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HP’s Proposed Corporate Split- A Supply Chain Matters First-Take Perspective

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Today, business and general media have been echoing the blockbuster news of the Hewlett Packard announcement indicating that HP desires to split itself into two separate companies. In this posting, we share our initial Supply Chain Matters impressions of this proposed breakup from both a global supply chain and information technology provider perspectives.

According to HP’s announcement, the company’s recently combined personal computer and printer business will split from its corporate hardware and services operations.  The former is proposed to be named HP Inc. and will have Dion Weisler, a current executive in that operation, as its new CEO while the latter will be named Hewlett-Packard Enterprise, and have current HP CEO Meg Whitman at the helm. However, most of HP’s current profits have come from the combined PC and printer side.

Both of the split entities would have an equal portion of upwards of $50 billion in revenues, but the various reports we have been reading indicate that the strategy for HP Inc. will be more about generating cash while HP Enterprise will be positioned for growth in enterprise and cloud computing areas. Reports further indicated that HP management has suggested that the current near $20 billion in outstanding debt may be placed on the HP Inc. unit itself, allowing the Enterprise unit more options in further strategic deals. 

The stated goal for this split is to provide both businesses with a sharper, more focused response to changing customer requirements. We are not all convinced, at this point.  Wall Street interests obviously will have a far different view.The proposed split has been targeted to be completed by the end of fiscal year 2015, subject to regulatory and stockholder approval.

Needless to state, there is no shortage of opinions regarding this significant announcement, especially since Ms. Whitman, three years ago, declared to customers and stockholders that HP will remain a single innovative company.  Since that time, HP has already shed upwards of 36,000 people as a result of various subsequent re-structuring programs with the ultimate goal being a range of between 45,000-50,000 job cuts.  With today’s proposed split announcement, the number is now pegged at 55,000 total job cuts.

In 2011, HP proposed a spinoff of its PC division, an announcement that ultimately led to the short CEO leadership reign of Leo Apotheker. Our Supply Chain Matters perspective at the time was that such a decision would unwind the global supply chain high volume leverage benefits that HP had garnered in the strategic procurement of hardware components, as well as raise yet another round of uncertainty for HP’s customers and supply chain partners. That view was later reinforced in a Wall Street Journal report published after our commentary.

The same concern remains with today’s announcement, although the combination of PC’s and printers retains some leverage. To calm such fears, we read one report stating that CEO Whitman has indicated that the two companies will have a “supply chain arrangement” that allows them to jointly negotiate strategic purchases. We are not that confident that such an arrangement has been all that successful among other large firms. Further, if one of the entities is burdened with the current total debt load that may not help in negotiating or consummating long-term, multi-year supplier agreements that often require up-front cash. Today, overall supply chain leadership is decentralized among HP’s business units. With this split, that model will have special significance.

In its reporting last week and this weekend, the Wall Street Journal revealed that for most of the year, HP held merger talks with storage systems provider EMC Corp, a deal that would have created an estimated $130 billion in combined revenues. Although those talks were reported as ended, the WSJ speculates that today’s proposed split could pave the way for a combination of HP Enterprise and EMC down the road. If that indeed is the strategy being played out, than the global supply chain leverage benefits from a combined HP/EMC, or another existing IT infrastructure hardware provider can buffer some of the loss of global supply chain volume leverage.

From an overall supply chain,B2B business network and applications perspective, the proposed split affords the HP Enterprise entity the opportunity to more aggressively innovate products in cloud-based systems, big-data analytics and decision-making as well as support for IT business process and cloud outsourcing.  That may well depend on what ultimately transpires in further announcements in the coming months.  There is the possibility that HP Enterprise could be adsorbed within another enterprise provider’s business strategy.

These past weeks, there has been speculation that HP’s printer business was in final stages of announcing some breakthrough technology directed at 3D printing applications in manufacturing and other uses. If that product comes to market, our speculation is that it will have dependence on HP Enterprise services. How such applications are apportioned under the proposed split is an obvious concern for HP’s current and future customer base.

Finally, in observing other high profile corporate splits, issues of how corporate-wide business shared services, such as procurement, data centers, B2B business network infrastructure and EDI systems, ERP, business and specialized supply chain focused applications, third-party logistics and online customer fulfillment are split out becomes a task of significant proportions. With so many job cuts that have already occurred to-date, and more expected to come, inherent business process knowledge and dedicated internal resources to shepherd the transition workloads are going to be challenging. With speculation of even more strategic changes down the road, the notion of two split companies that can respond faster to changing customer and market needs could be slowed-down by the need for adaptive business systems.

There is obviously more to come regarding the HP business split and we urge readers to stay tuned for further Supply Chain Matters commentaries and updates.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


Another Organized Labor Motivated Labor Walkout Involving Amazon in Germany

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On Monday and Tuesday of this week, a work stoppage involving fulfillment center workers at Amazon.com’s German based facilities took place. This was yet another walkout amid a series of periodic work disruptions that date back to 2013. As occurred with other such incidents, there were no reported disruptions in Amazon’s fulfillment activities within the German facilities.

Supply Chain Matters has previously highlighted the various incidents of labor disruptions at Amazon’s German based fulfillment centers. Initial labor stoppages occurred over four consecutive weeks in June of 2013, and again at the peak of the holiday fulfillment season. Another protest walk-off occurred in the spring of this year.

German labor union Verdi has been targeting Amazon and has organized these periodic work stoppages.  The primary issue involves an ongoing dispute as to whether temporary or full-time workers at Amazon’s German facilities should be classified as retail and catalog workers, which garners a higher pay scale in Germany. While Verdi claimed upwards of 2000 workers across five different sites participated in this week’s work stoppage, Amazon indicates the number was closer to 1300. However, the numbers seem to grow with each incident.

Yesterday, The Wall Street Journal published an in-depth front-page article in its United States edition, In Germany, Amazon Keeps Unions at Bay (paid subscription) which provides in-depth perspectives to the issues at-hand. The article is an interesting read.

The WSJ declares that Amazon has shunned Germany’s consensus-driven labor model and largely dictates contract terms at its 9 German distribution centers.  It quotes Amazon’s general manager at the Bad Hersfeld logistics hub as indicating that Verdi and Amazon do not go together. However, later in the article, the authors report that Amazon pays a variable monthly compensation, a bonus based on performance, issuance of restricted stock units, and paid time-off for pregnant workers. A Christmas holiday bonus was added in 2013.

Verdi’s ongoing organizing efforts continue to trigger what is described as a discernable rift among Amazon’s German workforce.  Some workers are thankful to be working for Amazon, while others want their employer to respect Germany’s labor voice practices where workers are formally represented by an organized labor representative in executive forums. The WSJ makes further note that Amazon targeted its German fulfillment center sites within high unemployment areas where workers would be more concerned with jobs rather than labor unions. That apparently adds to the ongoing tensions. What is occurring in within Amazon’s fulfillment facilities in Germany has similar parallels to attempted labor organizing efforts involving Volkswagen’s production facility in Tennessee.

This author is currently half-way through the book, The Everything Store: Jeff Bezos and the Age of Amazon. It is a fascinating read and provides many insights into the corporate culture and internal drive of Amazon, particularly its successes in challenging conventional norms related to shopping, commerce, fulfillment and business.  Thus, there should be little surprise in Amazon’s current direction in Germany and perhaps other countries. They are, after all, the current big gorilla of Omni-commerce.

After the highly successful and financially rewarding IPO of Alibaba last week, the online fulfillment provider that most believe will at some time surpass the shipment volumes of Amazon and others, one wonders if they will take a similar path when establishing a presence in Europe.

European labor tensions involving online shopping may well continue into the foreseeable future

Bob Ferrari


Lululemon Reported to be Turning the Corner from Previous Supply Chain Snafu

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Supply Chain Matters provides our readers periodic updates to examples of how supply chain snafus can impact business performance. In that light, we have provided ongoing commentaries related to Lululemon Athletica and its prior sourcing and production snafus of one of its most popular line of yoga pants for women.

In March of 2013 this global B2C online and brick and mortar specialty retailer was forced to both recall and stop selling its most popular line of women’s summer yoga pants after discovering that the “sheerness” of the fabric allowed too much to be seen underneath.  The CEO was compelled to publically apologize to customers for the problem and a short time later, announced her desire to step down from her CEO role due to personal reasons. Later in 2013, both a new CEO and Chief Products Officer was brought on-board, unfortunately too late to make any influential impact regarding the 2013 holiday buying period.

The latest business media update for Lululemon reflects a sales recovery with new product designs now becoming attractive for shoppers. Last week, the specialty retailer provided higher-than-expected revenues and profits and raised its outlook for the full year.  Online sales increased 30 percent from the year earlier while sales at physical outlets decreased 5 percent. In its reporting, The Wall Street Journal declared: “a sign that efforts to put supply-chain problems and fashion missteps behind are beginning to deliver results.”  Prospective investors were certainly impressed, sending the stock upwards in double-digits.

To accomplish this turnaround, supplier relationships were augmented and a new line of fashion products was accelerated to provide more online and store shelf assortment in July, a traditional transitional period from summer to fall.  The product line had emphasis other than basic black and gray, which resulted in higher cost and a near 4 basis point erosion in gross margin.

More supply chain challenges remain including upping the assortment of in-demand products that consumers demand as well as further supply chain process improvements. However, the situation seems more of a positive direction.

Our community is often reminded of the both the immediate costs associated with supply chain disruption as well as the longer-term impacts to brand and stock-price.  In the specific case of Lululemon, it has been a span of 18 months of such impacts and learning.  During that time, competitors have managed to seize an opportunity and provide consumers with other attractive and functional choices.

As acknowledged by company management, more work remains and it wilol certainly include a closer relationship of product design and supply chain.

Bob Ferrari


Significant Progress Reported in West Coast Port Labor Contract Talks- No Final Deal As Yet

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Some fitting good news came prior to the Labor Day holiday weekend in the U.S. concerning the ongoing labor negotiations concerning the Pacific Maritime Association, representing numerous west coast ports, and the International Longshore and Warehouse Union. The existing labor contract involving 29 U.S. west coast ports expired on July 1st.

The Associated Press and other supply chain focused business media report that ongoing talks have made significant progress with a tentative deal reached on the critical knotty issue of healthcare benefits. According to the AP report, the association especially focused on limiting fraud in health plans to avoid penalties that may occur under the Affordable Care Act. The AP report further cites a federal grand jury investigation in California indicting three people for an alleged $50 million scheme to swindle health plans involving dockworkers along with other federal investigations concerning fraud among the subject health plans.

In conformance to negotiation practices, no details have been released concerning specifics to the tentative agreement on the healthcare component. Other remaining issues involve compensation, job security and workplace safety, which imply that contract negotiations will most likely continue for several additional weeks.

Industry and retail focused supply chains have already implement contingency plans including the re-routing of inbound and outbound ocean shipments to U.S. east coast and other North American ports. That activity will likely continue as supply chains move into the critical pre-holiday surge of inbound products from China and other Asia-based producers.


Napa Valley Assesses Damage to Wine Inventories and Production Equipment

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Business owners in the Napa Valley area of California woke up today to the after-effects of the 6.0 magnitude earthquake that struck the region on Sunday.  The Napa Valley was very close to the epicenter of this earthquake and we all know and appreciate what this region’s most important commercial product is, namely great wines with global brand identity.

Reports indicate that the wine industry may have suffered some significant damage as a result of the quake and its aftershocks.  A report produced by business network CNBC features video and reports of damaged wine caskets and bottled inventory among growers and distributors, some of very expensive varieties. According to a report by CNN, the damage was isolated, some wineries being hit very hard, others not so. Wine producers and wholesalers are in the process of assessing overall damage along with trying to save stored aging wine.  Wine within damaged barrels will need to be transferred to other safe, secure, temperature-controlled facilities and the challenge is securing both additional barrels and available controlled storage that was not damaged. While insurance can compensate for lost inventory, exquisite wine cannot be replaced, and the harvesting and aging process must begin anew.  Larger producers may be in the position to sustain losses than smaller, specialized producers. That may well leave a hole in future revenues or cause a supply and demand imbalance, depending on the varietal product. The market for wine itself has its own challenges and is very much dependent on variety and brand.

Last week, we ran across a a syndicated AP published story regarding the bourbon industry.  Similar to wine making, it is an industry where long-term bets are made concerning current and future market demand. Distillers fund inventory aging for millions of gallons of product over a 2-5-10-15 year horizon. Super premium brands, currently the most popular, can often fetch large profits, but have to age 6 years or more.  The overall market for bourbon is booming, and distillers and distributors are banking on the continued boom in international demand to continue over the longer-term horizon.  Imagine your supply chain’s overall inventory averaging over multiple years. We observed that dynamic when earthquakes impacted the parmesan cheese producing areas of Northern Italy in June of 2012.

Wine and spirits supply chains feature unique challenges in long-term inventory management and associated supply and demand pricing strategies. Risk is an inherent factor, and major supply chain disruption caused by a natural disaster can be devastating to short and longer-term business results. They also add a new and far different aspect of product demand management challenges.

Napa wine producers will continue to recover from this natural disaster and hopefully, all producers, large and small, will be able to recover.  However, our community has yet another reminder of the fragile nature of today’s industry supply chains which can be significantly disrupted by a single natural disaster or event.

Bob Ferrari

 


Fears Grow Over Earthquake and Volcanic Activity in Iceland- Implications to Air Traffic

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Just over four years ago, air traffic across the continent of Europe was disrupted by a volcanic eruption that occurred within Iceland that spewed concentrations of volcanic ash at high altitudes and across European and Atlantic skies.  Many industry supply chains were impacted as time and value sensitive shipments of agricultural and food products, pharmaceutical, medical products, high technology and telecommunications components were impacted, to name a few.  Air travel was a mess as thousands of air travelers suffered through flight cancellations and so were ground logistics and transportation networks as supply chain logistics professionals scrambled to seek alternative means to move products to customers. 

Much was hopefully learned from that disruption event.

All of this week, media has been reporting a high concentration of volcanic occurrences within a specific region of Iceland. This intense earthquake swarm involves thousands of small earthquakes within the area of the Bárðarbunga volcano.  The intense clusters of earthquakes were moving towards the north and the east of the volcano. The Icelandic Meteorological Office raised the aviation threat level around the volcano to “orange” — or a 4 out of 5 on the agency’s risk scale — indicating that the “volcano shows heightened or escalating unrest with increased potential of eruption.” The last confirmed eruption of this volcano took place in June of 1910. This specific volcanic area has a history for massive eruption many hundreds of years ago. The area sits beneath one of the largest glacier areas in Iceland which in itself could itself explode if and when it comes in contact with hot molten magma.

Some reports indicate that any potential ash would likely travel south towards the Bay of Biscay, then head east over Western Europe, which raises heightened concerns for air travel across the continent.  After the previous air disruption incident, there was heightened debate as to whether European air safety officials overreacted with mass groundings of aircraft.  Then again, which airline or air cargo carrier wants to risk lives and aircraft costing hundreds of millions by flying through or adjacent to volcanic ash and debris clouds?

As noted, the 2010 European air traffic disruption incident was a reminder to the unplanned occurrence of significant supply chain disruption.  Let us all hope that there will not be any occurrence.

Supply chain logistics and customer fulfillment teams need to remain diligent in the coming days.


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