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Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Supply Chain Matters Highlights of Oracle Open World 2016 Conference- Summary Impressions

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This Editor once again attended the Oracle Open World conference in San Francisco this week and Supply Chain Matters has been publishing impressions throughout the week. As a reference, our prior blog commentaries included: Oracle OW16 sized450 Supply Chain Matters Highlights of Oracle Open World 2016 Conference  Summary Impressions

Highlights of Oracle’s Q1 FY17 financial performance last week leading-up to OpenWorld

Our initial on-site Commentary One posting highlighting Larry Ellison’s opening keynote.

Our Supply Chain Matters Commentary Two posting addressed reported uptake of Oracle SCM Cloud from last year’s announcement.

Our Supply Chain Matters Commentary Three posting explored the interrelationships among Oracle ERP Cloud and Oracle SCM Cloud, as well as highlighted announced future pipeline releases planned for SCM Cloud.

Our Supply Chain Matters Commentary Four posting highlighted the key messages from Larry Ellison’s second keynote, specifically implication of the release of Oracle Database Cloud.

In this our final on-site commentary, we share summary impressions, insights and takeaways for our readers and clients.

This Editor and analyst has been attending Oracle’s annual OpenWorld customer conferences on an off and on basis for well over a decade.  During that time span, I have observed lots of changes concerning Oracle from organizational, technical and customer applications perspectives.  Some to the good, some not so. That has been the context of our coverage of this and past annual OpenWorld events.

During this year’s as well as last year’s conferences, Oracle senior executives reminded attendees that it has taken this company ten years to reach its vision of Cloud based IT technologies and software-as-a-service (SaaS) applications. The results of that ten-year effort are now manifesting themselves in the blizzard of new Cloud based product and platform announcements that continue to unfold every year.  It is now difficult for customer’s to be able to keep-up.

I can well remember when the Oracle Fusion initiative was first introduced, and there were no initial indications of the length of the journey, only the breadth of the vision and the scope of the endeavor.  Indeed, the vision was bold, and to Oracle’s credit, it was not watered down when the challenges grew deeper. The effort took on a holistic approach to include infrastructure, database as well as applications dimensions.  Few enterprise technology companies have been able to execute such a breadth of technology.

More importantly, Oracle’s adopted a business and industry focused lens, one that could specifically respond to the overriding businesses challenges that enterprise, business and functional organizational focused technology needed to address and solve. This was an area where Co-CEO Mark Hurd plays a valuable role in his role-based articulating of the C-Suite challenges of business in so many industry settings and how IT must be able to respond to such challenges.

Such challenges include various multi-vendor based legacy ERP backbone customers who felt hobbled in their ability to ever be able to take advantage of the next generation of technologies because of the realities that upgrading was far too disruptive to existing business processes, would take far too much time and be far too expensive. Legacy ERP includes tendencies to have added too much business unique customization that provided more obstacles to overcome in adoption of newer technology.

As many technology authors and visionaries have pointed, in the prior era of ERP implementations, systems integrators were making the bulk of the initial money while ERP providers themselves gained sustaining revenue streams related to annual maintenance of systems that in essence, get the basic job done but add little to needs for more business agility, adaptability and revenue growth.

Oracle’s journey has been directed at developing a holistic Cloud based technology approach that can address IT as well as business cost control and margin challenges. It very much includes engineering based systems approach, as was often articulated by Larry Ellison himself. For our readers, that implies that Oracle’s target is to sell technology to senior leadership levels of businesses, as well as to IT or functional teams.

At the same time, the journey has led Oracle to bring along a host of other different traditional licensed application suites such as JD Edwards, E-Business Suite, Advanced APS, Siebel, Demantra, Agile, G-Log and many others. To its credit, Oracle did not stop ongoing development nor customer support programs in its own traditional suites, new acquisitions or long-time applications.  That afforded customers the peace of mind to determine which technology paths they wanted to pursue, at their own timeframes, as opposed to ‘it is my path to the Cloud or on your own’ approaches that some technology vendors tend to influence.

In its most recent financial performance briefing for analysts and investors, Oracle executives indicated that while the bulk of its installed based software applications customers have yet to make their decisions to move to Cloud based adoption models, many have begun an overall assessment strategy. At this year’s event, some executives’ views indicate a ten-year window, some view it as far less. Oracle has rightfully provided multiple paths, while assuring that legacy behind-the-firewall applications will be supported.

Many of the new early adopter customers of Cloud based platforms and applications have done so for specific business motivations, many with common themes of shedding legacy IT infrastructure costs with the ability to make more manageable technology leaps. Some view the Cloud as another form of leasing technology, or a computing utility platform that flexes with the needs of business or supply chain. That has been the declared surprise to the current momentum.  The upside has built-in momentum if Oracle continues to execute as it has done up to now, both in internal development and external acquisition.

Today there are some key new Oracle faces in senior leadership roles of development, sales and other areas while the company manages to continually balance new and seasoned experience and vision. While the bravado of the prior Oracle sometimes shows, it is now accompanied by a discernable shift toward being more customer and services focused. That includes adoption of practices directed at providing customers with what is described as zero-hassle buying, allowing more customers to try before they buy, and yes, less expensive pricing. Customer engagements are now assigned an executive sponsor for monitoring and customer feedback.

Over these past ten years, a lot has changed, most toward the better.  Today’s Oracle is one of momentum, continuous innovation and perhaps a dose of fast follower.  We continually observe this with every subsequent OpenWorld.

With the pending acquisition of NetSuite, and that of other acquisitions such as LogFire, Oracle is indeed increasing its momentum in offering a more business compelling and flexible path toward Cloud based ERP, data management, analytics and supply chain focused applications.  Indeed, acquiring 2800 Oracle ERP Cloud customers might well be just the beginning of this momentum. Oracle SCM Cloud will continue to be the recipient of that momentum as will Oracle Procurement. This Editor previously cited Oracle’s SCM development team for its slow pace toward the Cloud, but as noted in our prior commentary, we now observe that the pace of innovation is now accelerating.

Last year and again this year, Mark Hurd’s classic prediction was that by 2025, there will be but two enterprise technology vendors controlling 80 percent of the SaaS technology market.  Last year, we viewed that prediction as stick to the wall wishful.  This year it is beginning to look more likely that Oracle will indeed one of the few enterprise technology vendors that got it right.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Tesla Motors Model 3 Unveil- Product Marketing Meets Supply Chain Realities

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Today marks a product milestone for Tesla Motors, namely the public debut and availability of the new Model 3 SUV targeted for a broader customer base. In shades of Apple product availability events, Tesla’s PR team insures that photos of prospective customers camped out overnight at Tesla outlets are spread throughout media channels.  Tesla Model X 350187. 300x130 Tesla Motors Model 3 Unveil  Product Marketing Meets Supply Chain Realities

The hype cycle is on but the real test will be Tesla’s supply chain and product management flawless execution in the coming months.

In a prior Tesla commentary published in January, Supply Chain Matters noted that while Tesla met its internal goal to deliver more than 50,000 total vehicles in 2015, customers who made deposits as far back as three years ago to secure the new Model 3 remained disappointed. The model, which was supposedly designed to be built for a lower price point and with higher output volumes, has undergone a series of repeated delays making the overall program almost two years later than originally planned for market availability. Of course, such a delay has provided industry competitors such as General Motors ad Toyota the opportunity to bring to market electric powered models that can compete with the Model 3.

Tesla’s founder Elon Musk has characterized the Model 3 as “The hardest car to build in the world.” We interpreted that statement to mean the most sophisticated engineered vehicle but not necessarily one designed for higher volume manufacturing. Its falcon wing doors and air filtering system are examples of noteworthy engineering accomplishments but call into question needs related to design for higher volume manufacturing. Luxury seat manufacturing was recently moved from a supplier, in-house to Tesla’s production facilities because of quality and volume needs. Another ongoing open question is whether the planned Gigafactory designed to produce lithium-ion batteries in-volume will be ready to meet production ramp-up needs.

According to the latest update on the Tesla web site, general reservations begin today on a worldwide basis with a different order queue planned for each geographic region. Existing Tesla customers will also get a priority in the queue, which at first blush, somewhat defeats the objective of a car produced for new customers. Volume production of the new model is noted as beginning in late 2017 with deliveries initially targeted for North America. While those expectations might change during tonight’s scheduled Model 3 unveil, it does set muted expectations as to when large numbers of global consumers can expect to be driving the new Model 3.

It would appear that this is another classic case of product marketing meets the hard realities of supply chain ramp-up execution of a product in high demand. As in the case of Apple, be careful as to marketing hype when supply chain is the real determinant of customer fulfillment.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


When a Product Contains What it is Supposed To- A Business Media Expose

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Last week, The Wall Street Journal featured a novel but rather important article (Paid subscription required) reflecting on the importance of knowing your product, your supplier management and oversight practices along with supporting your core product marketing strategies.

The article reflects on actress Jessica Alba’s co-founded company, the Honest Company, whose company has soared to a reported $1.7 billion in private valuation in less than four years. The stated core mission of this consumer goods company is to offer cleaning products that do not knowingly contain harsh chemicals found in mainstream marketed and sold products.

One of the harmful compounds of question is that of sodium lauryl sulfate, referred to as SLS. The Honest Company’s claims to consumers are that its products are free of SLS.  However, in its report, the WSJ indicates that it commissioned two independent testing labs to analyze Honest’s liquid laundry detergent only to determine that it contained significant amounts of the chemical.

Honest naturally disputes such findings. The firm indicated to the WSJ that its manufacturing partners and suppliers have provided assurances that its products do not contain SLS other than trace amounts, and indeed provided a document from the laundry detergent supplier, Earth Friendly Products indicating there was no SLS content in its product. Earth Friendly indicated its document that it relied on its own chemical supplier, Trichromatic West, to test and certify that there was no SLS content. That’s when this story gets interesting since the lower-tiered supply chain chemical supplier told the WSJ that its certificate was not based on any testing and that there was a “misunderstanding” with the detergent maker, its customer. Further indicated was that SLS content was listed as zero because the chemical supplier did not add any SLS to the material it provided.

Honest reportedly claims to utilize an alternative cleanser in its products that is termed sodium coco sulfate or SCS. The WSJ goes further in its research for its report, interviewing a reported dozen scientists on how SCS itself is produced. It turns out the substance is: “made from palm or coconut oil, as a mixture of various cleaning agents that includes a significant amount of SLS.”  The Journal indicates that one of the country’s largest suppliers of SLS and SCS acknowledged that SCS indeed contains SLS.

Our readers can indeed read the entire WSJ report as to the back and forth communications the publication had with the Honest Company regarding the semantics of what is included in its laundry detergent product.

For Supply Chain Matters readers, particularly those of sourcing and procurement roles, the reported incident is yet another reminder of the importance of auditing and monitoring suppliers on a regular basis. It provides a further reminder in the need to have an active two-way relationship with product management and with associated product management teams to insure that the entire value-chain of a product conforms to important specifications.

Your firm can assume that the primary supplier is the sole source of product conformance to specifications and/or purpose. Many procurement teams have since discovered that in today’s complex web of value-chain stops, it is important to insure that all players clearly understand product and manufacturing process specifications, especially when supporting consumer product offerings.


Latest Reports of 2014 Smartphone Sales: Focus Beyond the Eye Catching Headlines

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This week, IT media publications are running the headline that in the last quarter of 2014, Apple edged out Samsung in smartphone sales.  While the Q4 smartphone numbers would indicate such an obvious eye-grapping headline, both of these smartphone producers, along with their respective supply chain ecosystems, should be more concerned with the implications of the total unit sales volumes in 2014.

Media is actually reporting the latest shipment numbers provided by research firm Gartner.  While Apple sold 74.8 million smartphones in Q4, vs. the 73 million sold by Samsung, a review of the full 2014 data provided in a Giga posting provides more concerning trending.  According to Gartner’s analysis, 1.24 billion smartphones were sold to consumers in 2014.  That represents a lot of production, supply chain, LCD and semiconductor component capability.

Both Samsung and Apple lost market share in 2014 by Gartner’s estimates, albeit Samsung took the brunt with a 6.2 point drop in market share. However in overall unit volumes for all of 2014, Samsung sold over 307 million smartphones, far outpacing Apple’s 191 million. From a supply chain scale and volume perspective, Samsung appears to stand tall, and yet, its supply chain does not garner the accolades that Apple garners.

Market share gains came from Lenovo, Huawei and a broad category grouped as “Others”. Readers might recall that Lenovo recently acquired the Motorola brand of smartphones and that Lenovo has strong market share within China.  That “Others” category, which supposedly consists of brands such as China based Xiaomi as well as India based producers, gained over 5 points in global market share. These producers are garnering increased consumer attention across emerging and developing markets, offering far more cost affordable features and options. Their momentum is collectively rising.

As consumer electronics and telecommunications focused supply chains know very well, the most important trend to focus on is overall scale, namely how many installed smartphones exist to generate more profitable and recurring electronic content sales. The 1.2 billion added smartphones in 2014 provides ample evidence of that potential.

From our lens, the most staggering statistical trend for global product development and supply chain teams to dwell on is that according to Gartner, Google’s Andriod operating system now powers upwards of a billion phones, up from 761 million recorded in 2013.

The takeaway is one that many a supply chain or product management planner should know all too well. Rather than a shorter-term focus on the latest quarter, the more meaningful analysis is to focus on bigger picture market insights and individual geographic country  data reflecting on market shifting.

The desired business outcome for smartphone focused supply chains is not so much the profitability and margin of the hardware, but rather the time-to-market and scale of installed devices.

Bob Ferrari


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