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Is There More Immediate Financial Crisis Involving Retailer Sears?

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Late last week, a published report by web-based Business Insider indicates that retail chain Sears is on the brink of financial catastrophe. This report cites both the sudden departures of two of the retail chain’s highest ranking executives along with speculation among internal employees, suppliers and several banks fearing that the retail chain may soon file for bankruptcy.

Sears has consistently and repeatedly dismissed such speculation.

The report notes that a recent SEC filing indicates that Executive Vice President Jeff Balagna departed the company last week, a highly unusual move for any retailer during the absolute peak of the holiday sales period. A further executive departure was Sears President and Chief Member Officer Joelle Maher which Sears confirmed to the online publication, but declined to indicate reason for the departure.

Sears will formally report third-quarter financial results later this week.

Further noted is that the retail chain’s Sears Hometown and Outlet Stores business unit has been experiencing significant inventory availability challenges along with reinforcement that a least six suppliers have “significantly’ reduced inventory shipments to Sears over broadening concerns related to financial health. In October, Supply Chain Matters highlighted reports that toy supplier Jakks Pacific suspended inventory shipments to the Kmart business unit due to concerns for overall financial health. Also in that month, Fitch Ratings identified Sears as one of seven retailers at risk of going bankrupt in the subsequent 12 to 24 month period. In August, Sears indicated that its overall cash balance had fallen to $276 million from $1.8 billion over the last 12 months.

Business Insider notes that Sears CEO Eddie Lampert has many other financial levers yet to be exercised to keep the retailer alive including the sale of additional real estate or major private brands. More news will likely come to light later this week when Sears makes its financial report to investors.

Each of these financial lifeline steps weaken consumer’s and supplier’s confidence in the longer-term financial sustainability of Sears as an influential national retailer.

In our revisit of our 2016 Predictions for Industry and Global Supply Chains, we indicated that the B2C Retail sector with include several financial casualties because of the ongoing compelling effect for consumers opting for online buying. Casualties this far in 2016 have included the bankruptcy and liquidation of Sports Authority along with athletic goods retailer Finish Line having to shutter upwards of 600 retail stores. Candidly, we can also disclose to our readers that when we formulated this prediction at the start of this year, we were of the belief that Sears would also succumb. We suppose some credit should be extended to Sears management for continuing to financially prevail, but any recent visit to a Sears retail outlet is a remainder of a very scaled-back retail operation with far more limited merchandise options. Once more, there are visible signs of degrading inventory management.

How Sears ultimately performs in this critical holiday fulfillment quarter will be crucial, but the current signs of senior executive departures and widening supplier concerns already point to downward spiral.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Labor Strike at ABX Air Comes at Most Critical Time

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Yesterday, a labor strike among 250 cargo airline pilots working at ABX Air, a subsidiary of Air Transport Services Group (ATSG) grounded more than 75 flights contracted for both Amazon and DHL Worldwide Express. The move came just before the start of busy Thanksgiving, Black Friday and Cyber Monday holiday shopping events.

As we pen this posting, reports indicate that just before 5 p.m. Wednesday, U.S. District Court Judge Timothy Black granted a temporary restraining order against the strike involving the pilots. That would allow for a temporary reprieve in the labor action if the pilots adhere to this order and continue negotiations over grievances.

Readers will recall that last year, Amazon contracted with ATSG to lease a total of 20 Boeing 767 air freighter aircraft to move Amazon Prime shipments from various customer fulfillment centers across the U.S. and other regions. A posting from Cincinnati.com, noting court documents indicates that ABX is a contractor to DHL, which employs 2,400 at its North American hub at Cincinnati/Northern Kentucky International Airport in Hebron. It operates about 35 flights a day for Amazon and 45 for DHL. Grounded flights may have affected as many as 20,000 individual customers for each aircraft affected.

Striking pilots claimed that ABX’s flight schedule demands have forced pilots to work an excessive number of emergency assignments because of limited flight staff, with little time for rest. Obviously, the timing of the work action, coming just before the busiest period of the year, is added attention mechanism.

Amazon officials have stressed to business media that their ability to do business is not beholden to a single cargo carrier. Reports from The Wall Street Journal and other publications indicate that the backup plan includes reliance on both FedEx and UPS air assets. But, in the case of UPS, airline maintenance workers who maintain UPS’s fleet of aircraft have announced that they have authorized a labor strike affecting the global parcel carrier after contract talks remained deadlocked over the issue of health-care benefits. That situation may come to a head after the ATSG action, as both actions involve chapters of the Teamsters labor union.

All of these developments are obviously disconcerting to B2C providers, online and traditional retailers.  The air cargo industry has a long history of labor concerns given the constant demands for longer overnight flights and constrained staffing levels. It would now seem that the industry has entered a period of increased assertiveness among employees to include labor actions to gain maximum action.

Supply chain transportation and logistics teams should continue to monitor ongoing developments since each of these actions, if they continue, will obviously have cascading effects. Rest-up for tomorrow’s Thanksgiving holiday since the coming days look to be challenging.

Bob Ferrari


Breaking News- Major Earthquake Strikes Northern Japan with Accompanying Tsunami Warnings

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Breaking news reports indicate that a magnitude 7.3 earthquake has struck Northern Japan off the coast of Fukushima Prefecture.

The US Geological Survey initially placed the earthquake at a magnitude of 7.3 but later downgraded it to 6.9. The quake reportedly occurred 37 kilometers (23 miles) east-southeast of Namie off the country’s east coast at a depth of 11.4 kilometers (7 miles).

As we pen this posting, a tsunami warning remains in place for Japan’s northeast coast with a tsunami wave of 1-3 meters (3-10 feet) possible.

Two aftershocks have been already reported by USGS, one 5.4 and one 4.8.

Thus far reports indicate boats are attempting to get out to sea to avoid imminent tsunami waves while residents living near the coast are being warned to evacuate to higher ground. Japan Railways has suspended operations of dozens of bullet trains operating in eastern Japan so engineers can check tracks to make sure they have not been damaged by the earthquake. Similarly, addition remediation measures have been ordered for what remains of the Fukushima nuclear plant comp

Penning this alert reminds us of the 2011 earthquake and tsunami that struck this same region in 2011. Only this time, the tsunami could impact eastern coastal regions. Hopefully, the same scope of such a disaster will not occur again. Many industries discovered the consequent impacts of supply chain disruption after the 2011 incident.

Industry supply chain teams should obviously be monitoring ongoing developments.

Our thoughts and prayers are with the safety of all citizens in the potential impacted coastal areas and we trust that events will not repeat themselves.

Bob Ferrari

 


Scoring Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains- Part Five

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For the past two weeks, Supply Chain Matters has featured a series of postings focused on revisiting and self-scoring our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of this year. We trust that you have valued from this look back and its now time for a look back at our final two previous predictions. Supply Chain Matters Blog

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.

As has been our custom, our scoring process is based on a four-point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.

Our Part Two posting revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.

In our Part Three posting, we revisited and reported on our various industry specific supply chain predictions for this year.

Our Part Four posting revisited specific predictions related to the ongoing maturity of both Sales and Operations Planning (S&OP) and Internet of Things (IoT) business processes.

This final posting is our look back at our last two, and often more provocative 2016 predictions.

 

2016 Prediction Nine: Alibaba and Amazon Will Expand Their Presence in Customer Logistics Fulfillment.

Self-Rating: 4.0 (Max Score 4.0)

 

Our belief at the start of the year was that there were strong indications that online giants Alibaba and Amazon would continue to expand their presence in last-mile customer fulfillment. There were two primary reasons. First, ownership of parcel logistics, transportation and last mile fulfillment provides each of these major online fulfillment platforms that direct ownership to insure online delivery commitments for premium buying services such as Amazon Prime. From a strategic strategy perspective, it builds full order-to-delivery control management capability for each of these dominant online global provider’s retail platforms that increasingly host multiple retail providers.

Second, analysis data continues to reinforce that Free Shipping policies have consistently attracted online consumers in buying decisions and offsetting costs will remain the determinant of profitability of online orders in the months to come. Consequently, it was our prediction that existing parcel delivery service providers would experience more shipper pushback regarding rate structures. Increasing transportation rates and dimensional package surcharges from both FedEx and UPS that began in 2015, and extended into 2016, along with building frustrations over service arrangements would make this prediction more viable for the most influential online retailers who need to control significant transportation budgets.

During its most recent quarterly earnings performance briefing, Amazon’s CFO acknowledged that while investing in one’s own logistics and transportation capabilities is expensive, customers are embracing more timely and predictive delivery capabilities, and are increasingly demanding faster delivery. Further noted was: “We want to control our own destiny.” Since July, the online retail giant has opened an additional 23 warehouses and customer fulfillment centers globally with investments expected to continue well into Q4.

With Amazon Prime membership members now approaching 60 million, and with indications of even more third-party sellers utilizing the Fulfillment by Amazon platform capability, Amazon is obviously preparing for an even bigger holiday fulfillment quarter in Q4. Upwards of 120,000 seasonal employees are expected to supplement existing full-time staff. Executives have indicated to investors that revenues are expected to be in range of $42 to $45.5 billion in Q4, as much as a 27 percent increase over last year’s similar period. Last year, major investments were made in the long-term leasing of 40 dedicated air freight aircraft along with hundreds of branded tractor trailer units. In the coming weeks, we can expect more same-day last-mile premium delivery services to be managed directly by Amazon.

China’s Alibaba business media has always included the ownership and control of its own logistics subsidiaries, the largest being Canaio. The Chinese online retailer’s co-founder Jack Ma wrote to investors in October indicating that now that China’s explosive double-digit growth in Internet users is now fattening: “in the coming years we anticipate the birth of a reimagined retail industry, driven by the integration of online, offline, logistics and data.”

One of the largest online shopping holidays across China is Singles Day. This promotional shopping day, also known as “Double 11”, produces more online volume than Black Friday or Cyber Monday combined in the U.S. The event was conceived by students in the 1990’s as a mock celebration for people not in relationships, with a desire to give something to oneself. In 2015, the online shopping event racked up the equivalent of $14.3 billion in shopping revenues for various Alibaba sites, surpassing that of Black Friday. Singles Day 2016 held this month was preceded by a nationally televised Internet streaming celebrity entertainment event held in a 60,000-person stadium in Shenzhen hosted by Alibaba Chairmen Jack Ma. A running tally was continually updated on video screen at the Stadium and online. By 3:15pm local time, the 2015 sales volume number had been once again, exceeded. Alibaba indicates that the equivalent of $17.7 billion in online sales, a 32 percent increase, was processed during this year’s 24-hour event.  However, the figures don’t include returns which could be as high as 30 percent, and there are growing cautions in that Alibaba reports on a metric of Gross Merchandise Value, which includes the cost of platform advertising fees in the revenue metric.

Just as critical, however, is Alibaba’s network of delivery vehicles and delivery persons who must navigate complex or vague delivery addresses or who must utilize ingenious means to transport these significant volumes of packages among dense urban streets and alleyways.

Given all the above that has occurred, we have placed a maximum self-rating score on this prediction.  Each of these global online platform dominants have now recognized the importance for controlling last-mile fulfillment, but more importantly, are building premium multi-retailer fulfillment platforms that will continue to seize more online market share.

 

2016 Prediction Ten: A High Visibility Supply Chain Snafu or Event with Business Implications

Self-Rating: 3.5 (Max Score 4.0)

The above was a prediction that we were obviously reluctant to publish for readers and clients. However, our observation of industry supply chains being whiplashed with unprecedented business change and growing global chain risks lead us to this wildcard prediction. Continued pressures to reduce overall supply chain costs in 2016 lead us to conclude that there may well be one or more high visibility supply chain or key supplier breakdowns in the coming year. Industry supply chains that have already undergone multiple years of cost or staffing reductions were likely candidates, along industries with highly extended value-chains without adequate risk mitigation. Significantly reduced resources, capacity or product quality assurance and monitoring will likely be casual factors, although public statements would indicate otherwise. We felt that suppliers would continue to experience pressures to reduce costs but at the same time be forced to provide more agility and responsiveness to changing needs. There was already an uptick in product recall incidents along with certain supplier quality shortfalls that we felt would continue.

The most visible and far reaching supply chain snafus or events in 2016 turned out to be two. Samsung’s botched new product introduction and consequent sales suspension of the Galaxy Note 7 smartphone was probably the most visible. It was followed a few weeks later with indications of exploding front consoles related to the consumer giant’s top-loading automatic washing machines that led to a recall of 2.8 million devices. There are still many learnings to come from the highly visible Samsung incidents that were characterized by media as “exploding Samsung devices.” They point to either management’s push too far in aggressive product introduction timing, potential breakdowns in candid collaboration among product management and manufacturing, or actual supplier component faults. Regardless, Samsung must now deal with challenge of restoring brand loyalty among different consumer product segments.

The other most visible event was Volkswagen’s ongoing product recall actions involving software modification of air pollution controls related to diesel powered automobiles. Both came from different casual factors but each has resulted in quite significant monetary and brand value implications. The air emissions modification has already forced VW to predict upwards of $20 billion in additional recall related expenses and many other implications to follow including significant headcount reductions to further reduce costs to pay for efforts to develop more electric or hybrid-powered automobile models.

Other 2016 Industry Specific Snafu’s

As note in our prior look-back at industry-specific predictions, the global automotive sector and their after-market supply chains continue to deal with unprecedented numbers of product and component related recall events. The ongoing series of safety product recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands continued to permeate in 2016. Multiple manufacturers initiated additional product recalls related to a whole series of automotive components with the end result being that most brands had vehicle nameplates under product recall notices involving millions of existing operating vehicles.

Among commercial aircraft supply chains, early product ramp-up challenges involving Pratt and Whitney’s revolutionary new geared turbine fan (GTF) engine forced manufacturer’s Airbus and Bombardier to modify their planned 2016 single -aisle shipment schedules for certain single-aisle aircraft. In the case of Bombardier, the shortfall in previous planned engine availability resulted in an announcement of a revised schedule for the firm’s CSeries program and consequent headcount reductions across the company. The Pratt GTF supply chain was designed to have “no single point of failure.” In June, executives from Pratt indicated to The Wall Street Journal that roughly half of the company’s suppliers for its new geared turbofan engines were not delivering parts and materials at expected levels as seamlessly as the company expected. United Technologies Chief Executive Gregory Hayes further indicated to the WSJ that at the time, 44 percent of the company’s 1,600 suppliers—including the 500 to 600 who supply parts and materials for the engines themselves—weren’t meeting the company’s on-time delivery and quality control targets. The most complex component, the composite metals based fan blade experienced significant production yield challenges that are now being addressed for 2016 output requirements.

Candidly, predicting high visibility supply chain snafus and events is not all that difficult given the constant pressures that various industry and global supply chains currently must deal with. What changed in 2016 was the size and scope dimensions, and the fact that very large, global based manufacturers and services providers are becoming more vulnerable to such occurrences despite such predictions.

 

This concludes our Supply Chain Matters revisiting of our 2016 predictions.  We again encourage our readers to provide their own specific feedback comments and observations regarding each of our 2016 prediction areas. As always, you can add your voice in the Comments section appearing at the end of any of our postings.

We extend a shout out to all those that participate and contribute under the extended supply chain management business process and supporting technology umbrella for responding to yet another difficult and challenging year and delivering expected line of business results. Thanks also to our network of contacts and other research analysts for assisting in formulating our looking back comments.

Normally, we would at this point begin the process of unveiling our 2017 predictions for industry and global supply chains starting in early December. As this noted indicated in our predictions update of November 10, in the light of the unprecedented developments of both the Brexit vote that occurred in the United Kingdom, and the election of Donald Trump as the incoming President of the United States, I made the decision as Editor and Managing Director of Research to postpone our 2017 predictions unveiling until sometime in January.

We believe that global based supply chains are about to enter uncharted waters that may well include increased trade protections and whiplash implications involving various industry supply chains. Any advisory firm predicting 2017 trends at this point may be doing an injustice to clients without further analysis as to how two extraordinary and certainly unforeseen events will likely play out in 2017. We published an initial first take impression after the election of Donald Trump, and will provide further updated insights for readers and clients during December. One thing we do know at this point is that next year’s supply chain predictions will likely focus on any global trade restriction impacts and the threat that these geopolitical forces spread to other countries next year. Other areas we now believe should be included are certain impacts to ongoing social responsibility initiatives, industries bearing the potential brunt of increased trade protections, the impacts of larger and more expensive M&A surrounding Internet of Things (IoT) and more developments concerning global ERP providers.

Stay tuned as we all transition into 2017 which could well be another more challenging year for industry and global supply chains.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved


Asia Pacific Leaders Wrap-up Their Weekend Meeting in Peru and Vow to Continue Trade Alliances

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This past weekend, political leaders of the Asia-Pacific Economic Cooperation forum met in Lima Peru to discuss free-trade, and specifically pending ratification of the Trans Pacific Partnership (TPP). According to various media reports, the delegates sent a direct message to President-Elect Donald Trump, namely that they will move forward with Asia-Pacific trade pacts with or without the support of the United States.  The implication could well be more trade influence for China.

The election of Trump reportedly loomed large over this summit of 21 nations, and President Barack Obama had his hands full in trying to assuage fears of the U.S. withdrawing from TPP and other pending global trade pacts. The U.S. Congress has failed to take up TPP ratification in the now lame-duck session, with little likelihood of doing so in 2017 now that there is full Republican Party control across all branches of government.  During the presidential campaign, Donald Trump blamed bad trade deals as one of the primary causes of manufacturing and other job losses in the U.S. and threatened to specifically scrap TPP and re-negotiate the North America Free Trade Agreement (NAFTA). In the light of this current perceived trade retrenchment climate, China indicated at the summit that the country was prepared to take the lead in promoting trade. The TPP alliance was a critical component of the Obama policy to counter China’s influence in influencing trade deals and more attractive trade arrangements among Asia-Pacific regions.

This weekend, the countries of Chile and Peru, two existing members of TPP, indicated they were interested in joining the Regional Comprehensive Economic Partnership (RCEP), a China led pact that could involve 16 nations.

Leaders of Both Canada and Mexico also indicated this weekend that they remained committed to North America based trade, which leaves open the question of how much they are willing to re-negotiate the existing NAFTA agreement.

As industry supply chains complete 2016 activities, there is a clear uncertainty looking out to 2017 and beyond if the United States, one of the globe’s largest trading partners takes on a harder trade stance. Many are looking to President-Elect Trump’s policy statements and pending Cabinet appointments to assess how hard a line the U.S. will take.

There are obviously many implications related to protections to intellectual property protection rights (IPP), more open access to Asia Pacific markets and the potential for tariff implications for certain products.  All could involve impacts to existing global supply chain product sourcing strategies.

Stay tuned as we continue to assess these changing geo-political developments and their impacts to global supply chain management strategies.


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