Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions. In this posting, we explore our first two predictions, which traditionally focus on what to generally expect in global economic and procurement dimensions.
An Optimistic yet Uncertain 2014 Global Outlook with Consequent Impacts on Industry Supply Chains
As has been noted in our annual predictions since 2011, the global economy continues to present an environment of uncertainty in many dimensions. However, economic forecasts concerning 2014 are a bit more optimistic but come with many cautions or caveats.
Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) forecast some growth in the global economy in 2014 but both agencies point to notable downside risks. The IMF forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.9 percent in 2013. It attributes much of the anticipated growth to be driven by the advanced economies. Emerging market growth is expected to be weaker while the Eurozone region is expected to gradually pull out of recession, but at a rather modest 1 percent pace. Growth in China is anticipated to level off to the 7 ¼ to 7 ½ percent range.
The OECD also forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.7 percent in 2013. The OECD has also downgraded growth projections for emerging economies, citing slower trade, subdued investment levels and potential further negative shocks that could impact these economies. In August of 2013, business media featured reports indicating that the BRIC honeymoon was over after the OECD declared that their data reflected slowing economic momentum for Brazil, Russia, India and China
Both organizations reinforce the existence of rather fragile consumers. Job growth remains tepid with unemployment levels especially high among young professionals in Europe and little improvement in the United States. Weakness in the European banking system and the cumulative effect of two years of recession does not add to the confidence levels of European consumers. The past shutdown of the United States government and continued brinkmanship actions over fiscal policy continues to spook consumers and is reflected in their spending levels. Each quarter, analytics firm ComScore polls a select group of U.S. consumers regarding their rating of economic conditions. For the past three quarters, consumer responses of poor economic conditions have consistently averaged between 40-42 percent. Similar sentiment continues across the Eurozone. The implication is that any product or retail focused supply chain focused on demand from direct consumers will continue to experience the effects of consumers who will be cautious in spending, and will be highly sensitive to price and value.
In 2014 industry supply chains will continue to be constantly challenged and must further enhance capabilities to be able to plan, sense, respond or adjust to product or services demand. Industry supply chains and their planning and S&OP teams who had previously planned on aggressive growth and product fulfillment in emerging markets need to be more diligent in the coming year. Overall, the ability to sense and respond to changing markets at the discrete region or country level will prove beneficial. Supply chain wide visibility to inventory, or exceptional supply and demand imbalances at the regional level will prove important as a differentiator to other competitive players.
Stable Inbound Commodity and Component Prices with Certain Exceptions
Commodity costs moderated significantly in 2013. As of mid-November 2013, the Standard and Poor’s GSCI Commodity Index was down approximately 5 percent year-to-date. Prices in certain sectors were down considerably, for example grains down 22 percent, industrial metals down 13 percent and agricultural products down 20 percent. The IMF forecasts that most commodity prices should remain flat or fall over the next 12 months. Some upside price risks were forecasted in corn coffee and wheat products.
In the all-important area of energy and fuel, both the IMF and the U.S. Energy Information Administration (EIA) are forecasting that oil prices are expected to stabilize at the levels incurred in late 2013. The EIA is currently forecasting a 2.8 percent drop in the price of West Texas Intermediate (WTI) crude oil for 2014, with both a 5.9 percent reduction in the per gallon cost of diesel and a 3.2 percent reduction in the per gallon cost of gasoline. Of course, any significant political or terrorist-related event in proximity to oil-producing regions changes the equation altogether. There are some upside price risks in the cost of U.S. natural gas in 2014 due to expected demand surges.
While commodity price pressures will generally moderate in 2014, we continue to believe that certain emerging market regions will be challenged by locally based commodity price pressures brought about by either localized economic, currency or other political factors.
Component pricing trends remain dependent on specific industry demand and supply developments, and will obviously continue to be dynamic. As always, industry supply chain dominants with the largest volume scale and long-term financial resources will garner attractive pricing. Small and mid-sized manufacturers and retailers should continue to benefit from buying consortiums or networks that provide scale.
In the area of procurement of services, trends will again be dependent on supplier relationships, buying scale or influence along with specific geographic regional specific trends. As always, the ability of procurement teams to obtain a deep understanding of spend patterns enterprise-wide requirements, with savvy contract management and supplier intelligence, will benefit in contributing to cost savings.
Bottom line, an easing of inbound pricing pressures should allow procurement executives to re-allocate their teams towards an increased focus on overall strategic needs for deepening supplier based collaboration in products and services, and in nurturing a deeper focus on joint supplier focused sustainability programs that deliver both innovation and cost avoidance opportunities.
Keep your browser focused on Supply Chain Matters as we continue with this 2014 Predictions series.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
A complete and more detailed research report that includes all of these predictions will be available for no-cost downloads in January.
© 2013 The Ferrari Consulting and Research Group LLC, and the Supply Chain Matters Blog. All rights reserved
We pen this posting in the middle of Cyber Monday and already, reports of both physical and online holiday sales levels for the all-important Thanksgiving and Black Friday weekend are confusing. However, one conclusion is clearer, supply chain, online fulfillment and logistics teams need to be prepared for a wild ride in the following 4 weeks.
Today’s published edition of the Wall Street Journal headlined (paid subscription or free metered view) that holiday sales lagged despite the blitz of deals, reporting that weekend sales dropped for the first time in at least seven years. While retailers such as Best Buy, Macy’s, Target and Wal-Mart opened physical stores on the afternoon of the Thanksgiving holiday and aggressively promoted deals, preliminary sales estimates point to sales across both holiday days as not equivalent to previous years. The WSJ opined how retailing has become a zero-sum game as sales growth comes at the expense of another retailer. It cites National Retail Federation (NRF) preliminary estimates that total spending over the Thanksgiving weekend fell to $57.4 billion, down 2.7 percent from a year ago. However, NRF forecasts total holiday through year-end to increase by 3.9 percent.
The fact that this weekend’s shopping activity spans an earlier promotional and shopping horizon seems to be either confusing media outlets or these outlets are in competition for the most click-through headlined content regarding holiday sales. Yesterday, Bloomberg reported that Black Friday online spending increased a record 15 percent to a record $1.2 billion. It cites ComScore online data going back to November 1 as well as Thanksgiving and Black Friday holiday online sales. What the authors failed to qualify was that last year, the majority of retail outlets were not open for business during Thanksgiving, and thus comparisons to last year are exaggerated to state the least. In its reporting, the WSJ cited NRF data and noted: “ On Thanksgiving Day, 45 million people went shopping, up 27% from last year, but traffic on Friday increased only 3.5% to 92 million..”
Readers who were monitoring social media probably viewed the many ugly images of shoppers fighting at a Wal-Mart to secure a promoted television model, or other images of shoppers stampeding into stores and malls to secure their bargains. One report we read indicated that Wal-Mart authorized its store managers, at their discretion, to announce hourly door busters, to add even more frenzy.
All of these reports and images should be of concern for sales and operations planning and supply chain teams planning supply and inventory resource requirements for the remainder of the month. While many product promotions are planned well in advance and inventory availability is managed to a concerted plan, it would initially appear that two trends are occurring.
First, consumers are clearly price and bargain focused, and thus sales for the remaining days and weeks will be driven by aggressive pricing and sales tactics that drive loss leaders but at the same time capture consumer eyeballs for other products, both brick and mortar and online focused. Second, as noted in our earlier commentary regarding what to expect, online sales activity may indeed peak later in the month, if it peaks at all. That implies a extremely keen eye on real-time inventory sales and inventory management across all fulfillment channels and having daily conversations with your online and traditional sales and marketing team members as to the most up-to-date promotional and sales fulfillment activities. The more those conversations can be collaborative as to what has been planned and what to expect, the less firefighting and ultimate lost sales.
Now more than any other period during the year, near real-time analysis of operational fulfillment and inventory data will differentiate the winners for this year’s holiday buying surge. This will be the keen test of any or all demand sensing and supply chain response capabilities.
Yesterday, this author had the opportunity to view ComScore’s Quarterly State of the Online Economy webcast. Any team or individual professional with responsibilities to plan supply chain or online business should consider signing-up for this series of quarterly webcasts since they are very good. Yesterday’s session included a review of Q3 online activity, a re-visit of online fulfillment results from the 2012 holiday buying season, and ComScore’s preliminary projections for this year’s 2013 holiday buying season.
In 2012, according to ComScore, online E-commerce sales rose by 14 percent. More importantly, analysis of all of the various online data indicated that consumers had concerns about the state of the economy and events occurring in Washington, and thus online sales clearly peaked at the very latter stages of December. Consumer buying patterns reflected high sensitivity to price and thus high promotional events such as Thanksgiving, Black Friday, and to some extent, Cyber Monday, all reflected spikes in buying activity. In terms of a pattern of one-day sales growth, Thanksgiving Day has grown the fastest over the past five years, growing a cumulative 201 percent on five years. It should therefore be no surprise that more and more brick and mortar retailers plan to open early on Thanksgiving to counter online buying promotions. Contrary to broad misconception, ComScore’s analytical data indicates that Green Monday, which occurs 10 days prior to the Christmas holiday, exceeded Cyber Monday in online sales, which is another indicator that consumers waited until the latter period to make online purchases. Also In 2012, there were 12 days of greater than $1 billion in online sales activity.
The ComScore team cautioned that 2013 reflects a much shorter shopping interval between the Thanksgiving and Christmas holidays in the U.S. , which reflects a mere 26 days. Growth in online activity involving mobile devices is projected to be $10 billion during this period, which is another reinforcement of a price sensitive online shopper equipped to price compare on a real-time basis. This online analytics firm additionally predicts that 25 percent of buying activity will occur after December 15th, with the period from December 15-20 being very crucial. And get this- they have further predicted that in one Monday to Friday week, there could be as much as five consecutive $1 billion dollar online fulfillment days.
Reviewing all of this data, it struck us that supply chain, Sales and Operations Planning (S&OP) and online fulfillment teams will again be put to the test in 2013. More than ever, advanced capabilities in inventory management and responsive replenishment will separate leaders from laggards. The ability to have real-time visibility and be able to pool inventory needed to support the breadth of omnichannel fulfillment needs is part of that differentiation. In 2012, we advised retailers to tear down the functional walls between traditional and online supply chain organizations. In 2013, we will again observe and teams will experience how important that becomes.
Consider a situation where the usual peaks will occur during the Thanksgiving holiday and Cyber Monday, but an even greater surge possibly occurring in the ten day widow prior to Christmas. Consider the ability of the supply chain to respond to five consecutive days of greater than $1 billion in sales, where the need for inventory and logistics will peak across multiple areas. Consider a consensus of predictions that consumers remained rather concerned about the future, and especially what is happening or not happening in Washington, a far more price-sensitive consumer whose holiday buying may be tempered or at least more focused toward specific needs.
The notion of “all hell breaking loose” will indeed take on a new dimension, and S&OP teams had better have clear communication with sales and marketing as to which specific product promotions are planned and how the supply chain will respond. Holidays in Asia and other parts of the world also follow in early January, which is another overlooked aspect to responsive inventory positioning and management.
Thus, a clear understanding and early detection of demand patterns among products, having deep visibility of the end-to-end supply chain, along with a responsive collection of key suppliers will obviously provide differentiation among your competitors in the market. Needless to state, supply chain teams are going to be very busy in the next few weeks, perhaps skipping Thanksgiving and working several weekends. S&OP teams will more than likely be having frequent added meetings to deal with any supply and demand imbalances that are bound to present themselves.
Another takeaway regarding what to expect in the coming few weeks are the critical role that logistics and transportation planning and execution capabilities will play in the coming weeks. ComScore’s analytical data continues to reinforce that the online consumer, given a choice, shops where free shipping is offered. The offering of free shipping clearly correlates to buying preferences. Secondly, Supply Chain Matters has frequently alerted our readers that the flexibilities in transportation services have become rather constrained as carriers and service providers respond to a far more cost sensitive pattern of normal demand for transportation services. Thus, the ability to take advantage of seasonally based flexible capacity will be a function of how responsive teams have become in planning and anticipating the specific surge periods of demand, as well as having solid and longstanding relationships with particular logistics and transportation service providers. Global providers such as FedEx and UPS have outstanding planning capabilities and are already predicting the specific days of expected peak shipment activity, and are planning flex capacity around such days. But, this year more than previous, there is finite capacity that can be deployed, and advertised delivery times will vary. Compound that with the need to responsively replenish inventories or have a supplier fulfill a last-minute need for added inventory, and the global network can become taxed. It will be interesting for our community to observe how global transportation and logistics responds to the 2013 pattern of peak periods for both fulfillment and last minute replenishment.
The bottom line from our lens is that the 2013 holiday buying surge will provide another test of how prior investments in responsive business processes, logistics and transportation planning and end-to-end visibility, and advanced technology differentiates the winners. For retailers and online fulfillment,the tearing down the prior functional walls among traditional retail and online inventory and fulfillment management should provide benefits.
We will all see how this plays out.
Supply Chain Matters Sustaining Sponsor E2open recently contacted us regarding a research report they recently commissioned that was focused on vendor managed inventory (VMI) strategies. The study results present interesting supply chain related business process and information technology insights for many industry supply chains that we will share in the commentary.
In terms of background, VMI programs are often predicated on the management principle of a vendor or supplier managing appropriate inventory levels of products based on either a product demand forecast or an actual order flows. The goal of many VMI programs is to drive more efficient and responsive inventory management. Many programs are triggered by replenishment based systems triggered from EDI messaging. Depending on the terms of the program, inventory ownership may transfer to the buyer either upon receipt of the product or when the buyer sells the inventory. (consignment based program).
A September study, conducted by Gatepoint Research, included 200 responses from senior IT, supply chain, finance and logistics executives from manufacturing, retail and telecommunications industry sectors. The majority of the respondents (98 percent) held CxO, Vice President or Director titles, thus the opinions were weighted from an executive viewpoint. Respondents overwhelmingly worked at large firms which included revenues in excess of $1.5 billion (67 percent).
The report authors draw some of the following observations based on the survey responses:
- Nearly half of responders employ VMI programs with buy-side suppliers. The utilization of both buy and sell side VMI fulfillment programs (partners, distributors, retailers, etc.) was cited by 30 percent of respondents. Nearly a half (49 percent) use consigned inventory at their buyer’s VMI location. Surprisingly, 22 percent indicated no plans to implement any VMI program.
- 28 percent of respondents indicate the sharing of inventory information manually (email, fax, etc.) while 20 percent indicate direct use of the resident ERP system, and 15 percent utilizing B2B integration among inventory systems.
- Most responders indicate a lack of access to real-time information. A majority (63 percent) indicate that they do not always have adequate visibility into their current inventory levels, while more than three quarters of respondents rely on batch reporting for inventory and order information.
- A stunning 69 percent rate themselves without differentiation from competitors regarding inventory turns. About one-third of respondents feel partner collaboration is adequate. Our supposition is that the other two-thirds feel partner collaboration is inadequate.
Reviewing this survey data, Supply Chain Matters can add other observations and insights. The data implies a high utilization of VMI among large enterprises, yet most responders indicating a lack of access to real-time order, inventory and order forecast information. (see below chart extracts) There should be little surprise that nearly 69 percent of responses indicate too much cash tied up in inventory, or too much excess inventory. Only 20 percent of responders felt that their inventory turns were better than the industry average.
How timely are the Forecast, Inventory, and Order information that you and your partners share?
Copyright 2013, Gatepoint Research, Used with permission.
Assess your ability to manage inventory levels.
Copyright 2013, Gatepoint Research, Used with permission.
Our other observation reflects on how respondents rate their inventory management collaboration with partners. Nearly two-thirds indicate high collaboration with partners while about a third feel partner collaboration needs improvement. We therefore conclude that while partner collaboration is rated high, other indicators point to a lack of adequate technology tools to actually leverage the meaningful business outcome benefits of the VMI program. Notice that collectively. 58 percent of respondents rely on either a daily batch, less than daily batch, or ad-hoc order based information. Similarly, 66 percent collectively rely on these same tools for inventory status while 80 percent collectively rely on these tools for inventory forecast data. That implies a lot of information latency, especially when readers consider current industry challenges to conduct business 24 by 7, as well as the massive movement toward online and multi-channel commerce.
By our lens, the most important takeaway from this study is the need for a leveraged use of an online B2B platform that not only serves as the basis of electronic data exchange, but more importantly, near real-time information related to the trending of orders and inventory. An online network or platform can serve many purposes. Besides connectivity, content and the on-boarding of suppliers, it can also serve as the basis of integrating more real-time information related to the status of orders, forecasts and inventory.
The path toward expanded supply chain business process capabilities is not as important as the all-important B2B network platform that forms the foundation of end-to-end connectivity, visibility and decision making capabilities. Why not take advantage of that platform?
What’s your view? Are your VMI programs being stymied by latency of information? Does this current research data surprise you in its conclusions?
The study itself can be downloaded at this E2open supported web link.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog and no additional compensation was rendered to highlight the above study.
A lot has written and spoken regarding the “Internet of Things” where individual devices and/or products are designed and produced with electronic logic that allows these devices to communicate with other devices.
An important indication of how soon we can anticipate these products came earlier this month when General Electric reaffirmed its significant commitment to “Industrial Internet” by announcing 14 individual products that will be designed and produced with Internet-linked sensors and software that allows these products to not only communicate but monitor their own service status. GE further announced strategic partnerships with Cisco, AT&T, and Intel to collectively deploy such capabilities.
When thinking about physical devices, another important area for manufacturing and supply chain teams is advances in item-level tracking and monitoring. Our readers are well aware of the history of technologies such as basic electronic bar coding, 3D bar codes and RFID tagging for item-level tracking applications.
This week, a Norwegian based technology provider made an announcement that should capture the attention of teams dealing with item level tracking, especially temperature sensitive products such as pharmaceuticals and perishable food.
Thin Film Associates ASA announced that it has successfully demonstrated a fully functional, stand-alone, integrated printed electronic temperature tracking Smart Sensor Label. This label (photo provided from the firm’s web site) is described as being built from printed and organic electronics with low power demands. The announcement points to the ability to track and monitor temperature and environment for pharmaceutical and the ability of retailers to have insight on both the temperature, shelf-life and food safety of perishable products.
In the announcement, the CEO of Thinfilm states that this platform will provide the basis for a variety of low-cost electronics in a label format. The company itself indicates that it has plans to produce its first system products by the end of 2014 which is a rather long time window by today’s race in innovation.
Regardless, the notion that the opportunity to have item tracking incorporated with a low-cost printable label that has application logic built-in is both fascinating and exciting to anticipate. Supply Chain Matters plans to dive deeper into this area in the months to come.
Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement. Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.
As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.
Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version. That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed. The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.
In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features. Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.
Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.
A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.
Of further significance was what was not announced yesterday. There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.
Apple’s supply chain teams now face rather tough challenges in the weeks and months to come. Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.
Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen. Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.
More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.
Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock. This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.
The new transparency of Apple and its supply chain is becoming more visible and more concerning.