General Motors Attempts to Turn to a New Chapter of Growth, Customer Loyalty and Supply Chain Practices
The public relations teams supporting General Motors have been in high gear these past weeks for obvious reasons. Lapses in product design and quality management practices, and what has been billed by business and general mediaas the worst U.S. product safety crisis in recent memory has led to a series of product recalls among multiple GM brands involving upwards of 2.6 million vehicles.
GM desperately needs to move beyond its current state and restore confidence in its brands and in its business management model. Suppliers and partners associated with supporting this U.S. based OEM need to also move on to more collaborative and win-win relationships, but that requires a different GM perspective.
When Mary Barra was appointed CEO of General Motors, this author communicated our Supply Chain Matters elation for this announcement. Our enthusiasm came from the dual fact that not only was Barra the first senior female executive ever to lead a global automobile manufacturer, but more importantly, because her 35 year background included plant management, manufacturing, product design and development leadership experience. She is also an engineer by training. Barra likely understands the elements of producing high quality cars and trucks and the important contribution of the GM supply chain ecosystem in achieving that goal.
If readers want to gain a candid perspective on Mary Barra’s current challenges in transforming GM, we recommend the recently published Time article, Mary Barra’s Bumpy Ride at the Wheel of GM. Author Rana Foroohar pens an insightful perspective on Barra’s management style and her efforts to change a rather in-bred corporate culture built around functional fiefdoms and little accountability. She describes Barra as the consummate “outsider-insider” with a far different style from most of her CEO predecessors. She has been put in charge to become the change agent and apparently has the support of many of GM’s employees in that task. In our previous commentary in December 2013, we called attention to the Wall Street Journal characterizing Barra as “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”
This week, business and general media are featuring reports of GM’s latest earnings announcement. The WSJ reported that after nine months, Barra wants to switch gears towards a multi-year strategy to deliver increased revenues and profits while restoring consumer trust. She explained to a group of GM’s top 300 executives that the company must do what it takes to be the “world’s most valued automotive company”. The going forward strategy leans heavily on reliance on planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. A goal is to have 47 percent of global sales to be fueled by these new models by 2019. It further includes market expansion and growth within China through investing in five additional auto assembly plants and he introduction of nine new Cadillac models in that country.
GM will further focus on the broader supply chain’s contribution to its renewed business goals.
According to a recent WSJ report, there is an internal belief that GM pays more than its competitors for materials and technology because the company bases parts purchases on unrealistically high forecasts that burden suppliers with high fixed costs when ultimate demand falls short. Our community is more blunt in such an explanation: it is lousy forecasting predicated on achieving functional stovepiped goals. The WSJ quotes some analysts as indicating that the automaker could save upwards of $1 billion a year with smarter purchasing practices, which as we know, is a typical Wall Street short-term perspective these days. Squeeze those suppliers!
GM’s existing product development chief, Mark Reuss, actually met with executives representing 700 suppliers indicating that the company is ready to share more financial risks if sales projections are high. At that same meeting, GM’s purchasing boss, Grace Lieblein indicated that the supplier base will likely need to add capacity to support growth plans. In a Detroit Free Press published report, she is quoted as stating: “we just have to be cautious and strategic about how we add that capacity and not move too fast.” Lieblein further communicated that an important strategy is convincing suppliers to locate closer to GM assembly plants to reduce transportation costs.
Obviously that’s a tall order for suppliers since transportation cost savings do not necessarily weight themselves to the benefit of the supplier. Adding production capacity to support additional volume and spreading that capacity further across the globe requires a significant financial investment. Add some history of throwing suppliers “under the bus” when quality plans go south because of component design flaws, well, you get the picture of legacy trust.
The new era of GM obviously requires what Barra has described as bold thinking and leadership. What this author was hoping to read is that goal of GM’s supply chain going forward is to support continued product innovation while controlling costs and accelerating productivity. Perhaps that will be articulated in the coming months.
It is this author’s view that such thinking can benefit by a broader and deeper perspective by GM’s executive leaders on how more modernized supply chain business practices, new product introduction (NPI) practices incorporated to supply chain impacts, more collaborative based inventory and supply chain planning practices have led to benefits among other industries as well as other automotive OEM’s. Today’s supply chain and B2B business network technology capabilities can further link the global end-to-end supply chain with more granular levels of planning and supply chain execution synchronization.
The business practices and enabling technology are available but it requires a good dose of change management infusion before real benefits can flow. We trust GM will hence forth nurture the leadership to set such perspectives.
© 2014 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.
Today marks simultaneous but select global-wide product availability release of Apple’s latest announced iPhone 6 models, and as noted in our previous Supply Chain Matters commentary, the supply chain is again being again put to the test in assuring customer fulfillment expectations. Consumers from Hong Kong, select European countries and the U.S. now have the opportunity to get their hands on the new models.
The Apple marketing gods pay special attention in hyping sales in the first weekend of iPhone availability. It adds to the optics of long lines of consumers queuing-up to get their hands on the latest and greatest smartphones and motivating consumers to buy now, while there is still some in-stock. Like other consumer focused companies, revenues in the upcoming holiday quarter can account for a substantial portion of expected financial results.
Thus far, published product reviews concerning the new models have been positive, which adds to positive consumer perceptions. At this same time last year, Apple set a record of 9 million iPhone 5 smartphones being sold on the initial full weekend. That performance came in the midst of ongoing production yield challenges with the premium iPhone 5s model, which demonstrated the highest consumer demand. In 2012, 5 million iPhones were sold on the initial weekend. Wall Street analysts are floating a number indicating an expectation of 10 million as the bogey for iPhone 6 sales in the first weekend. The bar of expectations grows ever higher.
Earlier this week Apple reported that it had more than 4 million preorders in-hand among the new iPhone 6 and iPhone 6 Plus models during the first 24 hours since the product launch event. Apple also indicated that many of these pre-orders will be delivered in October, a sign of setting proper supply chain realities. Indeed, smartphone carriers such as AT&T, Sprint and Verizon are quoting October availability with the U.S., with the Plus model being especially stretched-up for availability.
One rather critical difference this year is that Apple has not been able to extend planned availability of the new model iPhone within China. Last year, China was included in first weekend sales availability. A published article in the New York Times last week (paid subscription or free metered view) reported that Apple communicated a last-minute decision to delay availability to the three state-owned mobile service providers even though these carriers had already queued advertising and launch campaigns. Increased speculation across Wall Street and business media corridors is that China’s regulators are still voicing concerns regarding national security associated with the iPhone itself. No specifics as to when these concerns will be alleviated has led to added speculation that a grey market for both the new iPhone 6 and older iPhone 5 models will become rampart during the weeks leading up to the end of the year.
However, if Apple’s supply chain planners had factored availability of new models for China on weekend launch, they well may be scrambling to re-configure that inventory to satisfy pent-up demand in adjacent regional markets.
As a community, we often commiserate on the dynamic tensions and often conflicting goals among sales and marketing and supply chain teams which often manifests itself in the S&OP process. Apple’s supply chain teams are not immune to such tension. Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations. Air freight capacity is already allocated and we can all look for the clear signs of scramble and response.
While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts. They have pulled miracles in the past, and the stakes get even higher.
Stay tuned for updates.
Supply Chain Matters provides our readers periodic updates to examples of how supply chain snafus can impact business performance. In that light, we have provided ongoing commentaries related to Lululemon Athletica and its prior sourcing and production snafus of one of its most popular line of yoga pants for women.
In March of 2013 this global B2C online and brick and mortar specialty retailer was forced to both recall and stop selling its most popular line of women’s summer yoga pants after discovering that the “sheerness” of the fabric allowed too much to be seen underneath. The CEO was compelled to publically apologize to customers for the problem and a short time later, announced her desire to step down from her CEO role due to personal reasons. Later in 2013, both a new CEO and Chief Products Officer was brought on-board, unfortunately too late to make any influential impact regarding the 2013 holiday buying period.
The latest business media update for Lululemon reflects a sales recovery with new product designs now becoming attractive for shoppers. Last week, the specialty retailer provided higher-than-expected revenues and profits and raised its outlook for the full year. Online sales increased 30 percent from the year earlier while sales at physical outlets decreased 5 percent. In its reporting, The Wall Street Journal declared: “a sign that efforts to put supply-chain problems and fashion missteps behind are beginning to deliver results.” Prospective investors were certainly impressed, sending the stock upwards in double-digits.
To accomplish this turnaround, supplier relationships were augmented and a new line of fashion products was accelerated to provide more online and store shelf assortment in July, a traditional transitional period from summer to fall. The product line had emphasis other than basic black and gray, which resulted in higher cost and a near 4 basis point erosion in gross margin.
More supply chain challenges remain including upping the assortment of in-demand products that consumers demand as well as further supply chain process improvements. However, the situation seems more of a positive direction.
Our community is often reminded of the both the immediate costs associated with supply chain disruption as well as the longer-term impacts to brand and stock-price. In the specific case of Lululemon, it has been a span of 18 months of such impacts and learning. During that time, competitors have managed to seize an opportunity and provide consumers with other attractive and functional choices.
As acknowledged by company management, more work remains and it wilol certainly include a closer relationship of product design and supply chain.
Streaming reports over the past several weeks provide every indication to Supply Chain Matters that supply chain teams need to be prepared for highly competitive, promotional-driven online buying activity in the upcoming holiday buying surge. If there were thoughts that last year’s period was stressful, we venture that this year will bring similar stress. As we have further noted in prior commentaries, the evidence is growing that shoppers have permanently altered their shopping habits in favor of online. Thus, this year will provide interesting online challenges and we predict another round of blame games.
Similar to last year, the period between the Thanksgiving and Christmas holidays is relatively short. If the combination of bad weather and savvy online consumers plays out again when online consumers waited for the most attractive last-minute deals, online business results will be factored by which online retailer offers the best promotions as well as free shipping.
Let’s reflect on some current data points.
UPS, which was literally thrown under the bus as the Grinch that stole Christmas in 2013, recently announced an all-out effort to augment its operational capabilities during the peak holiday shipping period. These efforts result from a $500 million investment by UPS after last year’s incidents were evaluated. Included is that for the first time in the parcel shipping’s firm’s 107 year history, UPS will operate full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge. A complete detail of the UPS surge effort can be garnered from this published DCVelocity article.
No doubt parcel delivery giant FedEx will also have augmented capabilities and as noted in our recent commentary, the U.S. Postal Service has aggressively jumped-in offering both Sunday delivery and more aggressive small parcel shipping rates.
Retailers have also had to implement contingency ocean container transport plans amid the ongoing threat of west coast port disruptions prompted by ongoing labor negotiations. That may lead to earlier product promotions to offload bloated inventories.
Many online retailers have garnered their own online marketing and customer fulfillment learning from 2013. Some examples: Staples announced a series of enhancements to the omnichannel experience for its customers, including the ability to buy online and pick-up purchases at a local retail outlet that same-day. According to the announcement, Staples.com will automatically display the inventory available at the three closest retail brick and mortar stores, and indication that such stores now become online mini distribution sites. Customer have the continued option for shipping their online purchases direct to a local store with free shipping. In late August, Macy’s announced its $1 billion technology and infrastructure investment in omnichannel capabilities. That effort now includes the ability for online consumers to order online and pick-up their merchandise within 675 full-line stores. Wal-Mart has plowed $500 million into its new online E-commerce business, including the addition of three new online fulfillment centers, and had plans to invest an additional $150 million in the current fiscal year. Last year, the retailer was cited as having the highest online sales growth, 30 percent compared to Amazon’s 20 percent gain. Wal-Mart now has upwards of $10 billion of total revenues coming from its online channels, and no-doubt this aggressive retailer will be offering consumers attractive online offers.
Other online retailers such as Best Buy, recovering from previous stings with balancing brick and mortar and online capabilities are also preparing for more aggressive omnichannel support capabilities.
In a prior Supply Chain Matters commentary stemming from the IBM Smarter Commerce event, we highlighted what IBM described a “dark store” which is one that can serve as a localized fulfillment entity for limited volumes, or be able to convert to a broader based customer shipment fulfillment entity after retail closing hours. We may well observe some pilot applications of this capability in the coming period.
And then there is the gorilla of online fulfillment, Amazon, which continues to provide indications that it will again be prepared to offer aggressive product promotional and free shipping capabilities, including same-day delivery orchestrated by Amazon’s own package delivery network. There have been published implications that Google and its Google Shopping Express will offer retailers added options for online promotional activity including same-day or Sunday delivery.
B2C focused marketing and supply chain teams have planned all year for the upcoming holiday buying surge. No doubt, there have been budget dynamics as to which segment received the bulk of investments, the online marketing and promotional side, or the back-end online customer service and fulfillment. Preparations have been made and the ultimate test comes in but a few weeks. New learning as well as finger-point will be ever more interesting to observe.
Keep your web browser connected to Supply Chain Matters for our continued coverage of B2C/B2B omnichannel commerce learning during the 2014 holiday surge.
Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement. Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.
As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.
Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version. That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed. The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.
In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features. Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.
Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.
A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.
Of further significance was what was not announced yesterday. There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.
Apple’s supply chain teams now face rather tough challenges in the weeks and months to come. Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.
Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen. Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.
More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.
Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock. This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.
The new transparency of Apple and its supply chain is becoming more visible and more concerning.
In April, Supply Chain Matters made an observation that two of the world’s most competitive supply chains, Apple and Samsung, would continue to respond to different business needs and outcomes. Yesterday, yet another important precedent was set in this highly visible battle of supply chain response and market agility capabilities.
Samsung again upped Apple in its market introduction and media buzz concerning its brand new Galaxy Gear smartwatch. This new wrist device is scheduled to go on-sale later this month and retail for $299. This follows prior Galaxy smartphone announcements from Samsung that have been strategically timed to steal the market thunder from Apple.
In its reporting of the launch event, the Wall Street Journal opened its article with the following: “Samsung Electronics Co. planted its flag in the battle over wearable devices Wednesday, unveiling a digital watch than can run apps and interact with its own family of smartphones.” Of even more interest, the WSJ reminds its readers that Qualcomm also announced yesterday plans to ship its own new color-display Toq smartwatch later this year, available in a “limited edition” for $300, while in June, Sony unveiled an Android powered smartwatch expected to also ship later this month.
While these initial smartwatch models can arguably be described as first generation, they have been designed to extend the features of existing smartphones and will compete for consumer wallets this upcoming holiday buying season. They enter the market ahead of Apple where numerous information leaks indicate that an “iWatch” has been in the development pipeline. In our Supply Chain Matters posting in mid-July, we called attention to business media published reports indicating that high level external hiring by Apple raised questions over hard engineering problems and that Apple’s in-house teams have apparently not been able to solve and the ability of its in-house engineering team to develop wearable technology on a market timely basis. A published Financial Times article speculated that a new wrist computer device may not be introduced until the latter part of 2014. This obviously leads to speculating that Apple has desires to introduce market notable product innovation in a smartwatch, and has been willing to accept a delay in market introduction to achieve a more innovative product perception. Continual information leaks from various Apple supplier sources also attest to designers constantly changing product specifications almost to the final moment, which was a tenant of the prior Steve Jobs product design culture of the company.
A lot can change in the coming months and perhaps Apple will announce its rumored smartwatch later this year. A shout-out is certainly in-order for Samsung as well as Qualcomm supply chain teams for their efforts in supporting a well-timed announcement.
Our readers who stem from product lifecycle management roles can well attest to the arguments for either being first in the market or being a later entry with more compelling product features. Invariably, supply chain teams, and in particular, that of Apple will again be called upon to translate product design to high volumes of production in near record times.
Consumer electronics and high tech supply chains remain the crucible for the needs for tight linkages among product development and supply chain teams to meet highly competitive and compressed time-to-market and time-to-volume objectives. The prior walls among these teams is quickly evaporating.
Disclosure: The author of this commentary is a current holder of Apple stock.