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Implications from This Week’s FedEx Earnings Report

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FedEx reported Q4 and FY15 financial results this week that included strong indicators of some change in strategic direction along with implications from previous actions.

Financial highlights for the final fiscal quarter included an increase in adjusted   FedExGroundoperating income of 5 percent but a reported loss of $895 million primarily as a result of special charges related changes in the carrier’s pension accounting methods. Other factors impacting income in the quarter were noted as increased variable incentive compensation and unfavorable net impacts from fuel and weather.

For the full fiscal year, total revenues increased by $1.9 billion while operating income slid nearly $2 billion from the year earlier period.

Beyond the numbers were indications that FedEx management acknowledged that the carrier will significantly step-up investments in its ground based business segment. Because of the continued growth of online commerce, FedEx senior management indicated that both commercial and residential ground delivery services continue in volume growth. Daily volumes in Q4 grew by 5 percent and ground based operating margins have averaged 17-20 percent.  In the most recent quarter, margins for the ground based segment were negatively impacted by the recent GENCO acquisition. Senior executives further acknowledged that GENCO will remain a drag on full year FY16 profits for the ground-based segment which is perhaps an indicator of inherent profitability challenges related to this acquisition.

Regarding the announced $4.8 billion acquisition of Europe based TNT Express, company executives indicated confidence that regulators will likely not raise significant objections.

The carrier indicated that its capital spending in the coming fiscal year will be $4.3 billion, the majority of which will be channeled into ground segment infrastructure. Further announced was that the FedEx SmartPost segment, an online commerce focused service that hands-off last mile delivery to the United States Postal Service will be merged into the ground business segment on September 1st of this year. By merging the two segments, FedEx has plans to enable increased flexibility for its ground network. New software is being implemented that will combine ground-based packages destined to a common delivery address. Thus if the system determines a SmartPost package is destined to an address scheduled for delivery of a regular ground-based shipment, the software will route both packages to the delivery vehicle. If the SmartPost package is independent and does not meet network criteria, it will be routed to a local post office for delivery. The net effect is an impact to current USPS revenue streams.

Similar to UPS, the latest financial results from FedEx further reinforce the positive revenue effects of newly implemented dimensional based pricing, as well as the continuance of fuel related surcharges. In the most recent quarter, FedEx reported that ground based yields increased 2 percent because of the new dimensional weight rates. The Wall Street Journal reported this week that UPS is communicating to dozens of retailers that it intends to end big discounts related to dimensional pricing for this coming holiday buying surge, and in the case of some, enforce dimensional pricing for the entire year.

Given this latest information, Supply Chain Matters is of the viewpoint that FedEx is making a competitive thrust against its ground-based competitors, in particular UPS, for the support of online customer fulfillment.

For the international air express segment, FedEx continued with implementing its multi-year profitability plans which included cutbacks in overall capacity along with increased investments in more fuel efficient, less maintenance prone air freight aircraft. The effects of reduced international air express capacity were felt in the latter part of last year when U.S. west coast ports were severely impacted by bottlenecks, and shippers attempted to turn to alternative air routings.

Our prediction of a turbulent year in global transportation continues to manifest and includes continued efforts by major surface and air-based global carriers to significantly increase margins along with actions of heightened competitiveness among major industry players.

Bob Ferrari


Demand Sensing Lessons Learned in China

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As thought leaders in supply chain management, we often point out the critical importance for firms to more quickly sense geographic or regional changes in product demand and respond to such changes with integrated supply and fulfillment capabilities. This week, The Wall Street Journal highlights (paid subscription) how certain high-profile consumer product goods companies were hampered in China by not having such capabilities.

The report notes that a sudden change among China’s consumer buying trends suddenly occurred as millions of consumers elected to shift their buying practices away from larger retail outlets in favor of online marketplaces. The WSJ indicates that an estimated 461 million Chinese consumers, nearly a third of the population, are now shopping online. Further cited is Nielsen data indicating that nearly half of Chinese consumers are buying groceries online, compared to a quarter of consumers on a worldwide basis. Global CPG firms such as Beiersdorf, Colgate-Palmolive, Nestle and Unilever were reportedly laggard in the sensing of this channel buying shift.

For Unilever alone, the shift toward online buying accounted for a 2.7 percent drop in global revenues. The CFO of Unilever is quoted as indicating that CPG firms in China were “too slow to react to the changes in the marketplace.” Another Unilever executive is quoted as indicating: “It’s very, very difficult for us to be absolutely sure (of inventory levels) because the visibility across the extended supply chain in China is not that great.”

Many CPG firms distributing products in China had targeted their merchandising and inventory strategies towards large retailers and thus were not able to sense the changed buying patterns until inventories grew.

Many of these firms are likely to have acquired important learning and are re-focusing supply chain strategies more towards online fulfillment channels including more direct presence.  There will obviously be further learnings in the months to come.

Suffice to state that in today’s complex supply chain universe, generalized market support and distribution strategies will not suffice.  Each major market requires its own set of product demand planning, sensing and supply chain response strategies.

Bob Ferrari


Supply Chain Matters Summary Impressions: JDA Software FOCUS 2015 Conference

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Last week, Supply Chain Matters attended the JDA Software FOCUS 2015 conference in Orlando Florida providing a number of live update commentaries regarding this conference. In this final commentary related to this year’s FOCUS, we provide our summary impressions.

To view our prior observations and commentaries, please click on the below links:

Update One- Day One Keynote Impressions

Update Two- Day One Afternoon Sessions and JDA Cloud Strategy

Update Three- Day Two Customer Keynote Sessions

Update Four- Conference Awards and Announcements

 

In our view and in the view of others we spoke with, this was a far different JDA conference, one presenting a much broader cross-industry focus, a more succinct strategic agenda for customers and a less arrogant tone. For industry analysts such as this author, the sessions were far more open without restrictions and JDA executives were more open and willing to discuss strategic direction. It was fitting that the conference represented the 30th anniversary for JDA as a software firm.

As noted in our initial commentary, we were especially honed-in on the opening welcome address from JDA’s Chairmen and CEO, Bal Dail who outlined a three point strategy for JDA that included its plans to deliver for existing customers, continued corporate investments in technology and in partnerships. From the podium, he acknowledged that in the past, JDA had not especially listened to customers.  He also acknowledged a culture of past arrogance in the persona of JDA.  There were messages related to commitments for responding to customer needs for advanced technology, much broader partnerships with other providers, including the announcement of a new partnership with Google and the Google Cloud Platform for cloud services. Further emphasized was the ongoing partnership with IBM in Retail industry intelligent fulfillment needs.

We were further impressed with our 1-1 interviews with Jean-Francois Gagne, Chief Innovation Officer, Razat Gaurav, Executive Vice President, Global Industries, Fab Brasca, Vice President, Solution Strategy, Global Industries.  As a reference, Gagne arrived at JDA with the acquisition of Red Prairie while Gaurav and Brasca in a long-time veterans. We touched upon a number of technology strategy and industry adoption topics and this author came away with even more reinforcement that JDA is indeed far more focused and aligned toward bringing more leading-edge technologies to its various industry customers. The takeaway for our readers is that JDA is far more focused on leading-edge cloud development and that should pay dividends in time-to-value down the road.

The day two customer keynote theme was important and powerful, especially since it featured PepsiCo’s supply chain transformation journey that dates back to the early nineties and including the former Manugistics and i2 Technologies technology applications. The relationship of PepsiCo with JDA technology is a 20 year legacy, which is somewhat extraordinary in the supply chain best-of-breed technology industry. That was the missing reinforcement that JDA supports manufacturing and distribution intensive supply chains, in addition to retail.

This year’s FOCUS indeed included a special emphasis on the needs to support Omni-channel customer fulfillment needs, especially the various aspects of JDA’s Intelligent Fulfillment and JDA’s Flowcasting applications. Suffice to indicate that we were impressed by the depth of functionality.

We were also updated on the progress of JDA’s partnership with IBM to address the needs to process and fulfill retail industry Omni-channel orders. The partnership calls for combining the elements of JDA’s warehouse management, demand and workforce planning support capabilities with IBM’s Sterling Distributed Order Management network platform. JDA communicated to conference attendees that the initial release of this functionality will become available in June.

That was indeed a rewarding conference and it reminded those several years past where a broad variety of customer, industry and vendor specific supply chain management business process and IT focused topics were presented, discussed and talked about among attendees.

Bob Ferrari

Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters© blog.


UPS Q1 Operating Results Imply Renewed Focus on Profitability- Implications for Online Fulfillment

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Earlier this week, global package delivery provider UPS reported its first quarter operating results and provided a succinct message to online e-commerce customer fulfillment providers that the provider will protect its profitability in servicing this segment. The results were far different than the disappointing news delivered for the end-of-year quarter and an indication that last-mile delivery strategies associated with online commerce are subject to increased cost changes and implications.  These results are a further indication of the revenue and profitability boost brought about by the change to dimensional pricing of shipments, along with other operational changes.

For the March ending quarter, UPS reported an overall 1.4 percent increase revenues and an 11 percent increase in operating profit to $1.7 billion, demonstrating profitability increases across all operating segments. Results for U.S. based operations reflected a 5.3 percent increase in revenues while profits rose over 10 percent to $1.02 billion. U.S. Domestic Package revenues, where dimensional pricing went into effect, experienced a 3.8 percent increase in revenues.

Total shipments increased 2.8 percent to 1.1 billion packages reportedly led by European export growth of 9.4 percent.  No doubt, that was an indication of a positive impact from the increasing value of the U.S. dollar, allowing European goods to be more price-attractive in export markets such as the United States. For the quarter, UPS generated $2.4 billion in free cash flow. UPS raised rates and increased fuel surcharges across the board at the beginning of the year.

Brown further announced that it has declined to renew contracts with “a couple of substantial customers” whose business was not profitable enough, especially concerning e-commerce shipments. While UPS executives declined to name any specific customers, in its reporting, The Wall Street Journal indicated that children’s toys retailer Toys “R” Us was one of those customers. Reportedly, UPS raised it rates, prompting this retailer to move to FedEx in February.  We would surmise that other customers were well-known e-tailors as well.

Further announced was an increase in the number of Access Point locations where online customers can pick up their purchases themselves, thus decreasing the number of overall package trips for UPS’s last-mile delivery efforts. UPS executives were quick to point out that the carrier’s business goal was not to just increase costs for its customers but rather to facilitate improved efficiencies in shipping methods and packaging of shipments. Obviously, industry supply chain teams accountable for transportation costs and delivering cost reduction goals will likely have a far different perspective.

As Supply Chain Matters observed in our June 2014 commentary, dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping. With recent operating results from both FedEx and UPS now indicating a renewed focus on carrier profitability, the implications are indeed broader from both shipper and carrier perspectives, especially in the light of online consumer preferences for same-day or Sunday delivery.  Shippers and especially e-tailors will be responding with revised practices to protect their operating costs and margins.  The overall effect can either be a different, more efficient delivery fulfillment process that emphasizes customer pick-up or the development of more innovative delivery strategies.  The U.S. Postal Service as well as up and coming logistics disruptors may well benefit.

Supply Chain Matters continues to anticipate that major online retailers will initiate a different form of planning for the 2015 holiday fulfillment surge later this year, and that will be how to balance continuing consumer preferences for free shipping with the new realities of higher parcel shipping and logistics costs. New or different business models and strategies will continue to emerge in the coming months as this dynamic unfolds and both B2B as well as B2C shippers need to be prepared for such industry changes.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group LLC and the supply Chain Matters© blog. All rights reserved.

 


Supply Chain Matters Update Four- JDA Software FOCUS 2015 Conference

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Supply Chain Matters pens this commentary from JDA Software’s FOCUS 2015 conference wrapping up today in Orlando Florida. To view our prior observations and commentaries, please click on the below:

Update One

Update Two

Update Three

 

For the past ten years, in conjunction with the FOCUS customer conference, JDA’s Real Results Awards recognizes noteworthy customer demonstrations of innovation and business process excellence among six categories. The winners announced this year were:

Best Cost Savings- Edwards Lifesciences who decreased inventory by 13 percent and reduced its global expedited logistics costs by $2.8 million from 2011-2013. This customer presented its experiences during yesterday’s customer keynote sessions.

Best Partner Project- El Palacio de Heirro for its partnership with netLogistiK, a JDA alliance member to transform outdated infrastructure into a modern and robust WMS platform.

Best Collaboration- Fiat Chrysler Automobiles for improved collaboration between commercial and manufacturing teams for production planning and scheduling processes, enabling the identification of capacity issues earlier in the process, and improvements in order-to-delivery processes.

Best Result in Retail- Grupo Marti for automating its retail sports equipment replenishment processes through more accurate forecasting, factoring seasonality and sales promotional programs, while substantially improving inventory management and retail store replenishment.

Best Time to Value- Kenco for its joint efforts with JDA Consulting Services in going live with a specific 3PL customer’s JDA Warehouse Management System in just nine months, achieving full productivity within two weeks from go-live.

Best Result in Manufacturing- Tyco in its leveraged use of warehouse management applications to automate and standardize its distribution centers resulting in 36 percent reductions in warehousing costs at installed locations while dramatically improving lines shipped per hour.

Supply Chain Matters echoes our well-done and congratulations to the implementation teams representing each of these award winners. For further details regarding each of these awards, our readers can review the JDA press release related to the 2015 Real Results awards.

This year’s FOCUS indeed included a special emphasis on the needs to support Omni-channel customer fulfillment needs, especially the various aspects of JDA’s Intelligent Fulfillment and JDA’s Flowcasting applications. This year’s FOCUS included the unveiling of new capabilities to the JDA Intelligent Fulfillment and Transportation portfolios, including more granular, warehouse aware item definitions to improve load building, support for dynamic shipment splitting and prioritization, as well as other enhancements to integrated fleet and transportation management. This author had the opportunity to view sessions on each of these applications and will provide separate impressions commentaries at a later date.

Suffice to indicate that we were impressed by the depth of functionality.

We were also updated on the progress of JDA’s partnership with IBM to address the needs to process and fulfill retail industry Omni-channel orders. The partnership calls for combining the elements of JDA’s warehouse management, demand and workforce planning support capabilities with IBM’s Sterling Distributed Order Management network platform. JDA communicated to conference attendees that the initial release of this functionality will become available in June.

In our final commentary, we will summarize our overall impressions and takeaways from FOCUS 2015.

Bob Ferrari

Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters© blog.


Will Wall Street’s Patience with Amazon Soon Expire?

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Today’s business headlines include the reporting of Amazon’s latest operating results for the March-ending Q1 quarter. The global online provider and Omni-channel disruptor reported a net sales increase of 15 percent to $22.7 billion, but also a net loss of $57 million. There was a $1.3 billion unfavorable impact related to foreign exchange rates throughout the quarter. Operating expenses increased nearly 75 percent, prompting The Wall Street Journal to opine that: “Amazon again spent nearly all the money it took in.”

In essence, Amazon is spending and investing in all forms of projects and today’s predominantly short-term focused investors are growing ever more impatient with the timing of a big reward. Once more, Amazon has forecasted the potential of an operating loss, or small profit gain for its upcoming quarter.

An area that has captured Wall Street’s attention is revelations about the often secretive cloud computing support Amazon Web Services (AWS) business operating unit which was finally revealed. AWS revenues were reported as $1.57 billion in the quarter, up a whopping 49 percent, and at an annual run rate of nearly $5-6 billion for the year. Once more, this has been in a fiercely competitive sector with many global enterprise technology players duking it out for market-share dominance. Once more, operating margins for AWS are tracking at nearly 17 percent compared to nearly 4 percent for retail online fulfillment.  Retail fulfillment continues to have pressures related to distribution center rollouts as well as the net effects of free shipping offered to Amazon Prime customers.

The high AWS product margins categorizes this business as growing faster than Amazon’s online fulfillment business, although considerably smaller overall, but the difference in margins have now captured the interest of Wall Street, and most likely the community of activist investors.

Among online customer fulfillment highlights for the march-ending quarter were:

  • The launching of both Amazon Dash Button, a small button that Amazon Prime customers can place in their home to automatically reorder frequently used products. Supply Chain Matters recently called attention to Procter & Gamble as one key participant in this program, which might have prompted a reaction from Wal-Mart.
  • A complimentary offering, Dash Replenishment Service (DRS) enables connected devices to directly order replenishment supplies. Early participants in DRS include Brother, Brita Quirky and Whirlpool.
  • The launching of Amazon Home Services, a new marketplace for on-demand professional pre-packaged services
  • Amazon’s Prime buying service celebrated its tenth anniversary with tens of millions of members across the globe.
  • The opening by Amazon China of an Amazon International retail store on Tmall, featuring thousands of imported products and an expansion of Amazon Global Store offered in China to over one million items.

A common and troubling theme in today’s U.S. business climate has been activist investors surrounding well-recognized internally focused producers including names such as Apple, DuPont, Procter & Gamble and others.  The HJ Heinz-Kraft Foods acquisition announcement continues to have far reaching implications for other consumer product goods producers and their respective supply chains.

The question now becoming apparent is whether Amazon’s growth track record contrasted to profitability performance opens the door to activist actions as well, particularly when it concerns the potential of AWS.

What’s your view?  Will Wall Street activist investors surround Amazon as-well?

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters© blog. All rights reserved.


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