The following posting can also be read and commented upon on the Supply Chain Expert Community web site.

We have provided multiple Supply Chain Matters and Supply Chain Expert Community commentaries as to whether confidentiality and safeguarding of corporate information has generally eroded for personal or individual gain.

Specifically, the issue is whether unscrupulous individuals cannot resist the temptation for personal monetary or other gain from selling certain supply chain information, especially regarding the leaking of information concerning Apple’s value-chain. It seems that any leaked information along Apple’s value-chain which can either place a supplier in a more advantageous position or uncover Apple’s strategies and intents regarding new or existing products, is worth money. Information regarding the number one supply chain and one of the world’s most valuable companies has become extremely valuable, or so it seems. More importantly, the implications to businesses and supply chain teams is far-reaching and not in the best interests of where supply chain business processes need to be.

Late last summer, an ex- global supply manager at Apple was charged with 23 counts of wire fraud, money laundering and unlawful transactions involving a kickback scheme. That individual pleaded guilty earlier this year and admitted to receiving kickbacks from six different Asia based suppliers in exchange for Apple confidential information. In June, a Chinese court sentenced three people, including a former employee of Hon Hai Precision Industry, to prison terms for collaborating to steal information from a supplier to Apple’s iPad2 products in order to get a jump on producing accessory products. The latest visible incident involves an ex-Samsung Electronics manager who leaked information to a Wall Street hedge fund manager in December 2009. Bloomberg BusinessWeek reported last week that during testimony at an insider-trading trial involving an executive at Primary Global Research LLC , this same ex-Samsung employee disclosed confidential shipping information for Apple’s iPad components, potentially causing Samsung to lose a supply contract.

There exist enough visible incidents and probably enough insider knowledge among those in the industry to know that this type of behavior continues.  For what personal gain?  Is a relatively small amount of extra money worth the ultimate ruin of your professional reputation and your family’s well-being?

The implications of these continued incidents to business costs are also wide ranging.  If you believe in any way that confidentiality has become too rigid, or something to take lighly, as the expression goes, “you ain’t seen nothing yet”.  Anyone in any role that has visibility to supply volumes will be subject to increased scrutiny and control.  Efforts to increase collaboration among suppliers will be stymied by more stringent controls around privacy and security of information. This can lead to harder work for supply chain teams and that would be a shame since so much can be gained from open sharing of important supply and value-chain information and increased business intelligence to product demand trends.

Supply managers will be the most impacted since they are the closest to the information.  Doing business with Apple already involves secrecy and strict controls, and these incidents will only make the work of dedicated supply chain professionals even harder to accomplish not only with Apple, but other companies and trading partners as well.

The message to our community is therefore to take note of the importance of confidentiality, since abuse will not, in the end, favor anyone or any organization. We believe that this is a critical issue, and community and broader awareness and commentary needs to continue.

Share your views and let’s start a constructive dialogue on preserving the best aspects of information sharing while respecting the legal confidentiality of certain information.

Bob Ferrari

This is our fourth in a series of Supply Chain Matters commentaries regarding attendance at this year’s SAP Sapphire Now and ASUG conferences being held in Orlando.  Readers can reference our previous three commentaries at the following links;

Commentary One

Commentary Two

Commentary Three

As we write, day three is winding down with the final concluding evening concert headlined by Sting, yet to come.  As with previous Sapphires, this being our tenth, activities have been a blur.

In this commentary, we will touch upon two other topical areas we outlined in our prelude posting last week.  The First is the SAP Rapid Deployment Solutions (RDS) program and specifically its applicability in the supply chain, manufacturing, supplier relationship management and procurement areas.  Noted in earlier commentaries was the explanation that RDS were designed to help SAP customers get up and running in a major quicker manner, and include fixed cost and fixed scope parameters.

We were fortunate to have the opportunity to speak with Stefan Haenisch, senior vise president of solution assembly and packaging who has leadership responsibility for all of RDS deployment programs for SAP.  There are currently 230 RDS programs underway with 30 percent managed by SAP partners.  We learned that many of the components and elements of RDS come from SAP’s All-In-One programs which helped to develop many of the solution accelerators, best practices and tools that now make-up this new ongoing RDS effort.  We were also pleased to hear that SAP is committed to bring in more partner resources to support these programs, and that partners are bringing new ideas and innovation ideas with their involvement.

For the supply chain area specifically, 3 RDS offerings are in release status (Customer Collaboration, Extended Warehouse Management, and a basic S&OP application. Expected for release later this year are Global Available to Promise and Service Parts Management We were somewhat disappointed to be informed that Supplier Network collaboration (SNC) has slipped into early 2012.  Apparently there are concerns among SAP SCM management teams that there are too many RDS program efforts occurring at the same time. In the procurement area, there is an RDS for Procurement, and judging from an eight deep crowd I observed in a specific microforum dedicated to this subject, there appears to be lots of pent-up interest.

Another goal for us in exploring this year’s conference was the opportunity to view the long anticipated Sales and Operations planning prototype built on the HANA platform.  We were informed that demos were being run on the show floor, but to our chagrin, neither the Business Analytics Theatre nor the Advanced Technology Theatre could accommodate our request. We suspect that this application is still “in the oven’ as it were, since in his technology keynote, Vishal Sikka noted that S&OP would be coming later as a component of the Data Warehousing aspects of HANA.  We believe that this is unfortunate because SAP customers probably are confused as to existence of two separate and different S&OP application initiatives for this area, and which best meets business process needs.  We further suspect that SAP wants to make a big statement in this critical process area, but is trading off valuable time for the most elegant technology approach.  A less onerous application supporting the S&OP process is long overdue.

On the subject of business analytics, we participated in a highly informative interview with Steve Lucas, global senior executive leading SAP’s business analytics business strategies.  Steve acknowledged that this year, every individual SAP analytics product was involved with some major product upgrade or initiative, and that may be overwhelming in terms of customer understanding.  His organization has produced a two-sided visual that provided what we believe is the best high level explanation of the various architectural implications of HANA and business analytics, as well as a methodology for how customers can evaluate their roadmaps and direction toward HANA.  This visual was obviously being test run for customer briefings at Sapphire.  It provided for us, the best visual tool thus far to help understand the true implications of SAP’s direction for HANA and business analytics. Participants in our global blogger briefing all unanimously urged Steve to make this visual more visible for SAP customers as a whole.  Over the coming weeks, we will explore the implications of this direction on analytical capabilities applied to supply chain business processes.

We have to close out this commentary but we leave you with an important and meaningful statement from Steve Lucas.  HANA at the end of the day is a database, a dramatically different form of database that can perform its own calculations and analysis at a far more rapid rate than anyone believed.  That is the game-changing aspect of this direction and it comes with many challenges for SAP and its customers. Its also presents many opportunities for how we can better sense, respond, and adjust global supply chain processes.  Technology marches on, regardless of whether we are ready.

Bob Ferrari

B2B e-commerce provider GXS announced that it had acquired supplier information and community management technology provider RollStream. Specific financial information regarding the transaction was not made available. An FAQ document on the GXS site notes that this acquisition advances GXS’s strategy to speed and simplify the integration of global business communities.

This acquisition comes as no surprise, at least to this author, since RollStream was a technology vendor with a lot of upside opportunity.

Supply Chain Matters previously commented on our impressions of RollStream back in June.  We were favorably impressed with the business approach, user interfaces and breadth of information management functionality. We were especially impressed with the social media based design aspects of RollStream’s Community Platform.  This provider has a marquee customer base of customers in healthcare distribution, grocery and manufacturing related supply chains. A noted drawback was that the RollStream platform per se lacked transactional or value-stream planning capabilities, but this acquisition is an obvious response to that drawback.  Both companies stand to gain from this event, since the GXS EDI and transactional platform now has the opportunity to leverage RollStream’s social and supplier collaboration platform.

While some would question the definition or value of social supply chain concepts and technology, we believe that this area will prove to be more important over the long-term.

If you desire to gain further understanding of social supply chain potential, you are welcomed to view an on-demand thought leaders webcast previously delivered by Lora Cecere, Altimeter Group, and myself that explored both the front-end demand and supply concepts of social supply chain.

Supply Chain Matters will have further, more in-depth commentary regarding the implications of this acquisition after we have had the opportunity to secure a further briefing from both parties.

Bob Ferrari

The following posting can be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

During the past few months, in the Kinaxis expert community and on the Supply Chain Matters Blog, I have been sharing commentaries regarding the evolving new era of aircraft manufacturing which has had such a strong dependence on an outsourced supply chain of suppliers and partners, a dependence model that still exhibits needs for improved coordination in product innovation and material flows. The time has come to comment on a third potential player, one that presents a threat from a different perspective of the supply chain.

Most everyone is aware of the continuous setbacks that have occurred with Boeing and its 787 Dreamliner program.  The latest setback occurred just a few weeks ago with an unfortunate in-flight electrical fire causing one of the test aircraft to make an emergency landing.  The Dreamliner’s scheduled first customer ship scheduled for Q1-2011 remains in jeopardy, and is now over two years late. We also commented on Bombardier’s C-Series program, a single aisle aircraft that is the cornerstone of that company’s plan to compete head-on with likes of Boeing and Airbus.  The C-Series also has a high dependence on a globally outsourced supply chain including major component assemblies sourced in China, Ireland, Italy and Germany.

Both of these programs are a high-stakes gamble for competitiveness and attraction among global based airline customers, especially those in the emerging markets.  Success is keyed on who can best coordinate and integrate the most breakthrough innovative technology with the most cost-efficient, global-based supply chain. Is the case of aerospace, sourcing equates to innovation, cost, and access to a potential growth market that has political dimensions of presence.

The third player, Commercial Aircraft Corporation (COMAC), is now coming into broader visibility.  COMAC is a China based, state-owned aerospace manufacturer who has embarked on its own program of innovation and cost.  The C919 (not to be confused with Bombardier C-Series) is a single-aisle aircraft being designed to carry up to 150 passengers. It is also being designed to be an alternative to the Boeing 737 or Airbus A320.

A recent Bloomberg Businessweek article notes that some key suppliers that supply both Boeing and Airbus, such as General Electric and United Technologies, are also working with COMAC.  They are hitching their wagons to all major aerospace players in the overall game of global competitiveness and who will become ultimate winners.  The reasons are fairly obvious; suppliers want to insure access to China’s and other very large aircraft markets that will unfold in the coming years.  Bloomberg points out that China alone accounts for 22 percent of Airbus’s 2010 orders and 15 percent of Boeing’s.   Thus far, COMAC has received orders from three Chinese airlines and two leasing companies, all state-owned, for a total of 90 C919’s, even though the maiden flight is not scheduled until 2014.   That situation alone provides one key advantage that the company has in terms of China’s airline market, its influence as being China owned and resident.

Much has been written of late about China’s high speed rail market, and how quickly China’s state-owned railway was able to master world-class technology in such a short period of time.  China’s railway is now competing for large-scale rail projects not only within China proper, but in other global regions, including the United States.  The major high speed rail OEM’s from Japan, Germany and France were all compelled to form joint-partnership arrangements in China in order to assure market access.  Now, some of these providers believe that their technology may have been compromised.

There is no doubt that in the coming months and years, product design, innovation, reliability and supply chain sourcing will all be primary factors as to which aircraft ultimately succeeds as favored by global carriers.  The Bloomberg article summarizes the bottom line of its article as noting that China’s commercial aircraft industry is getting help from Western aerospace companies who wish to branch out beyond today’s major industry players. By being resident in China, CMOC may already have a cost advantage, but has a strong reliance on product innovation and engineering.  It will be interesting for all of us to observe how a low-cost producer can overcome innovation and intellectual property barriers.

The stakes are even higher and a lot can be learned from the current episodes in high-speed rail. We could possibly read business case studies ten years from today that outline the circular trend in commercial aircraft component sourcing, moving from a past one nation, one contiguous resident supply chain, to multiple nation component supply chains, and back again to one predominant resident supply chain, which could include China.

In any case, don’t be terribly surprised if in the next five years, you find yourself traveling on a Chinese commercial aircraft, especially if you are traveling between Chinese cities.

Bob Ferrari

In case you have not noticed, an interesting customer and supply chain distributor confrontation is underway, and it involves two highly visible players.  Kraft Foods signed a distribution agreement with Starbucks Coffee Company back in 1998, where Kraft provides global distribution of Starbucks coffee among retail outlets.  According to a company press release, Kraft notes that has grown this business from less than $50 million, to approximately $500 million in annual revenues, and Starbucks has recognized and acknowledged Kraft’s role in building this retail presence, leveraging its own supply chain capabilities.

Starbucks, however, now wants out of the deal.  According to today’s Wall Street Journal opinion commentary, Starbucks May Spill Kraft’s Coffee, (paid subscription may be required) this java experience provider has reached a challenge in growth.  While overseas expansion of outlets has gone well in some countries, other countries have presented more competitive challenges.  Starbucks is perhaps viewing the packaged-food business as a bigger growth opportunity for the future, and apparently wants more direct control.

The problem is that the deal with Kraft was designed as an indefinite arrangement, subject to certain conditions and limitations.  Starbucks has embarked on the inadequate performance route. It accused its partner of failure to properly market the brand, for example, not maintaining appropriate promotional displays inside grocery stores. According to the WSJ commentary, Starbucks sent a second letter on November 5^th indicating that its partner had failed to remedy the contract breaches and that the deal would end in March of 2011.

Kraft’s public statement makes note that Starbucks could take over the retail distribution business, but needs to compensate Kraft for the fair market value of the business, plus allow sufficient time for an orderly transition. Kraft hints at interest in a premium of up to 35 percent of sales value.  The Journal commentary quotes a Wall Street analyst best guess that a Starbucks buyout could amount to $1.5 billion.  Starbucks would have to incrementally invest in its own global retail physical distribution, transportation and process capabilities or find another partner with more favorable terms.

Whenever lawyers get directly involved in supplier and customer deals, events can get ugly and relationships can, in-turn, be severely strained.  Rather than risk an acknowledged positive relationship among two well-known companies, it would seem that a more rational approach should be explored.  Arbitration, in our view, is an acknowledgement that neither side is willing to make movement.

Starbucks, for its part, has to recognize the value that Kraft has provided in leveraging its supply and distribution expertise, along with its supply chain process capabilities in sales and operations planning. It must internalize what it would reasonably take in time and money to re-create these capabilities internally. Competitor Dunkin Donuts has elected to have a third party maintain retail distribution, and many other service retailers opt more for leveraging someone else’s supply and distribution network, for instance Amazon or others, vs. investing in singular capability.  It really comes down to that key question, how strategic is supply chain physical or process capability to long-term growth needs.

Kraft, in-turn, should recognize the importance of key customer needs, including the desire of the customer to gain more financial benefit from an existing relationship.  Kraft is already under the looking glass regarding its recent acquisition of Cadbury, and consequent need to drive considerable incremental savings in overall supply chain costs among both companies.  One would speculate that a loss of Starbucks’ profitable retail business makes the challenge even more difficult, or the potential moving of Starbucks to another consumer goods competitor’s supply chain distribution network does not bode well for Kraft’s reputation either.

Perhaps it’s time to stop playing ‘my supply chain trumps yours’ and move toward a ‘win-win’ negotiation arrangement where the lawyers and the egos stand in the background.

Bob Ferrari

Disclosure: The author of the above commentary is an owner of the common stock of Kraft Foods.

The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

The fallout from the indictment and arrest of Paul Devine, a global supply manager at Apple charged with wire fraud, money laundering and unlawful monetary transactions involving more than one million dollars in alleged kickbacks, has continued since we first commented on this incident.  As I pen this entry, a Google search notes over 1200 web entries directly related to various aspects of this incident. Commentaries in the blogosphere and among academics are focusing on the implications for procurement and supply planning strategies, and we all have to ponder whether this one, highly visible incident is just another sign of the state of the times or whether this is a watershed incident leading to more focused ethical standards.

Reports in various global financial publications such as the Financial Times and The Wall Street Journal are focusing on the general reactions among specific suppliers involved, as various companies respond to protect either legal interests or reputations in the market.  According to the Financial Times, Kaedar Electronics of China, a unit of Taiwan’s Pegatron Corp. and Cresyn of South Korea admitted it benefitted from the information provided by Mr. Devine. The article notes that “Cresyn and Mr. Devine signed a “consulting services agreement” spelling out what Mr. Devine was required to leak, including Apple product roadmaps and sales forecasts, in exchange for $6,000 in monthly payments.” The Times notes that Pegatron had begun its investigation and had suspended the Kaedar manager allegedly involved. Meanwhile a Wall Street Journal article notes that a Pegatron spokesperson acknowledged that Kaedar did pay a brokerage commission to an intermediate trading company for its business with Apple, but declined to disclose the amount of money paid. Others suppliers reportedly involved are indicting that such practices are not condoned.

No doubt, the coming days and weeks will provide even more opinion and commentary on the implications of this incident, and whether it sends a wake-up call on the state of ethical procurement practices when supply chain business pressures and various business cultures collide.  While some may deflect such remedies toward the moral principles or motivations of the individuals involved, or on future hiring and selection policies, in my view, hiring policy has little to do with the underlying root cause of this episode.

Individuals respond to the business culture and the goals and organizational expectations practiced within their firms.  We all know that Apple surrounds itself with a culture of extreme secrecy to protect itself from competitors.  Suppliers want an edge on their competitors, and will sometimes go to extraordinary means to secure protected information that provides that edge.  To change all of this, all members of the value-chain need to equally share in the risks and rewards of success, and further need to know where the lines are drawn. Apple has a well articulated Supplier Code of Conduct, and to its credit, is taking very decisive action in dealing with this incident.

I come back toward the needs for insuring that proper risk and reward strategies are practiced and properly monitored among all in the value-chain, and with all professionals involved. Confidentiality and the safeguarding of key information has its place and all parties need to understand that certain behavior and practices will not be tolerated.  The anticipation of lucrative business does not warrant unscrupulous behavior.

What’s your view?

Bob Ferrari