much as six months of safety stock supply of highly customized titanium forgings, which are supplied by a single provider such as VSMPO. Boeing confirmed to the WSJ the existence of the strategic reserves from its Russian supplier, with the material accounting for 15 percent of the airframe weight of the Boeing 787 Dreamliner. UA utilizes the subject titanium forgings to produce landing gears for Boeing and other producers, as well aircraft engine components for its Pratt & Whitney division. VSMPO further confirmed that customers had placed buffers in place as part of their risk management planning and that customers would go back to buying as needed for standard production. The WSJ further reports that Airbus has not acknowledged a safety stock strategy for titanium forgings.
Inventory management strategies are often a flash point among discussions involving supply chain planners and finance. However, insuring continuity of strategic supply components can be a far different dialogue. Supply Chain Matters has made note of other previous decisions made within industry supply chains to insure strategic continuity of supply when significant risk conditions are present.
South Carolina Facility Tapped
Electing to further dual source production, Boeing announced that the largest to date Dreamliner model, the 787-10 aircraft, scheduled for market delivery in 2018, will be built solely within the company’s non-union production assembly facility in North Charleston South Carolina. Statements to business and general media indicate that the sourcing decision was prompted by the stretched length of the aircraft’s fuselage. The suppliers of this 114 foot long stretch fuselage are within Italy and Japan, and normally the fuselage components are flown in on a special fitted Boeing-owned 747 Dreamlifter cargo plane. Boeing indicates that the elongated fuselage components required for the 787-10 will not fit the existing cargo aircraft.
Regarding the South Carolina sourcing decision, a published report by the Seattle Times reports: “It makes clearer the profound impact of Boeing’s 2009 decision to bypass its unionized stronghold in Washington in favor of building a second 787 assembly line in nonunion South Carolina. In six years, Dreamliner final assembly will be equally divided between the East and West Coast sites.” The Times report further notes: “So by the end of the decade, the prospect for Boeing widebody-jet production is that North Charleston and Everett will each be rolling out seven Dreamliners per month, while Everett will in addition be producing up to eight 777s per month, plus two 767 tankers for the Air Force.”
Meanwhile, a labor union among Boeing’s Everett Washington production facilities were naturally not pleased with the sourcing decision, indicating that while not surprised, they were certainly disappointed in the final decision.
Reports indicate that the Everett facility will continue to sustain a production level of seven Dreamliners per month while the North Charleston facility will ramp-up from three aircraft per-month today, to five in 2016 and seven by the end of the decade. According to Boeing, both production facilities will have similar production practices and standards.
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.
A commentary posted on Logistics Management makes the observation that the threat U.S. West Coast port disruptions as a result of current ongoing labor union contract negotiations raises an open question as to “peak shipping season” this year. News Editor Jeff Berman makes note that inbound container shipments destined for the ports of Los Angeles and Long Beach, which together account for upwards of 40 percent of incoming U.S. container traffic, increased 16.5 percent and 8.8 percent respectively during June. The premise presented is that buyers scrambled to move cargoes earlier to avoid the potential of goods being caught-up in a port stoppage.
Logistics Management further conducted a reader poll of 103 buyers of freight transportation and logistics services. That survey indicated 68.1 percent of respondents expecting a more active peak shipping season this year. Some respondents are reported to be concerned about potential transportation lane disruptions in the fall.
Meanwhile, as we approach the end of one month since contract expiration, no real news has come forward regarding the ongoing labor talks between the Pacific Maritime Association and the International Longshore Warehouse Union. That provides continued uncertainty and concern among industry supply chains.
Supply Chain Matters proposes to conduct its own reader poll. For those readers managing inventory, procurement, transportation and logistics services, here’s the question:
What are your organization’s current plans or strategies regarding a potential disruption or work stoppage among U.S. West Coast plants?
Provide your responses in our interactive poll at the bottom of our right-hand panel. We will open this poll for two weeks and will announce the final results.
On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.
Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.
According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.
The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start. Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August. Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.
What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage. The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.
Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.
As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India.
Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models. The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.
These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.
Then again, Apple continues to be rated by Gartner as the number one supply chain.