As we approach the New Year holiday which marks the beginning of 2017, we are heads-down in the preparation of our 2017 Predictions for Industry and Global Supply Chains. Supply Chain Matters blog readers should anticipate the full unveiling of our 2017 predictions over the first two weeks in January.
We do however want to share some of the overall highlights as to what to expect in the coming year.
There seems to be little doubt that the year 2017 will present even more uncertainty and increased volatility for many industry supply chains. Organizations and respective supply chain teams will once again need to be prepared.
By the end of 2016, political winds of change were blowing a strong gust across the global economy. Economies are entering 2017 in a year of heightened uncertainty in markets, brought about by more volatile, populist focused political environments among major developed nations including Eurozone countries and the United States.
The unexpected election of Donald Trump as the new President of the United States is indeed sending out shockwaves around the world. The Eurozone, which was already attempting to deal with the unexpected results of Britain’s referendum vote to exit the EU (Brexit) faces yet another concern with Italy’s December vote to reject constitutional reforms, which prompted the resignation of Prime Minister Matteo Renzi. This could lead to a potential general election in 2017 that could have strong populist overtones including potential EU exit.
By late-December, the value of Euro was moving ever closer to parity with the U.S. Dollar, its lowest level since January 2003. Many analysts are predicting that in 2017, the Euro will indeed reach parity and could even drop below the value of the dollar at some point. That will add to the challenges of U.S. based companies to export products and services globally.
Industry and global supply chains should anticipate yet another challenging year with resiliency, adaptability, and risk mitigation as important competencies. Industry supply chains will again be called upon to help contribute to top-line revenue growth. We anticipate added pressures for cost controls and cost reductions, which will place additional pressures on capabilities. Supply chain risk factors will significantly rise across many industries and within many global regions, along with needs for educating line of business and senior executives on the supply chain implications of such risks. More informed and deeper analytical capabilities to ascertain various impacts to global component and finished goods manufacturing and supply chain sourcing will likely be an ongoing requirement and supply chain organizations who have not invested in such analysis and decision-making capabilities will be tested.
We anticipate another challenging year in procurement and strategic sourcing with a renewed emphasis on strategic and technical skill needs. The role of the CPO will continue to evolve into one of strategic business advisor, requiring enhanced cross-organizational influence skills.
One of the most significant challenges for 2017 will be reflected in a supply chain talent perfect storm, one that is sure to occupy more of the management attention of supply chain and business senior leadership. The perfect storm is increased skills demand meeting limited available skilled talent supply. As Bloomberg BusinessWeek declared in late December 2016: “Right now the problem isn’t too many workers who can’t find jobs. It’s too many jobs that can’t find workers.” With the prospects of 2017 providing even more overall pressures to reduce supply chain costs, supply chain, procurement and product management related executives will be faced with difficult choices regarding the existing workforce. Executives who previously established multi-year plans to broaden skills and talent will face the reality that talent needs are more immediate. With upwards of 10,000 baby boomers turning 65 each day, the skills and experience flight becomes ever more challenging.
We further predict continued turbulence surrounding global transportation sectors with renewed interest in managed services and B2B network information integration. Industry supply chain teams can no longer view the outsourcing of supply chain logistics and transportation services to be an annual renewal but rather a revisit of required augmented capabilities in services.
We anticipate a new renaissance of supply chain focused technology investment during the 2017 in areas such as integrated business planning, supply chain risk mitigation and advanced analytical decision-making support. We predict increased momentum and interest in Internet of Things enabled industrial and supply chain networks. The new renaissance in supply chain focused tech adoption will lead to further tech vendor acquisitions, some involving well- known names.
We expect existing supply chain sustainability and social responsibility initiatives to continue momentum effort during 2017 despite anticipated Trump Administration efforts to dilute the notions of the effects of global warming. Such initiatives continue to provide economic and brand value benefits and further contribute to the strategic need for an overall sustainable business.
We predict a renewed global battleground for online B2C and B2B platform dominance among Alibaba and Amazon in 2017 with regions such as India being the key areas to watch for influence and added investment. WalMart.com remains a wildcard in the global B2C sector.
Finally, there will be the unique usual industry-specific supply chain focused challenges that are sure to include consumer product goods, commercial aerospace, pharmaceutical and healthcare and other industries.
The above will all be detailed in our upcoming 2017 predictions series. This year we will further augment our predictions series by contributed guest contributions and added podcasts or webinars featuring industry participants. If industry leaders desire to add their voice in our content stream as to what to anticipate, and how to be prepared, please let us know.
The year 2017 will no doubt test the competencies and skills of many across industry supply chains. At the same time, they will provide opportunities for leadership and added innovation to make a difference in achieving line-of-business and overall corporate objectives. The value of the supply chain and the notions that supply chain capabilities do matter have never been more recognized as they are as we approach the coming year.
It will be an interesting year to state the least so stay tuned as we navigate the ongoing developments throughout 2017.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.
In late August of 2011, three of Japan’s existing liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation, and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named what is today’s Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. The new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences, and subsequently an IPO in 2014.
Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.
This strategic move is wise from two perspectives.
First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.
Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions. The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake. The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.
Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.
As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.
The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.
The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.
The open question remains which suppliers eventually dominate.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
There continues to be significant merger, acquisition and strategic product development activity involving automotive supply chains and the stakes involve which company and which advanced technologies will ultimately control and benefit from the movement of more technology being embedded into automobiles.
If readers have not been up to speed with industry focused news, two recent major acquisitions add more evidence to this movement and to the pending battle between OEM manufacturers, transportation service providers and certain major supply partners as to whom will benefit the most from the ongoing technology wave.
In late October, fabless semiconductor manufacturer Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, a 34 percent premium in existing NXP stock value, to gain entry into automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. With this proposed new arrangement, Qualcomm brings its own technology strengths in mobile cellular communications technologies along with an evolving thrust into Internet of Things based capabilities.
Earlier this week came the announcement from Samsung regarding its intent to acquire electronic components supplier Harmon International for a reported $8 billion all-cash deal. This deal represents Samsung’s largest deal in its history and is no doubt motivated by strategic intents to gain deeper access to the automotive product value-chain. Here again, the deal has similar indicators of marrying Samsung’s technology based capabilities in mobile communications, electronic displays, memory chip and microprocessors with Harmon’s evolving capabilities to support connected vehicle and lifestyle audio product innovation. Harmon has already secured a reported $24 billion in order backlog from major automotive OEM’s.
In a prior automotive supply chain commentary, we called reader attention to a Bloomberg Businessweek report titled: The Foxconn of the Auto Industry, that indicates that Tier One supplier Magna has taken more proactive actions to position itself as the contract manufacturer of choice for self-driving vehicles. The premise is that if Apple, Google, Uber or other technology focused firms want to manufacture a self-driving vehicle than Magna may well remain as the first step as the design and manufacturing outsourcing option, freeing up resources of the automotive or transportation services provider to concentrate on a software and managed services business model. For Magna, the premise of its current strategy is twofold. First, there is a belief that in the coming five years, the core of product design expertise and IP for hybrid or electric powered self-driving vehicles will rest in software and services, rather than automotive component design such as bodies, engines and transmissions. Second, the contract manufacturing industry itself is moving more towards a one-stop shop for product design as well as more automated manufacturing processes including additive manufacturing techniques. Such a shift allows contract manufacturers to broaden their margins while increasing a presence up and down the automotive value-chain.
Obviously, major global automotive manufacturers are not inclined to ignore technology forces and consumer desires for more connected and more safety oriented automobiles. Collectively they each are sinking serious investments into either developing their own advanced technologies or teaming-up with other advanced technology providers such as Apple, Google, Microsoft and others to gain added footholds in these technologies.
From our lens, the vulnerability of some OEM’s rests with supply chain strategy decisions undertaken several years ago, when conscious decisions were made to transfer product innovation of major automotive sub-systems to Tier One or Two suppliers. That strategy afforded OEM’s the flexibility to be able to select from various competing product designs, take advantage of quicker time-to-market, and to be able to maintain buying leverage among key suppliers. Indeed, these strategies have yielded faster product innovation cycles in vehicle safety and control systems, connected cars and navigation systems.
As consumers opt for even more fuel efficient and autonomous type vehicles that serve as both satisfying needs for transportation and another source of entertainment and content, the industry picture takes on a different perspective. Fleets of connected vehicles, leveraging mobile and IoT technologies among such connected vehicles, opens the opportunities for a contract manufacturing strategy that affords new transportation services providers such as Uber, Lyft and perhaps other automotive OEM’s, to be able to directly contract or build autonomous driving fleets.
For automotive OEM’s themselves the strategy has to focus on maintaining brand loyalty and a unique driving experience. That implies continuing to provide consumers with both driving and entertainment technology innovation, marrying modular sub-system hardware, software and respective vehicle platform capabilities with a far faster overall innovation timetable may well be outpacing the OEM’s themselves because industry disruptors may now rest within product value chains themselves.
When a major new technology trend emerges, innovators can try to capitalize on the trend by creating and fostering a consumer product or service, or by creating the tools and technologies (the product supply and value-chain) that both enables and controls the intellectual property of the consumer product or service. Like the California gold rush analogy, you can either make money in providing the service to multitudes of consumers or in supplying all the pick axes and supplies needed to mine for gold. This is the analogy now emerging among today’s global automotive supply chains and there is big money and large technology stakes at-play.
Where these forces converge is indeed worth observing in the months and tears to come. Industry participants all along the supply chain should nor be surprised by other new entrants as well. Indeed, automotive and high-tech supply chains are merging, and that includes cultures of fast innovation in products, coopetition in processes and in value-chain strategies. Future supply chain sourcing strategy decisions will surely be grounded in deeper knowledge of technology capabilities and overall scope of supplier.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
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.
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.