Next week officially kicks-off the holiday buying frenzy with the celebrations of the Thanksgiving Holiday in the United States as well as the Black Friday and Cyber Monday shopping events that extend out to the following week. In its recent update on the U.S. online retail economy, analytical firm ComScore predicted that based on prior year sales and order volume trends, both the Black Friday and Cyber Monday periods will represent this year’s expected highest peak in shopping volume, perhaps more so with Black Friday.
In previous Supply Chain Matters commentaries we have advised online and traditional as well as B2C focused supply chain planning and customer fulfillments team to take a cautious but diligent perspective to daily customer buying actions over the coming few weeks. This diligence includes paying close attention to overly optimistic forecasts of expected retail sales among various channels and especially diligent in working with brethren sales and marketing teams in managing what is turning out to be a lighter inventory positioning heading into the prime holiday period. Forms of product demand sensing capabilities are obviously essential.
As business media has pointed out, third-quarter financial reporting by major retailers indicates a consistent theme of reduced inventory levels with expectations for higher margins and lower costs for the all-important and most profitable Q4 holiday period. The added costs of online fulfillment needs are a special consideration for managing costs. Lower inventory directives compel planning teams to determine the best consensus as to which merchandise will experience the highest sales volumes and when. Such bets were established weeks ago and hopefully monitored continuously. This upcoming period will be the time where tight collaboration with marketing and merchandising focused on the timing and seamless execution of targeted promotions will pay the most dividends.
For the first time, Amazon is charging sellers of the Fulfilled by Amazon program a hefty premium for storing inventory during the November and December timeframe, while offsetting some of these costs by lowering holiday focused fulfillment fees. All Black Friday and Cyber Monday focused inventory was due to Amazon warehouses last week. The cutoff for Christmas holiday focused inventory is December 2nd. That is another weighting for the stakes related to accurate inventory planning. Reports indicate that Wal-Mart has shifted more than half its inventory supporting Black Friday to its dedicated online fulfillment center warehouses. Once more, this retailer has made plans to have thousands of more items from its online catalog available for same-day in-store pickup.
The reality that many Sales and Operations (S&OP) teams often know is that over the next two-week period, there is little time to re-plan, especially with overall inventory levels being low. However, senior management expectations for higher margins and profitability are very high and thus many hopefully well informed decisions will need to be made in a very short time interval. Replenishing hot selling items runs the risk of insuring that this merchandise arrives in time or better, there are enough firm back orders from customers willing to wait. Electing not to replenish implies a plan to make-up any revenue shortfalls with all other existing inventory, thus the need for on-the-fly collaboration in merchandise promotions.
One other critical data point from ComScore’s latest update is that for online buying, the data concerning the correlation of Free Shipping to actual shopping cart completion is compelling. During the full 2015 holiday period, Free Shipping accounted for 68 percent of all online transactions vs. 55 percent in 2014. Online retailers hoping to preserve margins by allocating more of the shipping expense to customers may experience a challenge. Thus, S&OP teams will be educating and influencing senior executives with data indicating the predictive buying tendencies related to Free Shipping along with the importance that timing has to optimized inventory management.
The other wild card and implied white knight for the next few weeks will be responsive suppliers, transportation carriers and logistics fulfillment networks. We surmise that best-in-class teams have already collaborated with key suppliers on responsive back-up contingency supply plans to be able to quickly replenish hottest selling inventory. The question is what may be sometimes defined as “key supplier.” Is the supplier domestic or internationally based in terms of transportation lead time? Is the supplier one that we always pay on-time and has consistently made good on commitments? Does the supplier or distributor really have that on-hand inventory?
Regarding transportation networks, a learning that came out of last year’s holiday fulfillment surge was that there were bottleneck vulnerabilities to large carrier’s hub networks. Both FedEx and UPS labored during and after the peak periods to dig out of volume bottlenecks. Likewise, air freight carriers have removed a lot airlift capacity from their networks, and the fallback position appears to be more and more parcels flying in the bellies of commercial airlines. We all know that expedited shipping implies unplanned expensive freight costs and throw-in any occurrence of severe winter storms and the expense line grows further.
The coming two weeks will be the most stressful among B2C retail teams and this will be the test where the previous investments in people, process and technology are proven.
For our part, Supply Chain Matters will be monitoring ongoing events and providing periodic insights as the surge period unfolds and as the results are tabulated. For those of you working long nights and weekends who need a respite as to the big picture, check us out.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
For the past two years, Supply Chain Matters has provided visibility to Alibaba and in-particular, Singles Day, China’s largest online shopping event. As we continually point out, we can sometimes get enamored with online names such as Amazon.com and WalMart.com but Alibaba and its various online shopping sites is indeed an evolving player to reckon with in this era of online commerce and changing retail supply chain customer fulfillment. Last Friday was no exception amid reports that this year’s prominent shopping event across China once again broke records for shopper interest and order volume.
China’s Singles Day is somewhat equivalent to Black Friday or Cyber Monday in terms of an online shopping event. 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. It traditionally occurs on the 11th day of the 11th month or Double Eleven, since when written numerically, November 11th represents “bare branches”, a Chinese expression for bachelors and singles. Chinese consumers literally save their meager discretionary incomes while researching potential purchases for months in anticipation of this event. 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 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, and by 3:15pm local time, the 2015 sales volume number has been exceeded.
In total, Alibaba indicates that the equivalent of $17.7 billion in online sales were processed during this year’s 24-hour event.
Controversy still surrounds this event with critics claiming that orders are either inflated and never ship or prematurely canceled after entry in order to run-up overall numbers. Since Alibaba stock is now publicly traded on the New York Stock Exchange, the U.S. Securities and Exchange Commission (SEC) is providing added scrutiny of reported volumes, and Alibaba is reportedly cooperating in this effort.
Another significance to this event is the overall logistics required to deliver ordered goods to their designated recipients which reside in either high density urban areas or rural areas of the country. While we often report on the likes of Amazon, FedEx, UPS and other parcel delivery firms marshaling their vast networks to process Black Friday or Cyber Monday delivery volumes, Alibaba primarily owns its own parcel delivery logistics entity, Cainiao, along with close relationships with other logistics providers that insure that packages are delivered to expectations amid a number of residential delivery challenges across China’s high density urban and rural landscapes. The online firm estimates that 1.7 million delivery persons and over 400,000 vehicles were deployed to deliver package volumes in 2015. Photos of parcel sorting and fulfillment centers indicate the flood of packages that overwhelm such centers. Just as critical, however, is the network of delivery vehicles and delivery persons who must navigate complex or vague delivery addresses or who must utilize ingenious means to transport volumes of packages among dense urban streets and alleyways.
As with our prior commentaries, the takeaway from China’s Singles Day online shopping event remains a realization that while Amazon and other online retail platforms can often garner a lot of visibility across the U.S. and Europe regarding sheer volume in a singular promoted event, Alibaba has its own significant capability that continues to break records.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
The following Supply Chain Matters commentary has a theme, let’s call it a good news- not so good news theme. Be warned that its length is somewhat longer because it represents a Research and Consulting Advisory that I felt should be shared with our blog readers.
When I deliver presentations on supply chain management topics, I often use the above analogy regarding our community. You see, for many years, the efforts of supply chain management teams and professionals were often perceived as being taken for granted or misunderstood. Teams were frustrated as to why senior managers did not comprehend why supply chains do matter in accomplishing financial, operational and customer business objectives.
Today, the good news is that, more and more, the C-Suite and indeed the board room now have full understanding of the contributions and the value. The not-so-good news is the same, and it comes with higher expectations for delivering on key business goals, both financial and operational, and in the high-level visibility window now focused on any firm’s supply chain performance. Especially when shortfalls in performance cause the need for broader senior management and shareholder visibility.
So, where are we going with this posting?
Let’s revisit the ongoing developments involving certain commercial aircraft and aerospace industry supply chains. In our ongoing multi-year coverage of industry players, we have continually pointed out the extraordinary circumstances of an industry that is designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels is clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns. Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings.
One specific development has been the increasing visibility to the supply chain challenges occurring at aircraft engine manufacturer Pratt and Whitney, specifically its revolutionary new geared-turbofan (GTF) aircraft engines. Supply chain glitches and volume production ramp-up challenges have now directly impacted the aircraft delivery production plans of both Airbus and Bombardier, causing both final manufacturers to now incur the financial and airline customer consequences of delayed deliveries and unfinished aircraft waiting for the inevitable broken-link in the supply chain. The most visible broken link has of-late been Pratt. There are others as well but in this new world of ubiquitous visibility, any one supplier can bear the brunt.
In our blog commentary published in mid-September, we highlighted that United Technologies, the parent to Pratt, and specifically the UA CEO, warned the conglomerate’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers. CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news. Neither were UA stockholders who initiated an initial 2 percent sell-off in UA stock.
At stake is the ongoing production ramp-up of the Airbus A320 neo which first certified with the new Pratt engine. Certification of the neo version with CFM International engines is in-process, and with the current visible challenges for Pratt, Airbus production operations teams must now deal with the option of whether to shift current backlog order fulfillment more to CFM powered versions to insure attainment of Airbus’s 2016 and perhaps 2017 production objectives. Similarly, financially challenged Bombardier’s new CSeries aircraft has just initiated initial deliveries to airline customers but management was forced to warn that commitments for the overall market must now be scaled back because of the limited supply of finished Pratt GTF engines, the sole certified engine for the CSeries. Bombardier just announced its second round of significant headcount reductions to preserve cash and working capital needs.
UA CEO Hayes indicated in September that: “five parts are causing us pain this year”, due to supplier challenges in meeting Pratt’s current volume production and quality needs. There are approximately 800 parts for the high-level bill of material for the new GTF Pratt engine. One critical problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades, noted as a breakthrough in material design and expected performance.
This past week, United Technologies reported on its Q3-2016 financial and operational performance. To follow this story, we reviewed the entire transcript of the senior management briefing to equity analysts and shareholders.
It seemed obvious to this author, that the bulk of the attention of senior management, and the questions of equity analysts, were centered squarely on Pratt and its supply chain.
CEO Hayes opened the briefing with the review of UT’s three key priorities: flawless execution, structural cost reduction, disciplined capital allocation. He quickly touched upon the current success of Pratt and its new GTF aircraft engine, noting that the engine is already meeting or exceeding key performance targets and already delivering 99.9 percent dispatch reliability on Airbus A320 neo in-service aircraft.
Thus, the positives related to product design and engineering.
It was not too long before the Pratt near-term challenges and the details of slower deliveries than planned began to come forth. Regarding Pratt’s delivery challenges, Mr. Hayes emphatically stated: “It’s going to get fixed and its going to be fixed this quarter.” He later stated that UT senior management follows Pratt developments daily, and that four separate initiatives are simultaneously underway:
- Process improvements
- Yield improvements
- Lead-time reductions
- Additional added capacity
The Pratt operational and supply chain details continued through most of the management briefing, and even more as individual equity analyst’s questions honed-in specifically on more and more of Pratt and its supply chain challenges.
Highlights of disclosure included:
- In Q3, Pratt delivered 76 GTF engines across all platforms and management anticipates 150 engines to be delivered by the end of this year, meaning similar output level in Q4. The 2017 delivery goal is now set at between 350-400 engines.
- Pratt’s negative margin trend will increase from $650 million in 2016, to $950 million in 2017 because of absorbed engineering and development costs and break-even volumes not expected until way after 2017.
- The GTF titanium aluminum fan blade was again identified as being a prime bottleneck. At the beginning of 2016, the total lead time, from start to test completion, for the fan blade averaged 100-105 days, more than 3 months. First pass test yields were described as 30 percent. Today, the same lead time was noted as 55 days with first pass yield rate of 75 percent. The overall production process related to the fan blade was described as incredibly difficult.
- An additional fan blade production partner is scheduled to come on-line with added capacity by November. Full production of this partner is expected in January.
- Pratt is additionally starting-up a brand new, more automated factory, next to the current owned blade factory in April of next year.
- Pratt has a strategy in-place where no single point of failure resides in the supply chain. In-essence, at least two key suppliers for each of key parts within the GTF engine.
- And finally, UA brought back former Sikorsky Aircraft and GE Aviation senior operations executive Shane Eddy to lead operations at Pratt.
The need for the sharing of all this supply chain operational detail with investors comes back to our original theme of good and not so good news.
Operations and supply chain executives reviewing this information may identify very discernable symptoms of the interrelationships of product design and management, supply chain sourcing and volume ramp-up planning. The revolutionary new fan blade was a known critical component, yet now with visibility at the highest levels of management, additional financial and operational resources needing to address disappointing ramp-up needs are now being allocated. Bringing in a new senior operational manager with prior known accomplishments is another potential sign. Another theme we believe is the recurring one of having to balance billions of dollars of investment in stock buy-back with perhaps the need to invest capital earlier in manufacturing automation and worker productivity.
In essence when the CEO of your holding company, under the constant gun for higher shareholder returns, is now disclosing the detailed operational get-well strategies of your supply chain, than you know that the looking glass of visibility is very high, and the expectations for enhanced supply chain performance is similarly very high. That is indeed the good and not so good news contrast.
The good news of higher visibility is the priority for marshalling all required corporate resources to address existing supply chain challenges and needs. The not so good news is the peril that such visibility can sometimes bring.
This state is one that senior supply chain leaders will have the most difficulty managing.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Starting in late 2011 and early 2012, we began alerting our Supply Chain Matters readers to the building signs of potential consolidation and restructuring for the ocean container shipping industry. That was the time when the major container shipping lines began the pooling of capacity under various formed shipping alliances. Since that time, we believed it was important to provide continual updates, both on this platform, our annual predictions and other research.
Our update in April of this year re-iterated business media reports that the industry had, in-essence, three options: either shrink, merge or continue to ride out the worst downturns in decades.
Industry media also began to question whether shipping lines have chosen to ignore the implications of introducing larger mega-ship sized container vessels within an industry wide environment that was demonstrating anywhere from 10 percent, to as much as 30 percent excess capacity. Current freight rates for the industry are barely compensating for the cost of fuel let alone overall operating costs. The financial pressures continue to mount and the smaller carriers continue to operate under enormous financial stress.
Of late, shippers have been benefitting from the fallout of severely depressed freight rates but paying the price in slower transit times and unreliable scheduling of vessels. Some questioned whether shippers have been lulled into a perspective of sticking one’s head in the sand and assuming that excess capacity and depressed freight rates would eventually work itself out.
The current wake-up call has been the ongoing financial crisis that has been impacting Hanjin Shipping, as thousands of in-transit ocean containers were stranded by the declaration of bankruptcy protection of the south Korean based carrier. The latest development for Hanjin came earlier this week when a South Korean bankruptcy court ordered the shipping line to return its chartered ships back to their respective owners and to sell off as many of its owned vessels as possible. Neither the carrier’s banks, owners, or South Korean government are indicating any intent to bailout this shipping line to its original presence. Business media reports indicate that this is the strongest signal yet that the heavily debt loaded Korean carrier will either be liquidated or transformed into a much smaller, regionally based shipping carrier. We view the Hanjin developments as a definitive sign that the ocean container shipping industry can no longer continue to ride out the current industry dilemma.
The newest significant development will be this week’s announcement by Danish shipping giant A.P. Moller-Maersk indicating that it would split its current business operations into two separate operating businesses. Maersk Line, the world’s most dominant ocean container carrier will be the center point for a new container transport and logistics division that will consist of other owned businesses such as APM Terminals, Damco and Maersk Container Industry businesses. According to a report from The Wall Street Journal (Paid subscription required): “The split is intended to give Maersk Line more flexibility to grow through acquisitions in what is expected to be an acceleration of industry consolidation in coming months.” Further reported is a view by shipping executives that three existing Japan based carriers, along with Hong Kong based OOCL and Taiwan based Yang Ming Marine will likely be the target of bigger industry players.
Thus, the next phase for further merger and consolidations is about to commence, and shippers need to stay informed and be ready with what-if contingency planning.
At best, 2017 could be viewed as a year of continued industry consolidation. Ocean container freight rates are expected to continue at depressed and unsustainable levels with carriers idling additional vessels to protect margins and financial performance.
We advise global shippers and transportation services procurement teams to continue to plan for slower transit times and supplemental needs for adequate safety stocks. It would be wise to have some contingency plans in place to avoid being disrupted by another Hanjin type of development.
Beyond 2017 is anybody’s guess as the larger industry players absorb certain other existing players. The open question, by our lens, is whether global maritime regulators step-in to protect shipper and industry interests.
Stay vigilant and up-to-date.
This Editor once again attended the Oracle Open World conference in San Francisco this week and Supply Chain Matters has been publishing impressions throughout the week. As a reference, our prior blog commentaries included:
Our Supply Chain Matters Commentary Two posting addressed reported uptake of Oracle SCM Cloud from last year’s announcement.
Our Supply Chain Matters Commentary Three posting explored the interrelationships among Oracle ERP Cloud and Oracle SCM Cloud, as well as highlighted announced future pipeline releases planned for SCM Cloud.
Our Supply Chain Matters Commentary Four posting highlighted the key messages from Larry Ellison’s second keynote, specifically implication of the release of Oracle Database Cloud.
In this our final on-site commentary, we share summary impressions, insights and takeaways for our readers and clients.
This Editor and analyst has been attending Oracle’s annual OpenWorld customer conferences on an off and on basis for well over a decade. During that time span, I have observed lots of changes concerning Oracle from organizational, technical and customer applications perspectives. Some to the good, some not so. That has been the context of our coverage of this and past annual OpenWorld events.
During this year’s as well as last year’s conferences, Oracle senior executives reminded attendees that it has taken this company ten years to reach its vision of Cloud based IT technologies and software-as-a-service (SaaS) applications. The results of that ten-year effort are now manifesting themselves in the blizzard of new Cloud based product and platform announcements that continue to unfold every year. It is now difficult for customer’s to be able to keep-up.
I can well remember when the Oracle Fusion initiative was first introduced, and there were no initial indications of the length of the journey, only the breadth of the vision and the scope of the endeavor. Indeed, the vision was bold, and to Oracle’s credit, it was not watered down when the challenges grew deeper. The effort took on a holistic approach to include infrastructure, database as well as applications dimensions. Few enterprise technology companies have been able to execute such a breadth of technology.
More importantly, Oracle’s adopted a business and industry focused lens, one that could specifically respond to the overriding businesses challenges that enterprise, business and functional organizational focused technology needed to address and solve. This was an area where Co-CEO Mark Hurd plays a valuable role in his role-based articulating of the C-Suite challenges of business in so many industry settings and how IT must be able to respond to such challenges.
Such challenges include various multi-vendor based legacy ERP backbone customers who felt hobbled in their ability to ever be able to take advantage of the next generation of technologies because of the realities that upgrading was far too disruptive to existing business processes, would take far too much time and be far too expensive. Legacy ERP includes tendencies to have added too much business unique customization that provided more obstacles to overcome in adoption of newer technology.
As many technology authors and visionaries have pointed, in the prior era of ERP implementations, systems integrators were making the bulk of the initial money while ERP providers themselves gained sustaining revenue streams related to annual maintenance of systems that in essence, get the basic job done but add little to needs for more business agility, adaptability and revenue growth.
Oracle’s journey has been directed at developing a holistic Cloud based technology approach that can address IT as well as business cost control and margin challenges. It very much includes engineering based systems approach, as was often articulated by Larry Ellison himself. For our readers, that implies that Oracle’s target is to sell technology to senior leadership levels of businesses, as well as to IT or functional teams.
At the same time, the journey has led Oracle to bring along a host of other different traditional licensed application suites such as JD Edwards, E-Business Suite, Advanced APS, Siebel, Demantra, Agile, G-Log and many others. To its credit, Oracle did not stop ongoing development nor customer support programs in its own traditional suites, new acquisitions or long-time applications. That afforded customers the peace of mind to determine which technology paths they wanted to pursue, at their own timeframes, as opposed to ‘it is my path to the Cloud or on your own’ approaches that some technology vendors tend to influence.
In its most recent financial performance briefing for analysts and investors, Oracle executives indicated that while the bulk of its installed based software applications customers have yet to make their decisions to move to Cloud based adoption models, many have begun an overall assessment strategy. At this year’s event, some executives’ views indicate a ten-year window, some view it as far less. Oracle has rightfully provided multiple paths, while assuring that legacy behind-the-firewall applications will be supported.
Many of the new early adopter customers of Cloud based platforms and applications have done so for specific business motivations, many with common themes of shedding legacy IT infrastructure costs with the ability to make more manageable technology leaps. Some view the Cloud as another form of leasing technology, or a computing utility platform that flexes with the needs of business or supply chain. That has been the declared surprise to the current momentum. The upside has built-in momentum if Oracle continues to execute as it has done up to now, both in internal development and external acquisition.
Today there are some key new Oracle faces in senior leadership roles of development, sales and other areas while the company manages to continually balance new and seasoned experience and vision. While the bravado of the prior Oracle sometimes shows, it is now accompanied by a discernable shift toward being more customer and services focused. That includes adoption of practices directed at providing customers with what is described as zero-hassle buying, allowing more customers to try before they buy, and yes, less expensive pricing. Customer engagements are now assigned an executive sponsor for monitoring and customer feedback.
Over these past ten years, a lot has changed, most toward the better. Today’s Oracle is one of momentum, continuous innovation and perhaps a dose of fast follower. We continually observe this with every subsequent OpenWorld.
With the pending acquisition of NetSuite, and that of other acquisitions such as LogFire, Oracle is indeed increasing its momentum in offering a more business compelling and flexible path toward Cloud based ERP, data management, analytics and supply chain focused applications. Indeed, acquiring 2800 Oracle ERP Cloud customers might well be just the beginning of this momentum. Oracle SCM Cloud will continue to be the recipient of that momentum as will Oracle Procurement. This Editor previously cited Oracle’s SCM development team for its slow pace toward the Cloud, but as noted in our prior commentary, we now observe that the pace of innovation is now accelerating.
Last year and again this year, Mark Hurd’s classic prediction was that by 2025, there will be but two enterprise technology vendors controlling 80 percent of the SaaS technology market. Last year, we viewed that prediction as stick to the wall wishful. This year it is beginning to look more likely that Oracle will indeed one of the few enterprise technology vendors that got it right.