This past week provided stark reminders for apparel retailers and their suppliers on the realities of chasing the lowest cost producer, and of the blowback to the brand and its consideration of social responsibility.
Two different yet disturbing incidents involving suppliers located in the country of Myanmar have came to light.
Reuters reported that workers of a Chinese-owned factory making clothes for Swedish fashion retailer Hennes & Mauritz, conducted what was described as a violent demonstration that literally destroyed the production line of the factory. According to the Reuters report, production at Hangzhou-Tex Garment (Myanmar) Company, one of 40 H&M suppliers in that country, have been halted since February 9, nearly a month to-date. The worker dispute started with a strike in late January following the termination of a local labor leader advocating for an improved performance review system and healthcare coverage. Video observed by Reuters described dozens of female workers physically assaulting a factory manager. In late February, hundreds of workers were reported as storming this factory and damaging facilities including machinery, computers, and surveillance cameras. The Chinese embassy in Myanmar described the incident as an “attack” and filed a “serious request” to local government authorities to hold those involved accountable.
H&M issued a statement indicating that it was deeply concerned about this recent conflict and is monitoring the situation closely to include dialogue with concerned parties. What makes this news more troublesome is that H&M has been widely viewed as being outspoken among apparel retailers in promoting worker rights and fair wages. H&M was one of several retailers that demanded labor reforms and improved working conditions after the devastating 2012 Tazeen Fashion and 2013 Rana Plaza factory fires in Bangladesh that cumulatively killed upwards of 200 workers and injured over a thousand workers. In its reporting, Reuters cites H&M as ranking high in sustainability indexes.
A report also indicates that H&M has plans to influence apparel suppliers within the retailer’s supply chain to digitize payments for workers. A report conducted by the Better Than Cash Alliance indicates that 80 percent of factories in Bangladesh pay employees in cash notes. A review of 21 garment factories already utilizing digital payments pointed to significant savings in administrative time handing out cash to workers as well as some security for workers themselves with a more transparent way to receive money, provide more accurate data on wages paid, and afford greater economic independence to female workers.
Separately, a published report by The Wall Street Journal indicates that Europe private equity firm Apax Partners, which controls Germany based retailer Takko Holding, is facing questions from some influential investors after Takko Holding was found to be sourcing production at a garment factory in Myanmar that employed underage workers. Such findings were reported in February by the Dutch based Centre for Research on Multinational Corporations, known as SOMO. That report indicated that several apparel factories in Myanmar had unsafe working conditions, paid low wages or enforced long worker hours. Besides Takko, the SOMO report identified 12 factories utilized by six other Western retailers.
The WSJ report notes that Influential investors of Apax Partners include the California State Teachers Retirement System as well as the Greater Manchester Pension Fund. Each of these investors are highly sensitive to corporate social responsibility and human rights practices and each was vocal to express direct concerns about the latest reports.
Both Supply Chain Matters and apparel industry observers and participants continually point to an industry sourcing model where individual garment factories produce for multiple brands, and in some cases, factories will sub-contract to other factories often without the knowledge of the branded customer. As the WSJ concludes, brands certainly have influence in demanding certain working standards but have little direct control, other than continuous audits. Another ongoing challenge identified after the Bangladesh tragedies was factory owner access to capital to make necessary factory improvements to achieve minimal safety standards, with owners themselves seeking financial subsidies from apparel industry associations who source production in a particular country.
In the specific case of Myanmar, Reuters cites International Labor Standards data indicating that line worker wage rates average $63 monthly as compared to $90-$145 monthly wage rates in Vietnam and Cambodia. Yet in Myanmar, the government has yet to establish a standard for garment factory safety and labor practice standards.
Thus, the challenges of social responsibility continue to persist with the addition of a new lower-cost manufacturing region with a new set of workers becoming impacted by industry practices that weigh direct labor expense as a prime sourcing determinant. It would seem, though, that the risks get higher.
Most apparel retailers and brand producers have declared social responsibility statements and supporting practices. We all know that supply chains are driven by customer and consumer desires and needs, and in the case of apparel, that demand translates to continual variety and the lowest cost. Quality, or perceptions thereof, is sometimes overridden by the attraction of cost, when styles have a short market life.
We continue to submit that we, as consumers of apparel, have the ultimate voice on the weighting of social responsibility practices in the selection and consumption of our apparel choices.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Deep Dive on 2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on our next prediction.
2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Focused Initiatives
Despite the declarations by U.S. President Trump that climate change has not been proven to be an issue, we predict that individual business and supply chain self-interest needs, along with the track record of benefits to-date, will continue multi-industry green and supply chain sustainability initiatives and momentum. There is literally too much positive momentum on a global basis to motivate senior executives to derail such efforts in 2017. The need remains compelling.
Where Emissions Emanate
Scientists point to three sectors that are most critical toward reduction of GHG emissions:
Energy– the engine and most influential cost aspect of global business and of industry supply chains represents upwards of 30 percent of global CO2 emissions. Throughout modern history, the cost of energy and fuel has been the principal driver of a majority of industry, manufacturing, distribution, and global supply chain strategies. Reduction opportunities reside in the consumption of alternative and low carbon renewable energy sources, smarter and far more efficient energy, and logistics utilization practices.
Agricultural, Land Use and Forestry Practices account for an additional 30 percent of global-wide emissions. With world population growth expected to reach 9 billion people by 2050, our planet cannot tolerate an unsustainable food production system. Farming practices, fertilizer, water use, animal husbandry all add to considerable emissions.
City Infrastructure, Buildings and Transportation can be responsible for upwards of 40 percent of global emissions. More of the world’s population is expected to be concentrated in larger cities, (mega-cities) and thus will be the hubs for economic growth, commerce, delivery, and fulfillment logistics. The potential of smarter, more connected cities coupled with advances in more sustainable, renewable energy sources provides the opportunity for a complete re-thinking of urban logistics and transportation. Global trade must now stem from advances and efficiencies in global, regional, and local transportation networks.
To address these three imperatives, more and more organizations have discovered that the firm’s supply chain can be responsible for up to four times GHG emissions beyond that firm’s direct in-house operations. Industry supply chains are therefore one of the most critical areas of opportunity to enable GHG reductions and climate chain resilience.
Sustainability is further not limited to emissions and natural resource protections, it further umbrellas global-wide social responsibility as a business and corporate citizen, and in the treatment and respect of labor provided by individuals. Here, the latter is especially pertinent to industry and global supply chains who elect to source production, component supply or business services in low-wage, limited protection geographies.
As we begin 2017, scientists indicate that the Earth reached its highest temperature on record during 2016, breaking an earlier record set in 2014. This development represents the first time in the modern era of global warming data that average temperatures have exceeded prior levels for three years in a row.
The 12th Edition of The Global Risks Report 2017, sponsored by the World Economic Forum, observes that extreme weather events, climate change and water related crisis have each consistently been noted as among the top ranked global risks for the past seven editions of this report. However, according to this latest report, the pace of change is not yet fast enough to curb current warming trends.
The Artic sea ice had a record melt in 2016 and the Great Barrier Reef suffered an unprecedented coral bleaching event last year. Estimates are that GHG emissions are growing by 52 billion tons of CO2 equivalent per year even as the share from industrial and energy sources may be peaking because of investments in green and sustainability initiatives among multiple industries and countries.
Much has been accomplished these past few years, but more difficult work remains.
The Paris COP21 Agreement on climate change entered force during November 2016. This agreement has now been formally ratified by 110 countries with another 196 countries including China, now indicating strong support. The Global Risks Report 2017 cites data indicating: “The reality remains that to keep global warming to within two degrees Celsius and limit the risk of dangerous climate change, the world will need to reduce emissions by 40% to 70% by 2050 and eliminate them altogether by 2100.”
This new era of the Paris COP21 Agreement provides both a profound call to action as well as a significant opportunity- an opportunity for bolder collaboration and joint goal-setting to not only address greenhouse gas reduction imperatives and to saving our planet, but the imperative of sustainable business itself. It literally should change our perspectives and goal-setting for sustainability strategies surrounding industry supply chains, moving such initiatives beyond supply chain functional to line-of-business level efforts.
Across many industry supply chains, a lot has already been accomplished in identifying opportunities related to reducing industry supply chain related GHG emissions, preserving natural resources including water, and insuring sustainable supply of Earth dependent commodities. Multi-year objectives have been established that include annual tracking of performance to each objective. The benefits of these initiatives are meaningful in relation to savings on supply chain related costs, reductions in responsible emissions, insuring adequate supply of key strategic supply needs and a more positive perception to one’s corporate and product branding.
Opportunities to Further Leverage Technology
With the era of COP21, industry supply chains are presented opportunities to seize upon the tenets outlined in Jeremy Rifkin’s book, the Third Industrial Revolution as well as other Industry 4.0 thought leaders that point to the compelling convergence of technologies that are before us. One that leverages the convergence of green and renewable technologies, new more renewable energy sources, IoT enabled predictive-focused analytics and the digitization of manufacturing and supply chains. All are converging over the not too distant future, and collectively can foster insured business continuity through strategies that are directed at long-term sustainability of commodity, raw material, and natural resource supply.
In 2017, despite any U.S. political notions that climate change may or may not be a significant factor for business risk, industry supply chains and the respective businesses and customers they support and serve, will be at a disadvantage in de-railing or slowing down sustainability efforts.
Benefits have already been recognized along with added opportunities. From our lens, the ongoing convergence of digital and physical business processes manifested by IoT, more predictive analytics, autonomous decision-making and additive manufacturing will provide added opportunities towards sustainability needs and objectives.
The challenge remains insuring a sustainable business within domestic and global dimensions, and that momentum is likely to continue in the coming year.
This concludes our Prediction Nine drill-down. In our final posting of this series, we will explore Prediction Ten which addresses certain industry-specific supply chain focused challenges in the current year.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In preparing our overall 2017 Predictions for Industry and Global Supply Chains, and specifically our prior posting, Prediction One- What to Expect in Global Economic Activity, we had the opportunity to speak with both industry, supply chain and technology executives to gain current perspectives of what supply chains should anticipate in the coming months and how to be prepared.
One opportunity was a discussion with Paul Keel, Senior Vice President, Supply Chain for diversified manufacturer 3M Company. In my role as a supply chain industry analyst, my perspectives of 3M extend nearly 15 years, when I first interacted with members of the 3M supply chain leadership team. A lot has occurred since that time, and that came to be the context of the discussion with Keel.
The 3M of today is a $30 billion diversified manufacturer whose supply chains support 5 different business sectors that span both B2B and B2C focused market segments. Industry products are quite diversified spanning industries such as automotive, commercial aerospace, communications, healthcare, high tech electronics and transportation. The consumer segment is the wide variety of 3M branded products that many of us are familiar with including the iconic branded Post-It note pads. Today’s 3M has deeper roots as multi-industry supplier. The company has always been anchored in core manufacturing and today that includes upwards of 220 worldwide manufacturing plants. It all amounts to a considerable scope for 3M’s supply chain teams.
In our interview, Keel referenced Q4 of 2008 as an important milestone checkpoint for 3M, one that created acute awareness to the potential of heightened volatility of industry and global markets brought about by the global financial crisis. He described that point as “opening the aperture” of the 3M of 30 years ago, as a $3B manufacturer, and the aspirations of what 3M has become today in ten-fold revenue growth. The described anchor has been that of a complete product innovation and continuous improvement mindset across the company. It was also a wake-up call that supply chain capabilities do matter, and that 3M had to excel in all aspects of supply chain competencies.
Regarding 2017 predictions relative to heightened industry competition, continued market uncertainties and potential volatility, Keel remains of the belief that the supply chain will play an increasingly differentiating role for high-performing organizations. He states:
“In the hyper-competitive world of global business, we’re finding new ways that supply chain must lead. While historically organizations looked to their supply chains primarily for productivity and cost reduction, today high-performing companies count on us for much more – developing new products, protecting our environment, serving our customers, and driving meaningful value creation across the enterprise. Fully leveraging the power of supply chain begins with the proper mindset. ‘Make and deliver’ is no longer enough. To win in 2017, we’ll need to ‘amaze and delight.’”
Keel further described the notions of a bimodal supply chain perspective:
“There was a time when supply chains could settle for trade-offs…cost or speed, service or quality, flexibility or reliability. Those days are long gone. The equation has shifted from an imbalanced ‘or’ to an equilibrium centered on ‘and.’ Information and technology are central to achieving this synchronization. The leaders of tomorrow will be the organizations that can effectively manage a bimodal supply chain.”
We also discussed technology as the enabler of bimodal capabilities. Keel described 3M’s perspective as: “Asset-light and Information-heavy.” In the bimodal lens, it translates to enabling greater levels of efficiency in overall productivity levers, in an end-to-end supply chain risk mitigation approach to manage volatility, and general in moving forward with overall global optimization. The other technology lens is that of the business growth enablement lever, manifested by enabling continued end-to-end supply chain segmentation capabilities along with digitization of supply chain processes and decision-making needs.
Keel further pointed to corporate sustainability and social responsibility initiatives as an essential mindset going forward and a further component of bimodal. For 3M, this equates to declared responsibilities to communities, to employees and to the environment.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
While industry supply chain teams continue to work on achieving 2016 year-end strategic, tactical, operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of the year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.
As has been our custom, our scoring process is based on a four-point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.
In our Part Two posting, we revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.
In this Part Three commentary, we will revisit each of our industry-specific supply chain predictions.
For reader awareness: this posting is much longer than our typical blog postings but we felt it would not be appropriate to break-up the various industry sectors. You can scan the industry sub-headings if an industry update captures your interest.
2016 Prediction Five: Noted Supply Chain Industry-Specific Challenges
Each year when we publish our annual predictions, we often include a specific prediction addressing what we feel will be industry-specific challenges that are likely to dominate business and media headlines in the year. For 2016, we predicted challenges remaining in B2C Online Retail, Commercial Aerospace, Consumer Product Goods (CPG) and Automotive industry sectors. We added a further 2016 industry challenge, that being current efforts to deploy more sustainable and health conscious agriculture and food based supply chains.
B2C Online Retail
Self-Rating: 3.8 (Max Score 4.0)
We once again included the prediction of continued challenges in the B2C online fulfillment sector for several reasons. First, industry CEO’s were openly admitting that online trends provided one of the most challenging eras for the retail industry, with impacts ranging from merchandising, organizational and supply chain process and technology dimensions. Second, the byproduct of the late 2014 U.S. West Coast port disruption significantly impacted retailer bottom lines, that has obviously carried over as a challenge for better planning of inventories and expected volumes. Finally, there was the ongoing threat of Amazon, and what actions Amazon would take to impact online retail even more. The Amazon Effect continues to fuel online consumer expectations for faster delivery and instant gratification with little patience for shipment delays or lack of up-to-date information.
As the 2015 holiday fulfillment season, winded down, one important trend became crystal clear for 2016, more and more additional consumers have opted for online shopping. That reality was evident after the Black Friday– Cyber Monday weekend, and it continued right up until the 2015 Christmas holiday. Forecasting firm ChannelAdvisor indicated that online sales in the period of November 26 thru December 20 rose nearly 12 percent over 2014. Another takeaway for retailers as a result of the 2015 holiday period was the reality of the higher costs for inventory, distribution and order fulfillment to support online channels.
By mid-December 2015, reports began to reinforce that online orders were far more than originally anticipated with major parcel transportation provider FedEx and UPS networks falling behind in delivery commitments. Despite the best efforts, technology and forecasting tools, both parcel carrier networks were strained at various points, the former being impacted just before the Christmas holiday by supposedly severe winter storms. Some FedEx employees volunteered to work the holiday to get packages to their holiday destinations, as last-minute shoppers swamped its network. Our Supply Chain Matters assessment commentaries echoed whether the 2015 holiday surge brought forward the question of whether hub and spoke designed delivery networks can accommodate increasing holiday-surge volumes. While UPS managed to make all its required deliveries by 6pm Christmas eve, its network experienced visible slowdowns in the middle of December. Once again-finger-pointing among carriers and online retailers broke out as to which party exhibited accuracy of forecasting.
Two apparent stars of 2015 were Amazon and the U.S. Postal Service (USPS). Amazon took more control of its shipping network, chartering its own air freighters and implementing its larger network of customer fulfillment and package pre-sorting centers. The online retailer literally exposed the weaknesses of hub and spoke logistics and distribution and could promote holiday sales up until Monday of Christmas week. Package volumes handled by the USPS matched that of UPS. Profitability of the agency was however, a whole different story.
In early January, Wal-Mart announced plans to close 269 stores and re-align its brick and mortar retailing strategy. We viewed that announcement as the initial shockwave of the new industry realities, acknowledging the structural impacts that Omni-channel and online customer fulfillment were having on physical stores. In essence all retailers would have to rationalize their dual physical and supply chain presence in the light of consumers’ emphatically moving to online. Other announcements of physical store closings came from other large scale retailers including Macys. That was followed by Wal-Mart’s announced acquisition of Jet.com coupled with a declaration of a strategy more committed to online vs. physical store expansion.
There were added financial casualties from the movement to online including the declared bankruptcy and asset selloff of the Sports Authority retail chain. Athletic goods retailer Finish Line initiated efforts to close upwards of 600 retail stores after its new warehouse management system failed to process orders fast enough, costing the retailer an estimated $32 million in lost sales. This motivated us to declare in a research advisory: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, (Currently available for complimentary download in our Research Center) that this new phase will include physical stores being evaluated by either Return on Investment Capital (ROIC) or profitability growth, much more sophisticated supply chain and inventory management systems tied to advanced forms of predictive and prescriptive analytics, and the ongoing battle of Alibaba and Amazon for global online platform dominance.
We believe our prediction to anticipate more challenges for the retail industry in 2016 was on the mark and we likely continue into the coming year based on the results and final outcomes of this year’s holiday period.
Self-Rating: 3.8 (Max Score 4.0)
Industry dominants Airbus and Boeing continue to manage an unprecedented phase of ramping-up each of their individual global-based supply chains and ecosystems to make a dent in multi-year order backlogs over the next 3-4 years among new aircraft programs. We predicted a rather fragile commercial aerospace supply chain in 2016-17 with many increased risks and concerns. We expected the smaller industry OEM’s to be the primary victims of any supply disruptions.
Throughout 2016, delays in securing certain supply needs such as seats and aircraft interior components hampered production, especially for higher margin wide body aircraft. In May, The Wall Street Journal reported that that Airbus executives were trying to end what has become an annual rite, the end-of-year hockey-stick effort to fulfill the annual target for customer airplane deliveries. The company’s COO of commercial aircraft acknowledged to the WSJ the ongoing frustration and that: “we need to do better.” The report further indicated that the company was exploring further means to change the way airplanes are manufactured in a more predictable manner, language that often translate to additional manufacturing automation. Similarly, Boeing’s efforts to invest in more manufacturing automation became visible with the prototype build of the new 737 Max single aisle aircraft. In February, Boeing made a stunning announcement that it would deliver fewer completed aircraft in 2016 than the manufacturer delivered in 2015.
Another critical shortage turned out to be the new Pratt and Whitney geared turbo fan (GTF) engine that ran into a series of software snafus and key component delays during Q2 and Q3, causing Pratt to declare that it would miss its original 2016 delivery commitments. That event alone impacted the planned shipping schedules for the Airbus A320 neo, and eventually caused Bombardier to announce significant headcount reductions as a result of unplanned delays in deliveries of that manufacturer’s CSeries jets.
On the aerospace strategic supply and product value-chain front, merger, acquisition and business split-out strategies became even more evident in 2016. This was compounded by a general cyclical buying patterns and pressures for added cost reduction among aerospace OEM’s. Metals and forgings supplier Alcoa, the holder of multi-billion supply agreements with both Airbus and Boeing announced plans in March 2015 to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. In January of this year, Alcoa announced the split-out of Arconic, a new value-added aluminum and nonaluminum specialty forging manufacturing company. This split new company was formed to take advantage of the growth of supply needs for high-tech alloy fasteners, forged metal parts within the commercial aerospace and automotive industries. In early November, Arconic became listed for trading and was immediately greeted with 12 percent stock decline due to the concerns of the constant delivery adjustments to delivery schedules of aerospace and automotive supply chains.
Just a few weeks ago, Rockwell Collins and B/E Aerospace announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt. Other such moves occurred, each with the promise of long-term supply agreements and enhanced supply negotiating power with major commercial aircraft manufacturers.
By October, it was becoming rather evident that Airbus and Boeing were pursuing a different set of strategies. The Wall Street Journal reported this dichotomy by observing that while Airbus seemed to be pursuing efforts to increase its aircraft delivery cadence, Boeing was observed as pursuing a strategy of added wide-body sales to expand margins and fund needed production increases.
While the final 2016 production output numbers remain to be completed and announced, there was little doubt of the continued and ongoing supply chain challenges among various aerospace supply chains.
Self-Rating: 3.0 (Max Score 4.0)
Despite an improved economy and more optimistic consumers, the automotive industry continued to have its own unique set of challenges. An unprecedented level of industry-wide product recalls has taxed service management and repair parts supply chains and indeed continued to overflow into 2016. In 2015, the ongoing series of recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands continued to permeate in 2016. Multiple manufacturers were forced to add additional product recalls related to a whole series of automotive components with the result being that most brands had vehicle nameplates under product recall notices.
We predicted that the headline would shift to Volkswagen in 2016 and its needs to address thousands of diesel-powered vehicles with illegal air pollution monitoring devices and software, which continues to impact the reputation of its brand. By October, the financial implications for VW in the U.S. alone amounted to $15 billion in compensation agreements to vehicle owners, dealers and to government regulatory agencies. Other financial settlements involving European and other global owners will add to that number. The brand erosion impacts and remediation efforts are likely to likely extend for multiple years, along with the implications among the broader industry for attempts to alter emissions or other government monitored data.
Another concern indicated for 2016 was that of China’s automotive sector where significant overcapacity existed. We predicted that declining domestic demand would likely force more global exports. Our China sector prediction did not occur, primarily because China’s government provided a much-needed tax break incentive for would-be automotive buyers. Currently, more than 70 percent of autos sold in China qualify for an average $1470 incentive for buying a new vehicle. As of October, new car sales were a cumulative 19 million vehicles, reflecting a 15 percent increase from the same period a year earlier. By year-end, total output in China may exceed that of the United States.
In December, we concurred with Fortune Magazine’s published prediction that Apple will likely buy Tesla to springboard entry into the industry as well as acquisition of a fully operating, vertically integrated supply chain. We thought that Google (Alphabet) was likely another potential player. Obviously, none of these occurred and we blew that prediction. However, the most interesting development was Apple’s subsequent changed strategy in developing its own automobile design, causing the layoff of design team members and a possible different strategy.
We predicted that the bottom-line for the automobile industry in 2016 would be stepped-up efforts in quality assurance, combined software and hardware innovation, alternative energy and Internet-of Things technologies. We feared that automakers would again run the risk of complacency in the current environment of unprecedented low prices of gasoline, opting to promote higher margin trucks and luxury vehicles over those of more increased fuel efficiency and range. The latter is turning out to be the prevalent strategy and it has come at the cost of added innovation. According to JD Power, more than 62 percent of all motor vehicles sold in the U.S. during the month of October were either pick-up trucks or sports utility vehicles.
Global automakers now suddenly find themselves in late 2016 scrambling to stay in front of quickly evolving autonomous vehicle technologies that are prevalent with the likes of Google, Tesla, Uber and others. Both GM and Ford are now plowing investment monies in software development or in new start-ups to avoid opportunity lost.
Consumer Packaged Food and Beverage Goods
Self-Rating: 3.0 (Max Score 4.0)
Since 2014, we have included CPG in our industry-specific challenges for the coming year amid permanent changes in consumer tastes. The year 2016 provided little exception and the stakes indeed were far higher. Consumers continue to shift their food shopping preferences away from traditional processed foods in favor of food providers that offer more perceived healthy foods containing natural and sustainable ingredients. That in-turn has led to continuing low single-digit organic sales growth and laggard profitability levels among the largest CPG companies.
Declining profits and meager sales growth continues to spawn activist equity investors to influence certain CPG, food and beverage firms to consolidate. We predicted further M&A announcements in 2016, possibly involving blockbuster global brands, other than AB In-Bev’s acquisition of SAB Miller, but that by our lens, was a global market-share acquisition effort. There were attempts, such as Mondalez’s overtures to acquire Hershey that later fizzled. Thus, our prediction of wide-scale M&A was off the mark.
The industry remains consumed by zero-based budgeting and significant supply chain focused cost-cutting techniques. Industry leaders and past veterans point to experiencing one of the most dynamic, challenging and disruptive periods ever seen in the industry. As an example, Kraft Heinz Company, formed in 2015 when AB In-Bev’s HJ Heinz acquired Kraft Foods indicated in October that efforts to decrease annual spending by $1.5 billion by the end of 2017 has already met three-fourths of that goal. However, this large food producer reported a sales decline of 1.5 percent for the October-ending quarter, an indication of possibly trading product innovation and sales growth for higher margins and profitability. Executives of the merged company now indicate they will likely raise the cost-cutting goal for 2017.
We predicted that in 2016, the industry winners or survivors will be those who can lead in product and process innovation and gut-wrenching transformation to satisfy consumer preferences more healthy foods, while dealing with the significant distractions and de-moralization brought about by ZBB or other wide-ranging cost cutting initiatives. Generally, we sensed a noticeable uptick in industry product innovation with new product innovation cycles accelerating overall.
We further predicted that lean and mean cost controls would cause food quality monitoring levels to suffer and there will be yet another uptick in highly visible food related product recalls. Our review of the United States Department of Agriculture, Food Safety and Inspection Service listing of food related product recalls through the end of October indicted a near doubling of recall action in 2016, but many of these recalls were related to either undeclared allergens, mislabeling or misbranding of products. That would be an indicator of lax controls related to product management vs. food borne disease. Thus, our prediction of highly visible product recalls was off the mark but likely reduced staffing levels have an effect on assuring that accurate and up-to-date product quality and safety information is being maintained.
The True Organic, Green and Sustainable Food Supply Chain
Self-Rating: 3.8 (Max Score 4.0)
We added this specific 2016 industry related prediction because of the obvious reasons noted in our CPG industry prediction and the shear multi-year scope and effort implied in this effort. Consumers of food now demand to know more about the origins of the food they consume, and how it was produced. They are clearly holding well-known iconic food and restaurant brands accountable for increased commitment to this effort and companies in-turn, are rushing to satisfy these requirements. However, for large, global based companies with complex and established food supply chain practices, the challenge comes down to long-term planning and managing expectations of supply and demand.
Brands such as Costco, Hershey, Kellogg, McDonalds, Nestle, Tyson Foods, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. Yet, do consumers and providers realistically understand the significant challenges and timetables for these efforts? In other words, the entire food industry and respective shareholders needed to come together in concerted efforts in 2016 and beyond to address realistic timetables and consumer expectations as to when true organic, green, sustainable and socially responsible foods will be available in adequate supply and at more affordable prices.
We noted that providers and originators of meat, grocery and produce products will require financial incentives and economic resources to make such transitions over reasonable time periods. The other obvious concern is food safety. When massive scale methods are removed that focus on the use of harmful drugs, genetically modified methods of farming or raising animals in quicker time periods, what will be the near-term impact on food safety? The widespread food safety incidents that impacted Chipotle Mexican Grill since 2015 are a wake-up call reminder to consumers that a fully sustainable food supply chain is a big and complex challenge that is beyond individual companies and food suppliers.
In 2016, food companies indeed stepped-up initiatives and efforts in providing more visibility to the individual product supply chain. Many of these efforts were in enhanced information included in food labeling, or in specific web links that provide even more origin related information. New software can now report on inspection checks among each step in the supply chain while other software can provide very detailed ingredient information of all the possible allergens and health reactions. However, that was just an initial marketing and informational step that merely scratched the surface. The fact remains that consumers generally do not trust brand manufacturers and more industry-wide efforts in long-term supply planning are required.
There is an adage that when the industry big dog makes significant change, others quickly follow, especially those suppliers who also view opportunity for first mover or preferred supplier advantage. One of the more influential sustainable focused food companies in 2016 was McDonalds. This well-known chain was not the only big dog, for example, Nestle indicated it would make the transition to cage-free in five years’ time. Responding to its own challenges relates to sustaining revenue growth, this big dog restaurant chain has ended the use of certain antibiotics in chicken supplies and has embarked on a 10-year effort to provide cage-free egg supplies, which currently are part of upwards of 50 percent of current menu items. As Fortune Magazine noted in a published September report, the firm’s efforts in committing to changed efforts in poultry and egg sourcing are transformative for the entire U.S. food industry. This is because McDonalds represents a huge demand source with large-scale buying influence. It is currently buying over 2 billion eggs per year, and only an average of 13 million eggs currently can meet the cage-free standard. As Fortune noted: “McDonald’s cage-free commitment set off a stampede throughout the food industry. Nearly 200 companies have followed suit.” It further stated: “Now McDonalds isn’t waiting for the supply- it’s creating it.”
Agricultural commodities firm Cargill manages the egg supply for the restaurant chain and is now a founding member of the Coalition for Sustainable Egg Supply which is collaborating with farmers on new henhouse systems, revised farming practices, animal genetics as well as dealing with mitigating the impacts of cage-free in higher mortality rates and potentially higher bacteria levels. The commodities firm is further responding to the demand for non-genetically modified food by modifying practices for how it sources materials in the supply chain and meat-packing facilities.
On the producer side, some specialty egg providers see the opportunity for preferred supplier and our well on the way towards that object. The most prominent is the Happy Egg Company that controls 11 farms scattered across the Ozark Woodlands of Arkansas and Missouri. Other noted producers are Handsome Brook Farm and Vital Farms. In the case of Happy Egg, this producer now has upwards of 400,000 birds in totally cage free settings and plans to double production by the end of 2016. Distribution of product includes more than 7000 grocery stores nationwide with partnerships with Costco, Safeway and Wal-Mart.
There is indeed an acknowledgement that such changes require major multi-year shifts in farming. The U.S. Department of Agriculture estimates that the transition to cage-free could cost upwards of $7 billion for the industry, a considerable burden for producers alone. McDonalds remains committed to financially assist in some of this transition but other egg buyers have provided little interest to subsidize an industry transition.
Fortune notes that consumers are agitating McDonalds to implement pig and cattle antibiotic practices as well as more organic and sustainable meat sourcing practices globally. That challenge is currently characterized as far more challenging because it involves many more suppliers and intermediaries. This undoubtedly is a far more complex multi-year effort.
Therefore, we self-score this prediction on the mid-high side because we sense that the industry influencers are beginning to take on the long-term supply strategy view and have been willing to help producers in the multi-year transition. That stated, there’s a long way to go and it will include further food supply chain challenges. Therefore, do not be surprised if we carryover this prediction into 2017.
This concludes Part Three of our scoring of this year’s predictions. In Part Four, we revisit our predictions related to S&OP processes, the realities of Internet of Things initiatives.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
Three years have passed since the tragic Rana Plaza apparel factory fire that killed many hundreds of garment workers that were trapped by a factory collapse, and according to a recently published Bloomberg report, (Paid subscription may be required) an uncomfortable truth is emerging: “Vigilance isn’t enough.” The result is both continued efforts by branded apparel buyers to require more fashionable clothing at cheaper costs, while factories that need to producer such garments are subject to an economic and policy vise.
The report indicates that some factories in Bangladesh have improved, completing more than 60 percent of fixes required by the inspectors sent by major clothing brands. However, of some 1,600 factories covered by the Accord on Fire and Building Safety in Bangladesh, a major inspection program run by the apparel retail brands, more than 80 percent are behind schedule on completing necessary improvements. Factories covered under the smaller Alliance for Bangladesh Worker Safety initiative have also reportedly lagged. The government of Bangladesh has since shut down just 39 facilities that posed an “immediate” danger to workers. Meanwhile, industry consortium and government investigators, along with outside organizations, keep finding factory defects.
An ironic observation from this latest Bloomberg report indicates: “The craze for cheap, on-trend clothing that helped turn Bangladesh into the world’s second-biggest apparel exporter, after China, has actually intensified since the disaster. Low-priced brands keep undercutting one another, and that keeps squeezing the factories that produce their clothes.”
The United Nations International Labour Organization (ILO) which vows to shutdown unsafe facilities determined in June that factory safety upgrades within the country would cost an estimated $929 million, of which, an estimated $635 million in upgrades have yet to be accomplished. The economics of factory owners being able to secure affordable loans or even be granted such financing to fund needed worker safety improvements clashes with the reality that brand safety consortiums’ financial support is limited. Securing and installing necessary safety equipment is noted as another challenge because of the relentless pressures for product output at lower cost.
Another noted irony is structural in nature. The country’s overall garment industry has new factories opening all the time, in some cases prompting a Darwinian closing of less safe factories, but in-turn, adding to the list of factories that now need to be monitored. The country’s factories are inherently small and their ties to brand apparel buyers is described as tenuous. A further factor is that both industry sponsored worker safety consortium programs only extend to 2018, leaving little time for changes to financed and implemented.
As Supply Chain Matters and others have pointed out in many apparel-specific commentaries, buying practices within the industry continue to foster multiple sub-contracting arrangements where brands are de-facto sheltered or hidden to visibility as to which specific factories are producing certain garments. Such buying practices make contract interpretation and safety compliance standards difficult and subject to needs for continual inspections as to which brand apparel is being produced in any of the country’s apparel factories. Then there are the realities of the workers themselves who must work, regardless of factory safety conditions to sustain their families and livelihood.
As we all look forward to the upcoming holiday buying and gift-giving season, we wanted our readers to be aware of this latest report regarding factory and worker safety progress within Bangladesh, and perhaps other countries as well.
As long as we as consumers, continue to desire fashionable clothing at the cheapest possible cost, without consideration as where and how that clothing was produced, then the industry will continue in its strategies for chasing and demanding the lowest-cost manufacturing source.
The de-facto result seems to be heading toward highly automated garment factories that can produce thousands of garments from robotic machines. The byproduct with that approach are impoverished workers, desiring opportunities to better their economic stature, having such opportunities eliminated.
By our lens, this has always been a challenge for both industry and government collaboration and investment. Sadly, for the country of Bangladesh, such challenges remain.