In order to boost relatively flat revenue growth among its U.S. physical retail outlets, Wal-Mart recently raised salary levels for its respective U.S. retail associates to improve customer service and responsiveness. The retailer further continues to invest heavily in its online fulfillment channel. All of these actions provide adding pressure on margins.
In April, Supply Chain Matters echoed business media reports indicating that this global retailer was ratcheting up pressures on its suppliers to squeeze costs. Earlier this month, Reuters reported and somewhat validated a significant effort to offset increasing costs, namely imposing added charges among most all of Wal-Mart suppliers. Supply Chain Matters is of the belief that this effort will have added implications for both parties.
According to the report, added fees will relate to warehousing inventory along with amended payment terms, affecting upwards of 10,000 U.S. suppliers. In one cited example, Reuters indicates that a food supplier would supposedly be charged 10 percent of the value of inventory shipped to new stores or warehouses, along with one percent to hold inventory in existing Wal-Mart warehouses. It reportedly was not clear if the one-time charges apply only to the initial shipment or would cover a specific period of time. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In our April commentary, we observed that these appear to be signs of yet another wave of supplier squeeze tactics in order to improve a retailer or manufacturer’s overall margins. While these actions are not new for Wal-Mart, their application to a far broader population of suppliers is noteworthy. Such efforts that add to the cost burden of doing business with a retailer are bound to provide setbacks in efforts towards deeper collaboration and supplier product innovation. Consider that Wal-Mart continues with the construction and opening of new online fulfillment centers to support is WalMart.com fulfillment needs. The addition of supplier inventory fees to stock these new centers may cause some suppliers to consider alternative inventory stocking strategies of their own, that balance the needs of Wal-Mart with other retailers such as Amazon, Target or Costco. Indeed, unilateral efforts directed at transferring the cost burden among suppliers can often lead to counter-productive consequences, particularly during seasonal buying surge periods such as the holiday season.
Suppliers can take advantage of the same fulfillment decision-support technology as retailers, namely to determine the profitability potential for each major customer, and providing preferential service for customers that financially support needs for added responsiveness and fulfillment collaboration.
Too often, it seems that these mandates are handed down by the most senior management responding to investor pressures for more short-term profitability and margin growth. These efforts cascade from retailers and manufacturers, to first tier suppliers, and throughout other tiers of the supply chain. It’s unfortunate that there supply chain teams are rewarded more for enforcement of such actions as opposed to efforts directed at joint supplier process and product innovation.
In this Supply Chain Matters posting, we provide some background to our prior commentary noting that Airbus is in the process of evaluating a further ramp-up of the production cadence of its A320 aircraft. The most significant suppliers involved in these ramp-up decisions are often aircraft engine suppliers, fuselage and airframe components suppliers as well as the myriad of avionics and electronic component suppliers. A recent commentary from General Electric’s GE Reports, provides added perspective on how the prime aircraft engine provider for the new A320 NEO model is preparing. It further reflects on the challenges for ramping-up newer materials sourcing and production process technologies, including deployment of 3D printing techniques.
The new next generation A320 NEO aircraft will be offered with twin LEAP jet engines supplied by CFM International, a 50/50 joint venture between GE Aviation and Safran (Snecma). To date, CFM has recorded a backlog of more than 2500 orders for the LEAP-1A model that powers the new A320 NEO. Other versions of the LEAP power plant will be available as engine options for the newly designed Boeing 737 MAX as well as the Comac C919. Thus, with a total combined backlog of 8900 orders related to the LEAP engine, CFM is indeed a strategic linchpin for commercial aerospace supply chain output planning. The first operational LEAP engine is scheduled to enter service sometime next year.
The GE commentary reports that the newly designed LEAP engine will include 19 3D-printed components to include fit-to-print fuel nozzles and static turbine shrouds produced from super strong ceramic composite materials. There are currently 30 prototype LEAP engines supporting all OEM three manufacturers, going through final assembly or testing phases among global based facilities. The report provides a rather fascinating photo of the flying GE Aircraft test aircraft as the engines are tested for operational performance.
As noted in our prior A320 focused commentary, Airbus has already announced plans to increase its monthly A320 production rate to 50 aircraft by early 2017, but is now actively evaluating an even larger 60 per month cadence. As the LEAP engine moves through its initial prototype assembly and testing phases this year, and operational service in 2016, CFM must gear-up its own production volumes to match both Airbus and Boeing production volumes, while incorporating new leading-edge processes such as custom 3D printing.
It’s a tall order which obviously palaces CFM International as being one of the most key commercial aerospace suppliers to observe in the coming months and years. If further provides perspectives on how challenging such commercial aircraft output volumes will become.
Across our supply chain management community, we are often keenly aware of how the dynamics of product demand and component supply interrelate. While teams always strive to balance and align product demand and supply needs, forces in a market or across an industry have a way of adding different or unforeseen challenges. They drive home the importance of nurturing strong supplier relationships and creativity along with the notions that the supply chain and suppliers, do matter.
A timely reminder was brought forward last week within The Wall Street Journal’s published article, Bourbon Feels the Burn of a Barrel Shortage (paid subscription required or free metered view) Amidst souring consumer demand for bourbon and craft-distilling beverages, this industry is facing the blunt reality of a three year long shortage of the barrels required for storing and aging bourbon. More specifically is a shortage of required supplies of white oak which the barrels are constructed.
Various cooperages (barrel makers) are actually turning down orders, along with offers to pay upwards of twice standard barrel pricing from those distillers seeking availability of prepared white oak barrels. Existing barrel suppliers apparently have only the capacity and wood to supply existing loyal customers and are either wait listing or turning down new industry entrants. According to the article, the white oak supply problem was compounded by a massive contraction impacting the lumber industry during the 2007-2008 housing crash across the United States. Sawmills shut down and loggers abandoned the market. While the lumber industry is now rebounding, the article points out that white oak supply still lags the current demand among barrel makers, while a shortage of lumber mills and experienced people continues to limit supplies.
In response to the demand crisis, barrel makers themselves reportedly have become more creative. Examples brought forward included Independent Stave Company, a large private barrel maker and supplier to Evan Williams and Jim Beam, which is now buying logs sourced from five different U.S. states in addition to its traditional supplies within the state of Missouri. To avoid high transportation costs for logs, this supplier invested in a new lumber mill in Kentucky.
Brown Forman, producer of its iconic Jack Daniels branded whiskey invested in a new barrel making facility near Huntsville Alabama because it opened “a whole new territory of logs”. It reportedly halved the time required to ship new barrels to Jack Daniel’s production site.
Craft distillers have reportedly turned to seasoned consultants for help in finding and/or brokering any and all supply of new barrels while some fear that they will not be able lay away whiskey.
Here is the takeaway message. As you, I and thousands of other new consumers partake and enjoy their very favorite branded bourbon, standard or craft whiskey, consider the fact that active supplier loyalty, strong relationships and joint creativity helped to insure that said bourbon and whiskey was aged and nurtured in the proper white oak barrels.
Supply Chain Matters offers a timely new toast:
“Here’s to good times, good people, and great bourbon, along with creative and resourceful suppliers.”
When a report directly impacting supply chain strategy is featured as a front page article in The Wall Street Journal, we are certainly going to bring it to Supply Chain Matters reader attention. When that report correlates with other related reports, namely supplier squeeze or bullying tactics, rest assured we will bring it to greater industry supply chain visibility.
We have previously featured reports of supplier bullying strategies involving certain consumer product goods supply chains, and quite recently, supplier squeeze tactics among certain commercial aerospace supply chains.
Today’s WSJ report (paid subscription or free metered view) indicates that last month, Wal-Mart began an effort to place increasing pressure on its North America based suppliers to cut the cost of their products. According to the report, the retailer is telling suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. Apparently new executive leadership is embracing the concept of supplier squeeze in order to lower existing prices at retail stores. Wal-Mart recently raised salaries for store associates which have added a new cost burden. Further reported is that this effort has already caused renewed supplier tensions among suppliers who are already attuned to the retailer’s relentless focus on inbound cost. The new tensions for suppliers are that they potentially have less control on the way their individual branded products are marketed to Wal-Mart consumers.
This new WSJ report revisits a previous report of Wal-Mart’s current dealings with well- known consumer products goods provider Procter & Gamble and its cash cow product, Tide laundry detergent. The retailer recently began merchandising Henkel’s Persil laundry detergent directly aside of Tide in a move that the WSJ now clearly declares was an attempt to pressure P&G to lower the price of its market-leading laundry detergent.
Yesterday, Amazon released the news of a Dash Button, a physical version of its 1-click ordering. An Amazon Prime member sets up the device to correspond to a certain product and places the physical device in a convenient place (perhaps inside the cupboard or cabinet where household products are stored). When the supply runs low, the user can press the button to order more of that product, which directly communicates with Amazon via a Wi-Fi connection. It is literally an electronic Kanban replenishment system in a B2C setting. A total of 255 products from 18 brands are reported as being available through the Dash Button program and surprise-surprise, P&G and its Tide detergent is noted as a participant. That may well be another motivation for Wal-Mart to place direct pressure on its most longstanding and loyal supplier partner. This is also not the first time that P&G and Wal-Mart have openly sparred over P&G’s collaborative efforts with Amazon.
As survey methodology often depicts, a single data point is an observation, a second similar data point is of interest and a third data point within a short period of time is the early indication of a building trend.
Supplier squeeze tactics are often prevalent in times of significant economic stress when preservation of cash is a critical corporate objective. Industry supply chains experienced many forms of such tactics during the great recession that began in 2008-2009 and some suppliers actually succumbed to bankruptcy as a result. Today, global supply chain activity and output as manifested in the J.P. Morgan Global Manufacturing PMI Index has recorded 27 months of consecutive expansion. Thus, motivations for current supplier squeeze tactics have taken on different motivation, perhaps more related to short-term Wall Street and consequent stockholder expectations. In any case, it is by our lens, a concerning trend with the potential to provide setbacks to efforts towards deeper collaboration and/or partnerships with suppliers. Consider that Wal-Mart has embarked on a multi-billion dollar initiative to influence suppliers to source more products within the United States. Wal-Mart gives, and then takes-away.
A short-term business outcomes perspective can permeate across the many levels of the value-chain and procurement teams and financial senior executives need to be reminded of the consequences for longer term supplier partnerships directed at product, process and customer fulfillment innovation. Focus on the P&G dynamics with Wal-Mart, both rather savvy and determined business partners who have experience in good and not so good times, and in the savvy of push-back. Many suppliers, particularly smaller scope suppliers do not have the leverage of a P&G, and thus, there resides the current risks in supplier management.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has featured significant prior commentary focused on aerospace and commercial aircraft focused supply chains. A lot of our focus was on the OEM tier, namely global producers Airbus and Boeing, along with mid-tier OEM’s such as Bombardier, Embraer and CMAC. While we have featured commentary or highlighted developments on various larger-scale suppliers, candidly, we should have provided more in-depth perspectives of various other tiered suppliers.
What has prompted us to this candid conclusion was last week’s published Seattle Times article, Low Wages for Aerospace Workers Despite Tax Breaks for Employers. After analysis of Washington state data, the Seattle Times reports: “In 2013, outside of Boeing, a third of production workers at local aerospace parts manufacturers- companies that get tax breaks intended to preserve good jobs in the state- earned between $10 and $15 per hour.” That level, equivalent to $31,200 annually, represents the minimum wage level for Seattle. Once more, the report reminds readers that aerospace companies in the state of Washington are entitled to a 40 percent reduction in taxes on corporate revenues for the intention of “providing jobs with good wages and benefits.”
The report describes what is termed the “Boeing squeeze”, that being constant pressure to reduce the cost of component parts. A spokesperson of the Pacific Northwest Aerospace Alliance (PNAA), a trade group of local suppliers indicated to the Times that passing higher wage costs up the line “would encourage Boeing to take the work elsewhere.” Once more, suppliers seem divided on dealing with such a situation, with some indicating that the skills and education required for such production jobs do not warrant higher pay. This report highlights specific conditions and/or examples (pro and con) among local suppliers:
Aviation Technical Services (ATS)
Carlisle Interconnect Technologies (CIT)
Zodiac Cabin & Structures Support
In previous Supply Chain Matters commentaries we have highlighted reports of industry supplier bullying. While many would like to believe that certain supply chains have moved away moved away from squeezing the cost-reduction burden down the value-chain, these types of reports continue to indicate that such practices linger. Once more, having participants within a multi-billion dollar industry in the enviable position of having in-demand and technology innovative products resulting in upwards of ten years of unfulfilled customer orders would continue to practice squeeze tactics on suppliers would seem to indicate that supplier partnerships and collaboration remain a one-way lens. Why are so many production workers being asked to live and raise families on a minimum wage?
Shame on us for not paying closer attention to developments within all of the tiers of aerospace supply chains. We will do our part to change that including reaching out and researching more mid-market suppliers.
We however would suggest that the large OEM’s would take a similar perspective and examine how supplier practices impact the entire value chain, particularly those involving and setting a role model for social responsibility.
In January of 2013, during the National Retail Federation’s annual conference held in New York, Wal-Mart made a significant and noteworthy announcement. Bill Simon, the former head of Wal-Mart’s U.S. group announced plans to buy an additional $50 billion in U.S. sourced products over the next ten years.
Since that time, Wal-Mart has continued on a broad strategy to encourage its existing or new suppliers to source more products within the United States. The retailer also broadened its monetary commitment. Such efforts have included hosting open supplier summits where suppliers can learn from one another while pitching new product ideas to Wal-Mart buyers.
Last week, Chain Store Age featured a posting indicating that this global retailer is now in the process of planning for another supplier event to be held in early July. In the report, Cindi Marsiglio, Vice-President of U.S. manufacturing indicated before a meeting of targeted suppliers: “Second to price, customers care where their products come from. Our customers want to buy products closest to their communities.” Categories being singled out include baby and infants, food and consumables as well as pet care.
The Wal-Mart U.S. Manufacturing event is currently planned for July 7-8 in Bentonville Arkansas. Event details are still being worked out with registration expected to be opened in April. More information can be garnered at the following Wal-Mart web link.
Supply Chain Matters continues to applaud Wal-Mart for both its large monetary commitment and far-reaching efforts to promote further sourcing of U.S. manufactured products. We urge current or perspective U.S. suppliers to take advantage of such a program.