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Breaking: Amazon to Acquire Whole Foods- An Obvious Industry Inflection Point

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In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.   FBA sized Breaking: Amazon to Acquire Whole Foods  An Obvious Industry Inflection Point

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

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

 


A Path Towards Internet of Things Enabled Service Management- Service Parts Planning Realities

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This blog posting represents the second of a four-part market education series, in collaboration with supply chain planning and service parts technology provider ToolsGroup.

 In our initial posting in this series, we declared that one of the most promising line-of-business areas that will benefit from Internet of Things (IoT) enabled technologies applied to supply chain management will be equipment services management, especially service and spare parts management.  Planning 3 shutterstock 394279114 300x184 A Path Towards Internet of Things Enabled Service Management  Service Parts Planning Realities

A longstanding challenge in service or replenishment parts planning and management has always been the ability to forecast item-level demand when such demand is sporadic or sudden.  Now consider the opportunities to have demand-driven or predictive failure data and information emanating directly from the physical equipment.

But with any major business transformation, there are always foundational capabilities that come first. In the specific area of IoT enabled equipment and services management, a foundational capability is usually the need for a robust, responsive, and analytically-driven service parts planning (SPP) capability.

Yet an unfortunate reality is that many manufacturing and services organizations with lower levels of process maturity have not recognized the differing process and decision-making needs required for responsive and effective SPP.  Considering a leap to an IoT enabled service management business model will likely expose this weakness.

 

What Makes Service Parts Planning Different?

Three fundamental differences often found in SPP are the following:

  • Contracted service levels and customer contracts determine the overall parts distribution and required service response network. When there is either equipment downtime, caused by a failing part, or when equipment consumables are suddenly out-of-stock, equipment is no longer generating value for end-customers. There is very little tolerance for inventory back-orders since non-performing equipment results in downtime costs that can far outweigh the cost of the replacement part.

 

  • Service parts component demand is often manifested in intermittent or lumpy demand signals, caused by actual equipment operational conditions or changes in operating environment. That means planning in an environment of long-tail demand, parts that exhibit larger numbers of variability, lumpy or seasonality focused demand patterns. Traditional forecasting or demand planning techniques are often ineffective in planning parts demand in such environments. That’s because SPP is far more concentrated in individual item-level planning as contrasted to product family or aggregated planning techniques. SPP planning models feature higher stock keeping unit (SKU) counts and associated long-tail demand planning computations than traditional supply chain planning models. Algorithms that capture actual parts demand, or plan for future demand need to be far more sophisticated in item level and shipping location mathematical modeling.

 

  • Service parts networks require the need for multi-echelon and multi-tiered inventory stocking strategies tied to more predictive parts demand. Long-tail demand can be best managed by planning that factors item level and shipping location simultaneously. SPP must therefore be able to effectively manage and optimize inventory within such multi-echelon stocking environments.

 

A Path to the Future

Three to five years from today, even more equipment will be acquired by “services by the hour” payment methods, saving on front-end capital equipment costs for equipment operators. Physical objects such as complex equipment, engines, motor vehicles and other forms of equipment will be communicating operational performance and service needs via IoT enabled data and information flows. For equipment manufacturers, the opportunities are new lines-of-business and incremental multi-year top-line revenues flowing from such models.

The good news for IoT enabled service management processes is that the equipment itself can provide more proactive or prescriptive indications of when a part is scheduled to fail, as well as actual maintenance data related to parts failure. Such capabilities will provide added intelligence and more accurate parts demand information that will provide additional service uptime and operational cost savings for customers and service parts providers. In addition, the ability to link the physical equipment and operational data related to equipment with a robust SPP environment adds important benefits in the ability to capture and plan more accurate, and more predictive information related to service parts or consumable parts needs and requirements across a service management network.

However, the savviest businesses recognize that the end-goal is not IoT per-se, but in building the foundational people, process and technology capabilities that can best leverage the digitization of supply chain management and decision-making processes. An IoT front end isn’t much good without an equally responsive back end planning system.

Businesses that recognized the critical differences in more effective service parts management and made the initial foundational investment in more responsive SPP process capabilities will be far better positioned to harvest the benefits of smarter and more efficient network wide inventory levels, more timely decision-making and most important of all, more responsive service and satisfaction levels for equipment customers.

 

Bob Ferrari

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

 


NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

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Supply chain management professionals are often attuned to the weakest link that may develop among various tiers of the product value-chain. There are now building concerns that consumer electronics supply chains may be dealing with a potential industry-wide shortage of a key component during its most critical product demand period.

The Wall Street Journal recently called attention to a looming battle between electronic game console producer Nintendo against high-volume consumer electronics producers such as Apple. (Paid subscription required)

Component supply challenges include liquid-crystal displays (LCD’s), miniature motors and NAND flash-memory chips. The latter specifically points to NAND supplier Toshiba, which has become the second largest supplier of more advanced NAND memory chips.

For Nintendo, enthusiastic consumer demand for its newly released Switch gaming console is leading to aggressive planning for console output for its current fiscal year that ends in March 2018. According to the report, while Nintendo’s official sales target is 10 million units, the producer is reportedly pursuing plans to produce as many as 20 million units, double the official amount.  Nintendo Switch 425 NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

As supply chain planners are acutely aware, that is a considerable variance to hedge for.  A Toshiba spokesperson indicated to the WSJ that demand for NAND has been overwhelmingly greater than existing supply and the situation is expected to remain the same through the end of the current year. Compounding the component challenge are the realities of high-volume smartphone producers such as Apple, who can garner a heck of a lot of NAND memory supplier influence based on shear buying volume.

Companies such as Nintendo therefore must factor such realities and find more ways to garner added influence with Toshiba as well as other NAND suppliers.  A further, and likely more dynamic situation involves a building significant financial crisis surrounding Toshiba itself.

The supplier’s U.S. focused Westinghouse Electric nuclear reactor construction business unit has incurred significant financial losses forcing that unit to file for bankruptcy in March, leading to concerns for Toshiba’s financial survival as well.   In March, in what was reported as an acrimonious annual shareholder meeting, Toshiba shareholders agreed to split off the prized NAND flash memory unit in hopes of raising at least $9 billion to cover U.S. nuclear unit losses.

According to various reports, Toshiba’s NAND chip business includes a venture originally contracted with memory producer SanDisk, and that company was since acquired by Western Digital, which in-essence took ownership of the SanDisk stake in Toshiba’s memory operations.  Toshiba began making overtures that it would sell its attractive memory chip business to raise immediate cash.  Upon learning of that move, Western Digital threatened to block such a sale, based on its stake in the business. The latest reported iteration is that Toshiba has made a legal concession, in-essence keeping part of the memory unit in-house to appease Western Digital. However, the reality is that there are many active bidders for the prized memory business, including Western Digital.  Other reported bidders are industry leader SK Hynix, Broadcom as well as contract manufacturing services provider Foxconn. The latter, to little surprise, has sought the influence of Apple in helping to leverage its financial offer for the NAND business. As has been the case with Japan’s high-tech producers, the government of Japan, in the presence of Innovation Network Corp. of Japan,  remains active behind the scenes to ensure that any sale address concerns for intellectual and advance technology protection.

Where all this maneuvering ends-up is the purview of lawyers and industry-watchers.  A recent published report by The Financial Times concludes that negotiations are likely to be complex and subject to further delay, which adds more pressure on Toshiba’s need to stem overwhelming red ink. The length and overall outcome adds to the obvious uncertainties as to Toshiba’s plans to continue to be able to meet overall customer demand for NAND chips, not to mention the overall industry’s capacity availability.  With Apple planning to ramp-up production for the 10th anniversary editions of the iPhone, along with other global smartphone producers hoping to outdo Apple in second-half consumer demand, supplier influence and bargaining power are likely to be important determinants as to which producers garner the bulk of capacity-constrained supply.

Supplier contingency planning, along with the adherence to business and product-margin objectives will be a further challenge for industry supply chain teams, once-again placing an emphasis on more informed and data-driven planning and decision-making capabilities, not to mention supply chain risk mitigation as-well.

Approaching the mid-point of the year, with keen awareness that the second-half is most critical for business results, consumer electronics and high-tech supply chains have likely awareness to a difficult period ahead, one where agility, built-up supplier relationships and overall planning and execution capabilities will again be put to the test.

Stay tuned.

Bob Ferrari

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


Praise to APICS in Efforts to Update SCOR Reference Model

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Last week, APICS made a noteworthy announcement regarding The Supply Chain Operations Reference Model-SCOR, which we wanted to highlight for our Supply Chain Matters readers.

The supply chain educational and performance improvement organization indicates that SCOR Release 12 is currently under development by a committee of global supply chain practitioner experts and is expected to be released in the Fall, most likely in conjunction with the APICS Annual Conference. We call reader attention to the release because of the new topical areas being planned for inclusion in the new iteration, along with an increased effort to make this framework even more amendable to machine-readable language that can be leveraged for supply chain focused Cloud-based advanced analytics purposes.  APICS logo Praise to APICS in Efforts to Update SCOR Reference Model

From our lens, the planned SCOR Release 12 is a definitive acknowledgement that industry supply chain business process and advanced technology needs are rapidly changing, and manufacturers and services providers who have currently adopted tenets of SCOR need to incorporate such new factors into their performance frameworks and metrics.

APICS indicates that a SCOR job task analysis survey completed by over 1600 supply chain professionals validated the increasing importance for:

  • Sourcing and procurement processes for the SCOR framework
  • Metadata, digitization, omni-channel, and supply chain maturity model
  • Data analytics, data acquisition, data science, and predictive analysis as staff skills related to organizational supply chain initiatives
  • Continuing education and improvement of supply chain manager skills and abilities

In addition to these added context areas, ongoing APICS Special Focus Forums are addressing unique performance framework needs in areas such as humanitarian supply chains and new iterations of integrated of integrated business planning. Documentation efforts from these forums call for periodic updates to the digital library that APICS members have access to.

A further area addressed by a specific forum are opportunities to make SCOR more of a fabric in IT-centric supply chain analytics, dashboarding and overall integrated decision-support capabilities. Currently available is the software- SCOR Business Process Management Accelerator powered by Software AG’s ARIS tool. The tool itself can be extended via an open API to other Cloud-based ERP or specialty supply chain management applications, allowing analytics data to reference existing SCOR metrics. APICS further indicates a willingness to work with added software providers on other analytics and decision-support needs that seek to leverage existing SCOR performance or metrics relationship data. By our way of thinking, there is added opportunity down the road for the ability to incorporate artificial intelligence or machine learning techniques with SCOR frameworks for more predictive factors of supply chain performance.

Supply Chain Matters applauds the recognition of all the above as emerging drivers of supply chain success and of areas that can truly continue to benefit from a common supply chain reference model.

A final note relates to the need for augmented SCOR training, considering the addition of the above timely topics.  A recent conversation with Peter Bolstorff, APICS Executive Vice President, Corporate Development acknowledged the need for stepped-up training, given the added content areas with SCOR-12. The organization is currently working on stepped-up plans for SCOR training, in addition to current company hosted and public training activities. We anticipate further announcements in this area in the weeks to come.

Industry supply chain process and decision-support needs are indeed changing and its go to observe supply chain professional organizations adapting tools, frameworks, and training to help organizations manage such changes.

 

Bob Ferrari

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


Component Part Snafu Impacts BMW Production of Multiple Models

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Sales and Operations Planning (S&OP) and procurement teams understand that a parts shortage originating in the lower-tiers of the product value-chain can provide a noteworthy overall supply chain disruption.  Last week, luxury car producer BMW AG experienced such a situation, a component shortage that impacted the production schedule of multiple models.

BMW 4 Series 450 Component Part Snafu Impacts BMW Production of Multiple Models

Source; BMW

According to published reports, the German luxury car maker is slowing or halting production of certain models in response to a shortage of parts caused by delivery problems from supplier Bosch GmbH. The hiccups in the reportedly normally smooth operation show how dependent manufacturers are on a global, smoothly running supply chain.

In last week’s BMW’s case, the culprit is noted as a “Lenkergetriebe,” or steering gears used in BMW’s 1-Series, 2-Series, 3-Series, and 4-Series compact cars. Reports point to the supply disruption caused by a bottleneck at an Italian company that supplies the casings for Bosch’s electronic-steering systems. Bosch has since dispatched employees to Italy to help resolve the problem.

A report published in both the Financial Times and the Irish Times, quotes a BMW spokesman indicating that the 1- and 2-Series cars had come to a standstill on Friday and Saturday, whereas production of the i3 and i8 electric cars was running as normal. The plan, reportedly was to resume production by today, but BMW conceded yesterday that the “situation is unlikely to change this week”.

Bloomberg reports that BMW will seek financial compensation from Bosch. BMW purchasing chief Markus Duesmann indicated on Monday in an emailed statement to Bloomberg that there is only limited vehicle production at various German plants, while factories in Tiexi, China, and Rosslyn, South Africa, have moved up or extended planned interruptions.

No doubt, the current component supply shortage will be rectified.  As is the case for many of such incidents, the question is how soon.

Once again, another current day reminder that in today’s globally extended manufacturing and supply chain networks, a snafu or glitch at any tier of the value-chain can have widescale impacts without adequate supply chain risk mitigation planning.

Bob Ferrari


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