Yesterday, Boeing reported Q3-2011 revenues and earnings, but the real headline concerned a long awaited update on the company’s 787 Dreamliner and other commercial aircraft delivery schedules. Readers will recall that in late August, Boeing finally achieved its long overdue initial milestone for the 787, formal flight certification and first customer delivery.

While the Q3 financial headline was a rather respectable 31 percent increase in Q3 profits, far exceeding Street expectations, the grilling for Boeing executives during the earnings briefing concerned long-term outlook and commercial aircraft production volumes.  Boeing executives communicated production volumes that combine 787 and 747-8 deliveries, making it rather difficult for analysts to differentiate each.  In our July posting which reflected on Boeing’s Q2-2011 earnings report, we noted commentary from Flightblogger which speculated that Boeing’s new lumping of combined numbers just adds to additional speculation as to other stress points in the supply chain. At yesterday’s briefing, the number cited was 15-20 new deliveries of both 787 and 747-8 aircraft for this fiscal year.  Last quarter, that number was cited as a combined 25-30 aircraft this year, and thus a slowing has occurred for some obvious operational or design change reasons.  Another open question has been whether the devastating earthquake and tsunami that struck northern Japan had any previous supply impacts.

What was communicated is that Boeing management is observing “improvements to the quality, productivity and overall condition to the assembly within the production system.” Noted was that 787 production configuration has been finalized, and production volumes are about to transition to a rate of 2.5 airplanes, vs. a prior 2 airplanes per month. Production and delivery of 787’s is being planned to ramp to 10 aircraft per month by the end of 2013. First delivery out of Boeing’s planned second final assembly facility in Charlestown South Carolina was reported to be on-track for next year.

Boeing re-iterated that firm backlog for the 787 remains at 821 units, with an additional 200 contracted delivery options. Also noted was that initial gross margins on 787 program itself is now tracking to “low single digits”, which takes into account the cumulative impact of delays, tooling, and non-recurring costs. Boeing CFO James Bell estimated that the program would reach breakeven by 2021.  Read that statement once again- the 787 program will not reach breakeven for at least 10 years, with current numbers.

Of other interest for the Supply Chain Matters reading audience is that Boeing estimates that the addressable market for the 787 class of aircraft will be 5000 aircraft over the next 20 years.  The first 1100 aircraft represents approximately 10 years of that segment, which leads to the implication that the remaining 3900 aircraft will be produced and delivered in the latter 10 years of the program.  One could speculate that since current order volumes have plateaued, these numbers might be overly optimistic. In any case,  they represent quite a high volume milestone for Boeing and its associated supply chain partners to achieve, given past history.

One other item should be of supply chain community interest. Boeing’s overall inventory level increased by $1.8 billion to a current number of $18 billion.  The inventory rise was attributed to 787 work-in-process, supplier advances and tooling.

In our Supply Chain Matters Q3 Quarterly Newsletter scheduled for distribution later this week, we comment that aerospace supply chains remain under various forms of stress.  In the case of Boeing’s supply chain, there was celebration that after three years of delay and frustration, an important initial milestone has been reached.  Yet, when we examine the current backlog numbers for both Boeing and Airbus, and factor their combined needs to now ramp production levels to extraordinary volumes to meet airline delivery requirements, the notion of complete supply chain synchronization, agility and intolerance to disruption, adds so much more to the implications of that stress.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

This posting continues highlights of the Kinexions 2011 conference being held this week in Scottsdale Arizona.  Readers can also reference our prior Dispatch One , Dispatch Two and Dispatch Three commentaries.

One of the new twists to this year’s Kinexions conference was an invitation for a broader group of industry analysts / partners / bloggers to not only partake of the conference but also attend a separate afternoon briefing session hosted by Kinaxis senior management and select customers. Seldom have I found software vendors willing to allow this grouping open access, and we complement Kinaxis for this effort.  As COO John Sicard explained to me, the company has reached a point where it requires broader market awareness of its capabilities.

The influencer briefing kicked-off with CEO Doug Colbeth and COO John Sicard jointly providing a history of the company both in its fabric and its technology development. Emphasis was placed on the current demonstrated scalability of RapidResponse and an acknowledgement that the application works best when in coexistence of existing ERP or legacy systems among its customers. Nearly 60 percent of Kinaxis existing customer base operate with an SAP ERP backbone system.  Also explained was that when users interact with RapidResponse they declare their work area responsibility, which the application then utilizes to tailor respective planning views. The application not only manages and processes large amounts of data, but also the business rules that exist regarding that data.  In our view, that characterizes RapidResponse as akin to a business process management (BPM) type of application, which the application accomplishes in its S&OP functionality. We were also briefed on why the new announced re-naming to Kinaxis RapidResponse Supply Chain Control Tower was a natural extension of the company’s current growth plans.  Although there was a on-stage demo, not a lot of information was shared in this session regarding the detailed functionality that is being planned for this extension of RapidResponse capabilities.

The remainder of the influencer briefing session focused on interaction and presentations from invited customers. Elisabeth Kaszas, Director of Supply Chain for Amgen, provided an update on that company’s multi-year transformational efforts towards more responsive supply chain business processes. A benefit mentioned, that was rather difficult to do in the existing ERP backbone system,was the need to provide various product costing structures beyond just standard cost data.

Chalam Kalahasti, Director of Global Planning and Fulfillment for Cisco Systems, described the unique challenges for planning a highly outsourced, globally extended supply chain.  Cisco has a very active S&OP process tied to RapidResponse, and a plan-of-record is created weekly. What is also noteworthy is that Cisco’s direction in more response-oriented planning has been motivated by previous incidents of supply chain disruption, such as earthquakes in Taiwan and China and the tsunami in northern Japan.  Cisco’s supply chain planning process is predicated on the ability to assess a definitive impact from an unplanned event and to provide different options and scenarios for responding to the exception.

Paul Lindblom, a member of the senior IT staff at Qualcomm QCT, provided a detailed perspective of how RapidResponse integrates with various other Qualcomm systems, along with the unique needs for planning in a combination push-pull, semiconductor supply chain.  Semiconductor wafers are long lead-time items subject to fab capacity considerations, and in the case of Qualcomm, multiple fabs are utilized to supply product.  Conversely, wafer packaging and testing are driven by customer buying and lead-time requirement cycles. Semiconductor planning needs which requires the unique ability to be supported for by-product and co-product production are supported in RapidResponse.

Due to time constraints, our final session featured Kerry Zuber of Kinaxis who provided an overview of the latest 10.0 release of RapidResponse, which includes a significant investment in demand management and product forecasting functionality.

Our briefing turned out to be a jam-packed session with a literal fire-hose of information.  Luckily, the customer appreciation event held on a reservation in the hills outside of Phoenix allowed ample opportunity to unwind and have great conversations with fellow attendees.

In a final posting, Supply Chain Matters will provide some final summary comments and observations regarding the Kinexions 2011 conference.

Bob Ferrari

Added Note: Kinaxis is one of other named sponsors of the Supply Chain Matters blog and the author provides services to this vendor.

The following posting can also be viewed and commented on the Supply Chain Expert Community web site.

This posting continues highlights of the Kinexions 2011 conference being held this week in Scottsdale Arizona.  Readers can also reference our prior Dispatch One and Dispatch Two commentaries  which highlight day one activities.

Day two of Kinexions kicked off with an uncensored presentation from former Gartner Vice President and supply chain sage Kevin O’Marah, who now characterizes himself as an independent thinker.  Kevin reflected on the history of business automation and innovation, the important trends that productivity and talent have brought to businesses large and small and his belief that large ERP vendors are not delivering the innovation required to enable the next era of business and supply chain process capabilities. Kevin referenced multiple survey data that reinforces that demand volatility is driving executives and supply chains literally crazy, and that the community needs to get ahead of these new realities of business. Kevin described the new wave as being led by human intelligence but with technology leverage.  Kevin was also kind enough to acknowledge our working relationship in the earlier days of AMR Research and I sincerely thank Kevin for the mention.

Day two customer presentations featured Lalit Pandit, the CIO of D&M Holdings, and Joe McBeth, Vice President of Global Supply Chain at Jabil, and Erwin Hermans, Vice President of Supply Chain Solutions, Celestica.  One of the extraordinary aspects of attending a Kinexions conference is that the audience can get perspectives from the key players located throughout many tiers of today’s global supply chain. The D&M Holdings story is one of a mid-market company that needed to transform its supply chain utilizing a planning and response management application that users could quickly adopt and leverage.  It is also an example of how a cloud offering is an important option for mid-market companies.

While there were many nuggets of information shared by all of today’s presenters, my personal favorite was Jim McBeth, who vividly expressed what supply chain response management really means for companies, and especially contract manufacturers. Jim reflected on the recent March earthquake involving northern Japan, and more recently, the devastating floods impacting Thailand.  Each had supply chain disruption implications, and as Jim best described it, “the guy who was the best information, wins”. In 48 hours, Jabil was able to provide risk assessments and impact analysis for its OEM customers and key suppliers. Jim noted that most organizations, consultants and pundits speak to constantly keeping inventory down, when the reality may be keeping partners in balance and inventory right-sized to buffer identified areas of component risk. Jim also spoke to the reality of planning at the EMS level, the mid-tier of high tech value chains when the bigger fish OEM’s will get the prime priority for available inventory and capacity. The reality turns out to be the ability to plan with predictive data, to proactively collaborate with OEM’s along with the ability to predict what requirements will be before the bigger players do the same.

This afternoon’s closing event was an interactive influencer’s panel discussion moderated by Trevor Miles of Kinaxis, which I was honored to be invited to participate.  Fellow panelists were Andy Coldrick, one of the original thought leaders in S&OP, Russell Goodman, editor-in-chief, SupplyChainBrain, and Predrang (PJ) Jakovljevic of Technology Evaluation Center.  Our goal was to wrap-up the conference by summarizing what we heard from customers and influencers, how we viewed the current state of  supply chain business process and technology innovation, and the notion of what is the state of collaboration in supply chains. A eureka moment came from an interchange of what comes next for S&OP?  Andy provided the perspective that as the originators of S&OP discussed what would be the next iterations, they also could not agree to terminology.  Andy’s charge to the audience, it doesn’t matter how you term the next iteration, what matters more is the objective your organization is seeking. Wise words from an original thought leader.

Supply Chain Matters will feature two additional Kinexions commentaries, one reflecting on this year’s briefing of key market influencers, and our conference summary impressions.

Bob Ferrari

Added Note: Kinaxis is one of other named sponsors of the Supply Chain Matters blog and the author provides services to this vendor.

The following posting can also be viewed and commented on the Supply Chain Expert Community web site.

Day one of the Kinexions 2011 began with a full agenda of customer and partner presentations along with a significant announcement regarding the renaming and product direction for the Kinaxis software suite.  The conference kicked off with a rousing rock music video featuring many of the employees of Kinaxis welcoming this year’s attendees to the conference.  This author has attended many, many software conferences and this is the first time we have witnessed an opening video that actually features the people behind the scenes and thanks customers for their business.  It was great.

Doug Colbeth, Kinaxis President and CEO opened the conference by summarizing three themes that he has consistently heard from his many conversations with C-level executives. The first was represented by a person jumping out of a building, namely that in today’s volatile business environment, executives often have the feeling that they have jumped into a free-fall zone, waiting for the bungee cord will stop the free fall. That bungee cord is often the supply chain responding to a significant event. The second major theme was the funnel cloud of demand volatility, with the implication that the need to effectively respond to constant market demand change is ever more important.  The third theme was visualized as a junkyard, representing a reflection of the current frustration among C-level executives of the lack of flexibility and business responsiveness to the current climate of business among the current IT applications landscape that populates many large firms today. That frustration is often reflected toward corporate ERP and legacy systems that were designed with far different assumptions related to the speed of business change, and the realities of highly outsourced and complex global supply chains.

Colbeth noted that these recent conversations have reflected the need by customers to have a unified information portal of the entire supply chain that could serve as a control point for more predictive decisions and actions. In many industry settings, the umbrella of supply chain business processes and related decision-making have broadened to include new product introduction, supplier management, risk management, sales, operations and financial planning as well as customer services management. The analogy of need is often drawn to having a control tower of the supply chain, a single point of command and control. Colbeth noted that rather than providing multiple applications and platforms, Kinaxis will continue to focus on a single platform that supports multiple supply chain related decision-support needs. He reaffirmed that Kinaxis will always have a built-in bias that the supply chain is the company’s center of the universe.  With that came the announcement that the company is renaming its product to Kinaxis RapidResponse Control Tower, which will continue to support broader supply chain business process decision-making needs. Kinaxis has four customers that are deploying various aspects of supply chain control and over the course of the conference, customers, prospects and market influencers will be provided additional perspectives as to planned functionality.

Needless to state, this is a rather bold and dramatic direction for Kinaxis, one that promises to provide added dynamics to the supply chain technology provider landscape.

In our subsequent dispatches, we will provide some additional highlights of day one of Kinexions 2011, so stay tuned.

Bob Ferrari

Added Note: Kinaxis is one of other named sponsors of the the Supply Chain Matters blog and the author provides services to this vendor.

The following posting can also be read and commented upon on the Supply Chain Expert Community web site.

We have provided multiple Supply Chain Matters and Supply Chain Expert Community commentaries as to whether confidentiality and safeguarding of corporate information has generally eroded for personal or individual gain.

Specifically, the issue is whether unscrupulous individuals cannot resist the temptation for personal monetary or other gain from selling certain supply chain information, especially regarding the leaking of information concerning Apple’s value-chain. It seems that any leaked information along Apple’s value-chain which can either place a supplier in a more advantageous position or uncover Apple’s strategies and intents regarding new or existing products, is worth money. Information regarding the number one supply chain and one of the world’s most valuable companies has become extremely valuable, or so it seems. More importantly, the implications to businesses and supply chain teams is far-reaching and not in the best interests of where supply chain business processes need to be.

Late last summer, an ex- global supply manager at Apple was charged with 23 counts of wire fraud, money laundering and unlawful transactions involving a kickback scheme. That individual pleaded guilty earlier this year and admitted to receiving kickbacks from six different Asia based suppliers in exchange for Apple confidential information. In June, a Chinese court sentenced three people, including a former employee of Hon Hai Precision Industry, to prison terms for collaborating to steal information from a supplier to Apple’s iPad2 products in order to get a jump on producing accessory products. The latest visible incident involves an ex-Samsung Electronics manager who leaked information to a Wall Street hedge fund manager in December 2009. Bloomberg BusinessWeek reported last week that during testimony at an insider-trading trial involving an executive at Primary Global Research LLC , this same ex-Samsung employee disclosed confidential shipping information for Apple’s iPad components, potentially causing Samsung to lose a supply contract.

There exist enough visible incidents and probably enough insider knowledge among those in the industry to know that this type of behavior continues.  For what personal gain?  Is a relatively small amount of extra money worth the ultimate ruin of your professional reputation and your family’s well-being?

The implications of these continued incidents to business costs are also wide ranging.  If you believe in any way that confidentiality has become too rigid, or something to take lighly, as the expression goes, “you ain’t seen nothing yet”.  Anyone in any role that has visibility to supply volumes will be subject to increased scrutiny and control.  Efforts to increase collaboration among suppliers will be stymied by more stringent controls around privacy and security of information. This can lead to harder work for supply chain teams and that would be a shame since so much can be gained from open sharing of important supply and value-chain information and increased business intelligence to product demand trends.

Supply managers will be the most impacted since they are the closest to the information.  Doing business with Apple already involves secrecy and strict controls, and these incidents will only make the work of dedicated supply chain professionals even harder to accomplish not only with Apple, but other companies and trading partners as well.

The message to our community is therefore to take note of the importance of confidentiality, since abuse will not, in the end, favor anyone or any organization. We believe that this is a critical issue, and community and broader awareness and commentary needs to continue.

Share your views and let’s start a constructive dialogue on preserving the best aspects of information sharing while respecting the legal confidentiality of certain information.

Bob Ferrari

At this week’s Supply Chain World North America conference, Nick Little, Assistant Director, Executive Development at Michigan State University reminded the audience of the critical importance of any company to invest strategically in innovation and supply chain capability, even in the dark stages of a global recession. He reminded us that in July 2008, prior to the occurrence of the global financial crisis, Volkswagen decided to make a $1 billion commitment to U.S. resident manufacturing, and maintained that commitment even after the U.S. auto market collapsed in 2009/2010.

This week, Volkswagen conducted the grand opening of its new automobile assembly plant located in Chattanooga Tennessee, a plant which could employ 2000 workers and designed to produce upwards of 300,000 vehicles per year.  Volkswagen’s motivation to build a U.S. presence was to become more competitive in the North America market, and also buffer the current negative effect of currency fluctuations incurred by cars exported to the region.  The primary model for manufacture will be the Passat, and Volkswagen will aggressively price the new U.S. manufactured version of the Passat at roughly $7000 less than the current model.  The Passat was designed to compete head-to-head with the Toyota Camry and Honda Accord in the U.S.  As fate often plays out, both Toyota and Honda are struggling to recover from the March earthquake and tsunami that devastated northern Japan, and U.S. inventories of Camrys and Accords are at all time lows.

Volkswagen stands to benefit from more than $570 million in state and federal governmental incentives, and has designed the new plant for maximum efficiency. Up to 85 percent of parts will be source from nearby suppliers, eight of which are located on site to insure just-in-time delivery of parts.  The Wall Street Journal also noted that the average wage level estimated to be $27 per hour is the lowest of all current auto manufacturers with presence in the U.S.

Volkswagen is not the only company that maintained an investment in innovation supply chain capability during the past downturn.  We have previously noted on Supply Chain Matters how the specialized Mittelstand mid-market companies located throughout Germany utilized the recession to invest in more product innovation and production capability, and have been the first to benefit from the current boom of demand from emerging markets. These companies have a relentless focus on market niches, areas where bigger companies chose not to compete, and also in areas that demonstrate steady growth. German exports to China increased 45 percent in the first ten months of 2010, while other countries struggled.  While companies in the U.S. were quick to shed experienced workers, Germany’s industrial and legislative leaders pulled together to come up with innovate means to retain workers and prepare for the recovery.

Yesterday at a subsequent presentation at the conference, Alan D. Wilson, the CEO and President of McCormick & Company Inc., a global producer of spices and flavorings, proudly noted that during the recession, his company continued to invest in people and benefits, and that has paid off with a consistent track record of 4-6 percent sales growth and consistently exceeding Wall Street expectations.  McCormack continues to have a strong belief in continuous innovation and investment in supply chain capability.

Management books and business case studies often point to specific companies who were able to be best prepared to take advantage of a business upturn cycle, often disrupting existing industry participants.  It seems to us that a common trait was not so much growth by acquisition, but rather growth by consistency and follow-through in understanding customer needs, maintaining innovation and value-chain capability.

How many of today’s CEO and Wall Street players really understand this tenet?

Bob Ferrari