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Maersk Line Reports Increased Q4 and 2014 Full Year Profitability: But at What Potential Price?

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This week, AP Moller-Maersk, the conglomerate parent for global container transporter Maersk Line reported extraordinary profits for 2014 as it continues with its strategy to  consolidate into certain core industries. The conglomerate sold its 20 percent stake in Danske Bank resulting in a $5.5 billion direct windfall profit for shareholders.

Regarding Maersk Line, the current global leader in ocean container shipping, continued strong performance boosted net profit to $2.3 billion in 2014, up from $1.5 billion reported in 2013. Total 2014 revenues were reported as $27.4 billion, compared with $26.1 billion reported in 2013. Operating cash flow was $4.2 billion.

During the earnings briefing, AP Moller-Maersk CEO Nils Anderson indicated that Maersk Line’s improved its competitive position during the year and that the startup of the 2M vessel sharing alliance agreement with Mediterranean Shipping Line (MSC) has gone very well. Maersk Line’s profitability increase was attributed primarily to the dramatic cost reductions in fuel costs along with increased shipping volumes. Volume increased by 9.8 percent, mainly driven by growth in North-South and Intra trades. Unit costs were reduced by 7.2 percent, helping to offset reported average rate reductions of 3 percent. Noted was an average cost reduction in bunker oil of nearly 11 percent. Once more, the carrier declared it has no plans of increasing vessel speeds across its network fleet because such changes require a sustained lower bunker fuel price level.

Maersk now anticipates the global demand for ocean transportation in 2015 to increase between 3 and 5 percent in 2015, which is considerably different than prior year forecasts. Consider that in October of 2013, Maersk declared that the glory days of shipping were over. If these optimistic growth projections turn out to accurate, there is little doubt that container shipping lines will attempt to continue pressures to raise and sustain higher tariff rates.

Our Supply Chain Matters readers who manage logistics and transportation requirements each and every day can certainly attest to the sub-standard, unreliable shipping performance of today’s ocean container carriers.  The recent severe disruption that occurred across U.S. west coast ports these past five months added more consternation and frustration, as well as added transportation costs. We read and heard reports indicating that re-routed containers destined to U.S. and/or Gulf coast ports experienced added cost surcharges.  Many industry supply chains were forced to opt for more expensive air freight transport to meet critical inventory needs.

While this turbulent period in global transportation continues, the industry leader in ocean container shipping can boast of lower operating costs and higher efficiency resulting in superior financial performance.

However, what was the cost in dimensions of customer loyalty and service?

The new Triple E vessels require more time to load and unload.  The industry outsourced the management of trailer carriages, resulting in gross mismanagement of inventory matching. Port operators play hardball with organized labor, with port throughput held hostage.

Supply Chain Matters will not sugar-coat the financial performance of the industry leader in container shipping, since it would appear that it smacks of a “throw it over the wall” approach to customer and multiple supply chain industry needs.

Bob Ferrari


A Sudden CEO Leadership Change at Honda and Another Reinforcement of the New Product and Operations Grounded CEO

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In the wake of continued challenges involving quality glitches and mass product recalls, Honda Motor Company announced today that is current CEO will step-down in June to make way for a new breed of leadership.

Takahiro Hachigo, a trained engineer and currently a managing officer within China, will replace Takanobu Ito as president and CEO in late June. Mr. Ito has led Honda since 2009, at the height of the global recession.

According to reporting from The Wall Street Journal, this executive leadership change comes at a critical juncture for Honda, which is being challenged by Nissan Motor for the number three brand leadership for the U.S. market, and amid continued product recall actions involving airbag inflators produced by supplier Takata Corporation. Honda has been one of the brands most affected by the defective airbag inflator quality crisis, and in October, top executives took on salary cuts to demonstrate responsibility for quality problems.

Reportedly, company insiders were taken by surprise by the timing of this announcement, and the choice of a younger executive promoted over those executives expected to be considered as the next Honda CEO.  The global auto company further indicated that several directors who ranked higher than Mr. Hachingo would retire. In a released statement, Mr. Ito stated: “Honda is ready to make a new leap forward. To do this, Honda needs to be led by a new, younger team.”

Mr. Hachigo’s experience includes stints in product design, production operations, and procurement, which provides yet another example of a trend for new senior management appointments involving executives with product and supply chain management prowess. According to Honda’s announcement,  Mr. Hachigo’s previous experience includes roles as a vice-president of Honda Motor Technology- China, representative of development, purchasing and production- China, president and director of R&D in Europe, general manager of the Suzuka manufacturing facility production operations , general manager of purchasing and vice-president of R&D in the Americas.

This resume adds further evidence of the new importance of global-based experience, including operational experience within China.

In December of 2014, BMW appointed new replacement CEO Harold Kruger, with a background in operations, engineering and manufacturing.  A year earlier, General Motors rocked the global automotive industry by appointing the first ever female CEO, Mary Barra, who had risen through the GM ranks in roles in manufacturing, engineering, product design and other leadership positions. Mrs. Barra has since experienced a baptism of fire involved in GM’s massive product recall incidents.

This trend extends beyond the automotive industry, with product management and supply chain experience in the current CEO’s of Apple, Home Depot, McCormack Foods and other firms large and small.

There is an adage that one data point is interesting, two consistent data points are more interesting and three or more consistent data points is obviously a sign of a trend.  For the global automotive industry, the new trend for senior management is showing a common denominator for sensitivity and grounding in product design, operations and global supply chain management leadership.

The year 2015 may well be a watershed year as this new generation of product design and operations background CEO’s continue to take the leadership helm. For global supply chain ecosystems across the automotive industry, these are, by our Supply Chain Matters lens, encouraging signs.

Bob Ferrari

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


Breaking News: Tentative Agreement Reached in Labor Contract Talks Involving U.S. West Coast Ports

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To the obvious relief of many industry supply chains, an announcement that a tentative agreement has been reached among the Pacific Maritime Association and longshoremen has finally come.  The announcement came late Friday night, Pacific Time after nearly nine months of ongoing contract talks and rancor.

According to reports, dockworkers are expected to conduct normal port operations beginning this evening. This tentative agreement averts what could have been an even more disruptive scenario of a total shutdown of ports.

This five year contract agreement still needs the approval of longshoremen union members as well as individual employers.  There may also be some local port issues needing resolution.  Thus far, no details of the new contract have been disclosed including the reported final contentious issue related to the selection or elimination of certain arbitrators for work rule disputes.  According to published reports, U.S. Secretary of Labor Thomas Perez, while declining to reveal any details, indicated that employers and the union have agreed to a new arbitration system.

As Supply Chain Matters opined in yesterday’s update commentary, when contract talks were eventually resolved, it will take months before any U.S. west coast port operations return to a state of normalcy, if at all. The underlying issues of the structural impacts of unloading and loading far larger container ships, the notion of proper scheduling of now outsourced trailer carriages and the consequences of trucking lines classifying truck drivers as casual, independent contractors remain ongoing challenges to be addressed.

Gene Seroka, executive director for the Port of Los Angeles indicated to the Los Angeles Times on Friday: “more than ever, we need labor and management working together.”  Those words have special meaning for all U.S. west coast ports.

Remember this date, it will serve as the baseline indicator as to how long before U.S. west coast ports return to operational service levels meeting shipper and industry supply chain expectations.  Much work remains, not only from an operations perspective, but also from a shipping lines management planning perspective.

Bob Ferrari

 


Highlights of Supply Chain Matters Briefing with Fieldglass, an SAP Company

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In March of 2014, SAP acquired cloud-based procurement contingent labor and vendor management system technology provider Fieldglass.  Plans called for combining the functionality within Fieldglass with that of the existing human resource management capabilities of SAP SuccessFactors and integrating both with the Ariba, an SAP Company network platform. After the acquisition was completed in mid-2014, the technology services provider has since been designated Fieldglass, a part of SAP.

This author recently had the opportunity to conduct a briefing with this services procurement and contingent workforce management technology provider.  The briefing was prompted by reports that Fieldglass has experienced a considerable growth trajectory since the SAP acquisition.

In our briefing, we were informed that post acquisition plans have gone exceedingly well. The technology provider has grown its global workforce by just over 30 percent and relocated its corporate headquarters to another part of Chicago. Efforts are underway for broader coverage in Europe and Latin America. According to a recent press release, 30 percent of all customer implementations of Fieldglass in 2014 occurred outside North America.  That should be expected given SAP’s global presence and sales coverage.

The integration with the Ariba P2P platform was spurred by an internal SAP decision not to go forward with previous plans to augment Ariba Services Procurement, opting instead to utilize elements of Fieldglass. However, there remain separate user-interfaces among Fieldglass and Ariba but there have been described efforts to unify the look and feel of both platforms by leveraging SAP’s Fiori user interface strategy. When we questioned whether both Fieldglass and Ariba eventually come together, we were informed that there are no current plans to do so at this time.

Plans for business process integration of Fieldglass and Ariba were noted as tracking for release this current calendar quarter. That integration supports the ability to create a services requisition on the Fieldglass platform, create the ability for Statement of Work and services tracking, and Fieldglass will seamlessly pass such data over to the Ariba platform for requisition and purchase order creation.

To no surprise, the SAP and associated Ariba direct sales teams were described as embracing the selling of Fieldglass to manage contingent labor needs. The explosion of contingent labor business models among many industries has further helped in spurring SAP customer interest.  Our supply chain focused community of readers is aware of the expanding use of contingent services labor in many areas of supply chain execution and customer fulfillment. However, customers are required to secure two separate software licenses, one for Ariba and other for Fieldglass. That was described as changing at some unspecified future point.

Regarding the adoption of the SAP HANA database strategy for Fieldglass, there does not appear to us that there are any specific plans at this point.

We were further informed that Fieldglass continues in efforts to support non-SAP ERP backbone environments with recent customer activity involving both Oracle and Workday environments.

Our brief briefing did not accommodate time to dive into current Fieldglass pricing and long-term product roadmap strategies, as well as deeper direct materials and supply chain related contingency services support, and that will be our goal for a future briefing.

In the meantime, we encourage Supply Chain Matters readers who have had experiences dealing with Fieldglass since the SAP acquisition in managing complex services and contingent workforce management needs to provide us with your impressions and feedback.  We will incorporate them in a future commentary.

Bob Ferrari


Supply Chain Matters February 20th Update- U.S. West Coast Port Disruption

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On this Friday, February 20th, Supply Chain Matters provides another reader update and advisory on the all-important and unfortunately, all-consuming disruption occurring at U.S. West coast ports that is impacting multiple industry supply chains.

Various published reports indicate U.S. Secretary of Labor Thomas Perez has set today as a deadline for the Pacific Maritime Association and the west coast dockworkers union to end a long-running labor dispute that has clogged West Coast ports. The sides reportedly negotiated late into the Thursday night in San Francisco, but no agreement was reached.

According to a published report by the Los Angeles Times, City of Oakland Mayor Libby Schaaf, who has participated in a nightly call with Perez and mayors of other West Coast port cities, told the Associated Press that if a deal isn’t reached today, Perez plans to force the parties to Washington, D.C., next week to finish negotiations.

All reports seem to indicate that the one remaining issue of contract talks center on the union’s desire to have a unilateral say on the removal of an arbitrator called in to alleviate work disputes.  According to the LA Times, the union is focusing on one specific arbitrator who handles contract grievances at the ports in Los Angeles and Long Beach.

From our lens, most of this week’s reports indicate that the pressure for both parties to resolve this ongoing dispute has become far more intense.  We have viewed reports indicating that as of yesterday, 32 container ships were at anchor near the ports of Los Angeles and Long Beach, awaiting an available berth.  The repercussions continue to involve other West Coast ports and shipping lines with reports of on-time performance at dismal rates.

It has further become more expensive for industry supply chains to mitigate the current disruption with a new report from Drewry indicating that rates for container ships destined for U.S. East Coast ports are also skyrocketing.

The Journal of Commerce (paid subscription required) reported yesterday that even Wal-Mart is being affected, indicating that shipment delays are hurting its business and threaten its Spring and Easter holiday inventory needs.

The bitter reality for multiple industry supply chains however, remains that even if contract talks are resolved, it will take months before any U.S. west coast port operations return to a state of normalcy, if at all. As we have opined in our previous postings, the underlying issues of the structural impacts of unloading and loading far larger container ships, the notion of proper scheduling of now outsourced trailer carriages and the consequences of trucking lines classifying truck drivers as casual, independent contractors remain challenges to be addressed.

By our lens, the shipping industry is in a state of denial and blindness to customer needs for on-time reliability and effectiveness. Instead, the industry remains focused on individual interests.  That unfortunately foretells that 2015 will indeed be a year of continued turbulence for global transportation.

Bob Ferrari

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


Added Evidence to Structural Business Changes Impacting Consumer Goods Producers

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Supply Chain Matters provides added rather important data point concerning the ongoing significant business challenges associated with many large consumer packaged goods providers and their associated supply chain teams. Multiple U.S. based food producers continue to serve up grim financial and operating news from their latest quarter. Most all of these ongoing challenges are attributed to the industry’s abilities to adapt to fundamental shifts in consumer tastes, changes in previous market growth assumptions and now, the added significant financial implications related to foreign currency effects.

This week, the largest globally focused food manufacturer by revenues, Nestle SA, reported its slowest annual sales growth since 2009 and 2015 will likely provide added challenges. Nestle’s organic sales growth for all of fiscal 2014 was reported as 4.5 percent, a number that perhaps most other large CPG producers would relish at this point.  But, that number fell below Nestle’s declared growth target of five to six percent organic growth. Real internal sales growth was noted as 2.3 percent while operating profit was up 30 basis points in constant currencies but 10 basis points in net.  In terms of quantification, Overall sales in 2014 were down 0.6 percent and Nestle executives indicated that negative foreign exchange shaved that number by 5.5 percentage points, which is a very significant amount.

From a geographic perspective Nestle’s organic growth was described as broad-based and included 5.4 percent for the Americas, 1.9 percent in Europe and 5.7 percent in Asia, Africa and Oceania.  Business media noted that growth in developed and emerging markets is moderating.  The CPG producer indicated the need to adapt with the fast-changing expectations of the Chinese consumer.  In fact, throughout its earnings release, there is a constant theme of continuous product innovation, re-formulation and re-launching, which all impact the underlying supply chain.

Other noteworthy financial numbers were that Nestle’s cost of goods sold (COGS) fell by 30 basis points driven by product mix and pricing actions along with savings generated by Nestle’s Continuous Excellence program which more than offset increases in raw material costs. Distribution costs were up 10 basis points. The global CPG producer has further established a Nestle Business Excellence initiative at the executive board level in an effort to aggregate line-of-business support services. Thus, the pressure on costs, added efficiencies and productivity continue along with needs for continuous innovation and resiliency to global market changes

Campbell Soup also reported financial results this week, along with added plans for a multi-year zero-based cost focused initiative to slash costs and restructure certain operations. CEO Denise Morrison provided another profound quote: “We are well aware of the mounting distrust of so-called Big Food, the large food companies and legacy brands on which millions of consumers have relied on for so long” and further noting that changing consumer tastes remain a key challenge for the industry. Campbell’s has plans to re-organize its businesses by product category as opposed to geographic regions. According to reporting from The Wall Street Journal, Campbell’s has hired Accenture, the same consultancy that assisted 3G Capital with its efforts to consolidate the operations of HJ Heinz, ant those of Mondelez International, to assist in the Campbell initiative.

Supply Chain Matters reiterates that rapidly shifting industry markets and consumer preferences imply a critical need for increased product innovation and quicker introduction of new products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams be more responsive and anticipate such changes.  The focus clearly turns toward an outside-in perspective, allowing the supply chain to quickly sense changes in product or regional demand and respond as quickly as possible to market opportunities or threats. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.

Bob Ferrari

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


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