The Associated Press and other media outlets today reported that AB InBev expects to cut approximately 3 percent of its total global workforce, the equivalent of thousands of jobs, once the giant consumer goods conglomerate complete it latest $110 billion mega acquisition, that being rival beer brewer SABMiller.
The AP report notes that with a combined global workforce of roughly 230,000 employees, the 3 percent cutback could amount to around 6600 employees over a three-year period.
Such news should not at all be surprising, given the track record of performance from InBev’s controlling investor 3G Capital. The Brazil based private equity firm is noted for its zeal for zero-based budgeting techniques, along with a formula for the shedding of thousands of employees and across the board cuts in all forms of “unnecessary” expenses. Such zeal includes the extension of payment intervals involving suppliers which have been reported to average in the hundreds of days.
In our October 2015 Supply Chain Matters commentary, Are Mega Acquisitions Toxic for Product Process and Supply Chain Innovation, we observed that the sheer size and scope of bringing together two global beer giants is sure to provide added challenges in rationalizing product innovation, consolidation of business systems, supply and demand fulfillment capabilities on a global scale. Thus, today’s report is not at all surprising.
This week’s report additionally notes that InBev is yet to evaluate “front-office supply departments, for which integration plans are not completed.” By our lens, that is the indication of even more cuts to come along with other potential consolidations in the above noted areas.
In October, we observed that acquisitions of the dizzying scope and magnitude of-late have led to months of organizational disruption and changing management focus. That is especially pertinent in industries such as food and beverage and consumer goods, where consumer preferences and buying trends have caused upheavals among existing players and have led to current consolidation or growth via acquisition. Many of such past mega acquisitions have admittedly mixed results as to overall long-term success.
The open question is whether such acquisitions are likely toxic for required needs for product, process and supply chain focused innovation, agility and capability efforts, not to mention enhanced collaborative relationships with value-chain partners.
We have our views, but the ongoing new AB InBev consolidation efforts may provide different evidence.
Within the current case studies related to supply chain disruption and risk mitigation are how specific companies, specifically Wal-Mart and other home improvement retailers such as Home Depot were able to successfully respond to the devastating effects of Hurricane Katrina that struck the United States Gulf Coast region in 2005. Their response exceeded even that of U.S. federal disaster assistance agencies.
It goes without stating that consistency over time and over multiple events is the ultimate determinant of risk mitigation.
Our U.S. and foreign based readers may be aware that the Louisiana region surrounding Baton Rouge has been impacted by severe amounts of participation and widespread flooding. Thousands of families, many whom relocated from the 2005 flooding around New Orleans as a result of Katrina, had since relocated to this area, and once again have their lives terribly disrupted. Our hearts go out to all of them.
The New Orleans Picayune Times reported last week that in the aftermath of the flooding, trucks from Wal-Mart and United Parcel Service (UPS) were once again among the first to deliver much needed relief and re-building supplies.
According to the report, Wal-Mart’s Emergency Operations Center in Bentonville once again began preparations for response when meteorological conditions indicated storm conditions and high participation levels would continue. A Wal-Mart spokeswoman indicated to NOLA that eight Wal-Mart stores were closed because of flooding levels and damage but as of August 18, five were able to re-open. A distribution center in Hammond Louisiana that supports store replenishment needs in across Louisiana as well as South Mississippi remained opened. The retailer has also prepared for the pending shifts in recovery, anticipating the standard post-disaster need for diapers, bottled water, cleaning and other supplies.
A UPS spokesperson told the Times that that all of its distribution centers were able to sustain operations throughout the heavy rains and flooding. However, facilities supporting four cities: Baton Rouge, Port Allen, Jeanerette and Gonzales experienced limited capabilities. Similar to Wal-Mart, UPS began re-routing packages destined to south Louisiana late in the week as a staff of five company meteorologists in Louisville continued to monitor weather patterns. Because so many residences are unoccupied or remain flooded, UPS’s systems are being flagged and held for delivery delays until they are claimed or dispositioned be designated recipients. UPS is further preparing to initially focus on resuming high-priority deliveries, for example prescription medicines. The UPS spokesperson indicated that the carrier is further helping to coordinate transportation of trailers for the American Red Cross.
Planning and preparedness is always fundamental in supply chain risk mitigation.
Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow. However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.
To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.
Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.” In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.
Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.
The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.
And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.
The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.
In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.
In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.
Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.
The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.
Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.
In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.
Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.
We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.
The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers. They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
This blog commentary is a side note to our prior Supply Chain Matters published commentary related to first-half delivery performance for both Airbus and Boeing reflecting continued supply chain challenges.
A secondary competing competitor in the single aisle commercial aircraft program category has been Bombardier’s C-Series aircraft which has been challenged by extended financial, program and supply chain setbacks. A major milestone has finally occurred with the recent announcement that the first CS100 entered operational service at Swiss International Airlines.
The maiden commercial flight of the CS100 was a Zurich to Paris flight. During the first-half of 2016, Bombardier secured firm orders for 127 C Series aircraft. Transport Canada has further awarded type certification to the larger CS300 model aircraft and the delivery of this model to airBaltic is currently scheduled for Q4.
What caught our attention was a Business Insider blog posting titled: Airbus and Boeing’s greatest threat just arrived. That posting observes:
“Over the next few years, several manufacturers from around the world will launch aircraft aimed to compete with Airbus and Boeing. But Bombardier is the first to enter service and the only one that will compete head-to-head within one of their most important market segments.. Not since the demise of McDonnell Douglas and its MD-80 and MD-90 in the late ’90s has there been a third major player to challenge the Airbus-Boeing duopoly.”
“What Bombardier has going for it is the fact that the C-Series is widely viewed as a great plane — receiving critical acclaim for its fuel efficiency, range, and advanced technology.”
If readers have been following our stream of Supply Chain Matters commentaries related to the C-Series program for the past few years, you would have discerned another important advantage from a supply chain perspective. To provide readers just two examples, you can view our original commentary published in 2010 and a subsequent 2013 commentary posing the question: can a disruptor compete with giants. If the program had not encountered such setbacks from its original goal to enter the market in 2013, it would have entered operational service much earlier and provided evidence to major airline carriers that it could be a viable alternative to current extended delivery schedules for single aisle aircraft. Now, Bombardier will likely have to deal with the industry-wide supply chain constraints that exist, including availability of the newly designed Pratt & Whitney PurePower® PW1500G engine.
One could classify this as opportunity lost, but then again, only time will tell the ultimate determinant.
For airline and leasing customers, it is indeed good to have choices and options for new commercial aircraft. Both Airbus and Boeing sales teams have been rather aggressive in insuring that airline customers would not consider such an alternative option. But now, when the industry as a whole is constrained, than the most innovative program and supply chain management processes and consequent decision-making can well become the ultimate differentiator as to what airline customer elect to do in their buying choices.
We welcome additional reader viewpoints as well.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved
Reports that U.S. Volkswagen Dealers are Growing Restless Regarding the Ongoing Diesel Emissions Scandal Fixes
The ongoing brand crisis involving Volkswagen and specifically its customers and dealers over the diesel engine emissions alteration admission continues to take on new dimensions.
Last week, The Wall Street Journal reported that VW dealers across the U.S. are fuming regarding the receipt of specific guidance regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles have been sitting in lots for over 10 months while VW and U.S. regulators traverse a legal process for determining next steps. According to this report, U.S. VW dealers are now sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.
Not wanting unsellable inventory to be clearly visible, many dealers have reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW is currently compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold and un-positioned inventory, dealers are not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.
Last week, California regulators rejected a proposed VW fix for cars with the larger 3.0 liter diesel power plant. VW executives indicate that they have a fix related to the 2.0 liter diesel engines but regulators also need to approve this process as well.
In its report, the WSJ quotes one specific VW dealer executive as indicating that the scandal, compounded by the current glut of unsaleable inventory has soured his view of VW senior management. This executive further indicates that VW should take the unsold diesel vehicles back to Germany or some other location in the world where they can comply with emission standards.
On Friday, VW U.S. executives met with 150 Northeast U.S. dealers to review what was termed as a TDI Settlement Program, and pledged additional compensation to dealers. While the details of such restitution still are not known it was the first time that VW indicated that the dealers themselves will receive direct compensation.
A detailed timeline was reportedly outlined regarding the proposed buyback and repair program across the U.S., one that is expected to extend through the end of 2018. According to a subsequent report from the WSJ, a software fix would be made available for third-generation diesels by October, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.
This overall timeline, if approved by U.S. regulators will affect the nearly 500,000 existing diesel powered vehicles now on U.S. roads in addition to the unsold inventory of 12,000 vehicles. Thus, it is more than likely that U.S. VW dealer service teams will be very, very busy over the coming months and years. However, VW continues to decline media outlets regarding any specifics related to overall time lines or specific restitution for its dealers. The WSJ report also indicates that for consumers electing to sell their vehicles back to VW, a “third-party settlement specialist” would be inserted to act as an intermediary and direct communicator with dealers.
There is little doubt that U.S. VW dealers face a service management crisis, one that will tax both aftermarket and pre-sales service business segments.
As noted in previous commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.
Once again, all of these challenges in the months to come demand that VW executives move decision-making beyond the halls of Wolfsburg with more emphasis on major geographic based leadership such as VW U.S. The supply chain implications alone place a major emphasis on service management and responsiveness or risk even more erosion to the brand and to customer loyalty. VW needs to think more boldly and more creatively to address fixing the current challenges with non-conforming diesel powered vehicles including the need for augmented resources.
© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.