subscribe: Posts | Comments | Email

Commodity Markets Continue to Plunge: Good News and Not So Good News for Industry Supply Chains

0 comments

Last week’s financial and equity market headlines featured the news that global investors and speculators are bailing-out on commodities amid mounting worries about the slower pace of global manufacturing growth. If you have been following our global tracking of select PMI indices featured in our Quarterly Newsletter, you will have Two Year Global PMI Trendingvisually noticed this slower overall trend as depicted in the visual attached to this commentary.

Likewise, the precipitous plunge across China’s key stock market also continues, having a potential further impact on China’s major manufacturing sectors as consumers financially stung by severe financial loses retrench in domestic spending.

Commodities such as copper, gold, silver and oil are at their lowest points in years. Global mining firms such as Anglo American, BHP Billiton and Rio Tinto are quickly addressing cost savings by restructuring their commodity businesses that relied on the manufacturing growth and commodity speculation that has occurred in China. Multiple state-owned steel companies across China continue with optimistic output levels despite the evidence of a global surplus and overcapacity condition in steel. Anglo American alone has indicated it would slash upwards of 50,000 jobs over the next several years, amounting to a 35 percent reduction in its current workforce.

Likewise, energy companies are planning additional cost-cutting moves in the light of the sudden drop of oil prices, increased glut of supply and declining trends in global demand for oil.

For the majority of multi-industry supply chain teams, this is ironically good news since lower commodity prices equate to lower input, logistics and cost of goods sold (COGS).

In our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains (available for complimentary download in our Research Center), we highlighted a continued overall moderation trend for the cost of commodities in 2015 with certain industry specific exceptions.  We predicted that dramatically lower oil prices would be the dominating headline driving commodity and pricing trends in 2015, and just past the half-year point, the trend is holding true. Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen global weather or risk events such as the bird flu outbreak affecting turkey and poultry flocks in the U.S. Midwest and West regions.

However, teams cannot rest easy since the rising value of the U.S. dollar and resulting foreign currency shifts are providing rather significant headwinds to existing financial results for U.S. based manufacturers or those dealing in U.S. dollar dominated revenue flows. In some cases, such headwinds are having as much as a 10 percent or greater negative impact on overall revenues.

While lower commodity related inbound costs will help to offset some of the cost erosion, it may not be enough. Those manufacturers that had significant revenue and profitability expectations by tapping into China’s emerging consumer consumption could soon feel the effect of continuing concern. To provide added evidence, The Wall Street Journal reported today that the Chartered Institute of Procurement and Supply is raising its global risk index to its highest level since 2013. The heightened risk has a lot to do with certain key suppliers in China that may be impacted by the sharp decline in equity and consequent credit markets.

These are the not so good news messages.

Sourcing, procurement and supply chain leadership teams must therefore remain diligent to further opportunities to reduce inbound or supply chain services related costs for at least, the remainder of this year.

Bob Ferrari


WTO Moves Closer to Tariff-Free Classification of IT Products: Supply Chain Opportunities and Impacts

0 comments

Late last week, the World Trade Organization (WTO) reached a landmark $1.3 trillion deal that addresses the categorization of 201 information technology products that will be freed from import tariffs. Among the products covered in this agreement are new-generation semi-conductors, GPS navigation systems, medical products which include magnetic resonance imaging machines, machine tools for manufacturing printed circuits, telecommunications satellites and touch screens. Once approved, the agreement will update an Information Technology Agreement that has not been updated for the past 18 years.

According to the WTO, the tentative accord reached by 54 of its members was confirmed as the basis for implementation work to begin. Ministers from the participating members will now work to conclude their implementation plans in time for the WTO’s 10th Ministerial Conference which will be held in Nairobi this December. Five of the total number of countries needed for final signoff has thus-far not signed up.  Those countries include Colombia, Mauritius, Taiwan, Turkey and Thailand. The Director of WTO has indicated to news sources that approval from the remaining countries is due to process delays, and expects the required additional countries to sign-up soon.

This latest categorization is being billed as the first global tariff-cutting in 18 years with the implication that globally-based consumers should eventually benefit in purchases of computers, game consoles, touch-screen devices and other consumer electronics products.  All 161 WTO members are expected to benefit from this agreement, as they will all enjoy duty-free market access in the markets of those members who are eliminating tariffs on these high tech products. According to the WTO, the terms of the agreement will be formally circulated to the full membership at a meeting of the WTO General Council on 28 July.

A published Reuters report indicates that high-tech manufacturers General Electric, Intel, Microsoft, Nintendo and Texas Instruments are among those firms expected to benefit from the free-up tariffs. A U.S. trade representative indicated to Reuters that more than $100 billion in U.S. exports alone would be covered by the updated agreement.

The implication to hi-tech and consumer electronics industry supply chains is significant.

A considerable amount of new products and product categories have been added since these tariffs were originally created 18 years ago, and with over 200 products designated to be free of import tariffs and duty-free trade, the industry as a whole stands to benefit by increased global market access and more streamlined, direct flows to end markets. The notions of offshore and near-shore production as well as new opportunities for push-pull customer fulfillment strategies can well benefit from this development of tariff-free components and products. On the other hand, the competitive landscape of regional brands competing with global brands will magnify.

By our Supply Chain Matters lens, the agreement will have implications to current manufacturing sourcing of high-tech and consumer electronics products since the assumptions concerning added tariff costs will obviously change.  Supply chain strategy teams should therefore plan on a refresh supply chain network design models in light of these tariff-free assumptions to uncover any new opportunities for more efficient or enhanced customer fulfillment focused manufacturing and sourcing of end-products.

Bob Ferrari

 


Changing Perception in the Supply Management Industry

0 comments

The following commentary is a Supply Chain Matters guest posting authored by Jim Barnes, Services Managing Director, Institute for Supply Management (ISM).

One of the biggest challenges in our industry is gaining recognition of the value Jim Barnes ISM Photoprocurement and supply chain management brings to the corporate bottom line. We know supply management increases shareholder value by making business more competitive and more profitable, yet it’s hard to tell the story. The perception is we’re not very strategic but are overly tactical: processing paper, comparing one price against another and policing what other departments order.

To change this perception many in supply management are exploring the option of automating some functions to move away from tactical processing and focus more on strategic interactions with suppliers. Generally speaking, automation can help reduce the number of people doing tactical work; reduce the amount of money needed to do that work; and provide supply management professionals with more time to develop better relationships with suppliers.

There are several factors to keep in mind when considering the option of automation:

  • Know which processes can be automated and which cannot;
  • Recognize your human resources may not be interchangeable; and
  • Realize if you automate a bad process, you’ll just get bad stuff quicker.

Most transaction processes lend themselves well to automation, and there are tools to automate the bidding and RFP processes, too.  However, it’s very hard to automate the human interactions in supplier relationships like strategic sourcing and negotiating.

As you automate processes and free up supply management professionals, don’t assume everyone has the ability to move into a more strategic, interactive role with suppliers. At ISM Services, we offer clients the opportunity to survey their supply management professionals to determine if they tend to be more tactical or more strategic. Then we put them through a negotiation exercise where they can learn the difference between the skill sets, the value of both and determine where their strengths lie.  Participants learn that many times it makes sense to negotiate as a team with the best combination of negotiating styles to suit the objective.

It’s important to remember that automation on its own is not the answer; you still need to have a good process in place.  One of our clients had a highly manual, time consuming process for receiving goods and verifying documentation. When they first automated the process they merely replicated their manual process, and it yielded the same result, a very high exception rate.  After spending significant effort to re-engineer the process, they learned to rework and reset the rules to get much better results from the process.

Another problem can arise when departments are automated and outsourced at the same time, or at a later date.  For example, supply management professionals who automate their accounts payable and outsource it can run into problems because the new people managing it don’t have the important knowledge of the inner workings of the company. The result, according to an experienced practitioner-friend of mine, is “your mess for less.”

So how do you decide which automation strategy is best for your company and avoid some of the pitfalls? First, determine what you want to accomplish in which departments and then establish the metrics to measure your progress and accomplishments. For example, do you want to take work out of a process?  Do you want to eliminate onerous authorizations or unnecessary three-way match requirements? In the end you want to eliminate work of lesser value to the company and instill more strategic practices with your suppliers.

Second, take time to explore your options because there are quite a few available. Talk to your peers to find out what is working for them. Attend conferences and visit the vendors there and try their tools.  ISM Services does not recommend nor endorse automation software but we are available to help you evaluate it against your goals.

When managed well, automation can be a game changer in the supply management industry.  It can result in more efficient and cost-effective processes and give supply management professionals more time to collaborate and innovate with suppliers. It can shift the perception of procurement and supply chain management from tactical order processor to strategic partner in the C-suite.

Jim Barnes

 


Apple’s June-Ending Quarterly Performance: Disappointment or Supply Chain Praise?

0 comments

Yesterday, after the stock market closed, Apple announced its fiscal third quarter financial performance and Wall Street’s headline was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. Gross margin was reported as a whopping 39.7 percent which is extraordinary for the majority of today’s consumer electronics providers. Yet within minutes of the earnings report, Apple’s Apple Logoshares plunged 7 percent in after-hours trading and today, dropped as low as 21 points before a small rebound.

What the investment community is primarily concerned with is a perception that Apple is trending toward a one-product company, that being the iPhone, which with the latest results, accounts for 63 percent of Apple’s overall sales. That is a ten percentage point increase from a year ago, prompting concerns that other products such as the iPad are declining in sales, while new products such as the Apple Watch have yet to provide an offset. Unit sales of the iPad are believed to have declined 18 percent in the latest quarter, making a sixth consecutive quarter of year-over-year declines.  Once more, the previously touted partnership among Apple and IBM, designed to provide more business applications leveraging the Apple tablet, do not appear to be stemming the declining trend.

In the fiscal third quarter, while Apple reported shipping 47.5 million iPhones, an increase of 35 percent from the year earlier quarter, that number was 23 percent lower than shipped units reported for fiscal Q2. According to a report by The Wall Street Journal, analysts noted previous quarter-on-quarter iPhone volumes fell by 19 percent and 17 percent respectively, and remain concerned for a steeper rate of decline. Apple attributed unit shortfall to the lowering overall inventory by 600,000 units during the quarter. Fiscal Q3 has traditionally been Apple’s slowest volume quarter.

In an interview with the WSJ, CEO Tim Cook indicated that he refuses to accept the thinking that Apple cannot sustain its existing growth rates. He further indicated that Apple has pried open the door to untapped markets such as China, and that the company is sensing a larger conversion rate from Android powered devices to iPhone.

Apple did not provide any breakdown of Apple Watch performance but CEO Cook indicated to analysts that the “sell-through” of the Watch was better than the iPad and iPhone at their product introduction phases. We will have to wait and observe what that means over the next two critical quarters.

From our supply chain lens, the upcoming quarters will provide Apple’s planning teams with added challenges.  Earlier this month, we highlighted that Apple is now actively planning the ramp-up of the planned next release of iPhone. Reports indicate that the company is  requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, This is despite anticipated modest hardware changes.

Planners are obviously reducing existing model inventories but must be diligent to not impact Apple fiscal Q4 results. With expectations for increased sales of the Watch, as well as a newly introduced iPod Nano, additional effort will be focused on ramp-up production milestones.  An added challenge has got to be focused on what to plan for inventory and fulfillment needs for the iPad, given that there may well be a product change coming.

And then there is that mega “elephant in the room”, what to do with $200 plus billion in cash.

The adage for Apple’s and indeed many other global supply chain teams is often, not what you did yesterday, but what are you going to do tomorrow, next month, and next quarter.

Does that resonate?

Bob Ferrari


Machine Learning Technology Now Available for Automated B2B Integration

0 comments

Machine learning technology, which is a form of artificial intelligence, has now made its way into the area of procurement process support.

A simplified explanation of this technology is that algorithms actually “learn” from data and information patterns to make subsequent predictions based on such patterns. Supply Chain Matters has previously pointed out how machine-learning has been applied to manufacturing and supply chain planning focused processes. The technology when leveraged to support B2B direct procurement support can bring added scale and improved value for direct spend supplier collaboration. The added benefit for this type of technology is the ability to leverage item-level business intelligence as well as to provide more timely and robust support in the area of master data management.

In a previous commentary, Supply Chain Matters raised awareness to the critical importance of seamless interoperability for B2B business networks. Teams are well aware of the pain associated with maintaining connectivity and end-to-end visibility throughout their constantly changing B2B network. Managing today’s complex supply chain networks therefore demands not only end-to-end transactional messaging management but key planning, replenishment, and supply-chain decision support.

Teams that are dealing with existing ERP backbone systems such as SAP, require and expect seamless integration. They often have the added challenge in assessing and evaluating SAP’s changing product strategies and application roadmaps related in support of supplier networks. In the specific case of SAP’s Ariba cloud-based network, there are elongated roadmap timetables concerning full direct materials processes support as well as migration to the HANA platform.

One of the major benefits of working with best-of-breed technology vendors is their ability to innovate at a quicker pace than larger ERP providers. Because such vendors often support customers with existing ERP backbones, best-of-breed vendors understand that they must integrate information as seamless as possible. In the specific area of procurement and B2B business networks, ERP vendors have often accelerated their own path to innovation by acquiring emerging cloud-based vendors.

Nipendo, a cloud-based global provider of B2B network based supply chain technology recently announced that it was awarded a U.S. patent related to: “automated reconciliation of cross-enterprise transactions and digital documents.” Nipendo Supplier Cloud leverages this machine learning technology in the automated reconciliation of Procure-to-Pay processes throughout the entire supplier base, including direct goods suppliers.

What makes Nipendo’s technology different among existing vendor approaches is its leveraging of best-practice process templates (business rules) that govern interactions among suppliers and trading partners. Rather than custom programming and field-to-field information mapping that is often required in EDI grounded processes, machine learning techniques are applied to automate the majority of processes. The business rule platform enables teams to more quickly exchange real-time information with suppliers, orchestrate supply chain processes, and reconcile transactions to existing ERP systems. The advantage to teams is noted as simplicity, speed, and scale in supplier collaboration, and we tend to agree.

In our observations of the procurement technology landscape, this was our first awareness to such leveraged use of machine learning techniques, and we were impressed.

For further information, readers can explore Nipendo’s B2B Integration Solutions web page.

Bob Ferrari

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

Disclosure: Nipendo is a current client of the Ferrari Consulting and Research Group LLC

 


Country of Origin Legislative Actions for Food Has Broader Industry Supply Chain Implications

0 comments

In June, The United States House of Representatives voted to repeal country-of-origin labeling (COOL) for beef, pork, and chicken and social media commentary regarding the move continues to dominate as an ongoing trending topic.  The reasons are obvious- consumers demand and expect knowledge as to the specific sourcing origins of food products. Consumers are right to be concerned and watchful, and the impact of these actions continue to impact food, beverage and consumer product goods focused supply chains.

The original COOL legislation had good intent, requiring meat products sold in supermarkets and grocery stores to specifically indicate where the animal was born, raised and slaughtered.  Reports indicate that the original law was prompted by the lobbying of U.S. ranchers who compete with the Canadian cattle industry, and later garnered the interest of consumer watchdog interests.

But this current ongoing process now involves the political and economic implications of other supply chains, in addition to food.

The broader issue involves the World Trade Organization (WTO) which after the initial U.S. legislation was passed, ruled that the labels regarding animal origin would have a discriminatory impact against the two U.S. border countries, Canada and Mexico, and thus a barrier to free trade.  Both border countries indicate that the law requires that animals be segregated by country of origin, a costly process that has U.S. wholesale buyers avoiding the buying of export origin meat products.

Both countries are seeking permission to impose what is described as billions of dollars in added tariffs on U.S. goods in retaliation.  And there lies the supply chain impact which threatens to change the existing economics and stakeholder interests of cross-border trade.

U.S. legislators are thus caught in what is described as a damned if you do, or damned if you do not conundrum regarding the existing COOL repeal legislation which has now moved to the U.S. Senate for consideration.

In order to seek additional insights regarding the implications of COOL, Supply Chain Matters had the opportunity to recently speak with Candace Sider, vice-president of regulatory affairs, Canada, at international trade compliance services provider Livingston International. Ms. Sider has a significant background in understanding Canada’s regulatory processes involving interaction with federal and provincial officials, regulatory agencies and policymakers.

She explained that Canada viewed the original U.S. COOL labeling requirements as having a $3 billion impact on that country’s cattle and hog industry.  During the current arbitration period, decisions are expected to be made as to what commodities would remain on the original impacted list. If the surtax were to be implemented, importation from the U.S. of the subject products could ultimately passed on to consumers. The U.S. government has indicated to the WTO that it disputes Canada’s figures.  However, Canada is preparing to lift tariffs on U.S. imports that include in excess of 100 different commodities including products such as range and refrigerator parts, wine, and yes, chocolates.

The WTO is not expected to rule on the U.S.’s latest appeal to the threatened tariff increases until early August, or possibly September. Meanwhile, the implication of the ongoing dispute actually impacts more than just meat-focused supply chains.

Livingston is currently advising its clients to prepare for a number of potential scenarios involving the ongoing trade dispute process invoked by COOL.

Where all of this eventually ends-up is subject to many viewpoints.  After all, this is very much a process driven by economic, multi-industry and lobbyist forces.

However, one aspect is clear. The complexity of today’s globally based supply chains takes on many different dimensions and implications.  While you might have perceived that legislation affecting packaging disclosure of meat products has little to do with service parts, chocolates and wine, it indeed does. The takeaway is to nurture contacts and resources that can alert your team to ever changing developments and multi-industry implications.

Bob Ferrari

 


« Previous Entries