This weekend featured some significant news directly focused towards aerospace and commercial aircraft supply chain dynamics. The first is the announced acquisition by Rockwell Collins to acquire B/E Aerospace, and the other was the announcement of another round of significant headcount reductions at Bombardier, which will be highlighted in a subsequent posting.
Rockwell Collins and B/E Aerospace, yesterday announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt.
The announcement notes that this transaction combines Rockwell Collins’ capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management systems with B/E Aerospace’s range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, modular galley and lavatory systems for commercial airliners and business jets.
This cash and stock deal will obviously require approval from global regulators and represents a reported 22 percent premium to the closing price of B/E stock on Friday. From the lens of Supply Chain Matters, the deal further represents an evolving trend of key suppliers attempting to gain greater leverage in strategic product design and supply arrangements among global aircraft manufacturers.
In our ongoing multi-year coverage of commercial aircraft supply chain related developments, we have continually pointed out the extraordinary circumstances of an industry that has designed and manufactured a new generation of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels are clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns. Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but whom of-late have had to respond to key customer requirements for larger cost and productivity savings. Further at-stake are the opportunities for benefiting from multiple years of service parts and service focused revenues and margins related to ongoing aircraft operating maintenance needs along with desires to upgrade older aircraft with more Internet connected entertainment and business services.
Yesterday’s announcement indicates that this proposed acquisition significantly increases Rockwell Collins’ scale and diversifies its product portfolio, customer mix and geographic presence. Rockwell Collins CEO Kelly Ortberg indicated to The Wall Street Journal that the combination offered substantial cost synergies and the ability to cross-sell electronics and plane fittings, and positions the combined companies to lead in the development of “smart” aircraft. The latter can be interpreted to mean more connected aircraft in relation to passenger entertainment along with more predictive maintenance and services.
The proposed acquisition further provides more negotiating power and leverage. Readers may recall that in a Supply Chain Matters prior commentary, we highlighted a development in late July when Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments representing a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. We interpreted this development as a trend of more aggressiveness among key suppliers.
Similarly, our ongoing commentaries related to the industry have noted that current production shortfalls for new aircraft have come down to more timely availability of interior cabin components such as seats and lavatory outfitting components. This has become a more visible challenge to produce larger, dual aisle aircraft such as the Airbus A350 and Boeing 787.
The announcement points to the additional benefits of the cost synergies among the two companies, indicating the generation of run-rate cost synergies of approximately $160 million ($125 million after tax) over a six-year period. More than likely, that will reflect elements of both companies’ manufacturing and supply chain related activities.
This latest aerospace and commercial aircraft industry acquisition announcement may, more than likely, motivate additional announcements. It further reinforces our prior advisory for product management, procurement and supply chain teams to best be prepared for the new consequences of added supplier influence and push back via enhanced strategic positioning. The days of one-sided or tops-down supplier management seem to be numbered, especially in industry settings where revenue and growth potential are significant.
A final note relates to smarter machines and service management revenue potential. While original equipment manufacturers are certainly focused on the new business models brought about by more connected machines. Key component suppliers also understand such potential, and desire their portion of the incremental revenue and profitability benefits, and there lies the next frontier of collaboration and control.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This past August, this author penned a Supply Chain Matters blog commentary: The Newest Phase for Elongated Supplier Payments- More Aggressive Push Back. The essence of that commentary was that with many more multi-industry procurement teams extending supplier payments under the umbrella of working capital savings, suppliers themselves are now more aggressive in pushing back, especially when their own financial performance takes a hit from a key customer. In some cases, such suppliers utilize the threat of supply disruption to force more timely payments.
We cited supplier aggressiveness examples related to AB In-Bev, Boeing, General Motors, Tesco and Volkswagen.
Today, The Wall Street Journal reports (Paid subscription required) on yet another example, this time involving retail firm Sears Holding.
Jakks Pacific the fifth largest designer and marketer of toys and consumer products featuring a wide range of popular branded products and children’s toy licenses announced the suspension of supplying products to retailer K-Mart, part of Sears Holdings. The stated reason, according to reports, was concerns related to the financial health of the retail chain and to minimize risks of not being paid for inventory. While Jakks senior management did not initially disclose the name of the a stated “major retailer”, business media digging confirmed the identity of that retailer.
Normally, supplier pushback on concerns for delayed payments are not extraordinary news. Sears Holding itself has been itself financially challenged as a result of declining sales and profits and subsequent business restructuring and store closings. Sears CEO Edward Lampert had to recently respond to speculation that the K-Mart franchise was about to close in the light of previous decisions to shutter upwards of 130 K-Mart retail stores. In a blog posting featured on the firm’s SHS Holdings blog, Lampert indicated that there are no plans and there have never been any plans to close the Kmart format. He further calls into question whether intended parties seek to do harm to the retailer for other gain.
By our lens, the extraordinary aspect is the overall timing of the supply suspension, coming just before the all-important and business critical holidays fulfillment period. The vast majority of sales related to children’s toys occur during the Christmas holiday season. The other aspect to timing relates to the Wall Street community’s concerns as to whether other key suppliers will take the same actions related to Sears and K-Mart.
The CEO of Jakks indicated to the WSJ that the decision impacted his firm’s financial performance during the recent quarter as revenues fell by 10 percent, and the company’s stock value plunged by 15 percent. Reviewing the toy supplier’s latest third quarter financial results, we indeed noted the citing of suspended sales “to a major customer that is experiencing challenges” but there is mention to other causal factors such as the impact of Brexit and negative foreign currency effects. A balance sheet review indicates that there has been a nearly $109 million increase (63 percent) increase net accounts receivable over the past nine months. Working capital balances have eroded by nearly $24 million over the last year.
On its part, K-Mart management reinforces that it has an active and long-standing relationship with Jakks and that it continues to receive inventory from this supplier. One wonders whether that implies that compromises are already at-play. The SHS Holdings blog further weighed in a blog commentary from is CFO: Just the Facts- Vendor Relationships. It states in-part:
‘We can tell you that we have had a longstanding relationship with Jakks as we do with our tens of thousands of other suppliers and vendors. Despite the speculation and rush to report the negative, we have always paid our vendors for orders we have placed and as part of the normal negotiations between retailers and vendors, there are occasionally disputes over prices, allocations of product and other terms.”
That latter statement regarding occasional disputes can be interpreted in various ways depending on the perspectives of supplier or major customer. The tone of the commentary can have different interpretations as well. The transfer of the burden of working capital management or cash flow ultimately comes with certain consequences which need to be managed.
Regardless, the overall trending of increased supplier aggressiveness is prevalent, especially when such suppliers perceive their own financial and operational harm.
More information continues to come forth regarding Samsung’s bold decision to permanently suspend production and sale of its newly announced Galaxy Note 7 smartphone. Thus far, the information points to both product design/management as well as supply chain related learning. While it is still rather early to be able to definitely conclude what led to this brand debacle, the one clear aspect is that the Samsung Note 7 incident will be of multi-industry discussion, thought exchange and study for many months to come.
Many industry, business and other media voices are already concluding that Samsung’s decision to terminate the Note 7 product represents a bold effort to protect its overall brand and creditability with customers. The more that the negative publicity continued regarding Samsung, the more the damage. New reports and social media commentary are surfacing that the manufacturer’s engineering teams were themselves challenged with determining the specific root cause(s) of the thermal runaway fires.
We initially call Supply Chain Matters reader attention to a recently published and rather insightful New York Times report: Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone. This report indicates that within its process of overall response to reports of phones exploding and catching fire, Samsung’s engineers were unable to replicate the fire conditions. Further noted was that because of the tight deadlines and intense internal visibility to find root cause, engineering elected to conclude that the effect had to be associated with faulty batteries or battery design.
In August, the looking glass, as this blog speculated, quickly turned to battery supplier Samsung SDI. The Times citing documents from a South Korean product safety regulator as a source, indicates speculation that either the plates inside the battery were too close or the battery had defects in insulation or coating of electrodes. The early September product recall of 2.5 million phones was targeted to those Note 7’s that had Samsung SDI batteries. Both Samsung and the Korean regulatory agency turned to batteries supplied by alternative battery ATL to be those to be incorporated with the recall’s replacement phones. That decision reportedly backfired when reports of fires associated specifically to the replacement phones began to quickly surface.
No doubt, these efforts involving suspicions with battery design operation caused Samsung’s internal supply chain teams to scramble for a response plan. We speculated in our prior blog commentary that the rest of smartphone and consumer electronics industry was obviously watching events very closely as well to ensure that a battery defect was not involved with other product supply chains. Samsung SDI itself is a supplier to many other branded smartphones including Apple’s iPhone.
The Times article goes on to cite a former director and battery expert at the Korea Electronics Technology Institute as indicating that blaming the batteries as the problem was too quick to judgement given the lack of definitive post-testing data. Instead this expert noted: “The problem seems to be far more complex”.
Other reports that we have reviewed thus far also point to engineers under the gun to quickly resolve the cause of fires with un-conclusive or definitive test data. In the end, concerns for the brand, and concerns for short and longer term revenues and profitability seemed to have taken hold. Equity analysts at Credit Suisse had recently estimated that the Note 7 recall could cost Samsung upwards of $19 billion in lost revenues. Research firm Strategy Analytics had earlier estimated more than $10 billion in financial losses. Samsung itself has indicated to shareholders that it anticipates A $5.3 billion loss during the next few quarters. The manufacturer has already downward adjusted its third-quarter profit forecast by $2.6 billion. Thus the financial implications of this incident can be substantial.
In today’s world of global business, events reverberate continuously at the speed of social and traditional media. Staying in-front of and in-control of such information flow, particularly when it involves brand crisis is a daunting challenge that requires expert resources. Industries further exist in an overall business environment more inclined to lawsuits and litigation response to product recall incidents which often hampers open communication and timely response when lawyers become the filter for external and internal communications and investigation mechanisms. We have observed that theme consistently in these incidents as well as the supplier implications.
While information, discourse and industry implications related to the 2016 Samsung Note 7 product management events will continue to unfold, we offer one clear takeaway. The business process, information, market intelligence and decision-making relationships among product design, management, procurement and broader supply chain strategy teams is ever more important and required in today’s global business environment. No company is immune, regardless of stature or brand identity. The supply and product value chain leadership and accountability umbrella is broad and ever more inter-dependent.
Supply Chain Matters advocates that Sales and Operations Planning and internal organizational management mechanisms include product design and management as an entity within integrated business and operations planning.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow. However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.
To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.
Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.” In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.
Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.
The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.
And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.
The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.
In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.
In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.
Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.
The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.
Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.
In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.
Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.
We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.
The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers. They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
From time to time, Supply Chain Matters will highlight what we believe our technology and services providers that are providing unique or differentiating technology approaches in supporting business process needs. In this commentary, we profile Powerlinx, a technology that supports the ability of companies to quickly search out potential strategic partners.
VentureBeat describes this provider as “the eHarmony of business”, providing a technology that can more quickly identify potential partners utilizing advanced data discovery methods. In essence, the technology is similar to that utilized by prominent social media sites such as Facebook or Linked-In that leverage graph data discovery methods. The twist is the application to search out potential partners such as new suppliers, advanced technology providers, industry expertise or to be discovered by other firms for specific capabilities and traits. Thus, it can avoid the need for hiring business advisers and consultants to engage in a time consuming search activities.
The firm was founded in 2012 by former Dun and Bradstreet executives and dedicated its first two years towards developing what is now described as the proprietary PowerScore platform utilizing text mining and natural language conversion techniques, This platform recently went live in March of this year, and we were informed that it is currently populated with 85 million potential partners spanning 165 countries. The technology provider is also now discovering its value to manufacturers and supply chain management teams.
To populate this data store, developers scanned available primary sources such as company web sites, news releases, media mentions and other sources. A proprietary PowerScore™ algorithm analyzes a wide variety of metrics to provide a quantitative measure of a company’s compatibility with a potential partner.
Inferences are drawn among various data store partners regarding areas such as stated objectives, current or past relationships, successful relationships or other known strategic partners. Partners further have the ability to control which matches that would like to approve or be displayed. Our briefer, Yoni Cohen, Head of Product, was quick to point out that the data store is sensitive to any proprietary information and will protect such information. Partners’ in-turn have the ability to also limit any sensitive information.
To springboard customer adoption, Powerlinx currently offers a three-tiered pricing model to appeal to various user groups. The no-cost entry level Basic plan was designed for companies looking to grow, finance or exit a business and places a defined limit on the number of searches that can be conducted while providing the opportunity to respond to inbound opportunities identified by the platform. The two other tiers, Professional and Power provide support for unlimited matches with added hands-on Powerlinx consultant services. Pricing is rather attractive; a Professional subscription is currently priced at $100 per month or $1000 pre-paid for an entire year. A Power subscription is priced at $500 per month; $5000 annual pre-paid and comes with a dedicated analyst and premium services such as advanced privacy options and active promotional services.
Overall, we had not run into this type of technology prior to our briefing, and wanted to pass on visibility to our readers. We further garnered the impression that this is an energetic start-up with a mission, passion and purpose as well as a somewhat attractive pricing model.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Disclosure: We have no current client of business relationship with Powerlinx or its investors.