This posting is an obvious follow-on to our prior commentary about this September turning out to be a noteworthy month for technology related announcements.
Yesterday, SAP announced its intent to acquire Concur Technologies, a provider of cloud-based travel and expense management software. SAP was willing to shell out a whopping $8.3 billion in one of this enterprise technology provider’s largest acquisition deals to date, surpassing the prior acquisition database technology provider Sybase for $7.1 billion in 2010. It is also one of the most significant moves under the leadership under the now singular CEO leadership of Bill McDermott.
After pondering the announcement, the SAP user community should wonder whether SAP is again taking precious financial resources away from its mission of supporting manufacturing and service industry core business process support needs. Instead, this enterprise software provider has an apparent focus on being a multi-purpose business network company in the definition of SAP.
According to business media reports, Concur reported revenues of $546 million and an operating loss of a little over $24 million in its latest fiscal year which ended a year ago in September 2013. In its announcement, SAP indicates that Concur has a revenue run rate of more than $700 million in its current fiscal year, implying a revenue growth rate in the mid-twenty range. That is not all that spectacular for hot, cloud-based tech providers.
SAP was willing to invest half the Concur amount, namely $4.5 billion in its acquisition of cloud-based sourcing and procurement provider Ariba, which is now an SAP operating company and is being positioned as a longer-term cloud-based strategic platform for B2B supply chain sourcing, planning and procurement in direct and indirect materials support areas. SAP has since acquired Fieldglass, a cloud-based provider of contingent labor and services management technology to augment Ariba network capability. But as SAP procurement and supply chain customers have noted, the product roadmap for broader diversified business network potential benefits currently span a long, multi-year window, with multiple moving parts involving other SAP technology and applications areas. One can certainly speculate that Ariba as a stand-alone entity would execute at a far faster pace.
SAP is thus willing to pay in excess of a 10x multiple, no small change, to secure long-term strategic potential in an indirect procurement services category. Granted, travel makes-up a considerable expense for any company, but for larger enterprises, the product value-chain is of higher importance to bottom-line results. The business travel services field is a very crowded one, providing competition challenges with other noteworthy existing players, which will surely get more dynamic with this news.
Readers should note that in their announcements related to business network moves, enterprise vendors emphasize the value of transactions within the network. In the specific case of this Concur announcement, the number communicated is $600 billion in transaction volume. That is the clue toward the real intent, that being incremental revenue growth from transaction fees. However, customers and their procurement teams have become more savvy in this game, and are not reluctant to trade one business network for another if transaction costs exceed budget goals.
At first blush, this Concur deal appears to this author to be more about feeding SAP’s sales teams with added deal volume. That impression is reinforced by statements indicating that the majority of SAP customers do not currently run Concur. Giving the benefit of doubt, we certainly do not have privy to the full picture, thus we along with SAP customer and partner universe will have to await more articulation regarding yet another elongated business network player and roadmap.
In the week that Apple staged its massive media event announcing two of its newest iPhone models, BloombergBusinessweek featured an intriguing article titled: Apple’s iPhone 6 First Responders. The report serves as a very timely reminder of the critical importance for harvesting product performance and service reliability information very early in the product launch stages.
The Apple program outlined is termed early field failure analysis (EFFA). The Bloomberg authors had a novel spin as to the purpose, one that may well resonate with our reader audience: “ As customers line up to buy the device (iPhone) around the world, Apple employees will show up at work to learn how they screwed up- and fix it.”
Humor aside, the Apple program was conceived to resolve problems before they become far larger in-scope, when they are far more expensive to resolve across an outsourced supply chain. Bloomberg cites former Apple employee sources as indicating that EFFA testing is most stringent during the device’s first weeks of consumer sales, but can continue longer as problems arise. Therefore, the EFFA program for the iPhone 6 models is most likely underway as we pen this commentary. Once more, the report confirms that defective Apple devices returned at Apple retail outlets are directly airfreighted to Cupertino where the phone is physically examined and where manufacturing history can be traced to individual workers on an assembly line. There are some rather fascinating examples of how previous problems were found and resolved before they became a thorn.
The report is worthy of a read since it provides further evidence of the importance of connecting the service management business process with the product supply chain. It further provides evidence of how Apple’s product management and supply chain teams harness early feedback information related to specific products to avoid more costly issues and to protect the image of the brand. I suppose we could add that it also avoids the wrath of CEO Tim Cook when consumers feedback any displeasure in an Apple product.
At the beginning of this year, a 2014 Supply Chain Matters prediction and consul was that industry supply chain teams should anticipate continued consolidation activity for the ocean container industry. That indeed has been unfolding. The failed attempt among the top three global ocean container carriers to form the P3 Network was quickly followed by the announcement of the 2M Alliance and the Hapag-Lloyd – MSC merger. Now comes the next iteration.
Today features the announcement from French container shipping group CMA CGM that the service carrier has entered into service-sharing alliance with China Shipping Container Lines (CSCL) and United Arab Shipping (UASC). According to the announcement, the alliance will be termed Ocean Three, and will extend among Asia-Europe, Asia-Mediterranean, Transpacific and Asia- United States East Coast transit routes. The agreements will reportedly cover vessel sharing, slot exchange and slot charter agreements among the three carriers. Routes will be utilizing transshipment hubs common to the three partners. Rather noteworthy is that this alliance covers container shipments originating from the Middle East, Indian sub-continent and West Africa.
This new alliance requires the approval from the U.S. Federal Maritime Commission before it can go into effect.
Readers will recall that CMA CGM was one of the lines originally included in the former P3 Network alliance proposal, and was not included in the 2M Network alliance announcement among industry leader Maersk Lines and Mediterranean Shipping Company (MSC). If approved the Ocean Three alliance will also compete with the announced merger of Hapag-Lloyd and Chile based CSAV, an effort to create the fourth largest global container shipping line by consolidation. That merger is still subject to approval from European Union maritime officials.
Industry supply chain teams and transportation and logistics service providers should anticipate further announcements related to consolidation as the industry domino effect continues. While the various ocean container carriers continue to point out the benefits of increased efficiencies, schedule frequency and overall capacity utilization from these consolidation moves, the smoking gun remains as to the impacts to future tariff rates.
This week, the U.S. Postal Service (USPS) suddenly changed the dynamics related to shipping costs in B2C/B2B online commerce and the beneficiaries may well be online customers and mass retailers. The agency aggressively cut shipping prices involving small packages in what the Wall Street Journal described as: “..aiming to steal business from both FedEx Corp. and United Parcel Service Inc.,”
In effect, the Postal Service is acknowledging that its parcel rates were not competitive with its market competitors and it wants to do something about that. The steepest rate cuts are targeted to large volume shippers with packages of less than 5 pounds, with cuts involving other package weights and volumes. In its reporting, the Wall Street Journal (paid subscription or free metered view) cites an industry observer as indicating that a number of E-commerce shippers are either considering or have elected to now utilize the USPS as a result of this rate price change. In its article, WSJ further features a table that contrasts carrier shipping costs for 5-10-20 pound packages which clearly depicts more competitive USPS rates, especially when shippers factor the added fuel and other surcharges incurred by both FedEx and UPS. The USPS does not apply surcharges and has been the last-mile delivery mechanism for many rural addresses in the United States.
In previous Supply Chain Matters commentaries, we raised awareness that planned dimensional-based rate increases initially announced by FedEx and subsequently UPS would have definite impacts to E-commerce shipments in 2015. These rate hikes especially involved low weight but high bulk item shipments such as a case of toilet paper or paper towels.
Both FedEx and UPS were not at all pleased by the latest USPS pricing move and have each logged formal protests and claiming foul. No doubt, certain members of the U.S. Congress may be receiving protest calls. Then again, the cry concerning the USPS was to stop hemorrhaging money and this may well be a bold step in that direction. Officials at the USPS indicate that they will make money with these more competitive rates.
The USPS has made other important moves including partnering with online retailers Amazonfor Sunday deliveries, This week provided an additional announcement that Amazon, specifically its Amazon Fresh unit, and the USPS will partner in a trail to shuttle insulated containers of food products and groceries to residences in San Francisco, and perhaps other urban markets as well.
In the view of Supply Chain Matters, this latest move sets-up a whole different dynamic for B2C/B2B online customer fulfillment in the forthcoming holiday buying peak period. Online retailers who want to maintain attractive free shipping options now have a potential new alternative to control costs of such programs. Both FedEx and UPS will have to deal with a different competitive landscape in terms of rates.
Readers will recall that during the 2013 holiday surge period, the prime headline was the blame game directed at package delivery carriers carrier’s UPS, and to some extent FedEx, inability to handle the last-minute online fulfillment volumes that swamped logistics networks in the two days prior to the Christmas holiday. Both carriers have since invested in added logistics capabilities and have alerted online retailers that there may be a premium cost involved in supporting last-minute or time-sensitive shipments. Amazon for one has also been working on developing its own parcel delivery network.
The USPS has in all likelihood, added itself to this dynamic in the upcoming period. Reducing rates is one strategy, but delivering on-time at the height of crunch periods when all networks are tapped is the other test of competitiveness. We will all have to wait and observe.
In the meantime, we extend a Supply Chain Matters thumbs-up to the USPS for finally making bold moves.
You and I as online consumers, and many online retailers and businesses stand to benefit with these latest USPS moves.
Supply Chain Matters has featured many ongoing commentaries regarding electric powered automotive manufacturer Tesla Motors and its bold “gigafactory” strategic supply strategy. Our last commentary published in mid-August on this topic reflected on the high frenzy of lobbying and proposed incentives among various U.S. states to be designated as the designated site for this massive factory, but the betting for the final site was leaning heavily towards a particular site, that being Nevada.
This afternoon, the formal announcement regarding the chosen site for this massive $5 billion supply facility will be made but business and general media has already running stories concerning disclosed the site, which is an industrial complex near Reno Nevada.
Let’s re-visit the four strategic objectives outlined in our mid-August commentary in light of today’s expected announcement:
Bold supply chain vertical integration
As more information comes to light, there is no doubt in the lens of Supply Chain Matters that Tesla has elected a bold vertical integration strategy. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent. Current reports now cite the statistic that at total capacity, capable of supplying up to 500,000 electric vehicles per year, the plant capacity exceeds than all of the entire automotive industry’s current lithium-ion battery supply needs. However, other information now coming to light indicates that Tesla’s supply strategy extends beyond current automotive industry needs, and could include electric storage needs for public utility, alternative energy or other industry needs.
There are new reports that the Nevada site selection has considerations for being powered by solar, wind and/or geothermal energy methods. as well as being a potential supplier of electrical storage to Las Vegas casinos and entertainment complexes.
Proximity to key commodity supply and transport networks
The site itself is rather close to supplies of the all-important raw material of lithium supply. A report posted on SiliconValley.com observes that Rockwood Lithium, the only operating bulk lithium supplier in the United States could easily supply needed raw material. The sire itself, to be located within the Tahoe Reno Industrial Center is approximately a four hour drive from Tesla’s primary Fremont assembly facility, and does provide for rail services.
A well trained and technically savvy workforce
Currently, Nevada has one of the highest unemployment rates in the United States. No doubt, the State of Nevada probably included workforce training incentives to staff the new facility. This facility is expected to be highly automated, but previous estimates pegged overall employment at 6500 at full capacity.
Subsidies that may well defray the overall cost burden.
In its reporting of the Tesla Nevada site selection, the Wall Street Journal noted: “Nevada likely offered Tesla one of the largest incentive packages in the history of the U.S. automotive industry.” Reports reinforce Tesla’s prior statements indicating expectations that the designated states would defray upwards of $500 million of this facility’s total $5 billion costs. The Governor of Nevada is expected to convene a special session of that state’s legislature to finalize details of the overall incentives package. We’ll know in the coming days the details of such subsidies, but as noted above, early indicators point to a substantial package.
Tesla is a company whose boldness extends across its entire value-chain. Today’s announcement of Reno Nevada as the site as one of the largest single factories ever constructed in the United States is a testament to such boldness and initiative. The race to a 2017 volume production now begins.
Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.
Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.
According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.
The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.
Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.
Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.
By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China. A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.”
Supply Chain Matters has a two-fold reaction to these events. First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions. On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies.
In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle. Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers. One could argue that that might have led to the McDonald’s response.
However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.