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A Report of Supplier Squeeze Practices Occurring Within Aerospace Supply Chains

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Supply Chain Matters has featured significant prior commentary focused on aerospace and commercial aircraft focused supply chains.  A lot of our focus was on the OEM tier, namely global producers Airbus and Boeing, along with mid-tier OEM’s such as Bombardier, Embraer and CMAC. While we have featured commentary or highlighted developments on various larger-scale suppliers, candidly, we should have provided more in-depth perspectives of various other tiered suppliers.

What has prompted us to this candid conclusion was last week’s published Seattle Times article, Low Wages for Aerospace Workers Despite Tax Breaks for Employers.  After analysis of Washington state data, the Seattle Times reports: “In 2013, outside of Boeing, a third of production workers at local aerospace parts manufacturers- companies that get tax breaks intended to preserve good jobs in the state- earned between $10 and $15 per hour.” That level, equivalent to $31,200 annually, represents the minimum wage level for Seattle. Once more, the report reminds readers that aerospace companies in the state of Washington are entitled to a 40 percent reduction in taxes on corporate revenues for the intention of “providing jobs with good wages and benefits.”

The report describes what is termed the “Boeing squeeze”, that being constant pressure to reduce the cost of component parts. A spokesperson of the Pacific Northwest Aerospace Alliance (PNAA), a trade group of local suppliers indicated to the Times that passing higher wage costs up the line “would encourage Boeing to take the work elsewhere.” Once more, suppliers seem divided on dealing with such a situation, with some indicating that the skills and education required for such production jobs do not warrant higher pay. This report highlights specific conditions and/or examples (pro and con) among local suppliers:

AIM Aerospace

Aviation Technical Services (ATS)

Aero-Plastics

Carlisle Interconnect Technologies (CIT)

Hytek Finishes

Zodiac Cabin & Structures Support

In previous Supply Chain Matters commentaries we have highlighted reports of industry supplier bullying. While many would like to believe that certain supply chains have moved away moved away from squeezing the cost-reduction burden down the value-chain, these types of reports continue to indicate that such practices linger.  Once more, having participants within a multi-billion dollar industry in the enviable position of having in-demand and technology innovative products resulting in upwards of ten years of unfulfilled customer orders would continue to practice squeeze tactics on suppliers would seem to indicate that supplier partnerships and collaboration remain a one-way lens. Why are so many production workers being asked to live and raise families on a minimum wage?

Shame on us for not paying closer attention to developments within all of the tiers of aerospace supply chains. We will do our part to change that including reaching out and researching more mid-market suppliers.

We however would suggest that the large OEM’s would take a similar perspective and examine how supplier practices impact the entire value chain, particularly those involving and setting a role model for social responsibility.

Bob Ferrari


Wal-Mart Plans Another U.S. Manufacturing Summit

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In January of 2013, during the National Retail Federation’s annual conference held in New York, Wal-Mart made a significant and noteworthy announcement. Bill Simon, the former head of Wal-Mart’s U.S. group announced plans to buy an additional $50 billion in U.S. sourced products over the next ten years.  Wal_Mart Store

Since that time, Wal-Mart has continued on a broad strategy to encourage its existing or new suppliers to source more products within the United States.  The retailer also broadened its monetary commitment. Such efforts have included hosting open supplier summits where suppliers can learn from one another while pitching new product ideas to Wal-Mart buyers.

Last week, Chain Store Age featured a posting indicating that this global retailer is now in the process of planning for another supplier event to be held in early July. In the report, Cindi Marsiglio, Vice-President of U.S. manufacturing indicated before a meeting of targeted suppliers: “Second to price, customers care where their products come from. Our customers want to buy products closest to their communities.” Categories being singled out include baby and infants, food and consumables as well as pet care.

The Wal-Mart U.S. Manufacturing event is currently planned for July 7-8 in Bentonville Arkansas. Event details are still being worked out with registration expected to be opened in April. More information can be garnered at the following Wal-Mart web link.

Supply Chain Matters continues to applaud Wal-Mart for both its large monetary commitment and far-reaching efforts to promote further sourcing of U.S. manufactured products. We urge current or perspective U.S. suppliers to take advantage of such a program.

 


Report Indicates Volvo Will Open a U.S. Auto Production Plant

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Today, The Wall Street Journal reported that Volvo Car Corporation, owned by China based Geely Holding Group plans to invest $500 million in the construction of a new vehicle production and assembly facility in the United States.

According to this report, Volvo is making this investment to become closer to its prime North American market, take advantage of attractive labor rates and protect against currency fluctuations. Volvo has had a presence in the U.S. market since 1957 but has struggled in recent years to establish market-share growth. The plant will reportedly build vehicles utilizing a new “SPA” platform that serves the basis of several new models including the Volvo XC90 SUV.

The report further indicates that the auto maker is considering sourcing its new facility in a handful of U.S. states and will make a final site decision in about a month. Volvo had considered a new plant investment in Mexico but opted instead for a U.S. site.

What is even more interesting is that Volvo’s CEO indicates that the new factory could eventually serve as an avenue for its parent, Geely to distribute cars in the United States.


Supply Chain Matters Tutorial- Pros and Cons of Zero-Based Budgeting

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In the light of this week’s announcement of the mega-merger among HJ Heinz and Kraft, coupled with the new interest in zero-based budgeting techniques, we felt it was timely to provide a brief tutorial on the process.

A Google search can yield ample content and perspectives on this process.

In definition, zero-based budgeting (ZBB) is essentially a financial-driven process where budgetary resources are set to zero every year and must be justified for the new budget period. It was a process originally conceived in the seventies in an era where organizational  bloat among large corporations was rather common. Instead of referencing the previous year’s budget, the slate starts over with managers having to justify their business assumptions and required expenditures for the upcoming period, as if they were a new business or support function. Every budget is viewed from a fresh perspective and evaluated and approved based on relevance to overall corporate goals and expected outcomes.

In context it is rather important to note that ZBB is often a financial-driven process and can be undertaken and applied within companies or organizations that are required to considerably reduce costs and improve profits. As some are now pointing out, that is why it is garnering increased interest in among large consumer product goods producers.

It is rather important that organizations understand the pros and cons of this process. In our effort to do so, we are sharing our perspectives. We certainly encourage our readers to add their perspectives and experiences in the Comments section associated with this posting so that many can benefit.

Pros of ZBB:

  • A mechanism that facilitates much higher levels of cost reduction than traditional budgeting methods.
  • Relate costs to the specific mission and purpose of an organization at a given time.
  • Garner much more detailed understanding of an individual organization’s role and purpose and that organization’s staffing and resource levels.
  • Weed out duplication, ineffective and/or counterproductive activities.
  • Uncover additional opportunities for cost synergies.
  • Provide a means for prioritizing spending cuts
  • Some would argue that it diffuses an entitlement mentality by requiring detailed justification.

Cons of ZBB:

  • Clearly ZBB consumes a tremendous amount of time and organizational energy. Some would argue it can take up the bulk of organizational time, constantly having to justify and re-justify efforts.
  • In many cases, ZBB can stifle bottom-up or supplier based product or process innovation, since there is little time or resource for such efforts.
  • Consensus is difficult and often painful.
  • The impact to employee morale can be substantial, not only in the dimension of perceived perks, but in individual value and promotional opportunities.
  • Pits individual organizations in competition with one another.
  • Cuts can be taken to an extreme.
  • There can be a loss of focus to new, emerging or undiscovered opportunities among business, industry or new markets.
  • Needs to be implemented very carefully and skillfully.

 

Now at this point, you may have discerned that this analyst and consultant may have biases towards the cons of ZBB.  Contrary to the past, many industries and businesses have undertaken initiatives grounded in Six-Sigma, Just-in-Time or Lean Manufacturing methods. Thus, a lot of bloat or excess has already been analyzed and addressed. Some might argue whether these efforts were ultimately positive or detracted from business goal fulfillment or the overall reduction of costs.  Others would argue that the above methods did not effectively address organizational overhead or layering. I believe that on the whole, they were successful.

In my career, I have found that ZBB methods must be carefully and methodically conducted in the light of a well understood mission and clearly articulated strategic roadmap. Talent recruitment, skills development and ongoing career opportunities must not be sacrificed by the process. ZBB can often bring foreword a “survivor” mentality where political skills outweigh either proven years of experience or sacrifice the required leaders of tomorrow. ZBB can sometimes be a panacea for wholesale human resource shifts. The process can further serve as a radical change to supplier relationship and collaboration practices.

The difference today is that certain private equity investment firms such as 3G Capital are setting a different, or perhaps more acute standard.

We now invite our readers to weigh in.  Share your pro and con perspectives

Bob Ferrari

 


A Stark Advisory for Ocean Container Shipping Lines With Multi-Industry Implications

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Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over two years, Supply Chain Matters has been advising our multi-industry supply chain readers about the effects of substantial overcapacity conditions occurring among major shipping lines, and their consequent impacts for service, cost and logistics.  Efforts directed at introducing ever larger mega-ships, multi-carrier capacity agreements, outsourcing of certain services and increased transit times and tariff rates continue to compound themselves.

All of this places industry supply chains on the short end of any semblance of voice of the customer outcomes. The literal final straw has been the effects of the recent five month U.S. West Coast port disruption, which will take additional weeks or months to unravel.

Now, strategic advisor Boston Consulting Group (BCG) has weighed in with a recent bcg perspectives report, Battling Overcapacity in Container Shipping. This report concludes: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declare that overcapacity has fueled a downward spiral of decreased earnings and marginal shareholder value.

The report describes four destabilizing changes occurring in the industry, and observes that there are just two industry participants actually making money. They are two termed “global-scale leaders”, namely CMA CGM and Maersk Line, and the termed “niche-focused specialists” who have developed sustainable competitive advantage serving specific regions.

BCG advises the industry that in order to lift profitability, carriers will have to extract more value from commonly used cost and revenue-improvement levers and pursue scale by further unlocking synergies and more aggressively pursuing acquisitions. BCG argues that carriers have yet to tap the potential of multi-carrier capacity agreements. In the short-term, BCG  warns that the current low cost of bunker fuel may provide a false sense of security for shipping lines. They define further opportunities as extended joint procurement agreements, joint operations and equipment pooling in the short-term, and joint back-offices, shared service centers and IT development over the long-term.

If shipping industry players actually embrace these BCG recommendations and advisory actions, industry supply chain teams can well anticipate even more heartburn in the months to come.

Implied is more wholesale M&A among large and mid-tier shipping lines.  Joint carrier containers on single ships and back office shared service centers could well be predicated on decades old information technology, not tuned for today’s nor tomorrow’s customer service and container tracking needs. Investments in larger, more efficient vessels has not as yet been matched by corresponding investments in modernized IT and productivity directed at enhanced shipper intelligence and port throughput needs.

Larger mega-ships implies even more port congestion, since it will take longer to unload and re-load these vessels without solving the challenge of modernizing individual port infrastructure. Bottom-line: Solving the business challenges of ocean container shipping lines transfers burdens to existing  ports and multi-modal logistics centers.

Supply Chain Matters advocates for a more comprehensive multi-industry approach, one that spans beyond ocean container shipping.  A highly fragmented industry with competing interests, motivations and stakeholder needs can elect to continue to pass current challenges to the next tier of the value-chain, or come together to focus on the primary objective of serving shipper and multi- industry recipient needs in the new age of integrated physical and digital value-chains. A clear missing piece of the strategy is modernized technology, work practices and multi-segment and inter-modal collaboration.

Bob Ferrari

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


Breaking News: H.J. Heinz and Kraft Foods Mega-Merger Portend Additional Tremors Across CPG Supply Chains

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This morning, financial headlines reveal the rather stunning but not unexpected news that H.J. Heinz will merge with Kraft Foods Group in a combined public company that will be named Kraft Heinz Company. According to The Wall Street Journal, this deal will likely top $40 billion in valuation with the combined entity having revenues of approximately $28 billion. It would create what is expected to be the world’s fifth largest food and beverage company featuring many well-known consumer brands.

From the lens of this blog, this development reinforces a clear message to other traditional consumer product goods supply chains that business-as-usual is no longer acceptable, and that further industry changes and developments are inevitable.

This Heinz-Kraft deal is backed by infamous private equity firm 3G Capital Partners, and the financing of Warren Buffet’s Berkshire Hathaway, which are each contributing $5 billion in financing. The terms call for Heinz shareholders to hold 51 percent stake in the combined company while Kraft shareholders will hold a 49 percent stake. Once more, existing Kraft shareholders will receive a special, albeit hefty cash dividend of $16.50 per share representing a 27 percent premium over yesterday’s closing stock price.

Management of the combined company will consist of Alex Behring, current chairmen and managing partner at 3G Capital, as the new chairmen, and Bernardo Hees, current CEO of Heinz, assuming the CEO role. John Cahill, the relatively new chairmen and CEO of Kraft will assume the vice-chairmen roleCahill assumed the Kraft CEO role in late December with a mandate to speed-up business change, after Kraft reported flat annual sales and declining profitability. Indeed, in a mere 3 months, business change has occurred and will accelerate. As has been the case with prior 3G Capital actions, the combined company’s management focus will solely be that of 3G.

In its briefing to Wall Street analysts, 3G Capital executives indicated that the strategic intent for the combined company is to leverage product innovation and international reach.  However, cost-trimming is indeed part of the agenda with $1.5 billion or above in potential cost synergies being identified as likely opportunities.

Readers may well recall 3G’s prior track record with its prior acquisitions of AB In-Bev, Burger King and H.J. Heinz.  The firm actively practices a zero-based budgeting approach and every single year, 3G managed firms have to justify their cost and resource needs. In the situation of Heinz, the original goal of $600 million in cost savings amounted to near $1 billion in savings. Expenses were aggressively cut and production facilities were soon closed. Thousands of jobs have been shed among all of 3G’s prior acquisitions. In a Supply Chain Matters January commentary we echoed UK blogger David Weaver’s commentary on supplier bullying tactics occurring in Europe that specifically named 3G Capital managed companies such as AB In-Bev and Heinz’s practices for delaying payments to suppliers in some cases up to four months.

Once this latest mega-deal is consummated 3G will likely place an emphasis for expanding current well-known North American Kraft food brands to more global offerings among emerging markets while shedding other considered non-performing or non-strategic brands. Product innovation will indeed be the emphasis but more in the context of product formulation.  Have you tasted Heinz ketchup of late? From this author’s taste buds, it is far sweater and sugary in composition.

The irony here is that Kraft was once a food, beverage and snacks company with global aspirations.  Activist pressures precipitated the 2012 breakup of Kraft into two companies, Mondelez International and Kraft Foods Group. The declared strategic intent of the split was to create two smaller consumer products companies focused on different growth objectives, one being international snacks and convenience foods and the other, North American cheese and food brands Post split, Mondelez continues to struggle with sales and profitability growth after considerable cost cutting actions that impacted supply chain operations. An activist investor recently garnered a Mondelez board seat.

In a September 2013 Supply Chain Matters commentary related to Kraft’s supply chain profile at that time of the split, we outlined the significant business process and systems challenges that the Kraft supply chain team inherited.  We were tremendously impressed with the leadership of its integrated supply chain team at the time, as well as its direction, but now, more change can be anticipated. That indeed is the initial takeaway from today’s mega-merger announcement.

Our Supply Chain Matters Predictions for Global Supply in 2015 called for continued CPG industry turbulence because consumers are demanding healthy choices in foods and our shunning traditional brands that emphasize processed foods. Compounding this trend has been activist investors seeking accelerated shorter-term shareholder value, along with the shadow of 3G Capital and its track record of wholesale cost-cutting. The announced Heinz-Kraft deal obviously sends yet another troubling message to the consumer products sector, namely that financial engineering is a more preferable method of approach vs. continuous improvement.

Expect and anticipate more industry change to occur in 2015 and beyond. The emphasis is now focused on product innovation, doing more with less and market agility.

Stay tuned.

Bob Ferrari

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


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