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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.


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.


Industry Disruptor: Tesla and the Automotive Driving Experience

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We are often reminded that one of the most common traits of industry disruptors is that they think differently.  They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.   Telsa Motors Model S

Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.

Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors.  The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.

Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.

This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard.  It was designed as such.

Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad?  The article is impressive and worth a read.

What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.

Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”

In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.

In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.

For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.

Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.

In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating.  Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.

Bob Ferrari

Note: This author is not a current owner of a Tesla automobile nor  a stockholder, rather an observer and enthusiast of automobiles.

 


Boeing Production Head is Confident of Supply Chain Wide Capabilities

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In a previous Supply Chain Matters commentary focusing on aerospace focused supply chains, we brought forward how the voice of commercial aircraft customers is growing ever larger.  Influential customers and industry observers are increasingly indicating that both Airbus and Boeing should be focusing more on delivery commitments on existing new aircraft rather than indicating intentions to develop even newer technology-laden aircraft models. Among strategic plans for both of these aerospace global leaders are efforts towards added investments in supply chain capabilities including long-term strategic supply or added production capacity.

A recent published report by Reuters  featured on Yahoo Business provides the perspective of Boeing’s chief of airplane production programs on efforts underway to ramp-up production specifically that related to Boeing’s cash cow, the iconic 737 aircraft family. This specific single-aisle aircraft is especially important since it is today’s workhorse of the termed lower-cost, budget airlines such as Ryanair or Southwest Airlines, that are growing faster than long established carriers.

In the article, Pat Shanahan, Boeing’s Senior Vice President for Airplane Programs indicates that his company is not only well positioned to scale-up 737 production rates, but learning from past mistakes. He further points to needs for an integrated plan that includes not only internal manufacturing but the broader supply chain.  An important quote: “When I think about the mistakes we made back then (referring to 1997), we didn’t have an integrated plan that included the supply chain.”

In 2014, Boeing increased 737 model production to the rate of 42 aircraft per month, which was up from the 38 per month level experienced in 2013.  Current plans call for production of this popular single-aisle aircraft to ramp to a rate of 52 per month by 2018, along with a transition to a the newer 737 MAX model version.  Besides the 737 family, Boeing has additional plans to ramp-up monthly production volumes of the 787 family from the current level of 10 per month. The Charleston South Carolina facility now serves as a second production facility for the 787.

Boeing is not alone in these efforts.

Airbus who produces the rival A320 aircraft currently matches the 737 output of 42 aircraft per month has ramp output to 46 per month this year, and 50 per month by 2017.

Within the article, Mr. Shanahan outlines a risk-based approach for evaluating the readiness of the integrated supply chain. Unfortunately, there are not a lot of specifics related to people, process and information technology enablement specifics being addressed, but that seems to be par for the course when two high-profile, highly competitive aerospace  companies attempt to outpace themselves in product development and operational execution capabilities.  In some cases, both of these producers share common suppliers of components and technologies.

From our Supply Chain Matters lens observing both of these aerospace giants for the past eight years, it is clear that efforts towards major global supplier-based product development, outsourcing and supply chain risk mitigation have brought painful, but important learning on the importance of total supply chain wide visibility and fulfillment synchronization.  We recall the vivid images of multiple fabricated 737 fuselages sitting on the banks of a river after a rail derailment.

Both now take a far broader view of operational capabilities that umbrella both internal manufacturing and the global, end-to-end  supply chain.

A recent commentary appearing on the investor site, The Motley Fool, Are Boeing and Airbus Building Too Many Jets, calls to question the delicate balance for investing in too much production capacity if a bust in airline demand occurs sometime in the next few years. This commentary cites Boeing’s 2014 Current Market Outlook projecting existing demand for over 25 thousand single-aisle aircraft over the next 20 years. That is obviously a lot of airplanes and accordingly works out to and annual sales and production rate of over 1200 aircraft per year for all manufacturers. Noted in the commentary is that within a few years, Airbus and Boeing will likely be producing close to or exceeding this average volume. Hence, there is fear by investors of potential overcapacity.

As noted in our prior commentary, senior management at both of these major aerospace firms cannot rest on the laurels and enviable position of having 8-10 years of product demand backlog.  A very delicate balance involving even more product development, investing in supply chain and production capability and satisfying today’s Wall Street’s more short-term focused investor expectations, has such executives, and their supply chain and manufacturing teams,  constantly challenged.

Customers require new aircraft orders be delivered on-time to meet business growth, efficiency and productivity needs while investors require higher investment returns and profitability.  We all know that in a ten or even twenty year horizon, many business and market assumptions can change, sometimes dramatically.  Who would have believed five years ago that the price of crude oil would drop below $50 per barrel?

It is a delicate balance and aerospace supply chain ecosystems and internal supply chain and product development teams sit in the middle of this dynamic.

Bob Ferrari

 


Guest Contribution: The Product Information Supply Chain

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The following is a Supply Chain Matters guest blog commentary contributed by Ken Sickles, Vice President of Product & Strategy, 1WorldSync.  As a result of a recent briefing regarding the increasing importance of the product information supply chain we invited 1WorldSync to contribute this educational commentary for all readers.

In the retail industry, the supply chain has long been viewed as critical to success and profitability. Companies with tremendous reputations like Apple and Wal-Mart have long enjoyed the fiscal and customer satisfaction benefits of an efficient supply chain. But the retail industry is changing, and so will the supply chain.

In the past decade, advances in primarily mobile and social technologies have allowed consumers to become much more digital and connected to information and each other, and it has altered the way they discover and purchase products. While e-commerce has grown to almost 10% of the overall retail industry, analysts estimate as much as 50% of the retail industry is influenced by a consumers digital interactions. These “digital consumers” have a thirst for transparency about the products they are buying, and their thirst for information about them seems unquenchable. In some cases, digital consumers are so vocal about their needs; we are seeing governments put regulations in place requiring consumer transparency (e.g. EU 1169 – a European Union regulation requiring digital access to nutritional, ingredient, and allergen information for consumers at the point of sale).

The result is retail and manufacturing organizations have to be better at capturing, managing, and sharing product data through the supply chain. In fact, the need is so great, a data supply chain in its own right needs to be developed. Developing a Product Information Supply Chain, tightly integrated with the traditional supply chain, will help organizations ensure that ultimately consumers in the digital world have complete, up to date, and quality information where and when they need it in their purchase lifecycle.

We are already seeing evidence of the product information supply chain taking shape.  The industry is investing heavily in the software and processes that create and share product information. From the product development – aggregation and management of product data at the manufacturer – to setting an item up for sale at a retail or online store – to presenting that information to the consumer. Industry organizations such as GS1 are investing in new initiatives and capabilities to support the product information supply chain.

While the supply chain has long been a critical component to success in the retail industry, the product information supply chain may be an even more important to success in the future of the retail industry, as every consumer becomes a digital consumer.

 


Alcoa’s Strategic Positioning within Commercial Aircraft and Aerospace Supply Chains

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In the prior Supply Chain Matters commentary, we reflected on some current commercial aircraft industry developments from the lens of product demand reflected by the building voice of the industry’s most influential customers.  In this commentary, we focus on the strategic supply aspects of aerospace supply chains and provide background to this week’s news regarding another strategic acquisition announcement from AlcoaBoeing 787 production line

Earlier this week, this aluminum producer announced its intent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. According to business media reports, RTI’s business focuses is centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft.  The Wall Street Journal reported that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector.

The RTI acquisition follows last year’s acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.

Titanium is a very essential and critical commodity and component aspect for aerospace and commercial aircraft design and production.  The country of Ukraine currently is a prime source of the concentrates used for the fabrication of titanium. During the recent building political tensions among Russia, the United States and Europe over hostilities in Ukraine, Boeing and United Technologies augmented safety stocks of this key metal provided by VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. Last August’s report indicated that Boeing and UT had amassed upwards of six month’s supply of safety stock of highly customized titanium forgings.

Another rather important strategic commodity for newer, lighter and more efficient aircraft is that of carbon fiber.  So much so, that in November of last year, Boeing initiated an $8.6 billion long-term supply agreement with Japan based Toray Industries. The ten year supply agreement was initiated to support Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program.

Strategic sourcing teams for both Airbus and Boeing have to further consider mitigation of global supply risk and must practice a balanced component sourcing strategies to avoid too much dependency on a single region or suppler.

With current huge multi-year order backlogs, Alcoa’s strategic moves into key strategic commodity areas of commercial aircraft production assure a faster and perhaps more profitable growth prospect. The metals producer is also positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.

In July of 2010, Boeing’s CEO candidly admitted that industry-wide growth was highly dependent and/or constrained by many of the key suppliers to this industry. Six years later, with even heavier order backlogs that supplier dependency remains, particularly when it concerns key commodities and fabricated components. Thus, Alcoa’s strategic moves to tap into the key component needs of this industry may prove to be rather interesting in the months to come, with prospects for additional high dollar multi-year supply agreements.

As the pressure mounts on Airbus and Boeing to step up delivery volumes for vast backlogs of newly designed commercial aircraft, strategic suppliers of key commodities and advanced components will ultimately be the linchpins for successful customer fulfillment.

It should therefore be no surprise that other global producers are positioning to harvest some of the benefits.

Bob Ferrari


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