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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.


More Railcar Shortages Loom for U.S. Midwest- Grain Shipments Remain Impacted

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Earlier this year, severe winter conditions across North America coupled with the continued boom of bulk crude oil shipments originating from the Bakken region of North Dakota led to significant railcar bottlenecks and shortages. Business media was quick to note that the rail car shortage problems stemmed from pileups at the BNSF Railway, which was one of other railroads heavily burdened by surging demand for crude oil transport.  The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into the year.  BNSF Locomotive unsized

A recent published report from Bloomberg now indicates that grain farmers in the upper Mid-West region of the United States now have a compounding problem.  The article quotes grain industry sources indicating that 10 to 15 percent of last year’s grain crop still remains stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled.

This problem is expected to now compound further because the harvest of spring wheat is about to take place.  Grain elevators still contain storage of the prior harvest while an expected large harvest needs to be stored and transported to designated domestic and export markets. According to the U.S. Department of Agriculture, the U.S. spring wheat crop will rise to a four year high in the coming weeks, the bulk of which coming from the Dakotas, Minnesota and Montana. The president of the North Dakota Grain Growers Association is quoted as indicating: “With the railroad situation the way it is, it almost looks hopeless as far as catching up.”

From our Supply Chain Matters lens, the key railroad carriers, BNSF and Canadian Pacific seem to be taking the classic rear-view mirror approach to the problem.  A BNSF group vice president reports to Bloomberg that the backlog is expected to be down to less than 2000 past-due railcars by the middle of September.  Bloomberg further reports that as of the end of July, the Canadian Pacific reported in excess of 22,000 requests for grain cars in North Dakota being an average 11.7 weeks late while over 7000 rail cars are over 12 weeks late in Minnesota.

We strongly suspect that farmers, agricultural distributors and consumer goods companies are more interested in the plans that railroads will put in-place to avoid both the past and expected upcoming railcar backlogs.   What are these railroads specifically addressing to get in front of the problem? More than likely the resolution involves broader considerations including crude-oil shipments taking up the bulk of line capacities, along with compounding specialty rail car supply and demand imbalances.

Last winter, rail bottlenecks and delays rippled not only to grain and crude oil, but to other bulk commodities such as sugar and fertilizer, and to the shipment of automobiles and steel. According to this latest Bloomberg report, rail lines anticipate the backlog of grain rail shipments could extend through the October-November period, which overlaps with other agricultural harvests. Some railroads may not recover at all, which will present additional shipping challenges for farmers, grain operators, and indeed other industry supply chains in the coming months. As noted in previous commentaries, ongoing capacity and driver shortages among U.S. trucking companies cannot be relied on to solve this problem, nor is it economical for shippers and producers.

U.S. rail transportation infrastructure remains challenged and there needs to be concerted efforts to address both short and longer-term resolution of consistent reliability in rail shipping networks.

To our readers directly involved in the impacts of these bottlenecks, let us know what you are observing. How can  and should railroads resolve these bottlenecks?

Bob Ferrari


A Weekend of Tragedy in China and Taiwan

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This weekend provided tragedy and natural disaster for residents and workers in China and Taiwan.

On Saturday, a China based Tier Two auto parts factory experienced a severe explosion involving combustible metal dust that killed at least 75 workers and injured 187 other workers. Photos of the factory from various China media outlets and the BBC depict a charred building façade with many injured workers being treated by emergency responders. The factory belonged to Kunshan Zhongrong Metal Production Co. and is located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai.  Reports indicate that upwards of 260 workers were in the plant at the time of the explosion which occurred at 7:37am local time.

The plant performs plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. According to the supplier’s web site, the processor is a subcontractor to auto wheel maker Citic Dicastal Wheel Manufacturing Co. based in Hebei province. Various reports confirm that this factory was an indirect supplier of car wheels to General Motors cars produced in China, although other automotive OEM’s are suspected of having a reliance on Citic Dicastal Wheel.

A report published in today’s Wall Street Journal describes the subject factory as paying higher wages, ranging from 7000 to 8000 yuan per month, but demanding high rates of production. It cites two workers as indicating pervasive levels of metal dust accumulation within the facility’s polishing area. The report also cites workers as indicating that a small fire occurred within the polishing workshop four months ago.  According to a posting on ZD Net citing inside sources, the National Work Safety Authority has sent dust experts to carry out investigations and ordered all polishing workshops across China to stop production and begin self-inspection on production safety. As a result, the source expects the production of the pending iPhone 6, Xiaomi 4, and MX4 smartphones to be affected.

 

Previously within China, incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011,a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers. 

This latest incident involving combustible metal parts is sure to raise more concerns regarding workplace safety standards involving the hazardous production byproducts.

In terms of factory disasters, in June of 2013, 113 workers were killed in a poultry factory plant in Jilin province, reported as one of China’s deadliest industrial accidents in years.

Meanwhile a strong earthquake in southern China’s Yunnan province toppled thousands of homes on Sunday, killing at least 367 people and injuring more than 1,881. China’s official Xinhua News Agency reported that about 12,000 homes collapsed in Ludian, a densely populated county located around 277 miles northeast of Yunnan’s capital, Kunming, The magnitude-6.1 quake struck at 4:30 p.m. local time at a depth of 6 miles, according to the U.S. Geological Survey. Its epicenter was in Longtoushan township, 14 miles southwest of the city of Zhaotong.

Late last week, a series of consecutive deadly explosions caused by a natural gas leak killed at least 25 people and injured 257 in the southern Taiwanese city of Kaohsiung, Taiwan’s second-largest city. The underground explosions’ triggered fires that ripped off manhole covers on roads and cratered large boulevards. Local television footage showed roads exploded with flames, overturning cars and collapsing houses.  Reports further indicated that 12,000 people fled in fear of additional explosions but have since returned to their homes. As we pen this commentary, concerns remain regarding when the restoration of natural gas supply will be returned to the impacted area which includes various suppliers.

It was obviously not a good weekend in the region. Our thoughts remain with many of those impacted.

Bob Ferrari


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