In our Supply Chain Matters 2014 Predictions Research Report (full research report available for complimentary downloading in our Research Center) we specifically addressed consumer product goods supply chains where combinations of external forces are providing unique challenges. These forces include, among others, contraction of global growth rates and margins from previously expanding emerging markets, a certain group of activist investors demanding more cash value, and now, increases in key commodity costs.
While we have already provided a previous specific CPG supply chain commentary, an event held last week provided stronger evidence for additional thoughts.
One of the premiere events for consumer product goods companies is the Consumer Analyst Group of New York (CAGNY) Annual Conference, traditionally held in February. For those unfamiliar with CAGNY, it represents an organization of Wall Street analysts, investment bankers and others whose focus is specifically on CPG industry investment and performance. The conference which was held last week, is where a number of CPG senior executives provide a detailed business overview of their companies’ strategic goals.
Since 2008, Supply Chain Matters has utilized the content presented at this conference as reliable indicators for the upcoming challenges for CPG supply chains, and this year was no exception.
Thus far, we have reviewed presentations from Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We elected this initial grouping because these firms are exercising product growth strategies predicated on higher growth and margin businesses such as snacks, and because this grouping represents differences of corporate size, culture, as well as different perspectives, positive or otherwise, on supply chain challenges, capabilities or accomplishments.
Our initial analysis was to screen for common messaging regarding industry challenges and required business outcomes. That was not difficult, at all.
Mondelez, which has its sole business focus on a global snacks business, addressed the potential of a $1.2 trillion global snacks market, yet has experienced some realities of declining growth rates among snack categories in 2013. Hershey, a company that traditionally has been grounded in North American markets addressed a growth plank indicating that geographic expansion will be the key to growth and become Hershey’s #2 market by 2017. Campbell Soup, a company demonstrating positive results of late, stated its goals as growing faster in snacks and healthy beverages and expanding international presence.
As each CFO addressed his or her company’s segment it was clear that current signs of slowing growth among emerging markets has placed a pointed emphasis on improved operating margin and cost savings. Once more, such savings are to be re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand. A clear common message was increasing stockholder value and operating cash flow, the obvious response to activist investors circling the industry. As examples: Mondelez expects to deliver an additional $3 billion in gross productivity savings, $1.5 billion in net productivity, and $1 billion in incremental cash; Campbell Soup stated its restructuring programs have yielded $160 million in annualized savings.
That leads to the stated priorities for each company’s supply chain.
Mondelez addressed four current supply chain priorities:
- Step change in leadership talent and capabilities, articulated as changing 40 of 115 key leadership roles;
- Transform global manufacturing platforms with an emphasis on new biscuit, chocolate and gum platforms across a global presence;
- Redesign the supply chain network- with 30 plants already “streamlined”, closed or sold and 3000 FTE’s reduced; and
- Drive additional productivity and margin improvement programs to fuel growth.
Hershey, which has demonstrated positive supply chain successes to-date, addressed its supply chain goals as:
- End-to-end supplier integration focused on increased on-shelf availability, improved freshness, and localized regional production;
- Strategic procurement partnerships for product innovation, sustainability and cost control;
- Insights-driven supply and value-chain stressing deeper analytics; and
- Global shared-services
Campbell Soup and Pepsico similarly articulate expansion of on-shelf availability, innovative direct-store delivery programs, leveraging direct online commerce and expansion in faster growing markets as supply chain priorities.
We highlight CPG industry challenges because our industry readers need to quickly internalize the implications, both for their organizations and for their careers.
CPG supply chains have always been driven by sales and marketing, along with efficiency and responsiveness. That is not, obviously, going to change. What is changing is the need for bolder leadership skills which is now articulated by talent management being ranked as a top goal. There are many implications to talent management, too many to articulate in this singular commentary. Suffice to state, it implies a far broader set of management skills that span international business markets, translating required business outcomes for margin improvement into prioritized strategies, and in-depth understanding of what is required to be both market and business outcomes driven.
Emerging CPG supply chain leaders will require more depth in the tradeoffs of incremental business process improvement with cost-conscious information technology investments that enable the best end-to-end network response capabilities grounded in more predictive insights as to what to expect. They will now have to manage with less fixed capital and resources, with no choice but to have more reliance on partners and suppliers, including third-party logistics providers. That unfortunately, will lead to the dynamic of passing more cost and risk burden lower into the supply chain. We maintain that this will require total visibility to what’s occurring across the global supply chain, and that implies an end-to-end B2B platform integrating suppliers, contractors, trading partners and other key value-chain participants.
The notions of striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut, and are a relic of the past.
We, as thought leaders and/or consultants, need to stop feeding these fallacies and deliver more straight talk on what skills and competencies supply chain leaders, and their teams, need to be more successful in their efforts, keep teams motivated as well as enjoy coming to work every day. Technology vendors need to stop the endless re-purposing of supply chain visibility or competency acronyms and get to the essence of supporting CPG supply chains with more cost-effective and responsive solutions to immediate needs.
Finally, CPG firms themselves in need to quickly come to the realization that the supply chain leaders and individuals they require, today and in the future are indeed scarce, and be willing to recognize such leadership and technology savvy skills in compensation, incentives and management development and mentoring opportunities.
Throughout 2014, Supply Chain Matters will do our part in hard-hitting straight-talk commentary.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.
In late August of 2011, three of Japan’s liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. This new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences. Each of the merging companies was reported to hold 10 percent ownership in the new venture while the government agency held 70 percent ownership. The goal at the time was to position Japan Display and its technology in strategic markets related to small and mid-sized LCD displays, and to have the new company operating as an independent entity by early 2016.
This week, Japan Display announced its intent to raise upwards of $4 billion in an initial public stock offering (IPO) which the Wall Street Journal characterized (paid subscription) as the largest IPO from Asia this year. The WSJ further noted that if successful, it would represent a rare turnaround for Japan’s manufacturing industry. The report indicates that Japan Display currently supplies LCD displays for Apple’s iPhone 5S and iPhone 5C and its customer list now includes other top Asian and U.S. smartphone makers. The supplier has been skillful in improving the overall energy efficiencies of its LCD products while integrating touch sensors directly into the display, eliminating the need for a separate touch screen layer. Japan Display also appears on Apple’s 2013 listing of its top suppliers, and according to the WSJ report, garners up to a third of its current revenues from supply agreements with Apple.
While Japan Display made a small profit for its fiscal year ending in March 2013, it has not indicated to business media what its profit figures are for the current fiscal year. That information should presumably come with the IPO disclosures.
Reports indicate that $1.7 billion of the IPO proceeds will be utilized to enhance production capacity and develop new technologies. The remaining proceeds will be directed at current investing shareholders who will be unloading their stakes
With this announcement, it would appear that the timetable for Japan Display to become an independent operating company may be accelerating. Then again, with current favorable basis of Japan’s currency, the IPO may have more to do with opportunistic timing.
In either case, this IPO marks a significant positive milestone in resurrecting previous un-competitive LCD suppliers in Japan into a singular entity that is now holding its own. It represents another positive indicator that industry and government came come together to resurrect a supply eco-system, similar to what has occurred in Europe and the U.S.. It provides a reference model for other suppliers and supply ecosystems as well.
Consumer electronics leader Apple has released its 2014 Supplier Responsibility Report with declarations of better working conditions and tougher standards for those suppliers fortunate to be a part of Apple’s value-chain and supply eco-system. This year’s report is the eighth since annual reporting was initiated by Apple, and by our lens, continues to provide industry leadership and transparency in areas that require continuous industry attention.
Noted highlights of the 2014 report include:
- Increased efforts directed at social responsibility practices by publically releasing for the first time, more than 100 pages of declared Social Responsibility Standards.
- The education and training of 1.5 million people on their worker rights, and the weekly tracking of hours worked for over one million workers. Apple indicates that its suppliers have achieved 95 percent compliance with adherence to a standard maximum of no more than a 60-hour work week and with workers voluntarily agreeing to work such hours.
- A 51 percent increase in supplier audits at all levels of the supply chain amounting to 451 audits in 2013, averaging more than one per day.
- Continuing to seek out abuses of migrant workers by conducted 33 specific audits requiring certain suppliers to reimburse foreign workers $3.9 million in excessive fees paid to labor brokers.
- Enrolling 240 supplier participants in an Environmental Health and Safety (EHS) Academy covering 270,000 workers across China and other geographic regions.
- A declaration that as of January 2014, all active, identified tantalum material smelters in the Apple supply chain were verified as utilizing conflict-free materials.
In numerous previous Supply Chain Matters commentaries, we have both praised and taken Apple to task for certain social responsibility practices across its supply chain. The latest was the introduction of newest contract manufacturer Pegatron and the unexplained deaths of alleged underage workers.
We all know that Apple has experienced its share of incidents and unsavory practices among its supplier base. Being chosen or remaining to be a supplier to Apple comes with significant rewards in terms of volume scale and revenue potential. Apple extracts performance and scale capabilities that can tax suppliers and provide motivations to turn a blind eye to certain responsible labor practices.
However, we continue to praise the company for its continued efforts in openly sharing its declared Supplier Responsibity Standards along with taking a visible industry lead in providing education, support programs and enforced supplier accountability. Not all consumer electronics manufacturers follow such standards and that is not good. We were especially impressed with Apple’s approach to Environmental Health and Safety efforts across China, namely identifying a critical shortage of people trained to understand global standards, and establishing a formal 18 month training program to help increase qualified experts in EHS within the region, a program upon which the entire industry benefits.
High tech and consumer electronics manufacturers know all too well about the challenges and pitfalls of low-cost, high volume manufacturing environments that exist across China and other lower-cost regions. While industry associations and collaborations exist on paper, they do not seem to have the open leadership and teeth that Apple continues to demonstrate. If they do, we certainly want to be educated.
More progress is will obviously be required and other high tech and consumer electronics providers need to step-up and demonstrate their open and transparent efforts directed at social responsibility practices.
This week will feature some noteworthy announcements in the supply chain and B2B network technology arena.
We begin with today’s announcement that Elementum, which describes itself as the first mobile platform for end-to-end supply chain management, formally announced its market launch after 18 months in stealth mode as well as securing $44 million in Series B funding from Lightspeed Ventures.. The actual genesis of this B2B network comes from global contract manufacturer Flextronics, also an investor as well as a primary user. Flextronics has been utilizing the Elementum platform to plan and coordinate aspects of its own global supply chain and is now extending both the platform and the established network connections to other potential customers, including consumer products producer Dyson, also noted as a current customer.
The company’s marketing tag line is: Supply chain made simple, which is perhaps a bit too simplistic in message. It is great for marketing purposes but many of our readers are acutely aware that managing today’s global supply chains is not at all simple.
Supply Chain Matters was briefed on the cloud-based platform and technology stack incorporated within Elementum in early December. The rather interesting aspect is the network’s data management, end user experience and security model. It is described as rather similar to Facebook and Linked-In and indeed that is what we observed. It offers intuitive software primarily targeted at mobile based users providing action-oriented coordination based on evolving events. For our IT based readers, this multi-tenant platform is anchored in massively scalable data management techniques, REST-based API’s and Hardoop data extraction and synthesis. The technology embraces a graph-like network data model providing synthesis and visibility to information associated to activities occurring across the supply chain. It includes both structured and unstructured information sources.
The Elementum marketing team has commissioned a slick You Tube video to demonstrate its mobile-based functionality
Initially available are three applications that are named Perspective, Exposure and Transport.
Perspective is an executive dashboard like mobile based application that helps to monitor and respond to supply chain key performance indicators including supplier performance, cycle times, working capital and some others. In our briefing we were informed that Tom Linton, Chief procurement and Supply Chain Officer at Flextronics is a current mobile user of this particular application. The Exposure app provides real-time monitoring of risk management through an event monitoring center. If an event has significant impact on a particular supply site, the app alerts to that site through calculation of bill of material supply links. The Transport app provides visibility to existing distribution and transport movements and provides predictive alerts to potential late shipments.
Flextronics is not a new comer in the area of software spinoffs. Does anyone remember SimFlex Group a supply chain planning and optimization provider spin-off many years ago along with other B2B supplier management offerings?
On the one hand, prospective customers get the intellectual where with all and experience of a globally-based contract manufacturer with a massive supply base satisfying multiple OEM customers needs. On the other, it is a Flextronics based perspective grounded in high tech and consumer electronics supply chain ecosystem practices.
There are other cloud-based offerings available in today’s B2B connectivity, direct and indirect procurement technology market. Some emphasize supplier management, procurement, deep supply chain planning, B2B messaging or transportation and execution fulfillment. This whole area remains in a state of change with broadening technology footprints and ongoing M&A activity. Our view is that at some point, one or a few of these networks will be closest to enabling true supply chain control tower management capabilities.
In the meantime, $40 million in funding coupled with the best in talent can lead to some interesting potentials down the road, not to mention another B2B network player for consideration.
If you have been a loyal follower of our Supply Chain Matters commentaries and predictions concerning Aerospace supply chains, you would be aware of the difficult position these value-chain ecosystems currently find themselves in. Once more, you would have had awareness to these challenges three year ago.
Thus we were somewhat amused to stumble upon this week’s Bloomberg Businessweek article, With Epic Backlogs at Boeing and Airbus, Can Business Be Too Good?
The article poses a fundamental question. With over 10,600 of firm orders for new aircraft among both Airbus and Boeing- When is order backlog too big?
In a July 2011 commentary, Aerospace Supply Chain Are Now Stressed, we observed that the building multi-year backlog comes amid an industry track record of not so stellar performance in operational consistency, two-way communication and predictability. Over two years later, although some progress has been made, many of the same challenges remain.
The question posed by Bloomberg, and indeed the Wall Street investor community, is indeed the appropriate question. As the article points out, if a wait for a new airplane stretches out over too many years, it can fundamentally impact the business model strategies of airline customers. Some of those dynamics are already occurring surrounding the continued undelivered backlog of Boeing’s new 787 aircraft. It further can motivate these same customers to consider alternative aircraft deployment or procurement strategies.
Another important consideration are the quickly changing economic environments that often drive demand for airline travel. Airlines from emerging markets are estimated to make-up at least a third of the current order backlog. Current concerns surrounding former booming developing markets are becoming evident in global equity markets as foreign currency tensions, devaluation and and other local economic factors impact business growth within these markets. There will certainly be increased airline travel within emerging economies but this demand needs to be balanced with economic up and down cycles.
In a meeting with Wall Street analysts this week, the CEO of Boeing reported strong earnings for the recent fical quarter but raised some warning signs for 2014 regarding earnings growth. Investors responded by driving Boeing stock down by over 5 percent.
Boeing’s 2014 operational plans call for increasing aircraft deliveries by 10 percent, roughly 715-725 aircraft amid a backlog of 5100 aircraft orders. By the end of the year, Boeing expects to be delivering two new 737 aircraft every day, yet only 10 new 787 Dreamliners monthly. Airbus remains operationally upbeat, empowering localized operational decision-making, yet the realities of a near decade of backlog is hauting.
The new reality is that investors are now becoming aware of the flip side of euphoria- you have to deliver the goods according to customer desires and expectations, and you have to be able to assure required operational on-time performance at customer ship time.
In our most recent commentary regarding Aerospace supply chains, we opined that agility and responsiveness are indeed going to be very important industry differentiators along with on-time and consistent performance for new product development milestones.
An enviable industry position awash with order backlog does not condone business-as-usual. Rather dynamic and responsive capacity management, end-to-end value chain visibility, enhanced supplier collaboration and goal-sharing all come into play.
Each of the major aerospace OEM’s can certainly boast of record performance in 2013, but the real challenges remain as each supply chain ecosystem responds to unprecedented requirements for development and execution. They will each put to the test the real meaning for agile and resilient supply chains.
The Supply Chain Matters blog provides an update to our ongoing series of commentaries related to Bombardier’s
Aerospace Group and its efforts to introduce a technologically advanced single-aisle aircraft, termed the CSeries that could compete with Aerospace industry dominants Airbus and Boeing in the smaller single-aisle aircraft segment.
Supply Chain Matters first introduced our readership to the CSeries program in October of 2010 under the headline: CSeries Joins in the Global Supply Chain Outsourcing Perils of Aerospace. At the time, we noted that Bombardier was taking a huge strategic gamble on the supply chain deployment and market launch of the new and innovative aircraft which was scheduled for market introduction in 2013. While the CSeries could have been a market disruptor as a timely alternative for airline customers, timing was all important.
In mid-September, the CSeries accomplished its first maiden flight amidst celebration at Bombardier’s headquarters near Montreal. At that time there were 177 orders for the C-Series, including an order for 60 aircraft from Lufthansa’s Swiss International Airlines. First customer ship was original planned for the end of 2013 but was adjusted to sometime in 2014.
This week comes word that first delivery of the C-Series family has now been pushed back at least nine months. A Bombardier press release issued yesterday indicates that entry into service is now anticipated to be the second-half of 2015, which is a considerable milestone slip after maiden flight. The release declares: “based on the thorough review of the CSeries program after the first flight of the CS100 on September 16, 2013, the flight test phase will require more time than originally anticipated to ensure, amongst other things, that the aircraft has the overall system maturity to support a successful entry-into-service.” Also noted was that CSeries suppliers are aligned with the program’s schedule adjustment and will continue to work closely to move the program steadily forward.
Readers can certainly make their own interpretation of this schedule slippage but it is the view of Supply Chain Matters that this is a meaningful setback. Suppliers anticipating revenue inflows have been handed a setback, not to mention, what may be going on behind the scenes. In its reporting, the Wall Street Journal declared that this setback was a blow to efforts to start competing with Airbus and Boeing in the market for small passenger jets. Bombardier itself will have to adsorb additional unplanned program costs. In December, the company also changed its sales leadership chief for commercial aircraft which was a sign for far more aggressive sales and marketing tactics to gather additional orders.
Bombardier now joins the unflattering club of other major aerospace development programs who have experienced unanticipated or latter stage program delays. The CSeries B2B supply chain ecosystem must now adjust and make contingency plans.