In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.  

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

“The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Supply chain management professionals are often attuned to the weakest link that may develop among various tiers of the product value-chain. There are now building concerns that consumer electronics supply chains may be dealing with a potential industry-wide shortage of a key component during its most critical product demand period.

The Wall Street Journal recently called attention to a looming battle between electronic game console producer Nintendo against high-volume consumer electronics producers such as Apple. (Paid subscription required)

Component supply challenges include liquid-crystal displays (LCD’s), miniature motors and NAND flash-memory chips. The latter specifically points to NAND supplier Toshiba, which has become the second largest supplier of more advanced NAND memory chips.

For Nintendo, enthusiastic consumer demand for its newly released Switch gaming console is leading to aggressive planning for console output for its current fiscal year that ends in March 2018. According to the report, while Nintendo’s official sales target is 10 million units, the producer is reportedly pursuing plans to produce as many as 20 million units, double the official amount. 

As supply chain planners are acutely aware, that is a considerable variance to hedge for.  A Toshiba spokesperson indicated to the WSJ that demand for NAND has been overwhelmingly greater than existing supply and the situation is expected to remain the same through the end of the current year. Compounding the component challenge are the realities of high-volume smartphone producers such as Apple, who can garner a heck of a lot of NAND memory supplier influence based on shear buying volume.

Companies such as Nintendo therefore must factor such realities and find more ways to garner added influence with Toshiba as well as other NAND suppliers.  A further, and likely more dynamic situation involves a building significant financial crisis surrounding Toshiba itself.

The supplier’s U.S. focused Westinghouse Electric nuclear reactor construction business unit has incurred significant financial losses forcing that unit to file for bankruptcy in March, leading to concerns for Toshiba’s financial survival as well.   In March, in what was reported as an acrimonious annual shareholder meeting, Toshiba shareholders agreed to split off the prized NAND flash memory unit in hopes of raising at least $9 billion to cover U.S. nuclear unit losses.

According to various reports, Toshiba’s NAND chip business includes a venture originally contracted with memory producer SanDisk, and that company was since acquired by Western Digital, which in-essence took ownership of the SanDisk stake in Toshiba’s memory operations.  Toshiba began making overtures that it would sell its attractive memory chip business to raise immediate cash.  Upon learning of that move, Western Digital threatened to block such a sale, based on its stake in the business. The latest reported iteration is that Toshiba has made a legal concession, in-essence keeping part of the memory unit in-house to appease Western Digital. However, the reality is that there are many active bidders for the prized memory business, including Western Digital.  Other reported bidders are industry leader SK Hynix, Broadcom as well as contract manufacturing services provider Foxconn. The latter, to little surprise, has sought the influence of Apple in helping to leverage its financial offer for the NAND business. As has been the case with Japan’s high-tech producers, the government of Japan, in the presence of Innovation Network Corp. of Japan,  remains active behind the scenes to ensure that any sale address concerns for intellectual and advance technology protection.

Where all this maneuvering ends-up is the purview of lawyers and industry-watchers.  A recent published report by The Financial Times concludes that negotiations are likely to be complex and subject to further delay, which adds more pressure on Toshiba’s need to stem overwhelming red ink. The length and overall outcome adds to the obvious uncertainties as to Toshiba’s plans to continue to be able to meet overall customer demand for NAND chips, not to mention the overall industry’s capacity availability.  With Apple planning to ramp-up production for the 10^th anniversary editions of the iPhone, along with other global smartphone producers hoping to outdo Apple in second-half consumer demand, supplier influence and bargaining power are likely to be important determinants as to which producers garner the bulk of capacity-constrained supply.

Supplier contingency planning, along with the adherence to business and product-margin objectives will be a further challenge for industry supply chain teams, once-again placing an emphasis on more informed and data-driven planning and decision-making capabilities, not to mention supply chain risk mitigation as-well.

Approaching the mid-point of the year, with keen awareness that the second-half is most critical for business results, consumer electronics and high-tech supply chains have likely awareness to a difficult period ahead, one where agility, built-up supplier relationships and overall planning and execution capabilities will again be put to the test.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Sales and Operations Planning (S&OP) and procurement teams understand that a parts shortage originating in the lower-tiers of the product value-chain can provide a noteworthy overall supply chain disruption.  Last week, luxury car producer BMW AG experienced such a situation, a component shortage that impacted the production schedule of multiple models.

Source; BMW

According to published reports, the German luxury car maker is slowing or halting production of certain models in response to a shortage of parts caused by delivery problems from supplier Bosch GmbH. The hiccups in the reportedly normally smooth operation show how dependent manufacturers are on a global, smoothly running supply chain.

In last week’s BMW’s case, the culprit is noted as a “Lenkergetriebe,” or steering gears used in BMW’s 1-Series, 2-Series, 3-Series, and 4-Series compact cars. Reports point to the supply disruption caused by a bottleneck at an Italian company that supplies the casings for Bosch’s electronic-steering systems. Bosch has since dispatched employees to Italy to help resolve the problem.

A report published in both the Financial Times and the Irish Times, quotes a BMW spokesman indicating that the 1- and 2-Series cars had come to a standstill on Friday and Saturday, whereas production of the i3 and i8 electric cars was running as normal. The plan, reportedly was to resume production by today, but BMW conceded yesterday that the “situation is unlikely to change this week”.

Bloomberg reports that BMW will seek financial compensation from Bosch. BMW purchasing chief Markus Duesmann indicated on Monday in an emailed statement to Bloomberg that there is only limited vehicle production at various German plants, while factories in Tiexi, China, and Rosslyn, South Africa, have moved up or extended planned interruptions.

No doubt, the current component supply shortage will be rectified.  As is the case for many of such incidents, the question is how soon.

Once again, another current day reminder that in today’s globally extended manufacturing and supply chain networks, a snafu or glitch at any tier of the value-chain can have widescale impacts without adequate supply chain risk mitigation planning.

Bob Ferrari

Just days before the scheduled first customer delivery of the new Boeing 737 MAX aircraft, the commercial aircraft manufacturer has had to suspend ongoing flight testing after being notified by the engine supplier of what is believed to be an engine component manufacturing problem.

According to various published reports, Boeing was notified by aircraft engine provider CFM International about a “quality concern” related to the low-pressure turbine (LPT) discs installed within the new CFM LEAP-1B engines. A collection of five LPT discs with attached blades sit at the rear of this new, more fuel-efficient engine. 

Boeing spokespersons have indicated that the test flight suspension was ordered “out an abundance of caution.” Boeing further indicates that no operational problems were detected during the ongoing series of test flights. Affected LEAP 1B engines have been dispatched to CFM’s facilities for further inspection.

Reports are quick to point out that the engine problem is not engine design related but initial news of the suspension caused Boeing stock to initially drop nearly 2 percent.

As our Supply Chain Matters and aerospace supply chain industry readers may be all too aware, the industry remains sensitized to ongoing engine design issues. Specifically, design issues related to Pratt and Whitney’s new geared-turbo fan (GTF) engines which have impacted Airbus A320 neo customer delivery schedules and are still be addressed. CFM supplies an alternative engine, the LEAP 1A, as an option to the A320-neo, and those engines remain operational with some airlines. Initial indications are that the problem related to the 1B version are not affecting the 1A model.

A published report by the Seattle Times indicates that CFM informed Boeing late last week of a potential quality issue with the LPT disks within prior-delivered engines. CFM quality inspectors discovered an anomaly in the manufacturing process related to forging the discs.  As is often the case, LPT discs are provided by multiple suppliers, and the problem may rest with a single supplier’s discs. Thus, the likely steps underway are determining which specific engines included the suspect discs and assuring that all other discs meet manufacturing and performance specifications.

The irony of this news is that the 737 MAX program had repeatedly been reported as being ahead of schedule with very few issues. There have been upwards of 2000 hours of flight tests with first customer delivery to launch airline customer and Malaysia based Malindo Air, a subsidiary of Lion Air scheduled for later this month. Boeing indicates that the delivery will go ahead as planned, along with scheduled May delivery to Norwegian Air.

Boeing further indicates that production plans for the 737 MAX remain as planned, obviously with an expectation that the engine issue is temporary in nature.

Product management, procurement and supply chain teams are acutely aware that despite rigorous planning and testing, a supply or manufacturing glitch can occur at any time during a product lifecycle.  The challenge is often in the timely detection, the response, and the mitigation plans. This week, commercial aircraft supply chains have yet another current reminder that even the best planned programs are subject to unplanned events.

Always be prepared.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Here at Supply Chain Matters, we often highlight for our readers’ important areas of industry supply chain risks. That is why recent published reports by Bloomberg Businessweek and by Reuters specifically regarding South Korea caught our attention. Our readers have most likely been reading and hearing of growing tensions between the United States and North Korea over the latter country’s continued development of a missile system.

The Bloomberg Businessweek report, A Korean War Could Cut Pipeline of Vital Technologies to the World (Paid subscription required) indicates that: “If South Korea were to be hit by a missile, all high-tech electronics production will stop.” Noted is that the globe’s premier manufacturing center for advanced organic light-emitting diode (OLED) panels, the LG Display Co. facility in Paju, is in just a 15-minute drive from the Demilitarized Zone that separates North and South Korea, and within easy range of North Korea’s artillery capability. Further reported by Bloomberg is that about 12 percent of Apple’s existing suppliers are from South Korea, with LG Display being one of its largest suppliers. Once more, South Korea’s semiconductor manufacturers, including SK Hynix and Samsung Electronics reportedly supply tw0-thirds of the world’s electronic memory chips. A manufacturing supply disruption here would impact not only high-tech and consumer electronics, but various other equipment sectors as-well.

Reuters concurs that any interruptions could significantly disrupt global manufacturing of smartphones, televisions, computers, and tablets, but further notes that investors continue to pour money into South Korea’s equity markets, despite such risks.

Risks among other industry supply chain sectors are also noted.

Two of South Korea’s most prominent drug makers, Samsung BioLogics and Celltron have facilities located in a special economic zone located about 25 miles from the DMZ.

South Korea also hosts three of the globe’s largest shipbuilding firms, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, and Samsung Heavy Industries, and according to the report, two could be likely targets because they produce war ships.

The Bloomberg report raises concerns for South Korea’s logistics and transportation facilities being disrupted, which potentially could impact multinational manufacturers such as Hyundai and Kia Motor.

While businesses in this region have continually be sensitized to business risks because of their specific proximity to North Korea, most firms have forms of supply chain or other risk mitigation plans.  However, as noted from industry experts interviewed by Bloomberg, tensions this time seem far higher, along with the overall scope.

The takeaway from both reports are that a war with North Korea could indeed paralyze the global electronics industry and disrupt vital trade routes in the Pacific. While tensions in the area are not a new phenomenon, and have been accepted for many years, the unanswered question remains if the building escalations are now different, with added concerns.

Supply Chain Matters would additionally add that certain leading-edge high-tech producers have their supply chain risk mitigation teams sensitized to conducting various risk contingency scenario analysis and contingency planning. That would include augmenting some safety stock levels for certain top-line revenue components as well as back-up sourcing scenarios of alternative suppliers of DRAM and other electronics components. In the case of OLED displays, such back-up plans may have limitations due to an inherent shortage of the technology.

Yet other stark reminders of global supply chain risk.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.