In September of 2014, Supply Chain Matters began calling reader attention to aluminum producer Alcoa and its efforts to collaborate and introduce newer, high-strength and corrosion resistant aluminum alloys for the commercial aerospace industry. At the time, Alcoa struck a multiyear aluminum supply agreement with Boeing’s Commercial Airplane unit to make this producer the sole supplier for wing skins on its metallic structure commercial aircraft along with aluminum plate products used in wing ribs or other structural aircraft components. The supply deal was valued to be more than $1 billion at the time, and the two parties a desire continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications.
In March of this year, we updated our readers with news that Alcoa’s indent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. RTI’s business focus was centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft. The Wall Street Journal reported at the time that that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector. This RTI acquisition followed the 2014 acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.
Our March commentary noted that the metals producer was further positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.
Last week, the news reverberating across automotive supply chain audiences was that Ford Motor Company had reached an augmented supply agreement with Alcoa for use of aluminum based components. Readers might recall that the Ford F-150 was recently re-designed, making it the first mass market pick-up truck with an aluminum body. As a result of the design of lighter materials, this vehicle’s over weight was lightened by 700 pounds, adding upwards of 29 percent in overall fuel economy. Alcoa worked with Ford on the aluminum component re-design.
According to published reports, this revised supply agreement will allow for the use of more sophisticated alloys for additional use in the F-150 along with production of other exterior metal components such as fenders and door panels for other future Ford models. In its reporting, The Wall Street Journal (paid subscription required) quotes Ford’s product chief as indicating that collaborating on technology at this scale represents a fairly significant commitment by both companies.
While a reportedly large amount of Alcoa’s business still emanates from raw aluminum, the supplier is clearly on a strategic product innovation thrust to target business and product innovation needs in key industries. The WSJ reported that Alcoa is aiming to grow its automotive-aluminum sheet business alone to upwards of $1.3 billion by 2018, from a level of $229 million in 2013.
By developing new casting technologies for fabricating both aluminum and titanium based component parts, the door is being opened for joint product design collaboration and more strategic longer-term supply agreements to insure adequate supply. In its reporting of the Ford supply agreement, the WSJ spoke with Alcoa CEO Klaus Kleinfeld who indicated a focus on growing dozens of niche downstream businesses from aerospace to truck wheels, and in developing supply agreements with eight other auto makers.
Supply Chain Matters brings Alcoa to light as an example of joint supplier and OEM production efforts paying rewards in multiple strategic industries and boosting bottom-line results for both supplier and customer.
In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed 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. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. At the time, a Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low. Not all of the 10,000 suppliers would face the higher charges due to existing payment arrangements afforded these suppliers to utilize existing Wal-Mart distribution centers.
Last week, Bloomberg reported that Wal-Mart’s Suppliers Are Finally Fighting Back, indicating that some of the larger suppliers are saying no to these new cost squeezing measures. Some suppliers reported that the new fees are impacting their own bottom lines, while several firms are reportedly hiring attorneys to further pursue matters. The Bloomberg report indicates that two large, unnamed suppliers have refused to accept such terms. A senior vice president at Kantar Retail, which advises some Wal-Mart suppliers, is quoted as indicating: “It looks as though they (Wal-Mart) are trying to have it both ways and trying to pad their own margins where they are facing cost pressure.”
Regarding the report, a Wal-Mart spokesperson indicated to Bloomberg that the global retailer is willing to now negotiate with suppliers and will take into account prior history with a supplier, as well as quality of the products. The spokesperson further indicated that the retailer may encourage some suppliers to seek low-interest loans through an existing financing program, implying that those suppliers that do not agree to new terms may find their Wal-Mart business affected.
The report observes that smaller and even larger suppliers have the most at-stake in their ability to be able to push-back. “A smaller supplier, notified of the fees late last month and given two weeks to accept, said it won’t be able to make a profit on its Wal-Mart business under those terms unless it fires workers or cuts wages and benefits.”
From our Supply Chain Matters lens, these ongoing supplier developments related to Wal-Mart are indeed part of the realities for certain retail industry players who can leverage their sheer scale of buying power. On the other hand, it defeats more positive initiatives.
Wal-Mart’s ongoing initiative to purchase an additional $50 billion in U.S. sourced products over the next ten years could be a casualty of its ongoing supplier management efforts. Many of these newer suppliers will not only need the retailer’s long-term buying agreements and shared distribution facilities, but the ability to make meaningful profit in order to sustain their presence in the U.S.
Wal-Mart stated goals are to simplify supplier relationships and develop a broader U.S. supplier base. However, from our lens, cost-sharing tactics for having it both ways defeats such strategic objectives and places supplier relationships in the context for always on the ready for the next shoe to drop.
This week, two major U.S. based retailers, Target and Wal-Mart, each reported financial results that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers point to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains. The approaches, however, are different.
Wal-Mart’s second quarter net income declined 15 percent as a result of increased competition and added costs. The retailer has been forced to add staffing and has increased wages to improve customer service and overall merchandising. The retailer further pointed to currency fluctuations, lower than expected reimbursements for its pharmacy business and an increase in goods stolen or lost as weighing on profit performance. The latter related to “shrink” of inventory has to be especially troubling. The retailer is currently implementing a new inventory management system.
If our readers have had the opportunity to visit a U.S. based Wal-Mart store over the past 3-6 months, you would have witnessed the results of prior cutbacks in staffing and an ill-planned merchandizing strategy. Stores appeared messy, shelves were not stocked adequately and store and checkout clerks seemed to be in short supply.
On a positive note, Wal-Mart has finally been able to stem the lack of sales growth among its U.S. stores. Same stores sales across the U.S. actually increased 1.5 percent within the latest quarter, the fourth quarterly increase after rather long multi-quarter declines. Online sales rose 16 percent in the second quarter.
Wal-Mart has been heavily investing in its online and Omni-channel customer fulfillment capabilities which have obviously impacted profits in the short-term. In this week’s financial performance announcements, the retailer actually lowered its profitability targets for the current quarter and the remainder of its current fiscal year. The notion of Wal-Mart has been one of supply chain scale in distribution, warehousing and dedicated fulfillment.
In prior commentaries, Supply Chain Matters has highlighted reports indicating that Wal-Mart again focused on its suppliers for sharing the burden of needed higher margins. In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed 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. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In its reporting of Wal-Mart’s results, the WSJ noted Wal-Mart’s CEO Doug McMillon acknowledgement that the company was in a period of change. He further cited a 1996 magazine article hanging on the wall in his office titled: “Can Wal-Mart Get Back the Magic”, while quipping that the retailer has rebounded before.
In contrast, we reflect on Target.
For its second quarter, the retailer reported a 2.4 percent increase in same-store sales and elected to raise its outlook for the second time. A concerted strategy on improved in-store and online merchandising has caught the positive attention of Wall Street, especially in light of the prior 2013 massive credit-card breach that significantly impacted sales growth.
Sales of termed signature merchandise categories were reported as growing at 7 percent, three times faster. Online sales increased 30 percent contributing .6 percentage points to comparable sales growth while more than 80 percent of online sales growth was driven by Home and Apparel categories. Overall net income nearly doubled in the second quarter.
In its earnings briefing, Target CEO Brain Cornell specifically addressed five strategic priorities, many of which have supply chain connotations. The first is to become a leader in digital, including direct from store capabilities. Thus far the retailer’s is shipping direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target’s current online fulfillment is supported by six dedicated fulfillment centers, regional distribution centers and direct ship from store.
Most important from this author’s lens, was Cornell’s acknowledgement that balancing inventory across the network and leveraging resources at store level are an integral part of strategy. Target will be testing a new available-to-promise system that provides specific customer delivery commitments, later this year.
There was also refreshing candor. CEO Cornell indicated:
“Retail is changing rapidly today than any time in my career and we need to ensure that core operations keep pace with the new ways we’re serving our guests. Over time, Target has developed an incredibly complex supply chain, built to serve an outdated linear model in which product flows from vendors through distribution centers to stores. To serve guests today, we are becoming much more flexible in the way we fulfill demand for products and services. And this is stretching our supply chain well beyond its core capabilities.”
To add more credence to candor, Cornell acknowledged to Wall Street analysts that in-stocks within physical stores have been unacceptable so far this year. He has tasked a newly appointed Chief Operations Officer, John Mulligan, to have as his initial priority the improvement of overall supply chain capabilities.
As readers may be aware, Target recently had to make a very painful decision to close all of its Canada retail outlets. A part of that problem related to merchandising and significant challenges in maintaining in-stock inventories.
From our lens, such articulation from senior management, reflecting the importance of integrating both merchandising and end-to-end supply chain capabilities is a very important and noteworthy change in retail. Later in follow-on Q&A with analysts, Cornell articulated the value of collaborative efforts among various suppliers to bring more innovative products to market.
Wal-Mart and Target provide different contrasts but yet reflect the common challenges impacting retail industry. Retail supply chains are undergoing significant and groundbreaking change, far different than the last decade. Online and in-store marketing, merchandising, supply chain customer fulfillment and supplier management are all interrelated and must be addressed in a singular umbrella strategy and supporting action plans. Emphasizing one as the expense of the other often leads to sub-optimal business results.
Thirteen months ago, Supply Chain Matters called reader attention to the news that Boeing had reached a preliminary agreement to extend partnerships with a group of key Japan based suppliers to provide major structural components of the newly planned 777x aircraft. These suppliers provide major structural components such as fuselage sections, wings, and other components, and they involve parent companies Japan Aircraft Industries (JAI) and Japan Aircraft Development Corporation (JADC). Individual suppliers include:
Mitsubishi Heavy Industries Ltd.
Kawasaki Heavy Industries Ltd.
Fuji Heavy Industries Ltd.
ShinMaywa Industries Ltd.
Boeing has now announced that it has signed a formal agreement with these key strategic suppliers , which in aggregate will supply upwards of 21 percent of the major aircraft structure components for the planned new 777x model. The contract includes fuselage sections; center wing sections; pressure bulkhead; main landing gear wells; passenger, cargo and main landing gear doors; wing components and wing-body fairings.
In the Boeing press release, Boeing’s Vice President and GM of Supplier Management praises these Japanese partners for their commitment for working on the affordability goals associated to the 777X program. Judging on the interval of an entire year being required to finalize the supply agreement, we can all speculate on the back and forth negotiations. The JADC Chairmen and KHI President indicates in the release that the agreement involves investing in new facilities and introducing robotic and other automated systems. That may be the source of the negotiations and evolving production strategy.
Boeing notes that it has partnered with Japan based aerospace providers for nearly five decades, and that in 2014 alone, the company purchased more than $5 billion in goods and services. With the new supply agreement in-place, Boeing indicates it expects to purchase $36 billion of goods and services from Japan between 2014 and the end of the decade. From our lens, such a relationship is a testament to joint product design, component and production process innovation.
Teams have different definitions and context as to what may be termed strategic supplier. An overall spend of $5-$6 billion per year certainly qualifies for such a context.
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.