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.
© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.
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”.
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.”
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.
Supply Chain Matters has provided a series of ongoing commentaries involving fairly recent multiple industry aspects involving escalating pressures being placed on suppliers. Our commentaries have reflected on reports regarding global retailer Wal-Mart ‘s latest efforts of cost cutting and certain Consumer Product Goods producers being driven to bullying or extreme cost-cutting measures. Today, The Wall Street Journal provides a report indicating how one global automotive manufacturer is now trying to reverse course of previous supplier squeeze actions to foster needed collaboration.
This report, GM Wants Long-Term Parts Contracts (paid subscription or complimentary metered view) describes efforts by General Motor’s newest Chief Procurement Officer Steve Keifer to influence extended component parts supplier contracts that extend as much as a decade, in order to support two new vehicle product development programs and subsequent market volume output requirements. According to the WSJ report: “locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker can expect suppliers to share more innovations and better processes that help save money.”
For some of our readers, that statement would appear to be forward-thinking but keep in-mind that the U.S. automotive industry has had a long history of supplier bullying that has been difficult to change for some manufacturers. While Keifer is described as a GM veteran, he only recently assumed the CPO role at the end of 2014, after serving an executive role at Tier one supplier Delphi Automotive. The report thus hints that this new CPO has brought more of a supplier sensitivity to his role.
That approach is apparently being influenced and supported by GM’s new CEO, Mary Barra, who herself has a manufacturing and product development leadership background. According to the WSJ, Barra has recently implemented a strategy “aimed at improving relationships with suppliers that believed the automaker was overly optimistic in its planning assumptions or too forceful in cost-cutting mandates.”
The report points to the ongoing technology-driven revolution occurring across the automotive industry, and the need to bring even more technology to market at a quicker competitive pace. However, the new CPO has the challenge of undoing decades of poor supplier relationships that curtailed deeper collaboration on areas of innovation. The spur such innovation, GM is reportedly open to consideration of new suppliers from regions such as the U.S. Silicon Valley or Israel.
On this blog we have pointed out the drawbacks of how a short-term business outcomes perspective driven to cost reduction mandates can permeate across the many levels of the value-chain. While such efforts may lead to short-term accolades and performance bonuses, they undermine efforts directed at longer-term needs for product, process and customer fulfillment innovation. Suppliers themselves need to have heightened sensitivities to the business pressures of key customers, and try to provide a helping hand perspective on short and longer term supplier relationship alternatives.
In the case of this week’s WSJ report concerning General Motors, a changed senior management perspective, driven by both the realities of long-term industry competitiveness through innovation, and a leadership grounding in the importance of suppliers for contributing to such innovation has helped to initiate a changing perspective. That will help in overall change management.
We trust there will be more of the above positive actions rather than the others we have highlighted of-late.
When a report directly impacting supply chain strategy is featured as a front page article in The Wall Street Journal, we are certainly going to bring it to Supply Chain Matters reader attention. When that report correlates with other related reports, namely supplier squeeze or bullying tactics, rest assured we will bring it to greater industry supply chain visibility.
We have previously featured reports of supplier bullying strategies involving certain consumer product goods supply chains, and quite recently, supplier squeeze tactics among certain commercial aerospace supply chains.
Today’s WSJ report (paid subscription or free metered view) indicates that last month, Wal-Mart began an effort to place increasing pressure on its North America based suppliers to cut the cost of their products. According to the report, the retailer is telling 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. Apparently new executive leadership is embracing the concept of supplier squeeze in order to lower existing prices at retail stores. Wal-Mart recently raised salaries for store associates which have added a new cost burden. Further reported is that this effort has already caused renewed supplier tensions among suppliers who are already attuned to the retailer’s relentless focus on inbound cost. The new tensions for suppliers are that they potentially have less control on the way their individual branded products are marketed to Wal-Mart consumers.
This new WSJ report revisits a previous report of Wal-Mart’s current dealings with well- known consumer products goods provider Procter & Gamble and its cash cow product, Tide laundry detergent. The retailer recently began merchandising Henkel’s Persil laundry detergent directly aside of Tide in a move that the WSJ now clearly declares was an attempt to pressure P&G to lower the price of its market-leading laundry detergent.
Yesterday, Amazon released the news of a Dash Button, a physical version of its 1-click ordering. An Amazon Prime member sets up the device to correspond to a certain product and places the physical device in a convenient place (perhaps inside the cupboard or cabinet where household products are stored). When the supply runs low, the user can press the button to order more of that product, which directly communicates with Amazon via a Wi-Fi connection. It is literally an electronic Kanban replenishment system in a B2C setting. A total of 255 products from 18 brands are reported as being available through the Dash Button program and surprise-surprise, P&G and its Tide detergent is noted as a participant. That may well be another motivation for Wal-Mart to place direct pressure on its most longstanding and loyal supplier partner. This is also not the first time that P&G and Wal-Mart have openly sparred over P&G’s collaborative efforts with Amazon.
As survey methodology often depicts, a single data point is an observation, a second similar data point is of interest and a third data point within a short period of time is the early indication of a building trend.
Supplier squeeze tactics are often prevalent in times of significant economic stress when preservation of cash is a critical corporate objective. Industry supply chains experienced many forms of such tactics during the great recession that began in 2008-2009 and some suppliers actually succumbed to bankruptcy as a result. Today, global supply chain activity and output as manifested in the J.P. Morgan Global Manufacturing PMI Index has recorded 27 months of consecutive expansion. Thus, motivations for current supplier squeeze tactics have taken on different motivation, perhaps more related to short-term Wall Street and consequent stockholder expectations. In any case, it is by our lens, a concerning trend with the potential to provide setbacks to efforts towards deeper collaboration and/or partnerships with suppliers. Consider that Wal-Mart has embarked on a multi-billion dollar initiative to influence suppliers to source more products within the United States. Wal-Mart gives, and then takes-away.
A short-term business outcomes perspective can permeate across the many levels of the value-chain and procurement teams and financial senior executives need to be reminded of the consequences for longer term supplier partnerships directed at product, process and customer fulfillment innovation. Focus on the P&G dynamics with Wal-Mart, both rather savvy and determined business partners who have experience in good and not so good times, and in the savvy of push-back. Many suppliers, particularly smaller scope suppliers do not have the leverage of a P&G, and thus, there resides the current risks in supplier management.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has featured significant prior commentary focused on aerospace and commercial aircraft focused supply chains. A lot of our focus was on the OEM tier, namely global producers Airbus and Boeing, along with mid-tier OEM’s such as Bombardier, Embraer and CMAC. While we have featured commentary or highlighted developments on various larger-scale suppliers, candidly, we should have provided more in-depth perspectives of various other tiered suppliers.
What has prompted us to this candid conclusion was last week’s published Seattle Times article, Low Wages for Aerospace Workers Despite Tax Breaks for Employers. After analysis of Washington state data, the Seattle Times reports: “In 2013, outside of Boeing, a third of production workers at local aerospace parts manufacturers- companies that get tax breaks intended to preserve good jobs in the state- earned between $10 and $15 per hour.” That level, equivalent to $31,200 annually, represents the minimum wage level for Seattle. Once more, the report reminds readers that aerospace companies in the state of Washington are entitled to a 40 percent reduction in taxes on corporate revenues for the intention of “providing jobs with good wages and benefits.”
The report describes what is termed the “Boeing squeeze”, that being constant pressure to reduce the cost of component parts. A spokesperson of the Pacific Northwest Aerospace Alliance (PNAA), a trade group of local suppliers indicated to the Times that passing higher wage costs up the line “would encourage Boeing to take the work elsewhere.” Once more, suppliers seem divided on dealing with such a situation, with some indicating that the skills and education required for such production jobs do not warrant higher pay. This report highlights specific conditions and/or examples (pro and con) among local suppliers:
Aviation Technical Services (ATS)
Carlisle Interconnect Technologies (CIT)
Zodiac Cabin & Structures Support
In previous Supply Chain Matters commentaries we have highlighted reports of industry supplier bullying. While many would like to believe that certain supply chains have moved away moved away from squeezing the cost-reduction burden down the value-chain, these types of reports continue to indicate that such practices linger. Once more, having participants within a multi-billion dollar industry in the enviable position of having in-demand and technology innovative products resulting in upwards of ten years of unfulfilled customer orders would continue to practice squeeze tactics on suppliers would seem to indicate that supplier partnerships and collaboration remain a one-way lens. Why are so many production workers being asked to live and raise families on a minimum wage?
Shame on us for not paying closer attention to developments within all of the tiers of aerospace supply chains. We will do our part to change that including reaching out and researching more mid-market suppliers.
We however would suggest that the large OEM’s would take a similar perspective and examine how supplier practices impact the entire value chain, particularly those involving and setting a role model for social responsibility.