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Another Example of the Importance of Strong and Loyal Supplier Relationships- Bourbon

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Across our supply chain management community, we are often keenly aware of how the dynamics of product demand and component supply interrelate. While teams always strive to balance and align product demand and supply needs, forces in a market or across an industry have a way of adding different or unforeseen challenges. They drive home the importance of nurturing strong supplier relationships and creativity along with the notions that the supply chain and suppliers, do matter.

A timely reminder was brought forward last week within The Wall Street Journal’s published article, Bourbon Feels the Burn of a Barrel Shortage (paid subscription required or free metered view) Amidst souring consumer demand for bourbon and craft-distilling beverages, this industry is facing the blunt reality of a three year long shortage of the barrels required for storing and aging bourbon. More specifically is a shortage of required supplies of white oak which the barrels are constructed.

Various cooperages (barrel makers) are actually turning down orders, along with offers to pay upwards of twice standard barrel pricing from those distillers seeking availability of prepared white oak barrels. Existing barrel suppliers apparently have only the capacity and wood to supply existing loyal customers and are either wait listing or turning down new industry entrants. According to the article, the white oak supply problem was compounded by a massive contraction impacting the lumber industry during the 2007-2008 housing crash across the United States. Sawmills shut down and loggers abandoned the market. While the lumber industry is now rebounding, the article points out that white oak supply still lags the current demand among barrel makers, while a shortage of lumber mills and experienced people continues to limit supplies.

In response to the demand crisis, barrel makers themselves reportedly have become more creative. Examples brought forward included Independent Stave Company, a large private barrel maker and supplier to Evan Williams and Jim Beam, which is now buying logs sourced from five different U.S. states in addition to its traditional supplies within the state of Missouri. To avoid high transportation costs for logs, this supplier invested in a new lumber mill in Kentucky.

Brown Forman, producer of its iconic Jack Daniels branded whiskey invested in a new barrel making facility near Huntsville Alabama because it opened “a whole new territory of logs”. It reportedly halved the time required to ship new barrels to Jack Daniel’s production site.

Craft distillers have reportedly turned to seasoned consultants for help in finding and/or brokering any and all supply of new barrels while some fear that they will not be able lay away whiskey.

Here is the takeaway message. As you, I and thousands of other new consumers partake and enjoy their very favorite branded bourbon, standard or craft whiskey, consider the fact that active supplier loyalty, strong relationships and joint creativity helped to insure that said bourbon and whiskey was aged and nurtured in the proper white oak barrels.

Supply Chain Matters offers a timely new toast:

Here’s to good times, good people, and great bourbon, along with creative and resourceful suppliers.”

Bob Ferrari


Supply Chain Matters Interview with the CEO of ISM

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This executive editor conducted a recent interview with Tom Derry, CEO of the Institute for Supply Management (ISM).  Our interview was in conjunction with next week’s ISM 2015 Conference, which this year celebrates the 100th year anniversary of the   Institute for Supply Managementorganization. That is quite a noteworthy achievement offering a time to reflect on the past and future of the sourcing and procurement function.

For readers unfamiliar with ISM, this professional organization provides procurement and supply industry professionals and organizations with extensive education, research, publications and highly regarded certification. Most readers may be familiar with the often cited ISM PMI Index (Purchasing Manager’s Index) which compiles various supply chain activity indices among various industries. ISM, however, is a far broader organization focused on excellence in supply management.

Our interview touched on some broad topics. CEO Derry indicated that 2014 was an important year for ISM as an organization, one that included significant new initiatives. New staff has been recruited, finances have been solidified and new initiatives, such as attracting Millennials for careers in procurement and supply chain management, have provided broad member organization interest. Millennials will be critically important for the broad supply chain management community in the decades to come. Supply Chain Matters has previously highlighted ISM’s 30 Under 30 Rising Stars Program and we are in the process of interviewing past and current “Stars” which will be featured in upcoming blog postings.

In our interview, we touched upon ISM’s current certification programs.  Because of increasing global interest and demand, CPSM (Certified Professional in Supply Management) certification exams are offered in 5 languages with nearly half of applicant interest coming from outside the United States. That is encouraging news to the global demand for recognizable skills and standards.

We wanted to sense CEO Derry’s observations of the burning topics currently on the minds of the sourcing and procurement community. One theme is macroeconomic uncertainty reflected in current volatility of commodity prices and where they may be headed. Another is top-line revenue growth, especially since demand has been slacking in mature economies while some industries are discovering slow to no growth among emerging economies. Mr. Derry described the opportunities as supply chains becoming “globally local”, where cost- opportunistic production is sourced closer to the end customer and can be catered to specific regional market and consumer needs. It is about the understanding of what is the total cost of sourcing to support both lower-cost product strategies and leveraging the most promising local markets.

In our interview we wanted to further probe on the current climate for procurement, namely whether procurement leaders are being directed towards more and deeper cost savings or whether joint innovation in processes and products is in the forefront.  CEO Derry indicated that from his travels and conversations, a mind shift is occurring. He specifically cited an automotive industry example where a CFO was drilled by Wall Street analysts on cost reductions in manufacturing. The reply indicated that new technology, in areas such as navigation and driver safety innovations, incorporated in today’s vehicle models are clear signs that innovation is now coming from the supply base. This, in-turn, has led to gaining pricing power in the market. These efforts are becoming great examples of finding innovation and finding top-line revenue growth.

Supply Chain Matters recently highlighted reports that General Motors is initiating more longer-term, strategic relationships with key suppliers in order to foster more innovation in vehicle components and sub-systems.

Derry further believes that, over the past 20 years, a mind shift developed for cutting out cost.  Today, arbitrage opportunities for cost advantage are mostly gone, and the new emphasis has to shift toward how procurement can influence or directly impact more value for the business.

Looking ahead, given that this year’s conference is a celebration of the 100th anniversary of ISM, we asked Derry to describe the ISM strategic agenda moving forward. First, Derry emphasized that there is a need to celebrate the past century’s profession of procurement accomplishments. Supply Chain Matters would add our observation that many of today’s occupations have not endured as long.

Moving forward, because member needs are changing, Derry noted a more globally focused basis of ISM’s member services, with added emphasis for digital and mobile based content delivery.  Expect ISM to be active in establishing standards in ethics and social responsibility related to procurement practices reference points.  Derry iterated that customers have high expectations not only related to products, but how products are created. He specifically cited outdoor clothing provider Patagonia as a company that “walks the talk” in socially responsible sustainable materials. The apparel provider’s Footprint Chronicles examines Patagonia’s life and habits as a company and provides transparency to its end-to-end supply chain. Derry believes that firms will be increasingly aligned with values among the customer base.  In that light, we both shared examples related to how our children make their buying decisions not only factoring cost, but the standards and policies of the particular company. Another particular example was buying a new car, specifically on how Subaru markets and sells its vehicles, not only features and cost, but also its zero landfill and sustainable materials and energy standards associated with Indiana based manufacturing facility.

A final area touched upon in our interview was the state of professional education within supply chain management. This, according to Derry, is a question he often receives. He noted that the responsibilities and scope of procurement are changing rather rapidly and there is a need to constantly stay current. To be effective, procurement professionals need to understand the broader capabilities of the supply chain such as planning, logistics and transportation. A procurement professional does not necessarily need to be an overall expert, but should be knowledgeable to the needed capabilities and impacts of decisions across the entire supply chain.

Looking across all of the current professional organizations that umbrella supply chain management today, Derry observed that ostensibly, from an ISM perspective, the strategy is somewhat different than counterparts around the globe. To be effective in the role, there is a need to understand the elements of materials management, warehousing and logistics operations, not necessarily to be an expert with every one of these areas. He described ISM’s goals as concentrating on the skill and expert knowledge needs for procurement leadership and practioners to be most effective, which is slightly different than organizations striving to serve education needs in the end-to-end supply chain. ISM is deliberately striving not to replicate efforts of other professional bodies and organizations.

We thoroughly enjoyed our conversation with CEO Derry and wish ISM continued success in the next century for serving the professional development and services needs of supply management professionals across the globe.

We had all good intentions for attending this year’s ISM conference but unfortunately, other business commitments will preclude our attending.  However, stay tuned for coverage of announcements.

Bob Ferrari, Executive Editor


A Highly Visible Week for Apple and its Product Supply Chains

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This has been a highly visible week for Apple and its supply chain ecosystem.  Included was Apple’s announcement of obscene earnings for its latest fiscal quarter and perhaps too much visibility to supply chain related information related to the newly introduced Apple Watch.

On Monday, Apple reported operating results for the March-ending quarter reporting a 27 percent increase in revenues and a startling 33 percent increase in profits. Gross margin climbed to 40.8 percent above previous Wall Street estimates of 38.5 – 39.5 percent. The overall business media headline was that Apple’s iPhone line-up is gaining market-share while commanding higher prices. The average selling price of an iPhone has risen to $659, up $60 in the last year, while iPhone shipments were up 40 percent from the year earlier period to 61.2 million units. Emerging market demand, in particular China, Hong Kong and Taiwan is reportedly fueling this latest iPad sales volume increases. Revenues associated with the Mac personal computer lineup trended positively, up 10 percent in the latest quarter, bucking an overall industry trend of declining PC sales. Apple closed its latest quarter with over $193 billion in cash, up $15 billion from December.

However, there are some warning signs. Sales for the iPad declined by 23 percent in the latest quarter, an indication of a further sales decline trend.

Yesterday, The Wall Street Journal reported (paid subscription or free metered view) that one of the key technology components within the Apple Watch has experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers.  Citing people familiar with the matter, the WSJ report indicates that reliability testing has discovered that the taptic engines supplied by AAC Technologies Holdings of Shenzhen China, have demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp. have reportedly not experienced the same problem, with Apple reportedly moving all remaining sourcing of this component to Nidec. However, it may take more time for the new prime supplier Nidec to increase production volumes.

Although the WSJ indicates that it is unclear whether the tactic engine reliability has contributed to short supply, by our lens, this may explain why existing orders for Apple Watches have been in a backlog condition since product launch. On Monday, Apple CEO Tim Cook confirmed that “demand is greater than supply” for the Watch.

The WSJ further indicates that Apple has now communicated to other watch component suppliers to slow delivery volumes until June, without explaining why, which has surprised suppliers who were in full blown ramp-up. Neither AAC Technologies nor Nidec elected to respond to the WSJ in a request to comment.

The WSJ cites additional sources as now indicating that Apple is further considering the addition of a second final assembly contract manufacturer to supplement Taiwan based Quanta Computer. That second CMS is rumored to be none other than Foxconn, Apple’s principal go-to contract manufacturer when supply chain volume output challenges occur. However, even if Foxconn is brought online, it will be several months before the CMS can make its contribution to boosting output. The WSJ sources indicated late 2015 as an estimate.

As Supply Chain Matters has frequently pointed out, Apple practices dual-sourcing of key technology components as part of its supply chain risk mitigation strategy. This is especially prevalent in new product introduction and ramp-up phases. There are currently three prime suppliers for Apple’s existing iPhone LCD screens with reports indicating the introduction of another for the next model iteration of iPhone. In the case of the tactic engine report, the dual-sourcing strategy has obviously proven effective.

Finally, today’s Wall Street Journal calls attention to IHS Technology’s recent teardown analysis of a 38-millimeter Apple Watch Sport, the entry level model for the product line-up. (Paid subscription or free metered view)  The IHS teardown analysis indicates that overall costs of component materials and manufacturing labor cost amount to $83.70 contrasted to a retail selling price of $349. That according to IHS equates to a 24 percent ratio for parts and manufacturing cost, lower than the average 29-45 percent equivalent cost for Apple’s other product lines. This is an indication that the Watch is a product line with even higher profitability potential.  The taptic engine component noted above has an estimated cost of $16.50, the second most expensive component. The touchscreen and display module was estimated to cost $20.50, the most expensive component.

In two weeks, analyst firm Gartner will again unveil its annual ranking of the Top 25 Supply Chains. Apple has consistently commanded the number one ranking for many years, and with these latest operating results, we suspect that the Apple supply chain will again command the top spot.  Financial performance alone is compelling and when considering supply chain risk mitigation and segmentation strategy, the result is obvious.

Bob Ferrari


Apple is Once Again Practicing Supply Chain Segmentation and Risk Mitigation

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Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.

One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk.  In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.

During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.

Now there is new news leaking from Apple’s supply chain universe.  Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.

Since the Digitimes report, other Apple community blogs have amplified the report.  The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.

Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.

Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains.  In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.

Bob Ferrari

© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.

 


A Blunt Statement from Airbus’s CEO Regarding Cabin Equipment Suppliers

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In a mid-December posting, Supply Chain Matters called attention to a media report indicating that a component shortage within the commercial aerospace sector that was suspected of causing delayed shipments of brand new Airbus and Boeing airplanes. According to this Bloomberg report, France based Zodiac Aerospace, a supplier of upscale lie-flat airline seats was struggling to meet its delivery requirements for such premium aircraft seats. A month-long labor stoppage within a Texas production facility that ended in late October coupled with backlogged engineering teams working with airlines for final seat design approvals have led up to these late deliveries.

This week brings a new and even more noteworthy development. According to a published Reuters report, the head of Airbus’s passenger jet business called attention to suppliers of cabin equipment, indicating their failure to get to grips with chronic production delays was “unacceptable”.  A320_Vueling_Cabin

Here is the quote to a group of industry journalists:

I think the cabin equipment suppliers would do well to have an equivalent level of industrial maturity to that of aircraft manufacturers. They are big industrial companies now, they are not small companies, so they must put in place measures to meet their obligations. It is becoming unacceptable”

While Fabrice Bregier, the CEO of Airbus’s passenger jet division reportedly did not single out any one supplier, he was apparently responding to a question about French seat maker Zodiac, according to Reuters. Further noted is that both Airbus and Boeing have now positioned more people in Zodiac factories to help overcome the delays, and are insisting on vetting Zodiac seat sales as an ‘exception’ to their catalogs, according to industry sources.

As our supply chain community well knows, when frustration levels regarding the reliability of a supplier reaches the CEO level in a public lambasting, the crap has hit the fan and frustration levels have probably reached the boiling point.

Perhaps we can speculate that the CEO of a certain supplier, or multiple suppliers have been on the phone and in the air attempting to perform damage control and make assurances that all outstanding and future commitments will be performed to expectations.

Not a pleasant situation to be in, particularly in an industry with multiple years of backlogged customer orders for completed airplanes. It’s a slippery slope when a preferred vendor effects actions that are deemed “not acceptable to a level of industrial maturity.”

Bob Ferrari

 


More Clear Signs of Turmoil and Changes for CPG Producers and Their Supply Chains

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The turmoil among consumer product goods focused supply chains promises to increase with the implication of today’s business media headlines concerning Nestle and Unilever. These implications relate to ongoing merger and acquisition developments and the continuing effects of foreign currency headwinds, which are negatively affecting U.S. producers while positively impacting European based firms.

While speaking at its Annual Meeting this week, Nestle’s Chairmen acknowledged that the combination of H.J. Heinz and Kraft Foods, being orchestrated by 3G Capital Partners and Berkshire Hathaway would create a formidable competitor, particularly in the United States. Because of this, the global CPG provider indicated to shareholders that it will accelerate its shedding of marginal performing businesses.

Readers may recall that CPG industry icon Procter & Gamble is similarly involved in a shedding of non-performing or non-core businesses.

According to a report published by The Wall Street Journal, Nestle Board Chairmen and former CEO Peter Brabeck-Letmathe indicated that Berkshire Hathaway and 3G have “pulverized” the food industry.

The CPG company has already sold off ice cream and water related businesses, has struck deals to sell the bulk of its Jenny Craig diet business as well as an ice cream business and is reported to be in talks to sell its frozen food business. The CEO further indicated that Nestle needs to better leverage its global scale more effectively. According to the WSJ, that could imply even more added pressure on suppliers for better buying terms.

Earlier today, Nestle announced its operating results for the March-ending quarter. Those results included an overall 4.4 percent organic growth of which 2.5 percent was attributed to pricing moves. Sales increased a mere 0.5 percent with the effects of negative foreign exchange attributed to 4.5 percent. In its full-year outlook, the company remained committed to achieve organic growth of around 5 percent while improving margins.

That level of sales growth challenges many of today’s large global CPG producers.

The positive or not so positive shadow of foreign currency effects was further evident in the operating results of Unilever, whose first-quarter total sales rose 12 percent largely due to the effects of a stronger valued U.S. dollar, amounting to a 10.6 percent boost. Once more, Unilever indicated that factoring current exchange rates, its full-year earnings growth would be in the 7-8 percent range.

On the flip side, U.S. headquartered CPG producer Colgate Palmolive indicated a 9 percent negative impact on sales while Procter and Gamble indicated in January that it was anticipating currency swings to curb profit by as much as 12 percent.

Thus the pending Heinz-Kraft combination coupled with the current foreign currency shifts is indeed precipitating more industry turmoil. Many CPG businesses are being pitched for sale and/or consolidation.

When penning our Supply Chain Matters commentary related to the Heinz-Kraft announcement we opined that a clear message was now sent to consumer product goods supply chains that business-as-usual was no longer acceptable, and that further industry changes and developments were inevitable.

Add the current effects of currency and those in the industry negatively impacted may well initiate changes in product sourcing, promotion and distribution to help offset currency effects. Meanwhile, product innovation in more natural and less processed foods remains the key to longer term growth, whether by acquisition or by supply chain sourcing and development.

There is literally a new playbook for global based CPG firms and their respective supply chain teams, and be prepared for constant change in the months to come.

Bob Ferrari

 


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