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Chipotle’s Ongoing Brand and Food Safety Crisis Continues to Hinder Return of Former Patrons

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Supply Chain Matters provides an update on the ongoing brand and supply chain related challenges that have impacted Chipotle Mexican Grill, specifically a past series of food related illnesses including E-coli and salmonella tied to the chain. Subsequent government investigations could not determine any specific causes of prior multiple outbreaks, which presented a challenge in-itself. Last week, Chipotle reported its latest quarterly financial results and there remains evidence that consumers seek more definitive evidence of food safety responsiveness before they return.  Chipotle logo

In a previous February commentary, we observed that the restaurant chain had entered what we believed was a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In a mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef and produce supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled. That decision was apparently subsequently changed. In April, we highlighted the financial impacts of the ongoing crisis affecting bottom line results and management attention.

At the core of this ongoing crisis is the time-tested tenet that consumer trust is hard won, and hard to get back when consumers believe that trust has been violated. If there is any question of a lack of food safety practices at any point along the food supply chain, efforts need to be re-doubled to explore and address any and all such issues.

Readers may have sensed frustration in that our perception was the Chipotle senior management was placing too much emphasis in addressing the ongoing crisis as that of a sales and marketing challenge, one of providing consumers economic incentives to return, while taking what we perceived as a more lean expense towards food safety integrity across the supply chain. The chain embarked on new loyalty and incentive programs offering free burritos and chips to lure back previous customers.

Last week, the “food with integrity” chain reported its latest quarterly financial performance for the June-ending quarter that mostly invoked mixed Wall Street expectations. Although the restaurant chain has returned to some profitability, it has not managed to recover a significant portion of its prior loyal customers. Same store sales were reported as down 24 percent.  According to a report published by The Wall Street Journal, equity analyst firm JP Morgan cited a recent survey indicating that about 25 percent of the chain’s customers have stopped visiting, or are not visiting as frequently. These same analysts, according to this report, now indicate that a full recovery for Chipotle could take years.

Further disclosed was that full testing for any food pathogens in central kitchens, such as bell peppers, was changed because doing so resulted in lower perceived quality from restaurant patrons. The new food safety expert brought in to address food safety needs has reportedly developed other interventions to identify and eliminate pathogens such as now blanching bell peppers and lettuce at the local restaurant.

For the current year thus far, the decline in the value of the restaurant chain stock is approaching 40 percent. Last week executives indicated that upwards of 30 percent of transactions are now tied to the new customer loyalty program which by our lens may be just as troubling since a new culture of visit dependence can be increasingly tied to availability of monetary promotions as opposed to prior loyalty tenets of food taste, integrity and quality of food.

Last week Chipotle executives stressed that revised marketing efforts will now shift to providing wider visibility on food safety and the chain’s supplier traceability program. We do not know how much monetary and staff resources have been allocated to marketing initiatives as contrasted with supply chain food safety. Perhaps that will be forthcoming. Suffice to state here that this may well be another case of opportunity lost.

What seems to be so prevalent in today’s food industry is this notion that consumers have short memories, and that customer retention equates to smart and innovative brand marketing. Often this is driven by Wall Street’s relentless pressures for near-term stockholder monetary rewards vs. long-term brand integrity. Call us old-fashioned, but we remain in the belief that supply chain wide quality, oversight and responsiveness to consumer needs, particularly when any of these tenets is challenged, matter much more in the allocation of management and organizational-wide attention.

As for our personal household, we remain as previous loyal customers who have suspended our visits to Chipotle pending more definite data on overall food safety and integrity. When any company turns to short-term crisis management and stock recovery vs. systemic root cause, it should be a flag of caution. Convince and prove to consumers that supply chain wide measures have been definitively addressed. While consumer tastes are certainly personal in-nature, speaking individually, this author is willing to trade-off some taste for assurances of safety and quality.

Bob Ferrari

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


Reports that U.S. Volkswagen Dealers are Growing Restless Regarding the Ongoing Diesel Emissions Scandal Fixes

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The ongoing brand crisis involving Volkswagen and specifically its customers and dealers over the diesel engine emissions alteration admission continues to take on new dimensions.

Last week, The Wall Street Journal reported that VW dealers across the U.S. are fuming regarding the receipt of specific guidance  regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles have been sitting in lots for over 10 months while VW and U.S. regulators traverse a legal process for determining next steps. According to this report, U.S. VW dealers are now sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.

Not wanting unsellable inventory to be clearly visible, many dealers have reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW is currently compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold and un-positioned inventory, dealers are not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.

Last week, California regulators rejected a proposed VW fix for cars with the larger 3.0 liter diesel power plant. VW executives indicate that they have a fix related to the 2.0 liter diesel engines but regulators also need to approve this process as well.

In its report, the WSJ quotes one specific VW dealer executive as indicating that the scandal, compounded by the current glut of unsaleable inventory has soured his view of VW senior management. This executive further indicates that VW should take the unsold diesel vehicles back to Germany or some other location in the world where they can comply with emission standards.

On Friday, VW U.S. executives met with 150 Northeast U.S. dealers to review what was termed as a TDI Settlement Program, and pledged  additional compensation to dealers. While the details of such restitution still are not known it was the first time that VW indicated that the dealers themselves will receive direct compensation.

A detailed timeline was reportedly outlined regarding the proposed buyback and repair program across the U.S., one that is expected to extend through the end of 2018.  According to a subsequent report from the WSJ, a software fix would be made available for third-generation diesels by October, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.

This overall timeline, if approved by U.S. regulators will affect the nearly 500,000 existing diesel powered vehicles now on U.S. roads in addition to the unsold inventory of 12,000 vehicles.  Thus, it is more than likely that U.S. VW dealer service teams will be very, very busy over the coming months and years. However, VW continues to decline media outlets regarding any specifics related to overall time lines or specific restitution for its dealers. The WSJ report also indicates that for consumers electing to sell their vehicles back to VW, a “third-party settlement specialist” would be inserted to act as an intermediary and direct communicator with dealers.

There is little doubt that U.S. VW dealers face a service management crisis, one that will tax both aftermarket and pre-sales service business segments.

As noted in previous commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.

Once again, all of these challenges in the months to come demand that VW executives move decision-making beyond the halls of Wolfsburg with more emphasis on major geographic based leadership such as VW U.S. The supply chain implications alone place a major emphasis on service management and responsiveness or risk even more erosion to the brand and to customer loyalty. VW needs to think more boldly and more creatively to address fixing the current challenges with non-conforming diesel powered vehicles including the need for augmented resources.

Bob Ferrari

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


A Significant Announcement Related to Internet of Things Technology

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There has been quite a significant announcement related to Internet of Things (IoT) and Industrial Internet technologies, one that line of business, product management and manufacturing focused teams should pay close attention to.

General Electric announced that it will partner with Microsoft in uniting their Cloud computing and analytics technologies in a partnership that will bring GE’s Predix platform for the Industrial Internet to businesses running on Microsoft Azure. The parties indicate in the joint announcement that the combination of Predix with Azure will bridge GE’s industrial equipment and digital expertise in industry and manufacturing, and Microsoft’s forte in information technology. From the lens of this analyst, there are far more implications related to the all-important selection of a technology platform to power IoT initiatives.

This latest announcement bears significance because of selection of Microsoft itself. It is no secret that Microsoft technology has over the years become a dominant integrating technology within and across factory floors. Therefore, from my lens, the potential is the ability to link not only physical objects to business and supply chain business processes but further to connect the shop floor and manufacturing applications with operating assets as well. GE engineers and executives do due diligence very well and they are increasingly acted like an information technology provider with deep domain expertise in industrial equipment and expensive physical assets.

SAP focused readers may recall that at the recent SAP Sapphire conference, Microsoft and SAP also announced a strategic alliance to leverage Azure in the future development of more desktop and mobile applications as well as to provide extensibility of SAP applications to desktop, mobile, Cloud and analytics needs.

We believe that readers should view both of these alliance announcements as a strategy by Microsoft via its Azure platform to become a far more pertinent player as an IoT information and analytics platform. It further opens IoT efforts for the scope of mid-market equipment manufacturers where Microsoft technology is dominant.

In prior Supply Chain Matters commentaries we have called attention to GE as a manufacturer that is both a dominant player and first mover in IoT, but also a significant influencer as to which technology players will ultimately be key IoT participants. By recently opening up its Predix platform in its Digital Alliance program, GE is striving for Predix to become the Industrial Internet platform of choice. In our most recent blog related to GE Predix, I have stated:

Make no mistake, the expanded (GE) Digital Alliance program is a wide swath initiative to build extensive influence and critical technology and development mass in the IoT marketspace.”

This week’s GE-Microsoft announcement adds far more credence to this intent. It is sure to invoke other responses from competing enterprise information, business applications and infrastructure technology providers. The announcement is indeed a big deal and this partnership merits lots of visibility and scrutiny over the coming months.

We will do our part to keep readers informed and in helping to connect events and implications. While the IoT focused industry remains in the early stages of more widespread IoT deployments, current actions center on how major enterprise, supply chain, industrial equipment and platform vendors converge on approach, since the current strategy is one of fostering platform and technology dominance.

This is great theatre one that will keep technology analysts busy and engaged in advisory modes. Insure that you acquire multiple opinions and viewpoints to determine how to position your organization or line of business perspectives related to planned  IoT initiatives. Give us a call or send us an email if you require further assistance.

Bob Ferrari

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


Supply Chain Matters Impressions of PTC LiveWorx 16 Internet of Things Technology Conference- Part Two

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Product Lifecycle Management (PLM) and Internet of Things (IoT) technology provider PTC held its annual LiveWorx 16 IoT conference in Boston last week amid over 4500 attendees. Supply Chain Matters in the person of this industry analyst was invited to once again attend this annual event and walked away with varying impressions regarding the state of IoT adoption and on some shifts among PTC’s ongoing product strategies.

In our previous Part One commentary, we shared various overall impressions, insights and takeaways. In this Part Two posting, we share additional impressions.

Prediction Seven within our 2016 Predictions for Industry and Global Supply Chains (available for complimentary download in our Research Center) anticipated that B2b focused manufacturers and services providers would broaden their perspectives on connected devices and enhancing customer needs, but also stumble because of conflicts in approach, conflicts in stakeholder interests or data silo approaches. We were therefore especially eager to attend the LiveWorx panel discussion featuring select PTC partners. This panel consisted of executives from Cognizant, Dell, Flowserve, Glassbeam, HP Enterprise, National Instruments, ServiceMax and SAP.

Most all of these panelists observed that for now, most customers are not seeking out a specific IoT initiative per-se. Instead, they are seeking technology to assist in resolving use cases involving ongoing business challenges in manufacturing or supply chain or tapping new business opportunities and revenue streams. One panelist indicated that the current hype surrounding IoT has many teams “scratching their heads” in terms of selecting start points or understanding what business problems IoT will solve. From our lens, that reflects a need for broader market education.

Where projects lean toward IoT, the sales and approval cycle tends to be elongated, cited in the range of 6-12 months, with indications that discussion with up to 7 people representing different business functions such as IT, manufacturing, service management and other functions are involved.

Regarding project ROI, the panel indicated that IoT related projects must address definitive returns to the business in areas such as moving the revenue needle, avoidance of expensive downtime particularly in process intensive industry settings, safety of operations and of-course, enhanced customer service and response.

Another common challenge cited by panelists was the need for ubiquitous connectivity of networks, both in broadband Internet connections and mobile devices. Noted was that today, many customers do not have the scalable networks to support the large amounts of data flow implied by IoT use cases, along with the perception that doing so now would be cost prohibitive. One panelist questioned the large amounts of “junk” data now being collected.

As noted in our Part One posting, information and data security remains a top customer concern with panelists indicating that a lot of additional multi-industry education remains to be done. A separate panelist noted this as consistently one of the top three concerns from any customer. One panelist with lots of experience in process based industry observed that industry already has data security standards that are well-understood. This panelist pointed out that the controller domain will always be protected by separate protocols than the data extract domain.

One other area we wanted to highlight for our readers was the topic of what is commonly termed agile engineering.  This is practice commonly adapted by software and technology companies that promotes the creation of scrum teams that conduct frequent product prototypes, gaining immediate customer feedback on a proposed new product, and moving forward with yet another improved prototype until the ultimate product is released.  With more multi-industry products now having more and more technology and software content, classic “waterfall” engineering processes have a hard time keeping up with needs for constant agility. Readers may note the common thread among equipment product recalls of-late has been problems with the functioning software component or needs to update that software to address hardware issues.

PTC executives addressed this specific challenge in the industry analyst and press briefing, along with why they believe that augmenting PLM processes with more AR and VR tools can help support more agile engineering needs. To help in this effort, PTC is sponsoring specific thought leadership for customers to more fully understand agile engineering needs and requirements.

We did manage to attend a couple of breakout sessions focused on Service Lifecycle Management (SLM) and specifically customer efforts to upgrade older versions of either MCA or Xelus service parts planning application to PTC’s latest releases.  From the customer presentations we observed, the upgrade process was reported in positive terms. What was more interesting was the motivations for upgrading, which ranged from internal business changes or consolidation to needs to upgrade to more modern and more advanced planning capabilities.

Finally, during the executive Q&A, PTC CEO Heppelmann indicated that he does not expect PTC to get any more deeply involved in supply chain management focused IoT application needs.  Rather, PTC will allow its partner network to address SCM business and process needs utilizing PTC technology platform and applications.

Overall, LiveWorx 16 was a much more productive and educational conference this year, one that reflected on PTC making its own transitions into the current realities of the current Industrial IoT market.

Bob Ferrari

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


Volkswagen Reports Profitability Despite Ongoing Emissions Scandal

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Supply Chain Matters provides an important follow-up to the ongoing diesel emissions scandal and brand crisis associated with Volkswagen. Today, in announcing its financial performance for the first quarter of 2016, the company surprised many by actually reporting respectable operating and net profits. VW characterized such results as “respectable” considering the challenging conditions and further re-iterated that it has the financial resources to weather the current emissions scandal.

Last September, the U.S. Justice Department initiated a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. Volkswagen has since acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards. Since that time, there has been a series of internal and external investigations, management accounting and other management actions and/or missteps related to this situation.

Despite group sales revenue being down 3.4 percent from the year-earlier period, operating profit climbed to €3.4 billion, while net profits fell to €2.3 billion ($2.6 billion), down from the €2.9 billion reported in the year-earlier period. Automotive division’s net cash flow attributed to operating activities declined by a hefty 45.8 percent but total corporate-wide was slightly up because of a nonrecurring gain on the sales of LeasePlan. According to a published commentary from the Associated Press, the Volkswagen brand made only 73 million euros in the quarter, down from 514 million a year earlier, leaving an operating margin of only 0.3 percent.

It would therefore appear that the company’s broader brands and operating groups, in particular the highly profitable Audi and Porsche Divisions, are financially making-up the difference in the ongoing crisis.  Many manufacturers, not of the sheer global size and breath of Volkswagen would have suffered more financial implications.

In the announcement of financial performance, VW CEO Matthias Mueller states:

2016 will be a transitional year for Volkswagen that will see us fundamentally realign the Group. Nevertheless, we remain confident that our operating business will again record solid growth this year. The Group’s robust financial strength and earnings power are key to our ability to take the necessary decisions calmly and diligently and to resolve the strategic policies that will shape our future with the necessary determination

Today’s announcement of Q1 financial performance did not include any updates on financial contingencies related to ongoing actions related to the emissions scandal. The company outlook for the remainder of 2016 expects 2016 sales revenue for the Volkswagen group to be down by as much as 5 percent.

Reports indicate that a tentative agreement was reached with U.S. authorities in federal court in San Francisco to buy back or repair upwards of 500,000 vehicles. Attorneys for Volkswagen owners have until June 21 to file a final settlement with the court.


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