This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.
At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.
This news is significant for this industry in a couple of rather important dimensions. This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them. The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.
Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease. The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.
The takeaway for consumers is hopefully safer food products in the coming months. For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void. Food safety is every executive’s and every employee’s concern.
In a number of prior commentaries Supply Chain Matters has amplified the growing talent gaps that are today impacting multiple industry supply chains. As more baby boomers reach retirement age, supply chain and procurement executives are looking with trepidation at a looming talent gap. The industry needs an influx of fresh faces, especially professionals drawn from the millennial generation — people born between 1982 and the early 2000’s.
In May of 2014, The Institute for Supply Management (ISM) and ThomasNet jointly sponsored initiative titled the 30 Under 30 Rising Supply Chain Stars Program. Supply Chain Matters called specific attention to this program in an early April commentary. The stated goal of this joint initiative was to advance the future of the supply chain profession thru recognition of up and coming professionals making significant contributions within multi-industry procurement roles.
As a follow-up to our April commentary, this Editor was provided the distinct opportunity to interview two of the nominees included in this year’s 30 Under 30 Rising Stars program. They were Amy Schwantner, currently serving in the role as a Manager of Strategic Sourcing for CBS Corporation in New York City, and Wesley Whitney currently in the role of Sourcing Specialist at Enterprise Products in Houston Texas.
In our conversation, we touched upon a several areas in our discussions with these noteworthy 2015 Stars candidates.
Both Wesley and Amy indicated no prior detailed knowledge for the areas of procurement and supply chain management while pursuing undergraduate studies. Wesley indicated that his awareness to the field stemmed from his grandmother, whose career included a purchasing role at a local school district. Later, his interest was initially peaked from a friend who was pursuing a career in the field. Currently, Wesley’s responsibilities now include forging strategic agreements with suppliers.
Amy, who acquired an undergraduate degree in business administration, entered the field of procurement after a role as a financial analyst within a healthcare system. She indicated that she did not know what supply chain management really was while in her undergraduate studies, but now thoroughly enjoys her role. According to Amy, every day brings different challenges and at the end of the day, she truly feels that she is making a direct contribution to various CBS business needs. Wesley expressed a similar satisfaction, indicating that he feels that his role is not solely pushing transactions, but making a discernable difference in both satisfying business needs and in building more strategic and collaborative supplier relationships. Wesley always strives to engage his stakeholders to learn exactly what their needs are, and works to craft a supplier contract that will deliver on such needs. He noted he truly enjoys what he does every day and desires to someday expand his horizon in other areas of supply chain management, both in pursuing a Master’s program, and in broader exposure to areas such as logistics and transportation.
Regarding what excites each of these Stars, Wesley indicated his belief that he is delivering bottom-line value and impact to the table, something that cannot be said for other roles assumed by those in his generation. Amy expressed a similar view along with her pleasure at the opportunity to contribute to so many different business and functional groups that make-up CBS today. She has opportunities to contribute to advertising, human resources, finance, legal and media teams for their supplier sourcing and services needs. She has exposure and learning within new areas such as multi-currency requirements as well as building trust among project stakeholder.
Regarding occasional frustrations, both pointed to the challenges of working at large organizations where lots of stakeholders express different motivations and needs. Working in areas of supplier sourcing and procurement, both have to balance the needs of cost savings and P&L attainment with building stronger relationships with key suppliers. Wesley observed that supply chain has tended to lag in advanced technology adoption which he would like to see accelerated.
Both of our interviewees expressed the value for having active organizational mentors. Wesley noted the value of an intra-company rotational program supported by his employer that has a mentorship foundation while Amy noted that a mentoring system is fundamental for learning. According to her Stars biography, it took Amy just 18 months to rise from a role of analyst to one of manager for CBS. Amy attributes that accomplishment in-part to active support and mentoring. Both indicated that they have not experienced overt millennial clash but instead experience supportive environments that let them mature at their pace.
Regarding futures, both Stars expressed their individual enthusiasm in learning even more about the various different aspects of supply chain management and in continuing to advance in this area. Amy noted that procurement provides everything millennials desire in a career in terms of day-to-day challenges, more responsibility and the ability to make a day-to-day difference for the organization. She indicated that she does not hesitate to recommend her generational peers to explore and pursue their careers in procurement and supply chain. Wesley urged his millennial peers to get involved and explore the vast opportunities provided in this field.
Overall, from speaking to both, this Editor was equally impressed with the maturity and communication skills expressed by just two of these 2015 nominated 30 Under 30 Stars. Both serve as great ambassadors for this program and for the next generation of supply chain leadership. Consider active mentorship and support of rising stars within your organization.
There is positive news related to the U.S. west coast ports labor talk negotiations that impacted many industry supply chains during the latter-half of 2014 and the early months of this year.
The members of the Pacific Maritime Association (PMA), operators of the majority of ports along the U.S. West coast have voted overwhelmingly to ratify a new five-year contract with the International Longshore &Warehouse Union. The contract, when ratified by the ILWU, is retroactive to July 1, 2014 and will run through June 30, 2019. In early April, an ILWU Caucus delegation voted to recommend approval of the tentative agreement reached in February. Copies of the agreement were earlier mailed to longshore union members, who were afforded the time to discuss the ratified proposal at local union meetings. A secret ballot full union membership ratification vote was the final step in the process and the final tally is expected to be announced tomorrow.
The new five year widow should provide some comfort for industry supply chains in terms of avoiding labor slowdowns across U.S. west coast ports. The PMA announcement of ratification includes a statement from the CEO of PMA noting that port management looks forward to winning back the trust and confidence of the shipping community. That was obviously a required and long overdue statement.
As Supply Chain Matters has pointed out, there are ongoing infrastructure, productivity and automation challenges needing to be addressed as larger mega-container ships continue to enter into service. Any future snafu or disruption affecting the physical flow of containers and container chassis from foreign ports to U.S. posts will provide a likely impact on industry supply chains.
During the next five years, the expanded Panama Canal will finally open and shippers will be provided added options for shipping containers and goods directly to U.S. East Coast ports. Many of the U.S. east coast ports are preparing for that milestone by investing in deeper ship channels, expanded infrastructure, distribution facilities and transportation options. The open question is now which coast is better prepared to offer economic advantages.
Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.
While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.
The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.
This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.
In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.
Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair. As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.
From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.
From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s. However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.
To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time. There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls. Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.
From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change. Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.
Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features. From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Across our supply chain management community, we are often keenly aware of how the dynamics of product demand and component supply interrelate. While teams always strive to balance and align product demand and supply needs, forces in a market or across an industry have a way of adding different or unforeseen challenges. They drive home the importance of nurturing strong supplier relationships and creativity along with the notions that the supply chain and suppliers, do matter.
A timely reminder was brought forward last week within The Wall Street Journal’s published article, Bourbon Feels the Burn of a Barrel Shortage (paid subscription required or free metered view) Amidst souring consumer demand for bourbon and craft-distilling beverages, this industry is facing the blunt reality of a three year long shortage of the barrels required for storing and aging bourbon. More specifically is a shortage of required supplies of white oak which the barrels are constructed.
Various cooperages (barrel makers) are actually turning down orders, along with offers to pay upwards of twice standard barrel pricing from those distillers seeking availability of prepared white oak barrels. Existing barrel suppliers apparently have only the capacity and wood to supply existing loyal customers and are either wait listing or turning down new industry entrants. According to the article, the white oak supply problem was compounded by a massive contraction impacting the lumber industry during the 2007-2008 housing crash across the United States. Sawmills shut down and loggers abandoned the market. While the lumber industry is now rebounding, the article points out that white oak supply still lags the current demand among barrel makers, while a shortage of lumber mills and experienced people continues to limit supplies.
In response to the demand crisis, barrel makers themselves reportedly have become more creative. Examples brought forward included Independent Stave Company, a large private barrel maker and supplier to Evan Williams and Jim Beam, which is now buying logs sourced from five different U.S. states in addition to its traditional supplies within the state of Missouri. To avoid high transportation costs for logs, this supplier invested in a new lumber mill in Kentucky.
Brown Forman, producer of its iconic Jack Daniels branded whiskey invested in a new barrel making facility near Huntsville Alabama because it opened “a whole new territory of logs”. It reportedly halved the time required to ship new barrels to Jack Daniel’s production site.
Craft distillers have reportedly turned to seasoned consultants for help in finding and/or brokering any and all supply of new barrels while some fear that they will not be able lay away whiskey.
Here is the takeaway message. As you, I and thousands of other new consumers partake and enjoy their very favorite branded bourbon, standard or craft whiskey, consider the fact that active supplier loyalty, strong relationships and joint creativity helped to insure that said bourbon and whiskey was aged and nurtured in the proper white oak barrels.
Supply Chain Matters offers a timely new toast:
“Here’s to good times, good people, and great bourbon, along with creative and resourceful suppliers.”
Catching up on significant news impacting global supply chains, readers should note that A.P. Moller Maersk, the parent of market dominant ocean container shipping firm Maersk Line, reported Q1-2015 fiscal results this week. The overall financial headline for the Maersk Line business was a net profit level of $454 million in the latest quarter amid a 3.2 percent drop in overall revenues. By our lens, it is yet another indication that global dominant carriers are stressing increased profitability over service needs with increased implications for shippers, suppliers and B2B / B2C customer segments.
In both the earnings briefing and various interviews with traditional financial media, A.P Moller Maersk CEO Nils Anderson lauded the best first-quarter performance despite decreased volumes and falling rates on shipping spot-markets, declaring that Maersk Line almost doubled its results, its best performance ever. Return-on-invested-capital (ROIC), a key measure for the shipping industry reflected a 14.3 percent level amidst an overall shipment volumes decline of 1.6 percent. Cash flow from operations increased by nearly $200 million. Specific mention was made to the Asia-Europe shipment segment where Maersk has elected not to fully engage in a current price war among existing competitors who are apparently leveraging the current 30 percent decrease in the cost of bunker fuel. He acknowledged that Maersk was willing to absorb some market-share loss to protect profitability. CEO Anderson also confirmed eight successive quarters of in fuel consumption efficiencies in areas such as more efficient new vessels, slow steaming and the current depressed levels of bunker fuel costs. He further emphatically declared: “We have no intentions of speeding up the network” that current slow steaming practices would continue despite the current 30 percent lower cost of bunker fuel. He added that the company has continued plans to reduce overall costs by around 20 percent by the end of 2016.
Maersk Line additionally reported the completion of its vessel sharing alliance with Mediterranean Shipping Lines (MSC) at the beginning of April on the East-West segment.
Supply Chain Matters has previously called attention to the important takeaways reflected from the latest financial results for UPS, and earlier FedEx, namely that dominant carriers in their shipping segments are exercising strategies of maximizing profitability in spite of decreased fuel costs. Thus, shippers expecting some relief in the continuing trend of far more expensive surface and air transportation rates are going to be disappointed. The pressures on many industry supply chains, especially those in the B2C sector, for taking out additional cost has increased, and transportation is the major culprit. Once more, the new world of online and Omni-channel customer fulfillment requires higher levels of services and flexibilities. Hence the current vice for those responsible for transportation cost performance and rate negotiation.
Instead, this is undoubtedly a time for very active negotiation of transportation rates among carriers more willing to forgo near-tem profitability to capture needed market-share or added network volumes.
Perhaps lost in this current global-wide dynamic is the longer-term impact on smaller firms who do have the shipment volume leverage of global multi-national firms. Once more, for the ocean container segment, continued slower steaming without consequent major investments in customer service and in-transit container visibility implies continued high inventory investments to compensate for such inefficiencies.
Dominant carriers are obviously exercising a Darwinian strategy of shakeout of marginal players who may fall by the wayside. It would have happened earlier if the cost of fuel had not dropped so dramatically. If fuel costs continue to increase to former levels we may well all witness another round of turbulence.