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Further Announcements in Item-Level Printed Sensor Technology

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In October of 2013 Supply Chain Matters introduced our readers to the first signs of advances in item-tracking technology that being a stand-alone sensor in printed electronics.  We called attention to  Thin-Film-Electronics-ASA-Temperature-Sensor-Printed-Electronics-Display-Transistor-Memory-200x140Norwegian based Thinfilm Electronics ASA which announced that it had successfully demonstrated a fully functional stand-alone, Smart Sensor label built from printed and organic electronics with low power. We further noted that the announcement pointed to the ability to track and monitor temperature and environment for logistical needs in pharmaceutical supply chains as well as the ability of retailers to have insight on both the temperature, shelf-life and food safety of perishable products.

We have now received word of two other strategic partnership announcements involving Thinfilm’ s product development plans. One announcement outlines a partnership with Temptime, a significant provider of cold-chain related, time-temperature indicators to the healthcare and pharmaceutical industry. Currently, Temptime claims to produce the only temperature sensor for item-level vaccine monitoring that is approved by the World Health Organization (WHO) and the United Nations Children’s Fund (UNICEF). According to the announcement, both companies will collaborate to develop indicators featuring electronic technology that will alert people through digital display if medical or pharmaceutical products have been exposed to potentially damaging temperatures. Terms of this deal include a development-related investment from Temptime and commercial pre-orders for samples that can be shared with customers. While the press release notes that the timing is still to be determined, we believe that samples may well be developed in months.

Another announcement calls for a distribution agreement with PakSense, Inc. in the development of intelligent sensing products specifically designed to monitor perishable goods. PakSense currently provides numerous major food retailers and suppliers with solutions to help monitor the condition of perishable goods. Terms of this agreement authorize PakSense to distribute Thinfilm Smart Labels™ to food suppliers and retailers of produce, meat and seafood in North and South America. In addition, PakSense has submitted pre-orders for the labels, which are targeted for delivery to lead customers in early 2015. The Thinfilm printed electronic labels will indicate if certain temperature ranges have been exceeded, allowing added visibility into temperature variations that may exist within a shipment and will complement PakSense time and temperature monitors. Further indicated is that the ultra-low cost associated with the printed electronics process will now make it possible for PakSense customers to use multiple Thinfilm labels in a shipment at the “item” and “pallet” level. In addition to ThinFilm technology, key components of these smart labels will be provided by several other partners including PST and Acreo.

One of our predictions for 2014 was that the “Internet of Things” will accelerate in momentum, particularly in applications related to broader supply chain visibility. Smart, item-level labels that alert to environmental and other real-time conditions certainly falls under this category and the above announcements point to some exciting potentials in the not too distant future.

Bob Ferrari


Noted Survey: Challenges for Procurement Teams at Mid-Market Firms

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Members of the supply chain management and B2B community are literally bombarded every day by user survey results.  The reasons are many and unfortunate, since by our view, surveys have become too excessive. They are driving survey fatigue and more importantly, drowning out the surveys that provide the most insightful information.

Industry analysts and technology providers leverage quantitative and qualitative surveys to gain perspectives on the current challenges and viewpoints across multiple supply chain environments.  Industry trade publications and conference producing firms utilize surveys to attract attendance at various conferences or utilize conference attendees as sounding boards. Academics utilize surveys to identify areas for advanced research or academic based thought leadership.

The reasons are many and in this commentary, we will not dwell deeper into motivations.  

For you, our readers, it is important to not just dwell on the executive summaries or conclusions of such surveys, but to pay particular attention to the demographics, statistical survey base, and lineage of such surveys.  Look for statistical valid sampling, clear statements of the surveyed demographics, and more importantly, look for surveys that are consistently performed in a pre-prescribed basis, since they provide the most insights into shifting patterns of challenges and needs.

We view our role at Supply Chain Matters as not pitching endless summaries of our own research (we do conduct and produce such research), but more importantly to point out to readers various surveys that are grounded in discipline and believe warrant your attention.

We were recently alerted to a 2013 ISM Survey of Procurement Executives (complimentary report requiring reader registration) sponsored jointly by the Institute of Supply Management (ISM) and supply management technology provider, BravoSolutions. This report captured our interest because of both its demographics and its implied conclusions regarding the current priorities from procurement executives from mostly mid-market firms.  The survey itself yielded over 500 responses, which is fairly good by today’s standards. The demographics included the majority of respondents, 64 percent, from non-manufacturing industries such as agriculture, energy, mining, professional services, transportation, retail and other services segments. Firm size was weighted toward 45 percent with revenues under $500 million and 56 percent with annual direct spend in the range of under $50 million to $249 million. Thus, this survey can serve as a representation of current challenges and viewpoints among mid-market service providers, an area we normally do not come across.

In terms of our key takeaways from this survey, we noted that improving cost reduction and savings was by far (60 percent of respondents) the top business priority in 2013 for these mid-market procurement executives. Yet, these same respondents indicate they have only been able to deliver 10 percent or less in savings during 2013. The remaining top five priorities were rated as:

2. Revenue growth and profit improvements

3. Risk management

4. Procurement transformation

5. Supplier performance and sustainability management

 

By our view, while we were pleased to see that risk management has finally reached a top-three weighting of priority. Half of the respondents’ firms were prepared to mitigate what were described as reasonable levels of supply, supplier or operational risk.

Far lower in 2013 priorities, according to this survey were areas such as employee retention and training, improving regulatory compliance, improving the strategic nature of customer priorities and technology implementation. Merely 19 percent indicated that supplier collaboration and innovation was a stated priority. The latter noted lowered rated priorities can clearly be considered important enablers to the top three priorities. These lower-ranked priorities are another symptom of the need for broader influence skills for procurement.

This author had the opportunity to speak with Mickey North Rizza, Vice President of Strategic Services at BravoSolutions about the implications and messages embedded within this survey.  Readers may recall that Mickey was a very able and insightful supply management industry analyst at AMR Research and Gartner, before joining Bravo. We hope to feature Mickey in a future guest posting on Supply Chain Matters.

Mickey pointed to the continuing challenges of business process alignment among procurement teams, including more direct links to a firm’s sales and operations planning (S&OP) process, actively working towards broader cross-functional business alignments in joint initiatives along with a renewed emphasis on change management. Deeper partnerships and dialogue with IT regarding goal prioritization and technology’s enablement of these business goals, including options in today’s cloud-based computing applications certainly plays an important part.

There is a considerable amount of detail included in this ISM survey and we encourage our strategic sourcing and procurement readers to take the time to scan each of the highlighted areas. We especially call attention to a Table noted on page 16 of the report that describes the following: “To have world class suppliers we need our suppliers to ….”

In the important challenge of overall procurement transformation, respondents of the latest ISM survey report that while good progress has been made, many challenges remains. While mid-market firms often operate in lean environments and often do not have deep investment budgets, they can benefit from the learnings and insights from other transformation successes across industries including manufacturing-centric. Today, more than ever, the barriers to driving successful organizational change management and more affordable options in the ability to leverage advanced technology towards deeper procurement intelligence and insights have come down. Reach out and learn.

Bob Ferrari


Delta Airlines Financial Results Indicate an Updated Perspective on Supply Chain Vertical Integration

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In 2012, Supply Chain Matters began commentaries concerning Delta Airlines, specifically its bold supply chain vertical integration move in acquiring its own oil refinery to secure more cost-effective supplies of aviation fuel. Delta reached an agreement with Conoco Phillips to purchase a previously idled Trainer Pennsylvania refinery for $150 million and invest an additional $100 million to retrofit the refinery to optimize its ability to refine jet fuel, while securing additional distribution agreements for the gasoline and diesel fuels produced by the refinery.

This was such a dramatic industry move that we decided to keep our readers posted on updates.

Delta recently announced its earnings performance for the December 2013 ending quarter. Those results included an adjusted $558 million in profits, up from $7 million a year earlier. Total revenues increased 6 percent. Operations at the Trainer refinery produced a $46 million loss for the December quarter and a $116 million loss for the full year.  Regarding the Trainer refinery, Delta reported: “While lower crack spreads pressured results at the refinery, they also reduced market jet fuel prices and helped lower Delta’s overall fuel expense.” Refinery operations produced a $46 million loss in the quarter and $116 million for the full year but the airline further indicated that the Trainer refinery is expected to turn a “modest profit” for all of 2014.

By our view, the refinery related results are noteworthy and merit continued monitoring.  Delta continues target operating margins between 10 and 12 percent which are essentially the same target as 2012, albeit with more revenues. If Delta can indeed turn a profit in refining jet fuel and other products, while controlling its own jet fuel expenses that would be a significant milestone to its bold vertical integration thrust.

 


PTC Acquires Internet of Things Platform Provider ThingWorx

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Prediction Nine of our Supply Chain Matters 2014 Predictions for Global Supply Chains declared that the Internet of Things would gain considerably more momentum in 2014 and beyond. We based that prediction on new investment initiatives from industrial giants such as General Electric to build-out the technology and service technologies to make more machines interact with one another.

Yet another reinforcement of this increased momentum was yesterday’s announcement from product and service lifecycle management software provider PTC indicating that it had acquired ThingWorx, a provider of platform that allows firms to build and run applications that leverage machine to machine information exchange.  The acquisition included a sum of $112 million in up-front cash along with a two year earnings agreement that could net ThingWorx an additional $18 million.  The transaction has already closed and PTC indicated in its briefing call with analysts that ThingWorx will continue to operate as a separately branded company with its existing senior management team providing both platform technology for customers while affording PTC the opportunity to leverage this technology within the provider’s existing PLM and SLM product suites. ThingWorx’s revenue model is subscription based predicated on the number of connected devices.

ThingWorx was founded in 2009 by three previous senior executives at manufacturing intelligence portal vendor Lighthammer, after that company was acquired by SAP AG. Their goal was build a manufacturing and services focused platform that would leverage concepts of connected intelligence to operational systems, involving people, systems and devices. While PTC executives admit that ThingWorx is not currently profitable, they were willing to pay a considerable premium by investing in a “momentum” company that could provide much broader internal and external opportunities. The company provides opportunities to leverage PTC’s current customer base of asset intensive design and manufacturing firms including its high profile within aerospace and defense focused firms.

PTC will begin selling ThingWorx this quarter and believes the company can add an additional $5m-$7m in incremental boost to PTC’s annual revenues. The company also outlined plans for internally leveraging the platform in development plans over the next three years.

Supply Chain Matters initial reaction is that PTC has made a bold move to lock-up a promising technology platform.  Of course, how PTC balances the needs to continue to fund ongoing development and selling efforts by ThingWorx and at the same time insure an open standards based development platform will be interesting to observe in the coming months. The move adds another arrow in PTC’s ongoing efforts to compete with far larger enterprise software vendors. In the longer-term horizon, successful internal integration efforts if timely, could present rather compelling service management options for asset-intensive or service intensive customers.

Bob Ferrari

 

 


Supply Chain Matters 2014 Predictions for Global Supply Chains- Part Seven

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Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year.  These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.

In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.  Supply Chain Matters Blog

Part Two in this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.

Part Three summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.

Part Four addressed some unique industry specific supply chain challenges in 2014.

Part Five predicted increased implications regarding current supply chain social responsibility strategies and practices.

Part Six explored the implications of increased supply chain risk on global sourcing strategies in 2014.

In this posting, we dive into Prediction 8 related to expected global transportation developments and shifts, along with Prediction 9, increased momentum in the “Internet of Things”.

 

Prediction 8: Industry Re-structuring of Global Transportation Surface and Air Networks Increases Momentum in 2014 as Carriers Adjust to Realities

In 2013, global ocean container lines, air freight and surface transportation carriers experienced the presence of shippers that continue to elect, because of budget reasons, more economical and less priority prone transportation options. The reasons were obvious for shippers.  A continued uncertain global economy, along with the effects of severe recession in the Eurozone motivated shippers to rely on more economical and cost effective transportation modes. In surface transportation, a rather volatile environment of actual vs. stated tariff rates had some shippers opting for spot market tendering to take advantage of less costly rates than those contracted.  Improved planning of supply needs coupled with broader inventory visibility across the global supply chain provided more confidence among shippers to opt for regularly scheduled surface transportation.

Shifting patterns for product sourcing and increased momentum for near-shoring of production and distribution is further contributing to the trend. Supply Chain Matters featured a number of commentaries regarding global transportation industry structural shifts, rate trends, and what we viewed as a failure of the industry to deal with blatant realities of quickly changing global sourcing and trade patterns and too much capacity chasing lower transport volumes

Global transportation and logistics giants FedEx and UPS incurred a series of consecutive quarters where capacity allocated for priority air movement was significantly underutilized because of the shipping trends noted above.  Each of these carriers in turn, have taken proactive measures throughout 2013 to re-structure or re-align excess capacity dedicated to priority movements and at the same time, initiated efforts to compensate for lost revenues and potential profits with either rate increases or further expense reductions. Both carriers have announced rate increases ranging from 3.9 to 4.9 percent for ground and air shipments in 2014.

In ocean container segment, the picture is far more complex and troubling.  According to the United Nations Conference on Trade and Development Review of Maritime Transportation 2013, growth in 20-foot equivalent units (TEU’s) slowed significantly in 2012 with a volume increase of 3.2 percent. This was down from 7.1 percent from 2011, and 13.1 percent in 2010. Final volume numbers for 2013 may slightly exceed 2012. Multiple years of excess shipping capacity is now exacerbated by the ongoing delivery of massive new mega-ships designed to carry far more containers at a lower overall cost.  As an example, over the next two and one-half years, industry lead Maersk alone has plans to introduce into global service 20 new mega-ships, capable of transporting up to 18,000 containers with up to 35 percent less consumption of fuel.

A troubling global economy and certain cutbacks in global trade have not help. The problem has been compounded by carrier optimism that global shipping movements would eventually return to growth. An overall reluctance to maintain excess capacity has led to hemorrhaging balance sheets for shipping lines with multiple unsuccessful and some successful attempts to increase shipping rates to compensate for lost revenues and excess fixed debt and operating costs. In the latter part of 2012, the industry anticipated 4 to 5 percent volume growth only to discover that demand turned a negative 2 percent.

In January of 2013, the CEO of industry leading Maersk revealed in an interview with the Financial Times that the carrier was losing $8m-$9m daily. By October of 2013, the CEO of Maersk indicated in an interview with business network CNBC that “the worst is over for the global shipping industry but so are the glory days.” That was clarified to a statement that most goods that can be shipped by ocean container are already being shipped with little silver bullets of shipping on the horizon. We viewed that declaration as an industry milestone.

As we pen this prediction, the top three ocean container lines have a proposal before multiple global regulators to pool capacity and global scheduling under the termed P3 Network.  Another industry consortium, the termed G6 Alliance announced plans to expand their cooperation in certain global routes.  Each of these initiatives require regulatory approval and there is lots of speculation as to whether governmental agencies will sign-off on such actions involving the management control of hundreds of vessels across key global trade routes.  On December 5th,news broke that sixth ranked carrier Hapag and 20th ranked CSAV were engaged in merger discussions, If both lines were to merge, the combined entity would rank fourth globally.  In would as well motivate other potential player moves.

For all of these reasons, industry supply chain should anticipate increased momentum in the re-structuring of global transportation capacity and networks.  What is unclear is the eventual impact on transportation rates or schedule performance, either from a positive or not so positive perspective.  An optimistic scenario is that container lines and air freight carriers are successful in re-structuring networks to maximize efficiency, service, newer fuel-efficient equipment and lower overall operating costs, to benefit of shipping rates. Another scenario, particularly for the ocean container segment is more accelerated consolidation and fallout of marginal carriers. Efforts to expand consortium influence on control and management of capacity and rates will not be well received by regulators and influential shippers.

The bottom line prediction is that procurement and shipping leaders should expect continued global transportation developments during 2014 and close relationships and contracting arrangements with trusted carriers will be important during this period. However, there may continue to be cost affordable transportation options by venturing into the spot market.

 

Prediction Nine: Internet of Things Picks-up Considerable Momentum

In April 2012, The Economist magazine declared the coming of what it termed as “The Third Industrial Revolution”, a new era from the second industrial revolution that began in the 20th Century with the advent of assembly line manufacturing in the United States. This new era is enabled by the increasing digitization or individualization of manufacturing processes.  Cited were continued breakthroughs in 3D printing, individualized or additive manufacturing techniques, faster and more sophisticated engineering and manufacturing simulation and the increased benefits derived from the “Internet of Things” or machine-to-machine (M2M) technologies. And, it is not just a revolution in manufacturing, but in how services related to manufactured products will be delivered.

The Internet of Things provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management.  IDC recently predicted 30 billion autonomously connected endpoints and $8.9 trillion in revenue by 2020. It will profoundly impact both product and service focused supply chains in months and years to come and we predict more increased momentum in 2014.

Automotive and truck OEM’s continue to design and deploy smarter on-board technologies affixed to Internet connectivity in motor and commercial transit vehicles facilitating far more responsive and efficient methods to track operational status, route vehicles, or revise routing on a real-time basis.

In 2013, General Electric made a major product design and deployment commitment to what it termed as the Industrial Internet. The conglomerate characterizes industrial internet as a combination of sensor, software, analytics, data visualization and other technology tools integrated into complex machines such as turbines, locomotives, aircraft engines and other equipment. Industrial Internet is further described as providing contextually relevant information in a near real-time basis that can monitor, control or modify actual conditions of industrial assets.  Readers might recall current GE television commercials that provide visuals of aircraft engines communicating to maintenance teams current operating performance parameters and alerting to when maintenance will be required to avoid downtime. In its initial announcement, GE announced partnerships with a variety of other information technology and services firms including Amazon Web Services, AT&T, Cisco, Intel, Pivotal, among others and reinforced the emergence of new and previous unheard of vendor ecosystems that bring together manufacturing OEM, technology and service firms collaborating on enablement and delivery of more innovative products and services enabled by Internet real-time connectivity and more powerful analytical tools.

M2M facilitates needs to synchronize manufacturing devices and/or networks to the pace of market demand and further enable mass customization of products. It further accelerates asset intensive manufacturer’s needs to enable broader product   platform-as-a-service services that help customers to avoid large up-front investments in capital equipment in favor of forms of “pay by the hour” leasing and service agreements over multiple time horizons. It helps manufacturers to build annuity type revenue and profitability opportunities.

We believe that M2M and smarter machine investment and development efforts will expand beyond just the United States but to other geographic regions and will feature more announcements from well noted global based players in both manufacturing, services and technology circles.  Following typical investment and development cycles, efforts will continue toward most promising business cases for M2M, and we believe that will center squarely on the capital equipment intensive services management segment.  We expect other developments to come in the logistics and transportation services segment.

Expect other announcements from global players such as Siemens which will lead to additional partnerships as influential industry players, both classic manufacturing and tech-focused, jump on to building market momentum.  We agree with current industry participants that security remains an important obstacle to broader deployment and it will be important for 2014 development efforts to focus on stronger network and data related security measures. A further open question is whether more organizations are ready to leverage M2M networks for product innovation, or have the resources and where-with-all to do so.  For the time being, GE has a huge leg-up in this area.

 

This concludes Part Seven of our Supply Chain Matters 2014 Predictions series.

Keep your browser focused on Supply Chain Matters as in an upcoming posting, we conclude this series with our final predictions related to information technology in 2014.

As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.

© 2013 The Ferrari Consulting and Research Group and the Supply Chain Matters Blog.  All rights reserved.


Supply Chain Matters 2014 Predictions for Global Supply Chains- Part Four

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Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year.  These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.

In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.    Supply Chain Matters Blog

Part Two of this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.

Part Three of this series summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.

In this Part Four posting we address industry specific supply chain challenges in 2014. We need to alert readers that this particular posting in somewhat longer in content but we felt we needed to provide the entire spectrum of the more unique industry specific 2014 predictions.

 

Prediction Five: Noted Industry Specific Supply Chain Turmoil and Challenges

In 2013, we predicted that B2C and Aerospace focused supply chains will experience significant challenges and increased turmoil.  That turned out to be the case in many dimensions.  For 2014, we continue to predict added challenges for this sector, and are adding consumer product goods (CPG) focused supply chains to our 2014 predictions list.

B2C and Retail Focused Supply Chain Challenges

As was the case in 2013, B2C and Retail focused supply chain will face challenges for both consumer demand and supply aspects. The “Amazon effect” remains a real threat for both traditional brick and mortar and online retailing fulfillment strategies in 2014.

On the consumer demand front, the majority of consumers continue to be economically stressed and cautious given a world of many uncertainties. These consumers have shifted their research, buying and goods replenishment preferences towards channels offering the lowest price and highest value, and the effects of omni-channel retailing continued to reverberate throughout B2C segments in 2013 and will continue throughout 2014.

According to online fulfillment intelligence firm ComScore, in 2012 online E-commerce sales rose by 14 percent and there were 12 days of greater than $1 billion in online sales activity. The firm’s preliminary projects for 2013 call for a 14-17 percent increase in online sales with consumers utilizing mobile devices reaching the highest percentage of digital commerce with nearly $10 billion in spending. With a shorter 26 day buying period between the Thanksgiving and Christmas holidays, predictions call for intense promotional programs to attract consumer sales and ComScore predicts that nearly 25 percent of holiday buying will occur December 15th or later.  In 2013, some notable brick and mortar retailers such as Best Buy have developed new strategies to overcome the effects of “showrooming” where consumers visit a store to inspect product features and then elect to buy online.  The crux of the new offsetting strategy is price-match any online offer and to provide added services for consumers. However, as we pen this prediction, retail sales associated with the all-important 2013 Thanksgiving and Black Friday holiday weekend lagged behind 2012 levels for brick and mortar retailers, causing concerns for high inventory management visibility in the remaining days leading up to end of December.

Emerging market areas such as China and Russia are now experiencing explosive growth in online buying and although overall logistics are not as sophisticated, volume growth is being supported. Published research data indicates that consumer facing industry supply chains are continuing to invest more in direct, consumer-facing activities.

The above amount of activity will stress an already taxed set of capabilities across B2C focused supply chains and the spillover effects and consequences will extend into 2014.

On the supply end, global retailers have garnered considerable visibility to social responsibility practices and in particular, factory safety and labor conditions across garment factories in Bangladesh. The tragic Rana Plaza factory collapse that killed in excess of 1000 workers was the watershed event that has now led to the formation of three regionally based retailer consortiums addressing the state of factory conditions across that country along with financial mechanisms to assist factory owners in making required upgrades in facilities and compensating garment workers a living wage.  Prediction Six will provide additional detail on these types of challenges, which are sure to garner increased visibility and developments in 2014.

More than ever, for B2C facing supply chains, advanced capabilities in more predictive planning, inventory management and responsive replenishment will separate leaders from laggards.  The ability to have real-time visibility and the ability to plan and pool multi-tiered supply chain inventory needed to support the breadth of omni-channel fulfillment needs is part of that differentiation. In 2014, B2C facing supply chains will come to understand the critical linkages among supply chain network design and predictive planning capabilities.

In 2013 we learned how Amazon is expanding its breath of online product selections, its added investments in distribution and same-day delivery capabilities. We learned of distribution co-location fulfillment program among Amazon and Procter and Gamble, where certain consumer products are moved across the aisle to trigger Amazon’s online distribution network. More announcements will come in 2014.

In 2012, we advised retailers large and small to tear down the functional walls between traditional and online supply chain organizations and reduce overall complexity. In 2014, we again predict that teams will experience how important that becomes. The traditional concepts of physical distribution are now being re-aligned toward the ability to support individual order and higher flow-through volume. The ability to manage the tendency toward stock-keeping unit (SKU) proliferation brought about by multiple channel fulfillment will become another important differentiation for customer-facing supply chains.

Some noted retailers have already struggled with the effects of a digitally empowered consumer. Our prediction is that at a minimum, 2-3 and perhaps other highly recognized global or regional retailers may not survive this new world of omnichannel retailing in 2014. Amazon will continue to dominate but will remain under challenge from online efforts from Wal-Mart and other web-based fulfillment properties.

Consumer Product Goods (CPG) Sector Challenges

The CPG industry is traditionally an industry of high volume and low margins.  Profitability growth stems from a continuing stream of innovative products that consumers desire to buy, high sales volumes, overall efficiency and cost management. Stockholder interests lie in consistent dividend payouts and increasing market-share dominance.

Global scale is an important strategic differentiator. Smaller or less profitable brands and firms have been acquired by larger industry players, and continued growth and profitability stems from the ability to tap new consumer markets in developing parts of the world.  Economic recessions brought about a more cost-sensitive consumer, and the emergence of the attraction of private brands among consumer buying patterns has taken hold across the industry. Globally focused firms with large product portfolios and brands are able to leverage needed investments in innovation in laggard brands to differentiate their products over private brands, but the competition for the bulk of the consumer wallet continues. The current momentum of online fulfillment and the “Amazon effect” (noted above) has added additional pressures for business process and fulfillment investment. Profits generated from the most popular products or brands help to fund new investments in laggard products. Industry supply chain capabilities focus on responsive demand and supply planning, the ability to plan and anticipate consumer demand patterns and to control commodity and overall procurement costs.

What is changing is the heightened appearance of activist investors who apply dimensions of financial engineering to one or more CPG companies. Their goal is stated as extracting more hidden value for shareholders and the tactics can shake-up, disrupt or cause certain unforeseen effects to individual supply chains. Time Magazine recently cited a Citigroup report indicating that there were 138 activist actions by the end of August 2013 and further noted that activists are less likely to buy firms outright and more likely to pursue share buybacks allowing greater control of corporate strategy and tapping the vast amounts of trillions of dollars in cash on corporate balance sheets. “Their sites are on bigger, richer companies.”

The Supply Chain Matters blog has featured past examples of CPG supply chains response to activist actions. The most notably was the split of CPG icon Kraft into two separate companies, Kraft Foods and Mondelez International. That event was preceded by Kraft itself acquiring global confectioner and snack food company Cadbury. The cumulative effect was multi-year initiatives designed to extract cost savings primarily from global supply chain operations including capacity consolidation and facility closings. Savings garnered from supply chain cost reduction where channeled to fund both new sales and marketing promotions or to fund stock buyback needs. The newest announced 2013 initiative for Mondelez includes the goal of a 5 percentage point improvement in income margin by 2016, which accounts for upwards of $3 billion in savings.  Sibling firm Kraft Foods is in the process of re-investing in its overall capabilities to secure added operational improvements. Some of the same industry activists now hint of pairing up Mondelez and the Frito Lay snack foods division of Pepsico as a new and more formidable global snack and convenience foods provider.

In early 2013, another significant announcement was the acquisition of HJ Heinz by 3G Capital and Berkshire Hathaway with again the motivation to extract added value from a consumer icon. That motivated the Wall Street Journal to headline that merger activity is on a comeback in CPG. Several weeks ago, Heinz announced a re-structuring of its global wide facilities that included plant closings and reductions in corporate administrative staff.

With investment money remaining cheap, activist or M&A activity will obviously continue into 2014, and that threat alone places more pressure on CPG focused supply chains to harvest more cost savings. A look across the remainder of the industry finds that Procter & Gamble has been under enormous pressure these past months to produce additional growth and revenues, after its efforts to consolidate certain supply chain related activities. Nestle has been reviewing its entire global portfolio of brands. Kellogg’s announced a multi-year billion dollar efficiency and effectiveness initiative across its global supply chain. Both Coca Cola and Pepsico have experienced a slowdown in overall revenues and profits from traditional beverage lines causing additional speculation for re-structuring.

For all of the above reasons, CPG focused supply chains will be additionally challenged in 2014 as they are called upon to deliver further cost savings. Since multiple years of prior cutbacks in capacity, spending and resources have taken a toll, additional cutbacks will have far deeper implications. The spillover of financial activist actions may impact additional supply chains. As we penned this prediction, activist Carl Icahn was in dialogue with Apple regarding more increased value and dividends for stockholders.

China’s new shift to more a consumption driven economy will drive new opportunities for a growing middle class and CPG market, and will indeed present a competition among global, local or private brands.  The leaders will be those supply chain teams that can influence senior management on cuts in areas that will not cripple the ability to maintain market agility and maintain capabilities for more timely response to market opportunities or major disruption.

CPG companies must invest in new business process capabilities to meet the challenges of diverse global markets, varying channels of distribution and the threats of omni-channel commerce. The year 2014 will prove critical as to which CPG supply chains rise to balancing activist industry pressures for cost savings or consolidation with the needs for the supply chain to be more responsive to individual market needs.  Resiliency is the key strategy for CPG focused supply chain in 2014.

Aerospace Industry Supply Chain Challenges

Aerospace supply chain challenges stem from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limits are stretched into multi-year windows.

The literal duopoly of Airbus and Boeing continued to dominate industry news in 2013 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. Other smaller industry OEM’s such as Bombardier, Embraer and COMAC compete for niche aircraft segment needs, and each of these players faced critical milestones in 2013.

Both Airbus and Boeing focused supply chains continue with efforts to increase overall aircraft delivery volumes by an unprecedented 40 percent by 2015. At the recent Dubai Air Show held in November, new aircraft orders amounting to excess of $150 billion were booked with delivery slots beginning in 2020.  That is the indication that aerospace supply chains will be extraordinarily challenged for at least the next 10 years if not longer. The dual challenges of ramping-up volume production of released and certified aircraft, coupled with additional product design, development programs and component sourcing efforts for newly announced aircraft will continue to tax supply chain, sourcing and product management teams.

In 2014, existing released aircraft such as Boeing’s 787 Dreamliner must meet delinquent ramp-up delivery requirements in spite of continued component glitches. Suppliers to the 787 have already incurred financial hardships related to constantly delayed or changing delivery schedules. Amid the flurry of multi-billions of orders associated with the launch of 777x aircraft, Boeing’s engineering and production labor union in Seattle has rejected the company’s offer for a long-term labor agreement. In 2014, Boeing must deal with both of these challenges as key partners demand more of their share of financial benefits to unprecedented backlog order and customer delivery needs.

Airbus has plans to begin production and delivery of its new A350 aircraft in 2014. Production ramps of 40 percent increase for the existing A320 backlog, while continuing plans for development and first maiden flight of the anticipated A320 neo version of aircraft will accelerate in 2014.

Bombardier’s new C-Series aircraft first customer ship is expected in late 2014, after completion of certification by global regulators. Barring any major unexpected issues, that milestone will be crucial to convince prospective airline and leasing customers that another alternative exists for fuel efficient single aisle aircraft with possibly quicker delivery times than Airbus or Boeing.

COMAC also faces critical challenges in 2014-2015, those that determine whether it will be a viable market competitor. That OEM’s C919, which Fortune magazine recently declared as a direct look-alike to the Airbus A320, is scheduled for maiden flight in either late 2014 or 2015 and so industry watchers question the effectiveness or viability of the design.

Aircraft engine suppliers General Electric, Safran and Rolls Royce are also beneficiaries of unprecedented new aircraft orders. GE Aviation must fulfill a delivery rate of more than 4,000 engines per year for the next two years amid increasing customer orders for its new GE90, GEnx and CFM56 engine models. The company has a backlog of orders for 15,000 new generation aircraft engines between now and 2020. In 2013, GE Aviation provided indications for movement towards a more vertically-integrated supply chain strategy to both protect intellectual property and better control production ramp-up requirements.

Rolls Royce has plans to double its production output of wide body aircraft engines in next five years.  Aircraft engine manufacturers continue to foster and support recurring revenue flows from airline customer “pay by the hour” operating uptime leasing programs. “Power by the hour” airline customers expect to pay for engine up-time and long-term reliability, which in reality shifts more of the operating and uptime risk burden to the OEM manufacturer. The gold rush analogy that the makers of shovels benefitted more than the miners applies when it comes to aircraft engine providers. Each of these manufacturers and their associated supply chain partners are dealing with unprecedented order backlog volumes and production ramp-up needs, while insuring that newer, more fuel-efficient materials and components can meet the strict quality and operating time standards of aircraft power plant needs.

The year 2014 will indeed be a continuation for unique supply chain challenges across the civilian aerospace industry with little margin for setbacks or glitches. Both product development and operations focused coupled with service management focused challenges are in-store for 2014.

This concludes Part Four of our 2014 Predictions series.

Keep your browser focused on Supply Chain Matters as we highlight Prediction Six and Prediction Seven, both of which will address new dimensions of supply chain risk, in our next posting.

As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series

 

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