In our recently unveiled 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and already, industry dynamics of activist investors surrounding the industry are once again underway, and the supply chain stakes are becoming far higher and likely destructive.
Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. They demand healthy food choices containing natural and sustainable ingredients. Throughout 2016, these trends continued to be reflected in the business and financial performance of globally branded food producers who now continue to be challenged in achieving single-digit top-line sales and profitability growth. Global observers such as the Economist question whether the global expansion and presence model has run out of steam because of diminishing financial returns.
As what occurred in 2016, declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods. A report from Fortune describes the 3G Capital playbook as a “meritocracy” that is on track to consume the food industry. The model includes wholesale replacement of an existing senior management team and what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets. This model is further described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.
When 3G acquired Heinz, upwards of 7000 job cuts were initiated while five production facilities were shuttered. Earnings Before Interest and Taxes (EBITA) improved by 8 percentage points over an 18-month period. Heinz then acquired Kraft in 2015, and reports point to upwards of an additional 5000 in headcount reductions. A recent published Fortune report cites research firm AllianceBerstein as indicating that Kraft-Heinz is already 88 percent towards its goal to cut an additional $1.5 billion in annual costs by the end of this year.
Acquisitions govern growth as opposed to just organic sales growth. The CPG industry is now consumed with the threat of 3G, and as Fortune observes: “The entire food industry is “3G-ing” itself before Kraft-Heinz can do it to the companies.” Fortune writes: “The whole food industry is speculating who’s next.” We concur and we predicted that there will indeed be another major acquisition involving a major branded CPG company in 2017.
Little did we know that it would come so soon and with far broader scope.
Dynamics Already Underway and the Stakes Increase
Last week featured the news of what our prediction included although the target and size was a big surprise. Kraft-Heinz issued a $143 billion acquisition offer for global CPG provider Unilever. While the offer was quickly rejected as insufficient, and subsequently withdrawn, the implications are far larger and once-again reverberating across the industry while all await the next shoe to drop. The Economist headline was: Barbarians at the Plate: 3G Missed Unilever but its methods are spreading.
Within the past few days Campbell Soup and General Mills reported disappointing sales and earnings. Campbell’s cited mistakes in its fresh-foods business unit that included a recent product recall and decision to harvest carrots while they were still small. Late last week, General Mills reported weaker than expected revenues from sales of yogurt and soup along with weakened consumer demand. The firm’s outlook for the remainder of its fiscal year that ends in May is expected to decline by 4 percent.
Today, The Wall Street Journal reported that Unilever is now pivoting from the Kraft-Heinz attempted acquisition with its Board now deliberating on options to deliver greater short-term value for shareholders. That could include the sale of the firm’s current food division or attempting an acquisition of its own in the personal care area.
Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.
With such a backdrop, pressures increase on remaining CPG food and beverage companies along with associated food suppliers. By our lens, the survivors are those that embrace innovation and find ways to best accommodate today’s consumer choices.
Industry Supply Chains Buffeted from the Impact
In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This will unfortunately, continue and at a more intense pace. At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products. Thus, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.
All the above will be the primary agenda for CPG and beverage supply chains in the coming year. The 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. Many will need to be equipped to deal with our other 2017 predictions such as responding to the perfect storm in the requirements for skilled supply chain talent across many supply chain, procurement and distribution dimensions along with the needs for advanced technology to support more predictive decision-making.
Bottom-line, the CPG industry remains in a state of defense and apprehension, and by our Supply Chain Matters lens, industry supply chains will pay the inevitable price in needs for further cost and headcount reductions along with blocked efforts to instill added product, process, and resilience to overall business support capabilities.
Stating the Obvious
Sometimes, a blog such as ours needs to be blunt in viewpoint to provoke additional thinking or changed mindset. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time. CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers. This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.
One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week, transportation equipment provider Bombardier announced plans to shed an additional 7,500 jobs, or just over 10 percent of its global workforce, as it focuses on turnaround efforts amid a soft business-jet market and hiccups with its CSeries commercial aircraft program. This announcement came in the wake of a prior February announcement to reduce 7000 jobs.
The Canadian-based commercial aircraft and train manufacturer indicated that the headcount reductions will be global in-nature, affecting administrative and non production positions across the company, and are expected to save it about $300 million by the end of 2018.
According to business media reports, about two-thirds of the latest headcount reductions will stem from Bombardier Transportation, the company’s rail manufacturing business. About 2000 of these job cuts are expected to impact employees within Canada.
The cuts are further expected to include a realignment of design, engineering and manufacturing structures and the creation of new “Centers of Excellence” overseeing both rail and commercial aircraft manufacturing.
As Supply Chain Matters and business media continually points out, Bombardier has made a big strategic bet with the development and production in the CSeries single aisle commercial aircraft being a global airline alternative to aircraft producers Airbus and Boeing. This new aircraft finally entered commercial service with Swiss International after a multi-year program delay and flew its first paying passengers in July.
While the new aircraft is garnering positive reviews from airline customers, the financial toll on the broader operations of Bombardier continue and have had a noteworthy financial impact on the company. A year ago, to overcome continued financial funding needs, Bombardier struck an agreement with the government of Quebec to give-up nearly half its stake in the CSeries program in exchange for a $1 billion additional investment. The company further sold an equity stake in its train manufacturing division to a Quebec pension fund for $1.5 billion. That division continues to respond to stiff global competition coming from China’s lower-cost, state-owned rail equipment producers who are in the process of merging.
The latest and perhaps most untimely setback to CSeries program came late this summer with an announcement by aerospace aircraft producer Pratt and Whitney that it would not be able to meet its 2016 production and delivery commitments to certain aircraft manufacturers that included both Bombardier and Airbus.
We previously highlighted that Airbus’s first-half shipping performance related to its new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new geared turbo fan engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed aircraft was reported at the time to be lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.
In early September, Bombardier publicly disclosed a delivery schedule adjustment due to the shortfall in expected completed engines from Pratt. While re-adjusting to a lower revenue expectation, the manufacturer reaffirmed its prior earnings commitment, most likely setting the stage for the current headcount reductions.
Moving forward, the new CSeries is more than ever highly dependent on the consistent and more-timely performance of its sole aircraft engine supplier, Pratt. Industry watchers and academics may well look back and question whether specification and reliance on a single aircraft engine design was a wise one. Then again, Bombardier, from the get-go, may not have had the financial deep pockets to be able to certify and source more than one engine supplier.
In July, innovative electric car manufacturer Tesla Motors announced its Q2 product and operational results. In our July Supply Chain Matters blog posting related to Q2’s performance, we concluded that Tesla remained challenged with supply chain ramp-up issues as it strives to meet aggressive short and required longer-term production scale-up needs for existing as well as future model needs.
Yesterday, Tesla reported its Q3 operating performance and it would appear that the auto maker is now responding to its short-term supply chain challenges.
According to a published report by The Wall Street Journal, CEO Elon Musk called for a strong third quarter to strengthen his equity raising case for scaling up the supply chain and production needs of the newly announced Model 3, along with massive lithium-ion battery facility, the termed gigafactory, near Sparks Nevada. It appears that operational teams indeed performed in Q3.
From an operational perspective, Tesla delivered approximately 24,500 vehicles across the globe in Q3, of which 15,800 were Model S and 8,700 were Model X. That level of output was nearly double that of the year-earlier quarter. The Model X production performance improvement stands out because of that vehicle’s previous production hiccups due to design-for-supply chain challenges causing some components such as the vehicle’s doors to be brought in-house. It further represented an increase of just over 70 percent from last quarter’s deliveries of 14,402. Quite impressive. In addition to Q3 deliveries, the manufacturer indicated about 5,500 vehicles were still in transit to customers at the end of the quarter and these will not be counted as deliveries until Q4. Tesla further reiterated its prior guidance of 50,000 vehicles being delivered for the second-half of 2016.
In late July, we posted a blog commentary reflecting on Tesla’s revised master plan as communicated by founder Elon Musk. After taking hundreds of thousands of advanced reservations and up-front financial deposits for the Model 3, Tesla’s initial answer to a mass-produced and more affordable electric vehicle, Tesla had to revise its longer term production plans to target total annual vehicle output of 500,000 vehicles two years earlier than originally planned, which is now planned to occur by 2018. Musk’s response has been to rally his engineering teams to now focus on what is termed: “designing the machine that makes the machine.” In essence, the effort reflects on turning Tesla’s supply chain and existing production facilities into an engineering design challenge in accelerating capacity, integrated design and tory automation. As readers are also aware, Tesla maintains its own global wide logistics and delivery network for finished vehicles, without the use of traditional dealers and finished automobile lot inventories. That adds to the challenge.
If Tesla indeed continues to perform and deliver its anticipated 50,000 vehicles in the second-half of this year, 2016 will close with a production rate of slightly over 83,000 vehicles. That will set the stage for 2017/2018 to ramp-up to the 500,000 volume target, a near tripling of existing capacity and value-chain ramp-up volumes.
While short-term performance indeed looks better, the longer-term challenges remain and it will obviously involve all of the best engineering, supply chain operational minds and advanced technology adoption that Tesla can muster. That is not to state that the goal is not achievable, but rather the effort will be one that will make-up business case stories for many years to come.
© Copyright 2016. The Ferrari Consulting and Research Group 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
First-Half 2016 Delivery Performance for Airbus and Boeing Reflect Continued Supply Chain Challenges
As the commercial aircraft industry moves into the second-half of 2016, it is time for our usual Supply Chain Matters six month industry review of performance. Reflecting on delivery performance thus far, there are continued signs of industry supply chain supply challenges.
Let’s begin with Airbus which reported the booking of a total of 227 confirmed orders in the first six months of the year. That number may be somewhat understated since at the industry’s recently completed Farnborough Air Show, Airbus achieved bragging rights for announcing orders and commitments for 279 commercial aircraft, more than half originating from a single airline customer, that being AirAsia who ordered 100 A320neos.
Airbus recorded the delivery of a total of 298 aircraft in the first-half, which consisted of the following:
- 160- Single aisle aircraft (Variants of A319, A320, A321)
- 38- A330’s
- 27- A350’s
- 2- A380’s
In the above, tell –tale signs of supply disruption are reflected in two key aircraft. There were only 8 completed deliveries of the brand new A320neo, no doubt reflecting the ongoing catch-up in delivery of the brand new Pratt & Whitney geared turbofan engines. Airbus had delivered just 5 A320neos in Q1 meaning that just 3 were delivered in Q2. As noted in our prior commentary, nearly a dozen of completed A320neos have been reported as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The exiting delay is associated with fixing the engine’s cooling design through a combination of software and component modifications. Pratt engine deliveries were not expected to catch-up until after June and there are continued reports that Pratt’s supply chain remains strained. The other new engine offering, the new LEAP model from CFM International is expected to be available in the second-half of this year as-well. With a stated target to have a production level of 50 A320neo’s per month by 2017, there is a lot more planning and execution remaining.
A further problematic area acknowledged by Airbus has been supply and bottleneck challenges associated with newest model A350 production, and first-half completion of 27 reflects that ongoing challenge. Supply challenges have been noted as interior seating and structures and Airbus senior management has expressed public frustration regarding ongoing supply glitches.
Turning to Boeing, the aircraft producer reported the booking of a total of 321 orders in the first-half. At the completion of the Farnborough event in July, Boeing was able to announce orders and commitments for 182 aircraft but just 20 actual new firm orders.
Boeing further recorded the delivery of a total of 298 aircraft reflecting its previously announced scaled-down expectations for delivery cadence this year. The breakdown was:
- 3- 747’s
- 5- 767’s
- 51- 777’s
- 68- 787 Dreamliners
In the above, a challenged area remains completed deliveries of Dreamliners although the cadence has improved slightly beyond 10 per month. There is still a long way to go in ramp-up and lots of internal pressures remain since the program remains cash negative until delivery performance dramatically improves. Both Boeing’s Seattle and South Carolina assembly facilities are now producing completed Dreamliners.
With current order backlogs of nearly ten years for Airbus and over seven years for Boeing at current production cadence levels, both manufacturers have been concentrating on increased production automation and longer-term strategic supplier agreements. In June, key suppliers urged both manufacturers to move cautiously on demand noting that there are definitive restrictions on the ability to ramp-up the industry supply chain to expected volume output cadence. Another growing concern is the ability of aircraft engine producers to be able to support higher output volumes given the increased technical sophistication of the new generation engines. Pratt alone is in the midst of managing five different new engine models and with both commercial aircraft dominant manufacturers continuing to book further orders and explore newer model introduction, the pressure builds.
Again, only time will prescribe the course of events in an industry that is clearly reflecting supply chain distress.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved