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Positive Train Control Mandate for U.S. Railroads: Another Burdensome Cost or Opportunity?

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This author recently had the opportunity to speak with Lilee Systems, a provider of advanced wired and wireless communication products and services for the transportation industry. Our interest was prompted by learning of a relatively new product termed locomotive messaging and application server (LMS) that provides freight and passenger railroad operators the ability to achieve Positive Train Control (PTC) compliance. Beyond our cool impressions of this technology, our conversations focused on the potential other customer service focused opportunities that such technology can provide not only to railroad operations but other transportation services as well.

Our readers may or may not be aware of the term Positive Train Control. Wikipedia cites The American Railway Engineering and Maintenance-of-Way Association (AREMA) as describing Positive Train Control as having the primary characteristics for:

Train separation or collision avoidance

Line speed enforcement

Temporary speed restrictions

Rail worker wayside safety

“A train receives information about its location and where it is allowed to safely travel, also known as movement authorities. Equipment on board the train then enforces this, preventing unsafe movement.”

In September 2008, the United States Congress passed a new rail safety law, The Rail Safety Improvement Act of 2008, which sets a deadline of December 15, 2015, for implementation of Positive Train Control (PTC) technology across most of the U.S. rail network. Thus far, many class 1 U.S. railroads and passenger rail operators have communicated challenges in meeting this December’s deadline for PTC.

Lilee Systems can best be characterized as a silicon valley technology start-up serving a classic, conservative transportation business culture. Lilee was founded in 2009 and its founders feature extensive wireless telecommunications, network and software defined radio backgrounds. Lilee’s customers and partners include 5 of the 7 Class I North American railroads as well as technology partnerships with Cisco, redhat, Siemens, Alstom. Herzog and Parsons.

The bulk of our briefing focused on Lilee’s recently launched TransAir LMS-2450 server developed for enabling PTC compliance at the train level. This hardware’s design goals include long durability, modularity, and scalability with the ability to fit into a small space. Locomotives produced many years ago did not include space considerations for on-board electronics. Today’s newly designed locomotives however include provisions for more extensive on-board electronics.

Any of our readers who have ridden on a train, bus or in a moving car with Wi-Fi or Internet enabled capabilities may have wondered how the technology operates when moving among various cellular or telecom regions. That is where this type of technology emanates from. According to Lilee, some of its technology was piloted among corporate sponsored bus services offered by certain Silicon Valley tech employers, where hour plus commutes need to be productive, and Internet connectivity is mandatory. An extensive on-board communications server afforded the opportunity to add other customer and operator focused services needs.

One of the coolest features of LMS-2450 is that in addition to supporting multiple cellular, telecom and GPS enablement connectivity needs to monitor track status, the product includes an x86 based application server.  For non-technical readers, that equates to the ability to support other business or administrative support applications such as helping in communicating a train’s real-time location, expected arrival time or even maintenance status. The technology further supports interconnections of equipment such as trains being able to communicate with one another as well as operations control centers.

In our briefing, I wanted to further explore why railroad operators were having difficulty in establishing plans and resources to meet the year-end PTC conformance deadline.  The reasons vary but the common theme often comes down to viewing PTC compliance as yet another, non-revenue producing expense, perhaps one that is viewed as very expensive as well. Railroads themselves have core competencies in operations and managing transportation and not necessarily advanced information technology deployment.

Our interviews with shippers along with observations of both rail and ocean container transportation providers clearly reinforce notions that timely and responsive customer service is currently not a core competency for many such carriers.  While today’s Internet-enabled apps allows us to track the arrival or departure status of most any airline flight that is not the case in other commercial transportation segments.

Our takeaway message is therefore directed to executives, operational and organized labor teams of rail operators and other transportation providers. The tendency to context regulatory mandates or requirements as an added burdensome expense or additional work rule for conducting ongoing operations can be viewed in a far different context.  It can present an opportunity in the ability to electronically and digitally enable equipment to communicate more proactive customer and shipment focused status information as well as more predictive insights to pending problems. When did a train depart and arrive or what is an expected departure and arrival?  What specific railcars are included in a designated train and where are they destined? When will a train crew time-out in hours of service and can that be weighted in track scheduling and shunting?

The return-on-investment now takes on a far different dimension, compliance with regulatory safety requirements as well as infrastructure to enable more proactive customer service and added revenues. Work rules anchored in the pre-Internet era no longer cut-it in today’s online, seven by twenty-four world of supply chain operations and business.

We conclude this commentary with the Wikipedia extract for glass half full:

Is the glass half empty or half full? is a common expression, generally used rhetorically to indicate that a particular situation could be a cause for optimism (half full) or pessimism (half empty), or as a general litmus test to simply determine an individual’s worldview.[1] The purpose of the question is to demonstrate that the situation may be seen in different ways depending on one’s point of view and that there may be opportunity in the situation as well as trouble.”

Within the broadened horizon of today’s online digital business needs, regulatory compliance should also be viewed as opportunity.

Bob Ferrari

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


Evidence of a New Business and Supply Chain Headwind: A Stronger U.S. Dollar

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During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States.  That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.

P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.

The implications are obvious including a continued selloff of underperforming brands and businesses.  One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.

The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:

“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp.  to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”

Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.

The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.

We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a  booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.

Bob Ferrari


Apple Supply Chain Supports Spectacular iPhone Fulfillment Results

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Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product Apple Logointroduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.

Specifically in our mid-September commentary we noted:

“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”

We further declared:

While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts.  They have pulled miracles in the past, and the stakes get even higher.”

Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines.  The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.

Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.

Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.

Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.

Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.

All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.

The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.

Supply Chain Matters Tip of the Hat Award

 

 

We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance.  Let’s hope that the supply chain ecosystem will share in similar financial rewards.

 

Bob Ferrari

 

 


Breaking: Cereal Producer Post Holdings to Acquire MOM Brands

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The merger and acquisition churn involving consumer product goods producers continues, and with that CPG supply chains must continue to adapt to such changes. Today’s announcement from Post Holdings is yet another example of the constantly changing challenges for CPG focused supply chains having to adapt to both rapidly changing end-market as well as internal industry forces.

Today, Post Holdings, a self-termed a consumer packaged goods holding company operating in the center-of-the-store, active nutrition, refrigerated and private label food categories, announced that it had agreed to acquire privately-held MOM Brands Company for a reported $1.15 billion. This deal brings together both the No. 3 and No. 4 players in cereal based on dollar sales value. Together, they are expected to have an 18 percent share of the U.S. cold cereal market measured by revenue. Post currently has an 11 percent share.

Under the terms of this announcement, St. Louis Missouri based Post will pay MOM $1.05 billion in cash and issue MOM stockholders 2.45 million shares of Post stock. The deal is expected to close by the third quarter.

According to the announcement, MOM Brands is noted as a leader in the ready-to-eat (“RTE”) cereal value segment, with over 95 years of experience in providing high quality RTE and hot cereal products, strategically targeting the value segment in branded RTE cereal, private label, and hot wheat and oatmeal. Various business reports indicate this deal will provide Post a presence in the growing bagged cereal and hot cereal businesses, two of MOM Brands’ strongholds. MOM Brands now joins Post’s other brands of Honey Bunches of Oats®, Grape-Nuts Cereal®, PowerBar® Raisin Bran Cereal®, and a larger variety of other brands.

The acquisition announcement was timed with Post’s better-than-expected financial outlook issued for its December-ending quarter.

Supply Chain Matters has highlighted today’s announcement since the history of Post Holdings provides a pertinent example on the continuous changing state of CPG focused supply chains.

The Company’s web site provides an historic capsule upon which we have extracted important milestones:

“Post is over 115-year old with (to borrow a phrase) “a new birth of freedom1.” Post traces its heritage to C. W. Post who introduced Grape-Nuts®, the first natural ready-to-eat cereal marketed to enhance health and vitality, in 1897. Our history serves as a reflection of strategy, marketing, finance and governance during much of the 20th century. C. W. Post invented a cereal and a drink at a time when brands were beginning to resonate with the American consumer. His son-in-law, E. F. Hutton, saw the value of bringing together several brands under one corporate owner and General Foods Corporation was born.”

“General Foods was acquired by Philip Morris in 1985. Subsequently, Philip Morris purchased Kraft and merged it with General Foods…..Kraft sold Post to private-label manufacturer Ralcorp. Post was spun off into a separate, independent company on February 3, 2012.”

Ralcorp itself was acquired by ConAgra Foods in January 2013.

Since its spinoff as an independent company, Post has been an active acquirer of small and larger producers. Acquisitions have included peanut butter producers American Blanching Co. and Golden Bay Foods, eggs and diary producer Michael Foods, snack foods producers PowerBar and Musashi Brands. The Michael Foods acquisition was reported to have exceeded $2.4 billion.

A published report from the Minneapolis Star Tribune reports that the 95-year-old MOM Brands has grown steadily over the past 15 years, particularly capturing share in the low-price or “value” segment of the cold cereal business. That report indicates that MOM will continue to operate as a separate business under Post.

As is often the case in CPG deals, the Post acquisition comes with the usual expectations of added cost synergies, specifically $50 million in run-rate savings by the third year, including sharing of administrative services, infrastructure, sales and marketing. The Star report points out that MOM Brands employs 251 at its Lakeville corporate office and that some jobs there might be in jeopardy, as they often are in post-buyout cost cuts. We would not be all surprised if cost synergies are further applied to supply chain related input costs, functions and services. Such acquisitions often burden the acquirer with added debt or stock dividend expectations which, in-turn, fuel the need for additional cost savings.

While Post continues with its acquisitions spree, the top two producers in this cereal category, namely General Mills and Kellogg have each declared multi-year cost cutting or capacity consolidation initiatives. Supply Chain Matters has provided a focused commentaries on General Mills, the latest being September of last year. In early January, this producer announced the closure of two of its Pillsbury dough factories, adding to the elimination of another 500 jobs over the more than 1000 job cuts announced last year. In 2013, Kellogg announced a billion dollar Project K cost-savings plan that would extend over four years shedding an estimated 2000 supply chain jobs.

CPG supply chains do indeed have their own unique set of challenges. Producers riding the wave of consumer changing tastes and demands for healthier products must continue to innovate or grow or be consumed themselves by producers needing to fuel market growth expectations.

Bob Ferrari

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

 


SCMR Interview with Drewry- Continued Turbulent Waters for Ocean Container Interests

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Within our 2015 Predictions for Industry and Global Supply Chains (now available in complimentary research report- see note below), Prediction Five indicates a turbulent upcoming year in global transportation.  Gantry_Load_2

Supply Chain Management Review recently featured highlights from an interview with the Research Manager of Drewry Supply Chain Advisors regarding the state of the ocean cargo industry. We call attention to this interview because portions point to what can be expected in ocean shipping this year. For readers unfamiliar with Drewry, the firm is globally recognized in sea freight market intelligence and benchmarking and a specialist advisor in international sea freight procurement.

In the interview, Drewry Research Manager Marin Dixon indicates another year of freight rate market volatility and that supply-demand equilibrium will not return until 2017 at the earliest. Ocean container carriers will continue to be challenged by overcapacity.

Regarding the ongoing disruption involving U.S. west coast ports, Drewry expects U.S. port congestion to remain an issue with cost implications throughout 2015. The consequence is noted as more shippers considering options to protect themselves against future labor disruption risks by shifting routings to alternative ports.

Regarding ocean container shipping lines, Drewry expects more alliance consolidations over the next few years as carriers seek to leverage economies of scale and respond to market dynamics for unit cost leadership.

All in all, and as noted in the previous posting, another reinforcement of continued industry turbulence.

 

Note: We are experiencing technical issues within our Supply Chain Matters Research Center.  If you desire a complimentary copy of our 2015 Predictions for Industry and Global Supply Chains, please send an email to: supplychaininfo <at> theferrarigroup <dot> com. Please insure you include your name, role and return email address.


Yet Another Concerning Commentary of Supply Chain Bullying

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In our Supply Chain Matters commentaries focused on the challenges that are currently impacting consumer goods industry supply chains, we have called attention to the damaging effects that certain investor activism efforts have inflicted through mandates to either dramatically reduce costs, shed underperforming brands or consolidate CPG companies.

To clarify, an objective investor voice demanding excellence is and should be expected. Insuring shareholder return is always an important business outcome objective for supply chain initiatives and transformational activities. However, when that voice comes in the context of demands for short-term results regardless of consequences that is far different challenge. Years of transformational efforts can literally be destroyed by the effects of wholesale cost cutting mandates.

In our Twitter stream, we came across a re-tweet link from Huffington Post blogger David Weaver, referencing United Kingdom’s Daily Mail.com posting: The supply chain bullies: The giant household names that stand accused of hurting small suppliers. The commentary describes how consumer goods giant Heinz has doubled the time it takes to settle and pay supplier invoices imposing upwards of a 97 day wait for payment. Similarly, AB InBev is reported to have routinely taken up to four months to pay its suppliers.  These payment terms are written into supplier contracts and according to the commentary, most suppliers have little influence for pushing-back. It is a literal pay to stay practice. The commentary cites one source as indicating that a staggering £46 billion was overdue to suppliers in 2014.

While larger sized suppliers may have the financial means to borrow additional funds or adsorb such impacts, it is far more challenging for smaller suppliers who obviously lack such leverage. Once more, because of such practices, the EU community issued a prompt payment directive in 2011 requiring supplier payments within 60 days. As the commentary’s title implies: “It is a total abuse by certain large companies of their supply chain.”

We commend the messages of the Daily Mail commentary and would add that it further serves as a de-valuing of supplier relationships and needs for co-innovation.  During the severe global recession that began in 2008-2009, there were continual reports of large companies tending toward such practices to preserve cash, causing some suppliers to financially succumb. It is literally throwing your problem “over the wall” to make your supplier your banker.  Today, while the Eurozone sector continues to struggle to bounce back to growth from the same great global recession, news of such continuing practices is disheartening.

Disappointingly, it continues to be a practice that spans other industry supply chains, ones that have far higher margins.

As a community of supply chain analysts, we often echo the superior rankings of certain supply chains because of their extraordinary financial ratios or the productive benefits of advanced technology applied to procurement and other supply chain focused business processes. However, neither superior financial metrics nor advanced technology application be predicated on passing the burden of cost down the subsequent tiers of the supply chain in order to secure even more short-term financial benefits.  After all, that’s the far more-easier approach. Ignoring any longer-term implications, collect your performance bonus and moving on to the next short-term challenge or promotional opportunity seems to be a continuing norm, and that remains tragic.

We want to hear from our readers.  What’s your view on why such practices continue?  Is it out of the control of supply chain senior leadership or a manifestation of today’s leadership?

Bob Ferrari


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