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Pratt and Whitney Supply Chain Challenges Now Even More Visible

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It seems quite evident that August and September have featured quite a lot of significant developments involving multi-industry supply chains and Supply Chain Matters continues in the following subsequent postings to highlight those with significance or either short or longer-term implications.

We have previously alerted our readers to percolating supply chain related challenges concerning Pratt & Whitney, and specifically the aerospace engine provider’s newly released geared turbofan engines. In our July commentary related to mid-year operational performance results for both Airbus and Boeing, we highlighted that Airbus’s first-half shipping performance related to the new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed of the new model A320 were reported at the time as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.  Pratt & Whitney Geared Turbo Fan engine production line

This week featured an announcement from Bombardier, designer and manufacturer of the new C-Series single aisle aircraft targeted to compete with Airbus and Boeing. The Canadian based aerospace provider was forced to cut its 2016 delivery guidance down to 7, from a prior planned 15 completed aircraft, specifically citing delays in engine deliveries from Pratt. In its formal operational update, the president of the firm’s commercial aircraft operations indicates that Bombardier is working very closely with Pratt to address “supplier ramp-up” issues. In its reporting of the Bombardier development, The Wall Street Journal includes a statement from a Pratt spokesperson acknowledging that while there are some pressures on new engine deliveries, some progress is being made on delivery commitments.

The C Series delivery adjustment announced this week will result in lower revenues for Bombardier Commercial Aircraft for the year and the manufacturer is indicating the cutback will not materially affect operational earnings. None the less, Bombardier has much at-stake since the new Pratt geared turbo-fan engine is currently the sole engine specified for the C-Series. Obviously, Pratt is also trying to balance the needs of Airbus, with far higher short and longer-term order commitments with that of competing Bombardier. Once again, in times of delivery shortfalls, a de-facto balancing of prioritization in deliveries comes to the forefront.

In a related development and reinforcement, a Reuters published report this week features the head of the world’s largest independent aircraft leasing company, AerCap Holdings NV, which currently has outstanding orders for over 100 Pratt powered Airbus A320 neo’s, voiced concern that a delay in delivery of the Pratt engines could ripple out and affect AerCap’s ability to receive a new Airbus jetliner due in the next few days. A Pratt spokesperson subsequently indicated to Reuters: “”To meet what has been incredible demand for the GTF engine, we are working collaboratively across our entire manufacturing process to ensure maximum performance, and we are keeping our customers apprised throughout the process.”

In June, executives from Pratt indicated to The Wall Street Journal that roughly half of the company’s suppliers for its new geared turbofan engines were not delivering parts and materials at expected levels as seamlessly as the company expected. United Technologies Chief Executive Gregory Hayes further indicated to the WSJ that at the time, 44 percent of the company’s 1,600 suppliers—including the 500 to 600 who supply parts and materials for the engines themselves—weren’t meeting the company’s on-time delivery and quality control targets. The WSJ further observed that unlike previous generations of engines, 80 percent of parts for the geared turbofan are produced by entities other than Pratt itself, then shipped and assembled in the company’s engine manufacturing centers in Connecticut, Florida, Canada and Germany. This is a similar supply chain sourcing strategy as practiced by today’s leading aircraft manufacturers themselves.

Pratt has reportedly invested upwards of $10 billion in development of its revolutionary geared turbo-fan engine.  Yet, with the June report indicating 44 percent of suppliers not meeting on-time delivery commitments during the engine’s initial production ramp-up phase, it brings into question how much was invested in overall supplier production process needs. Pratt’s engine component supplier base is also shared with rivals such as General Electric and CFM International, providing yet another dynamic as to which engine manufacturer features the more aspects of design for manufacturability and design for volume.

United Technologies, the parent of Pratt, also provides a recent history of investing heavily in lean process, overall cost and production methodologies.  That, by our lens, provides a further looking glass as to whether such methodologies or organizational approaches impacted needs to adequately plan for the ramp-up and the production volume requirements for the new engine.

Obviously, Pratt will remain under an intense industry and media looking glass for some time to come as it attempts to deal with its ongoing challenges in meeting engine delivery needs.

The open question will be how long will airline customers and certain manufacturers tolerate such delays without taking other actions.  Since the cost of aviation fuel remains historically low, Pratt may have some leeway in addressing its ongoing engine delivery challenges.  Pratt’s goal is the ability to ramp-up production levels of the geared turbo fan model to upwards of 1200 engines annually by 2020 in order to address its current overall order backlog of upwards of 7000 engines. As some supply chain leaders would opine- it is better to flush-out and adequately address overall supply chain issues during the initial ramp-up than to have to experience such challenges on a continual basis. There indeed is the current challenge for Pratt’s sales and operations planning teams and its supply chain ecosystem and we trust that teams will rise to such challenges.

Bob Ferrari

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


The Newest Phase for Elongated Supplier Payments- More Aggressive Supplier Push-Back

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Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow.  However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.

To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.

Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.”  In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.

Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.

The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.

And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.

The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.

In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.

In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.

Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.

Other noteworthy news related to supplier push have involved UK retailer Tesco as well as global  iron and steel producer Rio Tinto.

The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.

Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.

In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.

Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.

We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.

The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers.  They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.

Bob Ferrari

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

 


Report of a Different Focus for General Motors in Supplier Management Relationships

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The Wall Street Journal has reported that General Motors will allow 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. At least once per year, suppliers can renegotiate terms when impacted by unexpected external economic factors.

This development is newsworthy because among long time automotive industry watchers, GM has developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Annual industry surveys ranking the relationship of suppliers with various global OEM’s have consistently ranked GM much lower in past surveys.

This latest move is attributed to support a new GM strategy that involves investing $5 billion over the next ten years to develop a new line-up of Chevrolet branded vehicles for consumer markets in Brazil, Mexico and foreign markets such as India and China. Thus, procurement strategy has taken on a more active strategy to longer-term support product development needs. GM’s new chief procurement officer, Steve Kiefer has reportedly been exploring alternative supplier management efforts with GM’s supplier base since taking on the CPO role in late 2014.

What we believe should go unnoticed is that Keifer’s previous industry background included roles at Tier One industry supplier Delphi Automotive, thus providing a fresh bottoms-up perspective on supplier relationship management.  Since taking over leadership of GM procurement, he has reportedly fostered the creation of longer-term supplier contracts that include co-innovation in component design or automotive sub-systems for areas such as safety and more intelligent vehicles. The WSJ report quotes a marketing executive for supplier Magna International as reinforcing that GM has taken on a more collaborative approach with that supplier.

We wanted to highlight this report for Supply Chain Matters readers because it is indeed noteworthy.  We thought about extending our “Thumbs-Up” recognition but we will hold off somewhat until there is further history in these ongoing efforts.

However, in the meantime, well-done, GM…


Visibility to Wal-Mart Business and Supply Chain Strategies Again Front and Center

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Wal-Mart, the world’s largest retailer held its annual meeting at the beginning of this month, and business and general media has provided lots of subsequent news coverage.  Wal_Mart Store

During the annual investor meeting held on June 2nd that included upwards of 14,000 attendees, Wal-Mart CEO Doug McMillon urged employees and investors to reimagine the future of the retail landscape. He further added that the retailer is picking up the pace of change, and from the overall supply chain lens, winds of significant change remain evident for many months to come. Such a change will place added burdens on suppliers to insure that Wal-Mart maintains both its global leadership role but also its needs to added profitability.

Many published reports related to Wal-Mart over these past two weeks point to the retailer as being at an important crossroads in terms of its long-held dominance in pricing and convenience. We call particular reader attention to a published Economist article: Walmart- Thinking Outside the box, (Paid subscription required) which provides an in-depth perspective on strategies and business needs.

From an online perspective, Amazon continues as the dominant online retail platform, providing online shoppers with both competitive price and convenience.  With further expansion in household consumables, grocery and other foods, Amazon will increasingly encroach on the Wal-Mart customer. Wal-Mart itself has invested a reported $10.5 billion within new information technology to enhance its online web presence and fulfillment capabilities.  In January, both existing IT groups were also merged together into one singular group. Yet, industry media reports that online sales slowed to a 7 percent growth pace during the first quarter, below company and investor expectations.

CEO McMillon observes that his team has paid very close attention to current retail industry trends including the growth of online, and that his firm will dominate by executing a strategy that leverages the combination of online as well as physical distribution and retail store presence. Stores will serve both as a retail destination as well as an extension of online in customer pick-up and returns.

Within physical stores, the retailer has invested $2.7 billion in higher wages and employee training, but at the same time, consolidated its physical retail footprint by closing 269 stores. Efforts are once again underway to spruce-up stores, clean-up aisle clutter and include more fresh produce offerings. The retailer further announced that over the coming months, Wal-Mart will return to an aggressive pricing strategy, promising to once again reduce prices on a number of offered items.

This leads to the supply chain challenge that is currently underway, namely, to compensate for all of the added investments in operations and online capability, suppliers will have to divvy-up additional cost and price savings. In a sense, this is nothing new for Wal-Mart’s suppliers; however it appears as though it is taking on more aggressive dimensions. We initially highlighted stepped-up supplier pressures in April of last year, and consequent supplier push-back attempts in September.

One of the largest and most loyal suppliers to Wal-Mart has been global consumer packaged goods producer Procter& Gamble.  The business relationship has extended for decades and today, P&G garners in excess of $10 billion in revenues from Wal-Mart alone.

Today’s edition of the Wall Street Journal features a front-page article: Wal-Mart and P&G: A $10 Billion Marriage Under Strain (Paid subscription required) that provides added insights into supplier relationships with the retailer. Over year ago, Supply Chain Matters highlighted a similar WSJ report on the intense competitive pressures of both firms, when the retailer elected to offer Persil, a European branded laundry detergent alongside P&G’s Tide branded detergent across Wal-Mart’s retail stores.

This latest report indicates that both firms: “are increasingly butting heads as both try to wring more revenue out of their slow-growing businesses.” The retailer in-essence is pressuring for reductions in prices for best-selling goods as it furthers efforts to invest in new capabilities, while P&G is attempting to protect both volume and profitability of its largest brands.

One other revelation brought out was that unlike all other suppliers, P&G does not have a contract that governs supplier agreements. Rather, both parties rely on in-person relationships, emails and handshakes to address supply programs and other particulars.

Returning to the broader Wal-Mart supplier community, the retailer’s new U.S. chief executive is reportedly spoke directly with suppliers in February and delivered a stern message concerning needs to work more on inefficiencies. The WSJ cites indicates that several people that attended indicated that the retailer expects “healthy tensions” will suppliers and will be “maniacal about managing costs.” The U.S. CEO is further pushing his procurement team to fight more aggressively in negotiations with suppliers and all buyers are now required to attend a workshop conducted by a U.K. based negotiations consultancy.

We suspect that some of our readers who reside in supplier organizations doing business with Wal-Mart may have already encountered the effects of this renewed supplier management efforts.

Thus is the evolving strategy of Wal-Mart, evolve quickly in the new era of retail by leveraging all existing assets, fight for every consumer in price and convenience, invest aggressively in needed new capabilities and garner any and all compensating cost reductions and efficiencies from existing suppliers to meet required financial bottom-line outcomes.

In some sense, the more things change, the more an organization can revert back to prior methods. In the end, we continue to question whether pounding suppliers is counter-productive, since process, cost and product innovation comes from all tiers of any supply chain in joint collaboration efforts.

Bob Ferrari


Supply Chain Matters Highlights from ISM 2016- Part One

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This supply chain industry analyst just returned from attending the Institute for Supply Management (ISM) 2016 annual conference held earlier this week. This is the conference where purchasing and supply management professionals gather for added learning, education and insights related to supply chain management and in particular, supply management’s role in contributing to required business outcomes.ISM 2015 Conference Logo

I walked away from this particular conference with many positive impressions, some of which will be shared in subsequent Supply Chain Matters commentaries.

Overall attendance was impressive as well as the profiles of those attending.  I was especially pleased on observing the many Millennials in-attendance, more so than I have observed in the many supply chain conferences this author has attended over the years. That is indeed great and a testament to perhaps the growing attraction to careers in supply chain management. Praise to ISM’s conference planning teams for putting together an overall agenda that featured many topics related to do’s and don’ts of procurement management as well as a number of panels that addressed skills, talent and career management topics. In that light, I also had the opportunity to hear from five of this year’s 30 Under 30 Rising Supply Chain Stars which was equally impressive.  More on that will also be forthcoming in a subsequent posting as-well.

One very impressive presentation I would like to highlight was presented by Ian Hope Johnstone, Head, Sustainable Agriculture for Global Operations at PepsiCo. His presentation addressed how this global based food and beverage producer is advancing sustainability in agricultural practices across a spectrum of farmers.  Further addressed was PepsiCo’s ongoing Sustainable Farming Initiative(SFI).

In a previous commentary addressing the global and industry supply chain ramifications of the recent COP21 Paris Climate Agreement, this author came to a realization, that the recent ground breaking COP21 Agreement on stemming global climate change 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 functional to line-of-business level efforts. Through Supply Chain Matters, my hope is to provide specific examples of such efforts, and clearly I can now cite PepsiCo’s ongoing efforts as a benchmark example of the context of business sustainability.

PepsiCo’s sustainability umbrella is indeed broad and includes sustainability needs related human, environmental, talent and global citizenship initiatives. No doubt the firm’s dynamic Board Chairperson and CEO, Indra Nooyi has been a guiding and important C-Level sponsor for such efforts and resources. Within the firm’s 2014 Sustainability Report, Ms. Nooyi articulates very powerful statements that communicate the broader requirements for sustainable business. One of those statements is here noted:

Weaving sustainability into the very fabric of our organization is a way to help future-proof our business for the changing world around us.”

PepsiCo’s sustainability umbrella therefore extends beyond procurement and umbrellas the entire value-chain and the many dimensions of doing business.

In his presentation, Johnstone highlighted the compelling need that food production must double by 2050 amid constrained land environments, an aging farm population and the ongoing climate changes impacting our globe today.  Once more, he validated that consumers are highly influencing sustainability needs, being much more demanding of health conscious and protein-based foods, along with demanding visibility to where particular food products are sourced.

From the procurement lens, PepsiCo’s Sustainable Farming Initiative is both consumer and supply chain facing linking the two toward common objectives. The Procurement criteria now include a diamond visual that includes Service, Quantity, Price and recently added Sustainability as buying criteria. Sustainability includes security of supply over a much longer-term window, ten or more years in many cases. Noteworthy was PepsiCo’s procurement team efforts in listening to and collaborating with various farmers on efforts required to reduce water consumption, smarter agricultural practices and respecting the data ownership needs of farmers.

This global food and beverage producer clearly recognizes that no one corporation can succeed in farming sustainability without actively working with other consumer products producers such as Land of Lakes, Kelloggs, McDonald’s Unilever and others in an industry consortium for addressing common standards in sustainable farming practices and in consistent water and land conservation and renewal practices.

For further information, our readers can review PepsiCo’s dedicated sustainability web page.

In our Part Two commentary I will address some other personal highlights from this year’s ISM annual gathering.

Bob Ferrari

 


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