If our community needed any additional reinforcement regarding how important, and perhaps how expensive, open contract management terms and supplier relationships have become, than today’s headlines involving Starbucks and Kraft Foods should be the reminder. (Paid subscription or tiered free viewing) Yesterday an arbiter ordered Starbucks to pay Kraft’s new spinoff, Mondelez International a total of roughly $2.8 billion dollars after the early termination of a Kraft’s supply coffee agreement with Starbucks.
The coffee supply agreement dates back to 1998 when Kraft was contracted to market and distribute Starbucks branded coffee among U.S. grocery and supermarket channels. In a November 2010 Supply Chain Matters commentary, we noted reports that the deal with Kraft was designed as an indefinite arrangement subject to certain conditions and limitations. In order to terminate the supply arrangement, Starbucks accused its partner of failure to actively market the brand and not maintaining appropriate promotional campaigns. Notice was given in November 2010 for termination in March 2011. For its part, Kraft indicated that Starbucks could take over the supply arrangement but needed to compensate the supplier for the market value of the business. At the time, Wall Street analysts’ estimates were that Kraft would seek $1.5 billion in compensation. Starbucks offered $750 million to settle the arrangement. The process was submitted to arbitration in 2011 after both sides could not agree to a compensation number.
While Starbucks now indicates that it strongly disagrees with arbitrator’s ruling, it must now reportedly restate its fiscal fourth quarter financials to show an operating loss. Because Kraft’s coffee business has now split into Mondelez International, that company will receive the recovery from the arbitration award. According to a report published in the Wall Street Journal, Mondelez management indicates that any proceeds will be utilized to buy back shares of that company.
For its part, Starbucks has taken control of its own packaged coffee distribution business and has entered into a distribution agreement with Keurig single-serve brewers. A company spokesperson indicated to the Wall Street Journal that it has sold more than one billion K-cups since the suspension with Kraft. Kraft, in turn, has now entered into an agreement to distribute McCafe branded coffee from McDonalds.
In our November 2010 commentary, we opined that instead of playing “my supply chain trumps yours”, perhaps it was better to move toward a “win-win” negotiation agreement where the lawyers and egos stand in the background. Readers can make their own judgment as to whether this was hindsight or wishful thinking. Three years later, the financial implications have now come to light.
From our lens, a final observation is in order from regarding Mondelez. Instead of allocating this award totally to stock buyback, perhaps some of these monies can be invested in supply chain transformation. After all, that was the original intent.
Supply Chain Matters Sustaining Sponsor E2open recently contacted us regarding a research report they recently commissioned that was focused on vendor managed inventory (VMI) strategies. The study results present interesting supply chain related business process and information technology insights for many industry supply chains that we will share in the commentary.
In terms of background, VMI programs are often predicated on the management principle of a vendor or supplier managing appropriate inventory levels of products based on either a product demand forecast or an actual order flows. The goal of many VMI programs is to drive more efficient and responsive inventory management. Many programs are triggered by replenishment based systems triggered from EDI messaging. Depending on the terms of the program, inventory ownership may transfer to the buyer either upon receipt of the product or when the buyer sells the inventory. (consignment based program).
A September study, conducted by Gatepoint Research, included 200 responses from senior IT, supply chain, finance and logistics executives from manufacturing, retail and telecommunications industry sectors. The majority of the respondents (98 percent) held CxO, Vice President or Director titles, thus the opinions were weighted from an executive viewpoint. Respondents overwhelmingly worked at large firms which included revenues in excess of $1.5 billion (67 percent).
The report authors draw some of the following observations based on the survey responses:
- Nearly half of responders employ VMI programs with buy-side suppliers. The utilization of both buy and sell side VMI fulfillment programs (partners, distributors, retailers, etc.) was cited by 30 percent of respondents. Nearly a half (49 percent) use consigned inventory at their buyer’s VMI location. Surprisingly, 22 percent indicated no plans to implement any VMI program.
- 28 percent of respondents indicate the sharing of inventory information manually (email, fax, etc.) while 20 percent indicate direct use of the resident ERP system, and 15 percent utilizing B2B integration among inventory systems.
- Most responders indicate a lack of access to real-time information. A majority (63 percent) indicate that they do not always have adequate visibility into their current inventory levels, while more than three quarters of respondents rely on batch reporting for inventory and order information.
- A stunning 69 percent rate themselves without differentiation from competitors regarding inventory turns. About one-third of respondents feel partner collaboration is adequate. Our supposition is that the other two-thirds feel partner collaboration is inadequate.
Reviewing this survey data, Supply Chain Matters can add other observations and insights. The data implies a high utilization of VMI among large enterprises, yet most responders indicating a lack of access to real-time order, inventory and order forecast information. (see below chart extracts) There should be little surprise that nearly 69 percent of responses indicate too much cash tied up in inventory, or too much excess inventory. Only 20 percent of responders felt that their inventory turns were better than the industry average.
How timely are the Forecast, Inventory, and Order information that you and your partners share?
Copyright 2013, Gatepoint Research, Used with permission.
Assess your ability to manage inventory levels.
Copyright 2013, Gatepoint Research, Used with permission.
Our other observation reflects on how respondents rate their inventory management collaboration with partners. Nearly two-thirds indicate high collaboration with partners while about a third feel partner collaboration needs improvement. We therefore conclude that while partner collaboration is rated high, other indicators point to a lack of adequate technology tools to actually leverage the meaningful business outcome benefits of the VMI program. Notice that collectively. 58 percent of respondents rely on either a daily batch, less than daily batch, or ad-hoc order based information. Similarly, 66 percent collectively rely on these same tools for inventory status while 80 percent collectively rely on these tools for inventory forecast data. That implies a lot of information latency, especially when readers consider current industry challenges to conduct business 24 by 7, as well as the massive movement toward online and multi-channel commerce.
By our lens, the most important takeaway from this study is the need for a leveraged use of an online B2B platform that not only serves as the basis of electronic data exchange, but more importantly, near real-time information related to the trending of orders and inventory. An online network or platform can serve many purposes. Besides connectivity, content and the on-boarding of suppliers, it can also serve as the basis of integrating more real-time information related to the status of orders, forecasts and inventory.
The path toward expanded supply chain business process capabilities is not as important as the all-important B2B network platform that forms the foundation of end-to-end connectivity, visibility and decision making capabilities. Why not take advantage of that platform?
What’s your view? Are your VMI programs being stymied by latency of information? Does this current research data surprise you in its conclusions?
The study itself can be downloaded at this E2open supported web link.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog and no additional compensation was rendered to highlight the above study.
In our coverage of global supply chain developments these past years, sometimes we have observed a tone of arrogance when it comes to collaboration on the part of firms within either the supply or demand side of supply chain management.
Arrogance, which can be focused in either positive or negative directions, can come from a belief of having an advantage, whether that advantage is overall size, organizational or industry stature, a far more superior product or just plain power negotiating. Arrogance can sometimes stem from having a strong belief that the current state of affairs for a particular business is unacceptable because it is too vested on past practices or not aligned with the negotiator’s beliefs regarding its current state.
In specific area of channel management, new entrants to a market may have the belief that they can disrupt that market with a far different channel strategy. In 2010, Google made a decision to produce and distribute its own Nexus branded smartphone. Google made the decision to circumvent the existing telecom carrier networks of distribution and instead allow customers to order an unlocked smartphone directly from a website. That ended up being a flawed experiment. From the get go, Google experienced multiple issues related to consumer difficulties in purchasing and activating phones. Questions were also raised on the deployment of a worldwide order channel and on consumer’s ability to easily obtain service. Contract manufacturer HTC was further placed in a rather challenging position to be able to support all of these needs from Google and, looking back, really did not gain any favors in doing so. In March of 2012, Supply Chain Matters noted that Google was making plans to offer a variety of co-branded tablet computers directly to consumers via an online store concept similar to sites such as Amazon and Apple. Thus, another experiment in disrupting the channel had little success.
Google’s newest and more viable play at challenging the channel turns out to be its $12.5 billion acquisition of Motorola Mobility in August 2011. With Motorola, the company can exercise a broader strategy of being able to engineer both hardware and software, and consumer mass customization. The newly released Motorola Moto X smartphone manifests these objectives in functionality and the ability of consumers to order the phone customized to color and other design preferences. Google has also influenced Motorola to dramatically slim down its product lineup along with its global distribution channels. Broader thinking, market opportunity and business savvy worked together toward a far more opportunistic approach to solving the perceived challenge to the status quo of channel management.
About a month ago, the Wall Street Journal published an article regarding Apple and its efforts to grow smartphone sales in Russia. Russia represents an enormous emerging market. This article describes that the major telecom carriers across Russia do not subsidize smartphones for customers in exchange for long-term contracts. Russian consumers acquire their smartphones at unbundled prices either through a telecom carrier or other outlets. As readers are probably aware, this is the same channel distribution situation as that in China. It is a situation that allows for a robust “grey market” in acquisition of the coolest smartphones on the global market.
To gain favor with telecom carriers and build brand loyalty, producers such as Nokia and Samsung develop deals with Russian network operators to allow consumers to garner several months of rebates on data service, helping these consumers to defray the initial out-of-pocket expense for purchasing an unsubsidized phone, with the opportunity for obtaining literally free data services for several months.
WSJ describes that Apple insists that Russian telecom carriers sign-up for steep annual minimum purchases in a distribution agreement, volumes that the carriers know up-front cannot be achieved and would cause financial harm to the carrier. The article further notes that in July, Apple CEO Tim Cook played down the carrier situation by indicating that 80 percent of smartphone sales in Russia are sold through retailers outside of carrier owned stores, and boasted that iPhone activations in that country set a record in the most recent quarter.
When Apple released its latest iPhone 5s and iPhone 5c lineup, availability was announced across five countries, which did not include Russia. Russian consumers who wanted the latest and greatest iPhone most likely got them via grey market channels.
Availability in China was predicated on sales through Apple’s China based retail stores, certain retailers, or grey market sources. Contrary to rumors, Apple was not able to land coveted deals with major carriers such as China Telecom.
Supply chain leaders, working collaboratively with sales and marketing, have long discovered that supporting growth in emerging markets comes from an intimate understanding of the existing channels of distribution and figuring out how desired volume growth can be achieved in win-win relationships. If Apple’s goal is to grow volume through penetration of emerging markets, than overcoming a negatively focused sense of arrogance and understanding win-win in the channel can lead to desired success.
Often in the day-to-day flurry of supply chain management, we can sometimes lose historic perspective as to how prior critical decisions led to current day accomplishments.
In the Corporate Watch section of today’s Wall Street Journal there is a brief entry regarding Ford Motor Company titled New Work Shifts Increase Vehicle Capacity. The entry states that Ford has boosted its North American vehicle production capacity by 600,000 vehicles in the past 15 months. The company has done this to respond to increasing consumer demand for Ford vehicles. Ford Vice President of North America manufacturing James Tetreault is quoted as indicating that capacity was able to be increased without building new facilities because of the ability to break down constraints at plants and with Ford’s suppliers. Ford has initiated revised labor practices with the United Auto Workers, has added an additional 8000 people to its manufacturing workforce and has added additional work shifts among new facilities.
However, Supply Chain Matters believes this brief mention has far more important takeaways for Ford’s North American manufacturing and the industry’s extended supply chain teams due to efforts initiated back in 2008 at the height of the global financial crisis that especially impacted North America automotive markets.
In a Supply Chain Matters March 2012 commentary, The Automotive Industry- A Look Back with More Inside Proof that Supply Chain Do Matter, we noted the Wall Street Journal’s citing from a book authored by Bryce G. Hoffman titled Alan Mulally and the Fight to Save Ford Motor Co... The book highlighted that by the fall of 2008, most of Ford’s suppliers were on the brink of bankruptcy. At the time, Ford Vice President of Global Purchasing Tony Brown then launched Project Quark, a secret global cross-functional team tasked to monitor supplier health, prevent supply chain disruption for the business and shrink the supplier base into a viable network of strategic suppliers. The book also noted that Brown recognized that Ford could not stand alone in its efforts to revive and sustain the North America automotive supplier base. In the end, it was an inter-industry collaboration among Ford, Toyota, Honda and Nissan with coordinated efforts that saved the supplier network.
In our March 2012 commentary we noted the important insight and learning that in the crisis of 2008, an acute understanding that the supply chain does matter and coordinated efforts among industry players and the U.S. government helped to preserve the capability we witness today.
Ford can now proclaim that it has expanded capacity by 600,000 vehicles through the collaboration of internal, labor union, and supplier initiatives, without the need to add expensive new factory capacity. Ford and other automotive industry supply chain teams should at the same remember that critical awareness, strategy and automotive supply chain industry initiatives initiated at the precipice of the 2008 financial crisis in all likelihood provided the foundation for Ford’s current accomplishments.
This Supply Chain Matters commentary is a follow-up to our previous breaking news commentary regarding E2open and its acquisition of supply chain planning, collaboration and response management technology provider icon-scm.
Our initial commentary noted the previous favored Solution Extension partnership that icon-scm had in the area of SAP capabilities in response management or what is sometimes referred to as fast planning. I
In the interests of fairness, we noted that Supply Chain Matters had reached-out to SAP for comment in formulating our commentary, but had not heard back at the time of publishing.
This afternoon, SAP proactively responded and provided additional perspectives which Supply Chain Matters would like to share
We were informed by SAP representatives that the Solution Extension partnership with icon-scm and the application SAP Supply Chain Supply Chain Response Management by ICON-SCM has not officially be dissolved as yet. There is a prescribed process for winding-down such a relationship in terms of communication with existing customers, attending to existing sales cycles and other matters, but we were informed that the partnership is in all practicality is likely to be closed.
SAP confirmed that existing customers that have secured SAP support will be assured that they will continue to receive that support until maintenance contract renewal, or for the life of the application SAP customers utilizing icon-scm will likely have the option to renew maintenance with SAP or opt for another alternative including that of E2open. Existing customers should rest easy that both SAP and E2open have affirmed a transition support plan.
Regarding some background to the partnership, SAP indicated rather positive customer interest and uptake in the initial year of the icon-scm partnership, not so in the second and third year. Mark David, who has supply chain planning solution management responsibilities for SAP affirmed the importance of customer interest in supply chain response management capabilities.
While a lot of icon-scm interest came from customers from the high tech sector, SAP was challenged to generate customer interest from other industries. This was not from a lack of effort from the SAP Supply Chain Management Solutions Management team. a muted admission that SAP sales teams did not have either the domain knowledge or patience to ride out elongated sales cycles. SAP customers were apparently demanding a more harmonized approach in integration to the broader array of the SAP Supply Chain Management applications suite and thus willing to continue use of existing SAP planning applications such as APO, awaiting such harmonization.
While SAP viewed icon-scm as strategic down the road, there was apparently not enough momentum to justify a corporate acquisition decision at this time. SAP however affirmed to Supply Chain Matters that the company has been working on a full harmonized supply chain response management collection of capabilities that would address today’s challenges manifested by multi-channel fulfillment and more outsourced activities. That approach could likely include leveraging of the B2B networking patform provided by Ariba, SAP’s most recent acquisition concerning supply chain and procurement support.
Obviously, the timetable of that effort has a renewed emphasis and urgency.
Since our initial commentary, Supply Chain Matters has received additional background and other information from E2open which will be shared in a later commentary.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog.
Boeing reported its fiscal Q2 2013 earnings this week and there were many sound bites related to the company’s global supply chain capabilities, and more challenges yet to come.
The financial numbers were stellar. Total revenues increased by 9 percent while profits rose 13 percent. Those were fairly sound numbers when you consider the challenges this aerospace manufacturer has had with the 787 Dreamliner. However, the company warned that it is bracing for potential “draconian” cuts in military and defense spending, which accounted for over one-third of revenues in the past quarter.
One of the very first topics from CEO Jim McNerney in the earnings briefing was to address the recent 787 aircraft fire that occurred at London’s Heathrow airport. He reminded analysts that Boeing was limited about what it can publically disclose. However he did make reference to the UK Air Accidents Investigation Bureau (AAIB) and its post-incident investigation that pointed to the Emergency Locator Transmitter located at the upper rear of the aircraft as a possible cause. This transmitter has been reported to be produced by Honeywell International, and is installed on a number of different aircraft types. The Wall Street Journal reported last week that people familiar with the investigation indicated that it was unclear if the transmitter triggered the fire or provided additional fuel for the fire. This transmitter is not part of the main electrical system of the aircraft and is powered by its own battery. Examination of the aircraft by AAIB investigators indicated extreme heat generation that appeared to melt through the carbon-fire skin of the aircraft. Yesterday, the U.S. Federal Aviation Administration and other global aviation authorities issued a directive instructing 787 operators to remove and/or inspect the subject emergency locator transmitter. Honeywell continues its investigation of the incident.
CEO McNerney once again re-iterated the company’s confidence in the integrity, safety and performance of the 787. He confirmed that all 787 battery system enhancements were completed on both previously grounded operational aircraft and those on the production ramp. There should have been a shout-out to the Boeing tiger teams who completed this exercise under considerable time constraints.
Highlights of other supply chain related news included that Boeing’s commercial airplane backlog of orders now stands at 4800 aircraft. An extraordinary situation, one that many companies would envy. The again, it adds considerable stress the to the company’s global supply chain network which has to deliver all of this aircraft according to customer expectations and needs.
The division itself has had its highest output levels in nearly 15 years. The company delivered 169 aircraft in its just completed quarter including the 16 787’s that had been queued during the aircraft’s operational grounding earlier this year.
Boeing acknowledged customer requests to accelerate deliveries “continues at a healthy pace.” The company launched the newest version of the Dreamliner, the 787-10 last month with 102 orders and commitments. Interest in the new 737-MAX continues with 1400 orders to-date. McNerney stated that the company was on-track to increase 737 production to 42 aircraft per month by the second quarter of next year. He further stated that Boeing was positioned to add more production capacity if customers require. In its reporting, the WSJ noted that the 42 number matched that of Airbus in its competitive A320 aircraft, and that exceeding that number would put Boeing in the position of being able to boast of the largest output producer for the category.
Production rates for the 787 remain on-target at the rate of 7 per month, increasing to 10 per month by the end of this year. One other interesting note from the briefing was that total inventories increased by $1.5 billion during the recent quarter, attributed to the anticipation of increased production volumes of the 787. Apparently, suppliers continue to ship to earlier commitments.
Boeing forecasted commercial airplane deliveries in the range of 635-645 for 2013, which implies an average run-rate of 53 aircraft per month. Next year, that number gets even higher.
One added note. In the Q&A session, at least two equity analysts had probing questions related to Boeing’s plans for increased engagement with partners and suppliers. CEO McNerney responded: “If you work with us there is a chance to increase volumes significantly, while helping Boeing in delivering cash and margin goals.” He further indicated that it will take time to work on business equations with certain suppliers that make sense for both partners. Our interpretation of these statements is a message to suppliers that the potential of high volume Boeing business exceeds current operational frustrations in delivery and payment rates. What comes to mind is the analogy of the automotive industry and its former supplier relationships. You need to stick with us, despite the financial pain we can incur, because our business is massive.
One of the important observations to keep in mind is that despite the number of very high-visibility negative developments concerning the 787, Boeing stock has risen in value. That, as our readers know, is extraordinary since major supply chain snafu and disruption tend to have some negative consequences on a near-term company stock price.
However, with this latest briefing, Boeing appears to be warning investors that potential cutbacks in the defense sector can be of some concern. We speculate that this will add additional pressures to the commercial aircraft business to meet aggressive delivery commitments while continuing to reduce cost. That’s a tall order for any global aerospace provider’s supply chain network.