We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As a reminder, our self-scoring process will be 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.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014.
In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.
In this Part Four posting we re-visit Predictions Six and Seven.
2014 Rating: 2.0
Throughout 2013, business headlines were focused on the occurrence of highly visible incidents of perceived or alleged labor abuses, coupled with environmental safety concerns among production facilities supporting multiple industry supply chains. Thus, our 2014 prediction called for higher levels of visibility to those supply chains proactively addressing social responsibility and unfortunately, those that are inclined in accepting past status-quo. We predicted consequent business and shareholder implications surrounding such practices.
This was a prediction that unfortunately, did not occur to the levels we anticipated and thus we have given ourselves a low self-rating.
On the positive side, labor activism continued to be a discernable trend among so-termed, lower cost manufacturing regions. Business media such as Bloomberg provided added visibility to worker safety and pay conditions among female workers within regions such as Bangladesh. In China, the workforce has turned toward male dominance and reports of sexual harassment have come to light. In a Supply Chain Matters commentary in May we noted trends reflecting for the most part, a female dominated workforce in Bangladesh enduring workplace perils to sacrifice for the better good of their families. A predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.
In the high-tech sector, Apple continued to undertake meaningful steps to initiate broader supplier responsibility practices including substance use regulations across its supplier network. The highly visible consumer electronics provider published both its Eight Annual Supplier Responsibility report along with a new Regulated Substances Specification which was made available for open viewing. The substances specification called for the banning of cleaning agents’ benzene and n-hexane within all supplier factories. Unfortunately other high tech and consumer electronics brand owners appeared not to join in openly declaring higher standards for safe chemical use.
Many consumer products companies along with their respective supply chain suppliers made some continued strides in environmental and social responsibility particularly in the areas of palm oil and other agricultural commodity sourcing.
The apparel industry continued efforts by various industry consortiums to improve factory safety working conditions across countries such as Bangladesh and Cambodia. In an early November update, we were disappointed to observe that a large number of garment factories across Bangladesh failed safety inspections. According to reports, the inspections uncovered critical structural deficiencies within 100 factories that require immediate repairs. In 17 of the inspections, factory conditions were deemed to be so unsafe that the factories were ordered closed. Around 110 of building inspections uncovered the need for immediate actions required to bring the facility above acceptable safety levels for production to continue. Garment workers in Cambodia have increasingly become more vocal in seeking higher wages within that country and some European retailers have pledged to offer higher wages. However, industry consortium efforts appear to have bogged down with little outcry from external groups or stockholders.
Prediction Six was a disappointment in 2014, not just for us, but for various industry supply chains who still weigh lowest cost higher than active social responsibility practices and accountability.
Our prediction cited that the ongoing cumulative effects of increased financial and business related risks would motivate manufacturers and retailers to once again revisit multi-tiered global sourcing strategies.
Overall, 2014 has turned out to be a tame year in terms of global supply chain risk and major disruptions, with some notable exceptions, and that more likely has muted any major efforts for changed sourcing.
According to global re-insurer Munich Re, Natural disasters worldwide caused about $42 billion in economic damages during the first half of 2014, well below the average amount of $95 billion for the same period during the past 10 years,. Insured losses totaled about $17 billion during the first half of 2014, compared with a 10-year average of $25 billion. Increased volcanic and earthquake activity caused some concerns in Northern California and in Iceland during August while in Asia, there were constant incidents of major earthquakes, many of which located in non-industrial areas.
Social and Political Unrest
In the area of social and political unrest, early 2014 brought a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear while territorial hostilities among Russia and Ukraine presented threats of potential European supply chain disruption. In May, a dispute over drilling rigs in the South China Sea precipitated rioting across Vietnam that caused disruption to hundreds of China-owned factories. The Middle East was a constant threat for continued hostilities, specifically related to Syria and Iraq.
One of the largest ever recorded outbreaks of the deadly Ebola virus that has struck certain West Africa based countries has the strong potential to impact industry and global supply chains if the outbreak is not controlled. The outbreak which initially began in March has now broadened to nearly 16,000 reported cases and nearly 5700 deaths. Potential threats are in global transportation and logistics as well as localized outbreaks that could impact specific industry supply chains in the light of past severe global outbreaks of SARS or influenza.
Humanitarian focused supply chain activities continue to provide the critical defenses for avoiding a broader pandemic outbreak involving far more countries and geographies. While a global pandemic might have been characterized as a low probability scenario among various industry supply chains, Ebola remains an acute current day reminder of a disruption that can impact many industry and global supply chains.
Merger and Acquisition
In the pharmaceutical and drug sector, business headlines reverberated with a slew of planned or attempted merger and acquisition activity as the major industry players jockeyed for strategic advantage in product pipelines, cost structuring and emerging market access. Any of these would have provided the potential for major supply chain disruption.
Specific Industry Disruption
Two of the most notable industry related disruptions in 2014 involved automotive and global shipping. An unprecedented level of product related recall announcements precipitated by lax product design and supplier management practices prompted the cumulative effect of multitudes of brands recalling millions of automobiles and light trucks that has brought automotive service supply chains to crisis stages. The most visible incidents involved an alleged defective design of ignition switches installed on multiple General Motors produced vehicles. The other ongoing crisis involves alleged defective air bag inflators produced for multiple automotive brands by Japanese supplier Takada. Automotive OEM’s may well revisit their supplier sourcing, quality conformance and product design practices in the light of the current levels of risk exposure.
The other major disruption with ties to global sourcing was the perfect storm of near paralysis that impacted U.S. west coast ports at the very height of import and export shipment activity related to the 2014 holiday fulfillment period. As we pen this self-rating commentary, the port crisis continues, with little optimism related to easing, and the reverberations and effects of this crisis will likely alter global surface shipment routings in the months to come.
We continue in the belief that the days of global sourcing based on one-dimensional dimensions of direct labor or transportation are over. Consequent sourcing decisions that factor elements of possible risk will bring forward far different dimensions of balancing global sourcing with risk mitigation. Since 2014 provided an overall tamer risk environment, out of sight was probably out of mind. However, the symptoms and casual factors remain evident.
This concludes Part Four of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess our remaining 2014 predictions in the final posting of this series.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In last week’s Update Three commentary regarding the current crisis involving the near paralysis among the U.S. West Coast ports of Los Angeles and Long Beach, Supply Chain Matters highlighted that conditions on the ground were not showing any signs of improvement. As this week draws to a close, the situation appears to be deteriorating even more, and now involves clear impacts and continued disruption for both U.S. exports as well as imports.
Last week, the National Retail Federation (NRF) published an editorial with the statement: “The sudden change in tone is alarming and suggests that a shutdown of the ports — either from a walkout by labor or a lockout by management — is imminent.” The NRF has since been joined by other industry associations including the National Association of Manufacturers (NAM) the U.S. Chamber of Commerce, and 60 other organizations representing agricultural growers.
Agricultural exports such as apples, forest products, potatoes and other crops are now jeopardized. Growers indicate that Far East buyers are now cancelling orders and moving to alternative sources of supply. According to a report from industry trade group, Agriculture Transportation Coalition, the consequences of the current port congestion are being felt throughout the United States. The railroads are unable to bring agriculture products from the Midwest and the South to West Coast ports because of the port congestion crisis. In addition, ocean carriers continue to attempt to pass on their increased costs by imposing draconian congestion surcharge fees on U.S. exporters and importers.
A published report in American Shipper (registered sign-up or paid subscription) now indicates that formal labor negotiations among the lead negotiators of the international longshoreman’s union and the Pacific Maritime Association (PMA) are currently in recess and not expected to resume until December 2. The publication characterizes this development as: “bad news for importers and exporters hoping for a quick agreement and rapid restoration of normal operations at West Coast ports.”
A new wrinkle concerning labor work stoppages expanded earlier in the week as independent truck drivers contracted by trucking firms serving both ports initiated multi-day job actions seeking fair wages and better working conditions. These job actions expanded to five trucking firms serving the port complex as of Monday. Truck drivers, mostly hired as independent contractors, have had longstanding grievances with local trucking firms and now the Teamsters labor union has taken the current port crisis as an opportunity to leverage driver demands to be recognized as full-time employees.
We again echo our Supply Chain Matters advice that industry supply chains impacted by the current west coast port disruption should be in full response management mode and seeking alternative options for both imports and exports from these ports. The situation is such that there appears to be little indication of improvement and further indications of shutdown, lock-out or government imposed mediation. Response time to save holiday revenue budgets is in critical stages, too late to save the Black Friday-Cyber Monday holiday weekend, and essential to save customer December and January holiday fulfillment commitments.
We may well observe that the winners and losers of the 2014 holiday buying surge were those individual industry supply chain teams that demonstrated the most resiliency and responsiveness to the west coast port debacle.
In last week’s commentary we echoed comments from observers that described a logistical nightmare that could undermine the best laid plans for the all-important holiday fulfillment surge period. One week later, various media and on-the-ground reports paint a picture indicating that the crisis is worsening and that retailers and manufacturers are well into contingency scenario planning. The situation has further spread to other ports including Seattle and Tacoma, with a report indicating that truck queues at Tacoma stretching several miles long. On this Friday afternoon there is no doubt that Sales and Operations and supply chain execution teams are manning the phones, terminals and supply chain business network systems to figure out their scenario options.
A report this week from business network CNBC clearly points to the confluence of forces undermining this building crisis. Shipping companies and port operators are pointing their fingers at the ILWU labor union for orchestrating work slowdowns in the shadows on ongoing labor contract talks. A spokesperson for west coast port operator, Pacific Maritime Association (PMA) is quoted as indicating that terminals that had averaged 25-35 moves per hour were experiencing less than 10. Yesterday, the PMA indicated that the union was not dispatching adequate levels of highly skilled crane operators to unload ships. Union representatives are pointing to a severe shortage of truck chassis and of truck drivers as causes. As of yesterday, a report indicates that 14 ships are now anchored off Los Angeles and Long Beach waiting for space, double the number of last week.
The National Retail Federation (NRF) is now seeking the personal intervention of President Obama citing an obvious sudden change of tone among the PMA and the ILWU and suggesting a full shutdown of every west coast port may be imminent.
Regardless of the finger-pointing, the situation has fast become the perfect storm scenario that many had feared and industry supply chains need to deal with the realities. This perfect storm has a strong potential to cascade further into the upcoming holiday fulfillment surge, dragging consumer product manufacturers into the effects. Need we painfully remind our readers that the Black Friday and Cyber Monday shopping events is a mere three weeks from today.
A published report in today’s edition of The Wall Street Journal indicates that Wal-Mart and Kohl’s had shipments arrive earlier than usual, and while caught-up in the current crisis, delays are not having a major impact on current merchandising plans. In contrast, the parent of Ann Taylor and Loft stores blamed a shortfall of sales in the recently completed quarter because of delayed shipment and the shifting of inbound goods to more expensive airfreight channels. These are all indicators of the impact of proactive risk planning on the part of retailers. However, larger retailers often have the resources to be able to cushion disruption or finance earlier pre-holiday inventory movements than smaller or cash-strapped brick and mortar or online retailers.
We therefore re-iterate that retail supply chains are now too-deep into the holiday execution window with little tolerance or patience for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, which is now not very likely, it will do little to salvage the current backlogged condition. It will take additional weeks to dig out of the current mess.
Supply chain teams need to be in full-on contingency planning mode since supply chain execution is now the bogey of the all-important holiday business goal revenue attainment. For some retailers, financial survival is at-stake.
The obvious question now turns to making good on critical holiday focused revenue expectations. From our lens, last year’s last-minute shipping snafu’s for destined holiday goods are in-jeopardy of repeating. Retailers who did not plan for the current crisis will have to figure out ways to offload products in December leading to our previously described doomsday scenario- that retailers delay their most aggressive promotions until the very last days before the Christmas holiday when inventory is hopefully in-place.
The west coast port crisis by default, now engages FedEx, UPS and other surface and air carriers as retailers turn the emphasis toward priority movements and just-in-time inventory offload promotions. Further, it will be especially interesting to observe how Amazon, Google, Wal-Mart and other large online players respond or take competitive advantage to the developing logistics perfect storm scenarios.
As for port operators, organized labor, ocean container lines and their logistics partners, best you address and solve the confluence of forces that resulted in this muddle. Yes, ongoing labor contract negotiations are a factor, but there are other industry shortcomings becoming evident that point to lack of proper surge planning.
Last year, UPS, and to some extent FedEx, were thrown under the proverbial bus by retailers for non-performance at the most critical time period. In 2014, the creditability of west coast ports and indeed the surface shipping industry is at-stake for being the Grinch’s of Christmas.
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.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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
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.