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A Guest Viewpoint- Procurement Impact of the Amazon-Whole Foods Acquisition

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The following Supply Chain Matters guest blog is contributed by  Jim Wetekamp, Chief Executive Officer of BravoSolution. This is part of a series of invited guest commentaries relative to the acquisition announcement from Amazon regarding intent to acquire Whole Foods.

 

The Amazon-Whole Foods acquisition is arguably the biggest, most ground-breaking deal of 2017. It will change the retail game as we know it today, and spark a tremendous shift for procurement and supply chain teams.

The reasons Amazon bought Whole Foods for $13.7B are clear: the vertical integration establishes a brick-and-mortar presence for the eCommerce giant, expands its distribution network, and finally breaks Amazon into the grocery market – a long-time pursuit for CEO Jeff Bezos. For Whole Foods, access to new technologies that will modernize the in-store grocery shopping experience and accelerate supply chain efficiencies will likely have measurable impact on the bottom-line. Think warehouse robots that can move inventory to where it needs to go much faster, and Amazon Go type checkouts that make the purchase process instant and digital for consumers. Whole Foods Austin A Guest Viewpoint  Procurement Impact of the Amazon Whole Foods Acquisition

Though the extent of the integration between the two entities is still very unclear, we can assert the acquisition will inevitably transform the first and last miles of the grocery supply chain.

Three areas of impact for procurement

 Backend technology will become much more sophisticated across the entire supply chain industry. The acquisition will likely be a trigger for additional investment into Amazon’s procurement technology. Between AI-enabled online ordering with Echo and Dot for industrial procurement, Dash goods ordering services with single item push-button replenishment, and improved inventory tracking with Internet of Things (IoT) enabled logistics — including smart-containers and drone technology — there is a long runway for Amazon to work with from a technology perspective. The procurement and supply chain space will benefit from the windfall of this innovation, getting a glimpse of what is possible and having a successful model to reference, which will propel the industry forward in digitization.

The health and organic food market will also change. Consumer demand for healthy, natural and organic food offerings has skyrocketed and many grocery stores have been giving Whole Foods a run for its money by offering healthy options at prices that won’t break the bank. The scale and efficiencies offered by Amazon’s ownership and technological expertise will likely help Whole Foods capture new cost savings and pass the benefit onto consumers in the form of lower prices. Grocery procurement teams need to be cognizant of this and identify strategies that will help them keep pace with these efficiency gains and lower costs structures so they can continue to compete on price. Amazon was already a big threat to both traditional retailers and online ordering platforms such as Instacart and Peapod, and this acquisition is poised to help it gain even more ground.

Amazon’s previous investments in aircraft and tractor trailer leasing coupled with  ocean freight booking also pave the way for a continued transformation of inventory management, logistics, and distribution. With leadership in the online shopping experience, proven capability for order fulfillment and an established home delivery network, many believe there’s no stopping Amazon from solidifying its position as an envied supply chain leader. This could have positive implications for the entire supply chain industry.

As Amazon expands its grocery delivery capabilities, it will face the same challenges the industry has been grappling with for a while now, such how to safely, affordably and reliably deliver perishables, and may end up finding a solution that others can adopt. This would open an entirely new realm of possibilities for all players – it’s an issue all grocery brands care about and a development everyone will be paying attention to in the fallout of the acquisition.

There’s also the obvious impact on suppliers. As the in-store and online experiences get better for shoppers, so do sales figures, which benefits both the buying organization and the suppliers that sell into them. More sales means more revenue, and more profit and business opportunities for both parties. Additionally, the acquisition may spark even more demand for organics and sustainable food items by opening up access to more consumers. For suppliers, this means more emphasis on sustainability, quality and transparency.

It’s tough to say for certain what the specific implications of this acquisition are for grocery and retail procurement teams at this point, but the residual impact will be game-changing. As Amazon vertically integrates and its supply chain gets even bigger, it will shake up even more industries and cause major shifts in how procurement teams act and innovate.

 

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

 


A Path Towards Internet of Things Enabled Service Management- Service Parts Planning Realities

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This blog posting represents the second of a four-part market education series, in collaboration with supply chain planning and service parts technology provider ToolsGroup.

 In our initial posting in this series, we declared that one of the most promising line-of-business areas that will benefit from Internet of Things (IoT) enabled technologies applied to supply chain management will be equipment services management, especially service and spare parts management.  Planning 3 shutterstock 394279114 300x184 A Path Towards Internet of Things Enabled Service Management  Service Parts Planning Realities

A longstanding challenge in service or replenishment parts planning and management has always been the ability to forecast item-level demand when such demand is sporadic or sudden.  Now consider the opportunities to have demand-driven or predictive failure data and information emanating directly from the physical equipment.

But with any major business transformation, there are always foundational capabilities that come first. In the specific area of IoT enabled equipment and services management, a foundational capability is usually the need for a robust, responsive, and analytically-driven service parts planning (SPP) capability.

Yet an unfortunate reality is that many manufacturing and services organizations with lower levels of process maturity have not recognized the differing process and decision-making needs required for responsive and effective SPP.  Considering a leap to an IoT enabled service management business model will likely expose this weakness.

 

What Makes Service Parts Planning Different?

Three fundamental differences often found in SPP are the following:

  • Contracted service levels and customer contracts determine the overall parts distribution and required service response network. When there is either equipment downtime, caused by a failing part, or when equipment consumables are suddenly out-of-stock, equipment is no longer generating value for end-customers. There is very little tolerance for inventory back-orders since non-performing equipment results in downtime costs that can far outweigh the cost of the replacement part.

 

  • Service parts component demand is often manifested in intermittent or lumpy demand signals, caused by actual equipment operational conditions or changes in operating environment. That means planning in an environment of long-tail demand, parts that exhibit larger numbers of variability, lumpy or seasonality focused demand patterns. Traditional forecasting or demand planning techniques are often ineffective in planning parts demand in such environments. That’s because SPP is far more concentrated in individual item-level planning as contrasted to product family or aggregated planning techniques. SPP planning models feature higher stock keeping unit (SKU) counts and associated long-tail demand planning computations than traditional supply chain planning models. Algorithms that capture actual parts demand, or plan for future demand need to be far more sophisticated in item level and shipping location mathematical modeling.

 

  • Service parts networks require the need for multi-echelon and multi-tiered inventory stocking strategies tied to more predictive parts demand. Long-tail demand can be best managed by planning that factors item level and shipping location simultaneously. SPP must therefore be able to effectively manage and optimize inventory within such multi-echelon stocking environments.

 

A Path to the Future

Three to five years from today, even more equipment will be acquired by “services by the hour” payment methods, saving on front-end capital equipment costs for equipment operators. Physical objects such as complex equipment, engines, motor vehicles and other forms of equipment will be communicating operational performance and service needs via IoT enabled data and information flows. For equipment manufacturers, the opportunities are new lines-of-business and incremental multi-year top-line revenues flowing from such models.

The good news for IoT enabled service management processes is that the equipment itself can provide more proactive or prescriptive indications of when a part is scheduled to fail, as well as actual maintenance data related to parts failure. Such capabilities will provide added intelligence and more accurate parts demand information that will provide additional service uptime and operational cost savings for customers and service parts providers. In addition, the ability to link the physical equipment and operational data related to equipment with a robust SPP environment adds important benefits in the ability to capture and plan more accurate, and more predictive information related to service parts or consumable parts needs and requirements across a service management network.

However, the savviest businesses recognize that the end-goal is not IoT per-se, but in building the foundational people, process and technology capabilities that can best leverage the digitization of supply chain management and decision-making processes. An IoT front end isn’t much good without an equally responsive back end planning system.

Businesses that recognized the critical differences in more effective service parts management and made the initial foundational investment in more responsive SPP process capabilities will be far better positioned to harvest the benefits of smarter and more efficient network wide inventory levels, more timely decision-making and most important of all, more responsive service and satisfaction levels for equipment customers.

 

Bob Ferrari

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

 


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.


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