Already in 2013, Supply Chain Matters has noted a number of supply chain disruptions that have challenged procurement and transportation professionals. Efforts to reduce transport costs by selecting more economical transport options has led to the effects of decreased capacity and slower transit times for both global ocean container, and now, international airfreight movements. There was a brief dock strike involving major U.S. west coast ports in November, followed by the threat of work stoppage involving 40 U.S. east coast ports that was averted by mediation.
Now, the latest disruption involves the port of Hong Kong, the world’s third busiest ocean container port and a primary shipment gateway for consumer and electronics goods produced in China’s massive Pearl River Delta manufacturing region.
A port strike involving 450 workers has dragged into its seventh day and shipping lines are beginning to reroute ships to alternative ports. The Wall Street Journal reported that this strike is costing HIT $644,000 per day, not to mention the pending impact for shippers expecting their goods.
The port of Hong Kong is noteworthy for shippers in the region because of its more frequent connections to U.S., Europe and other Asia port destinations. Unions have traditionally had weak bargaining power at this port and thus container lines were obviously caught off-guard, not expecting a strike of any duration. Striking workers are seeking a 20 percent pay raise from the roughly $7 per hour they currently earn. These workers also complain of having to work 12 hour shifts without any work breaks.
The work stoppage involves a contractor to port operator Hutchinson Port Holdings Trust, which operates 16 ship berths at Kwai Tsing, Hong Kong’s major container port, including two through with a partnership with Cosco lines. According to press reports, the port operator obtained an emergency court order late Monday for striking workers to vacate the terminal premises. Reports indicate that dockworkers have since relocated outside the entrance but are refusing to yield to threats of being fired.
The New York Times indicates that vessels that were scheduled to dock at the port are experiencing delays as long as 60 hours with likely ripple effects across the global supply chain. Taiwan based Evergreen Line is reporting that as of Wednesday, 10 of its ocean container vessels are in the port waiting for berths, while an additional 20 vessels are floating offshore waiting. Some are in the process of being re-routed to the ports of Skekou in China or Khaosiung in southern Taiwan. In its reporting, the WSJ indicates that some operators are now considering avoiding the port altogether until conditions return to normal.
Needless to state, procurement and supply chain teams should be exercising their disruption scenario plans regarding the real threat of additional delays for inventories that are scheduled for transit utilizing the port of Hong Kong. Depending upon the eventual length of this disruption, multiple industry supply chains could be impacted in the planning of summer inventory needs.
This Supply Chain Matters commentary is our initial assessment of the previously noted news that SAP had announced plans to acquire multi-echelon inventory optimization technology provider SmartOps.
For those unfamiliar with SmartOps, this vendor is a provider of multi-echelon inventory optimization and supply chain analytical software. The company was founded in 2000 by Dr. Sridhar Tayur, then on the faculty of Carnegie Mellon University. Its initial software was named Multistage Inventory Planning and Optimization or MIPO. Dr. Tayur had credited this author with introducing SmartOps to the broader supply chain planning market back at that time, while I was Research Director for supply chain planning applications at AMR Research. Later in my career, while at SAP, I helped to establish SmartOps as one of four different partners in providing SAP supply chain planning customers’ integration choices for the multi-echelon inventory optimization planning requirement needs. SmartOps software was named as an SAP Industry Network Partner in 2006 and reached Solution Extension Partner status in 2009, one the highest levels of SAP partnership can achieve at the time.
One of the first SmartOps lighthouse customers was Caterpillar, followed later by John Deere and others.
Readers should keep in mind that since this proposed acquisitions remains in-process, neither side can provide any detailed content, although some information may be selectively shared with existing customers of both firms. However, this author has had some general conversations to provide an initial assessment for our readers.
First, this announcement is not to be viewed as any real surprise. Effective multi-tier inventory optimization can save multi-national enterprises a ton of money, and that has fueled high interest in this software segment for quite some time. Some companies have literally been able to payback their investment in this software in less than a year, just from the total inventory savings. The original concept was to have inventory optimization software such as SmartOps fully integrated with SAP APO, in essence, having SmartOps automatically plan inventory and safety stock target levels behind the scenes for planners. The reality however was that very few customers were able to achieve this level of integration, because of a number of complex factors. None the less, just having a standalone inventory optimization analysis uncovered lots of opportunities for overall inventory deployment savings while maintaining or increasing customer service levels. Having certified integration with SAP’s integration stack coupled with SAP’s commitment to first and second-level software support added more attractiveness for SmartOps to be a preferable choice of SAP IT support teams among various industry clients.
From a solution breadth perspective, analytics intelligence and demand sensing capabilities were added to SmartOps functionality beginning in 2011. The Enterprise Demand Sensing (EDS) is of special interest to manufacturers in the consumer goods sector because it determines daily sensed demand at the item, location or customer segment level, a functionality that was laggard in SAP Advanced Planning and Optimization (APO). Thus, the acquisition announcement indicates SAP has plans to enhance both the SAP Sales and Operations Planning Powered by HANA application and the SAP Advanced Planning & Optimization (APO) application with these augmented capabilities.
By achieving SAP highest partnership status , SmartOps software was listed on the SAP price list with field sales representatives garnering significant commissions for selling either a standalone inventory optimization or combination supply chain planning and inventory optimization deal. My sources indicate that the decision to pull the trigger on acquisition was therefore primarily advocated by SAP industry and field sales teams as a lever to increased customer interest in supply chain wide analytics.
The other more strategic aspect of this acquisition relates to an opportunity for leveraging additional cloud computing options, along with leveraging more analytics on the SAP HANA platform for the SAP Supply Chain Management installed base, especially for the SAP Sales and Operations Planning Powered by HANA application, which has a lot of potential interest from SAP customers, but needs additional springboards in deployable functionality.
SAP has thus upped the ante for existing technology players in the sales and operations and supply chain analytical applications area with particular targets being Oracle, IBM, Kinaxis, JDA, Steelwedge, ToolsGroup and others in this space. The question however remains how quickly SAP will execute on its supply chain focused cross-integration cloud and HANA based analytics vision once this acquisition is consummated. The other open question is overall pricing of both cloud and HANA analytical offerings. If the SAP field persists in demanding seven figure deals in this area, best-of-breed vendors will continue to be a competitive alternative.
Supply Chain Matters will provide added analysis in the coming weeks when more information and market dynamics become more apparent.
SAP has announced plans to acquire multi-echelon inventory optimization technology provider SmartOps.
According to the announcement, SAP has plans to leverage SmartOps utilizing the SAP HANA platform. The announcement further indicates an intent to enhance both the SAP Sales and Operations Planning Powered by HANA application and the SAP Advanced Planning & Optimization (APO) application. SmartOps has been a long time preferred partner of SAP for supply chain inventory optimization requirements and thus this announcement in a natural progression of that partnership.
As part of this acquisition, existing SmartOps employees will join SAP. The transaction is expected to close during the first quarter of 2013, which is a good indicator that talks were already in an advanced stage.
Supply Chain Matters will provide a deeper dive into the implications of this announcement when additional information comes forward.
For Apple, the deemed most valuable listed company for Wall Street investors, anything written about the company, especially downbeat, draws many eyeballs.
Today’s front page article published in The Wall Street Journal, Apple Cuts Orders for iPhone Parts As Demand Slips, is no exception.(paid subscription or free metered view). The article summarizes reports from insider sources (most likely Apple suppliers) that indicate that orders for iPhone 5 LCD screens have dropped to “roughly half of what the company had previously planned to order.” Apple allegedly notified of the supply cutback in December. The WSJ concludes in its report that this development indicates that sales of the latest iPhone have been not as strong as previously forecasted due to stronger market competition. As expected, the story had a downward impact for Apple’s stock.
Supply Chain Matters is of the view that one should not jump to business conclusions on the basis of a downward adjustment in Q1 product forecasts. For consumer electronics, Q4 and the associated holiday buying surge is the classic peak period for supply chain fulfillment, especially for Apple. Most all of the company’s new product launches are indeed strategically timed to build pipeline demand for the Q4 end of calendar year period when consumers are inclined to spend on lavish gifts. OEM’s can have a blowout Q4, but it can come at the cost of eroding previously forecasted Q1 demand. The report that the downward adjustment was communicated in December, we believe, is more a reflection of responsive supply chain planning.
In the particular case of LCD screens for the iPhone 5, Apple had purposely contracted with three different suppliers because of initial manufacturing yield challenges on the new layered screen design. The company shifted requirements for display technology to in-cell technology, combining the touch and panel layers in a single design. Reports from various Asia based business media outlets during the last six months have noted initial difficulties in securing high production yields with this new technology. Supplier Sharp was especially challenged to meet volume production requirements because of its severe financial difficulties, which have since been alleviated by a cash investment from Qualcomm. A downward adjustment in LCD supply may be acknowledgement of increased production yields along with the need to cut back on this contingency supply plan. For its part, Apple has again wisely elected to not comment.
Supply chain component needs expand and contract with any quarter, a reality of today’s demand-driven supply chain management practices. Thus, we tend to not draw any significant conclusions from the latest reported production cutbacks.
If on the other hand, Apple continues on a trend of subsequent quarterly contractions in supply requirements for the remainder of 2013, than that would be more newsworthy.
Note: No sooner than when we posted the below commentary comes late breaking news that longshoremen and east coast port operators have agreed to a 30 day extension for existing labor negotiations. These same reports indicate that the key sticking point, royalty bonuses paid to union workers had been “agreed upon in principle by the parties”. The current contract is now extended until midnight, February 6, 2013.
This is now a supply chain disruption scenario that we are pleased to change from moderate to lower probability. None the less, supply chain teams should continue to have contingency plans in place.
It is looking more and more likely that global supply chain teams may not have to deal with the effects of a U.S. east coast port strike next week. In early December, Supply Chain Matters noted such a dire probability regarding the west coast dockworkers work stoppage, only to report a settlement the next day. We would certainly be pleased to report a similar settlement result regarding the current east coast port situation.
As noted in our Supply Chain Matters alert on December 20th, if a work stoppage were to occur, it would present far more supply chain wide physical and economic disruption consequences. Some industry sources note that over 90 percent of containerized shipments destined for the U.S. eastern seaboard would be impacted as well as 40 percent of all container cargo entering and exiting the U.S… The threat of a work stoppage involves 36 major ports including the major container facilities of Charleston / Savannah, New York / New Jersey, Hampton Roads, Baltimore, Miami, Port Everglades, New Orleans and Houston. A labor stoppage would involve the handling of all ocean container traffic but goods not in containers and military cargo would not be impacted.
The major stumbling block in management and union negotiations remain worker royalty payments related to the total number of containers handled by ports. The U.S. Maritime Alliance, representing all port owners, wants to place an annual cap on these payments, while restricting newer workers from receiving such payments. The International Longshoremen’s Association union considers these payments a basis of essential compensation. Federal mediators remain involved but there has been no reported progress in the talks, which would indicate a continued impasse. A White House spokesperson indicates that President Obama continues to monitor this situation and urges the parties to work at the negotiating table to resolve issues as quickly as possible.
If the strike occurs, multiple industry supply chains would be impacted, not the least of which would be those involving petroleum, agriculture, automotive, retail, industrial equipment, construction and other commodities. This is the period where late winter and spring merchandise arrives at port complexes. The auto industry alone has a high dependency on new vehicles entering dealer showrooms while component parts need to maintain U.S. auto production levels.
Industry supply chains have already begun contingency planning, re-routing existing inbound or outbound ocean container shipments to either U.S. west coast or other ports. Air freight is also a consideration for certain high value, high density shipments such as electronics. An open question is whether other port or transportation unions will sympathize with east coast dock workers and slowdown existing handling and logistics operations. Supply chain teams will need to keep a keen eye toward on the ground developments and contingency movements next week and beyond.
The one thing that is certain is that a strike of this magnitude will have expensive consequences both for the U.S. economy and to specific supply chains.
We trust that this situation will resolve itself in a last-minute settlement but urge all supply chain planning and operations teams to execute all contingency scenarios.
Earlier this year, Supply Chain Matters wrote of the uncharacteristic supply stumble for Procter and Gamble, specifically related to the market introduction of its new Tide Pods laundry detergent. Our byline was that in these challenging business times, even superior rated supply chain organizations can experience a supply snafu.
The supply snafu involved the market introduction of the newly branded line of Tide Pods, a capsule blended laundry detergent that was originally planned for market introduction in August of 2011. P&G product management had to push the market entry date to early 2012 due to production supply challenges that limited how much supply that would have been available at retail outlets to support a broad product launch. Meanwhile, P&G’s competitors in the home laundry market segment were given a market opportunity to perhaps garner market-share in the one-dose, convenience segment, which is more profitable than the bulk laundry detergent segment.
We can now share an update to this former P&G challenge with Tide Pods. A mid-December article published on AdvertisingAge notes that P&G is now projecting first year retail sales of $500 million for the Pods product offering. This article notes: “… a major feat considering that of the 1,500 new consumer-packaged goods launches tracked by SymphonyIRI in 2011, only 21 percent reached one year sales of even $50 million. Moreover, because of product scarcity, P&G has not offered promotions on the premium-priced Pods, so discounting hasn’t had a role in its success.”
The article goes on to note that supply shortages still linger and that smaller bag packs remain on allocation to retailers. Despite all of these challenges, P&G’s supply chain and product marketing teams have successfully managed to garner a 73 percent share of the unit-dose market segment including notable retail outlets such as Wal-Mart. All of this has been accomplished as sales in the broader laundry detergent segment are actually down 0.2 percent.
Once again, the cross-functional efforts of P&G teams have turned the challenge of supply adversity into a major market win.
That qualifies for a hearty 2012 thumbs-up award from Supply Chain Matters.