As many of our Supply Chain Matters readers are aware, the July 4th holiday in the U.S. is a big one. Not only is it the annual celebration of U.S. liberty and independence, complete with numerous concerts, picnics and fireworks demonstrations, the holiday serves as the symbolic kickoff to summer vacation and other family-based activities.
The first two weeks in July is often a period when firms take the opportunity to shut down or scale-back operations to refit or perform major maintenance on manufacturing and other equipment as well as IT applications and systems.
One high tech and consumer electronics manufacturer that will be very busy this summer is that of Hewlett Packard which is in the key preparation stages of splitting the former company into two equally sized companies on November 1st. One company, Hewlett Packard Enterprise Company will oversee operations of the now HP Enterprise division, A $55 billion dollar entity. The other, HP Inc., will oversee operations of the now HP Printer and PC divisions, of equivalent revenue size.
The HP split involves separating balance sheets, facilities, IT systems and applications, including those related directly to the support of HP’s end-to-end supply chain. Purchase agreements among various suppliers must to recast foe each new company along with various special agreements. HP operations currently span 600 locations in 170 countries.
The split comes in the midst of massive headcount reductions that have already occurred across many business and functional groups.
Supply Chain Matters has featured prior commentaries related to the risks in splitting-up HP’s vast and complex supply chain ecosystem of suppliers and manufacturing partners. Most important was the global buying scale of a singular HP that was constantly leveraged among suppliers.
Management of the upcoming split is being overseen by a 500 person Separation Management Office that includes key executives that will make-up both split companies, including HP’s current CIO.
This week, The Wall Street Journal featured an interview of HP CIO Scott Spradley, who described a complex surgery analogy for separating various IT systems. Keep in-mind that HP is primarily supported by an SAP ERP and Business Suite infrastructure and applications backbone. According to the report, HP is about to initiate a global network of IT command centers designed to keep operations humming amid the combined $1.8 billion restructuring effort. The report cites the closing of 2600 internal computing programs that include those supply chain related.
Another sudden twist to this ongoing story comes from today’s WSJ which reports that the executive tasked with leading the HP Separation Management Office announced his departure from HP this week. According to the report, this was an unanticipated setback in what so far has been a smooth transition process.
Obviously it is going to be a rather busy summer across the many halls of HP, particularly the halls of the company’s combined and soon to be separated supply chain ecosystem of suppliers and supply chain support teams.
In the meantime, we extend best wishes to all of our U.S. based readers for a joyous and safe 4th of July weekend.
For the past three years, our Supply Chain Matters editorial commentaries related to the annual Council of Supply Chain Management Professionals (CSCMP) sponsored State of Logistics survey reports have consistently expressed concern towards a persistent trend for increased logistics, transportation and inventory costs within the U.S… The latest report depicting 2014 activity and our related commentary was no exception.
Thus it was rather timely this week for the Grocery Manufacturers Association (GMA) to release findings of a benchmark research report conducted with the help of the Boston Consulting Group. The report, A Hard Road: Why CPG Companies Need a Strategic Approach to Transportation, provides profound observations for Consumer Product Goods focused supply chains related to transportation cost increases trending way beyond a cyclical trend. The most sober takeaway from the report is the declaration that: “transporting goods to retailers is now the greatest worry of supply chain leaders.”
The GMA-BSC report indicates that more than 80 percent of supply leaders interviewed cited transportation as their top-of-mind concern, while across the board, service levels are declining. According to the report: “Trucks are chronically late, capacity is insufficient, and delivery windows are exasperating retailers” Once more, transportation costs are noted as eroding other supply chain cost savings. The report authors indicate that since the study was conducted in 2012, freight costs have risen as much as 14 percent over the four year period, and only a third of CPG producers were able to trim transportation costs these past two years. CPG firms are further increasing safety stock inventories to compensate for unpredictable service levels.
While there is no simple solution for tackling the current challenges related to transportation, the report outlines five different lever strategies for reader consideration. A key message is that the procurement of transportation can no longer be viewed from a pure commodity perspective, but rather a strategic internal or external sourcing strategy related to line-of-business needs. One important lever outlined was that active supply chain network design analysis should be considered a priority. A sober statistic noted that 72 percent of CPG firms surveyed are now actively engaged in network design efforts as compared to the 6 percent level reported in 2012. That is compelling. Such efforts are directed at dynamic means to optimize routes, locations of distribution centers for supporting customer fulfillment needs as well as assessment of trade-offs in owning transportation assets. Obviously, technology and services firms catering to supply need network design are rallying to support these needs.
This report concludes with a message that CPG supply chains need to view transportation from a strategic lens, focusing product distribution strategies on transportation-centric cost and service requirement needs. Supply Chain Matters obviously adds that such recommendations apply to other industry supply chains as well, along with active consideration for developing in-house supply chain network design capabilities.
U.S. transportation cost and service performance are indeed an ongoing key concern, one that will remain to be analyzed at the highest levels of supply chain leadership for many more months to come. Carriers and 3PL’s had better be attentive and proactive in addressing these concerns.
In order to boost relatively flat revenue growth among its U.S. physical retail outlets, Wal-Mart recently raised salary levels for its respective U.S. retail associates to improve customer service and responsiveness. The retailer further continues to invest heavily in its online fulfillment channel. All of these actions provide adding pressure on margins.
In April, Supply Chain Matters echoed business media reports indicating that this global retailer was ratcheting up pressures on its suppliers to squeeze costs. Earlier this month, Reuters reported and somewhat validated a significant effort to offset increasing costs, namely imposing added charges among most all of Wal-Mart suppliers. Supply Chain Matters is of the belief that this effort will have added implications for both parties.
According to the report, added fees will relate to warehousing inventory along with amended payment terms, affecting upwards of 10,000 U.S. suppliers. In one cited example, Reuters indicates that a food supplier would supposedly be charged 10 percent of the value of inventory shipped to new stores or warehouses, along with one percent to hold inventory in existing Wal-Mart warehouses. It reportedly was not clear if the one-time charges apply only to the initial shipment or would cover a specific period of time. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In our April commentary, we observed that these appear to be signs of yet another wave of supplier squeeze tactics in order to improve a retailer or manufacturer’s overall margins. While these actions are not new for Wal-Mart, their application to a far broader population of suppliers is noteworthy. Such efforts that add to the cost burden of doing business with a retailer are bound to provide setbacks in efforts towards deeper collaboration and supplier product innovation. Consider that Wal-Mart continues with the construction and opening of new online fulfillment centers to support is WalMart.com fulfillment needs. The addition of supplier inventory fees to stock these new centers may cause some suppliers to consider alternative inventory stocking strategies of their own, that balance the needs of Wal-Mart with other retailers such as Amazon, Target or Costco. Indeed, unilateral efforts directed at transferring the cost burden among suppliers can often lead to counter-productive consequences, particularly during seasonal buying surge periods such as the holiday season.
Suppliers can take advantage of the same fulfillment decision-support technology as retailers, namely to determine the profitability potential for each major customer, and providing preferential service for customers that financially support needs for added responsiveness and fulfillment collaboration.
Too often, it seems that these mandates are handed down by the most senior management responding to investor pressures for more short-term profitability and margin growth. These efforts cascade from retailers and manufacturers, to first tier suppliers, and throughout other tiers of the supply chain. It’s unfortunate that there supply chain teams are rewarded more for enforcement of such actions as opposed to efforts directed at joint supplier process and product innovation.
Supply Chain Matters calls reader attention to an added backdrop to the State of U.S. Logistics during 2014, specifically continuing ocean container shipping challenges. Robert Bowman, Editor at SupplyChainBrain penned an article, Searching for a Solution to Chassis Management.
The article observes that in a bid to cut costs and focus on the construction and launch of ever-larger container vessels, shipping lines began selling off intermodal assets such as owned truck chassis. The result is noted as some of the largest U.S. port complexes having a tough time managing the ocean container truck chassis flowing between terminals, attempting to figure out which entity has jurisdiction over inspection, maintenance and repair practices, and where chassis need to be scheduled to handle arriving vessels. Supply Chain Matters also called attention to this problem in our coverage of the U.S. West Coast port disruption in the fall of 2014.
While equipment leasing companies have stepped into the vacuum with various concepts of equipment pools or “pool of pools” the latest ratified labor agreement involving U.S. West Coast ports calls for dockworkers insisting that inspect chassis upon exit from a facility, That has led to additional challenges and frustrations, and according to this report, federal cout action is a strong possibility as lessors balk at this added inspection step.
In our prior Supply Chain Matters commentary concerning Sharp Corporation, we reiterated the two sides of supplier based relationships involving the most recognized supply chain, that being Apple. On the one hand, being chosen as an Apple supplier can provide enormous scale, global reach and financial rewards. However, Apple is a demanding customer with unique and exacting processes that can test any supplier.
Apple further practices very active supplier risk mitigation, insuring that this global consumer electronics provider has at least two or more supplier agreements in-place for key components.
In a May commentary, Supply Chain Matters highlighted a report indicating that one of the key technology components within the Apple Watch had experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers. Citing people familiar with the matter, The Wall Street Journal reported at the time that reliability testing has discovered that the taptic engines supplied by a China based supplier demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp., the backup supplier, reportedly had not experienced the same problem. Apple subsequently moved all remaining sourcing of this component to Nidec.
Today’s WSJ report regarding Sharp also makes mention of the Apple Watch component issue in the context of how manufacturers can discard faulty products when design issues or production snafus are evident. The report again noted how Apple subsequently turned to Nidec for nearly all of its taptic engine production needs, but it took time for this other supplier to ramp-up its own production processes to be able to accommodate Apple’s overall production volumes. Thus, for our readers who were wondering what was causing the delay in the delivery of their new Apple Watch, now you know.
The obvious takeaway is that active supply risk mitigation is essential for key technological components, as well as the ability to lend a helping hand to suppliers in time of product or business crisis. Such risk mitigation is especially critical in new product ramp-up stages as volume production processes are tested for volume scale.
There are two-sides to supplier loyalty and management, and how they are practiced goes a long way in the determination of overall supply chain agility and responsiveness.
In November of last year, the WSJ stated in a report related specifically to Apple’s supply chain: “If you cut a deal with Apple, you better know what you’re getting into.” That statement continues to sum it all.
Supply Chain Matters has featured several prior commentaries specifically related to Sharp Corporation, one of three current liquid crystal display (LCD) screen suppliers in Apple’s supply chain.
Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. Our last commentary in early April, Perils of an Apple Supplier- Sharp Corporation, highlighted continuing reports of severe financial crisis surrounding Sharp. The Wall Street Journal reported at the time that various restructuring options were being considered but no final decision had been made. One reported option was that this supplier was moving to spin-off a portion of its LCD panel business unit with intent to seek a new capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. One of the tenets of Japan’s high tech industry is to rely on government funded agencies to bridge times of financial crisis. Since our April commentary, Sharp’s bankers agreed to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction. Also since that time, the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cites data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through the current quarter.
Today, the WSJ featured a report (paid subscription required) indicating that Sharp has warned that its survival could be at-stake, and that it is now pushing suppliers for deeper price cuts and that it further considering sourcing of display components from new China based suppliers rather than its former Japan based suppliers. At its annual meeting for shareholders held this week, sales directly attributed to Apple accounted for 20 percent of Sharp’s fiscal year revenues.
For the fiscal year that ended in March, Sharp racked up a loss reported to be $1.8 billion, due to write-downs of its LCD operations. Yet, this supplier maintains a public confidence that it can implement steps to maintain its ongoing viability, despite its share price haven fallen upwards of half over the past year.
LCD screens are highly strategic for Apple, and the consumer electronics juggernaut has elected to initiate strategic supply agreement among three different suppliers to insure both leading-edge technologies as well as the ability to scale to Apple’s flexible volume requirements.
All of which leads back to the perils of being an Apple supplier. In a recent Spend Matters sponsored webinar (no relation to this blog), chief research officer Pierre Mitchell observed that Apple imposes very strict contract terms among its supplier base, shifting considerable risk on the backs of suppliers while preserving major rights to product based intellectual rights. So much so that GT Advanced Technologies recently elected to seek voluntary bankruptcy in order to gain leverage with Apple over what was described as onerous contract terms.
The conundrum for Sharp and other Japan based high tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management. So much so that the most optimistic financial forecasts are stubbornly held to up to just prior to the formal reporting of the bad news. On the other hand, firms such as Apple that practice active supply risk mitigation for key components will often have contingency options to buffer the shortfalls or stumbles of any one key supplier.
The financial challenges involving Sharp will most likely linger and through its ongoing re-structuring efforts, this supplier could introduce even more risk into its ability to deliver to customer needs.
The takeaway for the broader high-tech supplier community is to insure you understand all the terms and risk implications of your supply and technology agreements.