Supply Chain Matters featured a previous commentary specific to global consumer electronics manufacturer Sony, and its recent report of fiscal year-end earnings. We noted, as did others in media, that forty of Sony’s top executives, including its CEO, decided to forgo end of year bonuses amounting to 30-50 percent of their compensation because the company failed to keep a promise to return the group’s consumer electronics division to profitability for the current fiscal year that ended March 30.  We observed that many CEO’s and top executives are very comfortable with awarding themselves large bonuses and double-digit increases in total compensation in spite of operating results. Some have done so while taking major cost cuts from supply chain related operations.

As a means of more evidence, we further wanted to call our readers attention to an article published in the May 6-May 12, 2013 edition of Bloomberg Businessweek titled Some CEOs Are More Equal Than Others, which adds more credence to a growing skew in executive compensation. (paid subscription required for the full listing of rankings) Bloomberg editors subtitled this article noting that companies were supposed to be disclosing the pay gap between CEOs and their employees, but they have not.

Bloomberg staff compared the disclosed CEO compensation mandated by the Securities and Exchange Commission, including salary, bonus, changes in pension accrual and value of stock awards, with U.S. government data on average worker pay and benefits by industry. The result was a ranking of 100 companies with the highest CEO-to-worker compensation ratios. The ratios range from 1795 CEO-to-worker Ratio for the number one ranking to a 299 CEO-to-worker Ratio for the number 100 ranked company. In the context of the manufacturing and retail industries, the Bloomberg ranking of sectors ranked by CEO compensation bulge were noted as:

Rank 1- Communications

Rank 2- Industrials

Rank 3- Health care

Rank 4- Consumer discretionary

Rank 7- Materials

Rank 8- Consumer Staples

Upon further review, we placed a supply chain & B2B lens to this listing and noted some further observations:

• Three of the top ten ranking include retailers and/or service providers.  JC Penny tops the list (with a 1795 CEO to worker ratio) but its CEO was recently discharged because of poor profitability performance among other issues. There are many retailers in the Bloomberg listing of CEO pay disparity and yet many of these retailers are scrambling to meet the new competitive dimensions of an multi-channel online world. Some others of mention: Target (#13), Wal-Mart Stores (#18), Macy’s (#20), Lowe’s (#74), Gap (#75), Kohl’s (#83), Home Depot (#92). Retailers are constantly challenged with razor thin margins yet it would seem that pay at the top provides a different set of measures.
• We contrasted the 2012 Gartner Top 25 Supply Chains with this Bloomberg listing. Nine of Gartner’s Top 25 appear in the Bloomberg 100 ranking, specifically in Gartner ranking order: McDonald’s (Bloomberg #66), Procter & Gamble (#72), Coca Cola (#22), Intel (#100), Wal-Mart Stores (#18), Colgate Palmolive (#87), Nike (#8), Caterpillar (#73), 3M. Either their supply chains teams contributed to CEO performance objectives or other financial metrics such as overall supply chain cost, return-on assets, major supply chain outsourcing or other factors led to the Gartner ranking.
• We have noted the many challenges and dysfunctional nature of pharmaceutical and health care supply chains in numerous Supply Chain Matters commentaries. Industry players in the Bloomberg listing include McKesson (#12), Medtronic (#31), Pfizer (#47), Abbot Laboratories (#53), Baxter International (#70), CVS Caremark (#77).
• Readers of this blog are well aware that we have featured numerous commentaries related to the continuing global supply chain challenges of Boeing.  Yes, that company is listed as #86 with a 314 CEO to Worker Ratio.
• Finally, the Bloomberg listing feature two global transportation and logistics services providers: FedEx (#67) and UPS (#88).

While these types of CEO pay rankings come with a lot of built-in, subjective or other emotion, the take-way for us was contrasting the gesture of the Sony executive team with many of the companies listed in the Bloomberg Businessweek ranking of CEO compensation ratios.

Perhaps more gestures of CEO and senior executive pay for performance actions are in order.

Then again, CEO’s march to their own set of norms and expectations.

For our part, we will highlight for our readers, any supply chain or B2B developments (positive or not so positive) that involved companies with the top CEO pay disparity rankings.

Bob Ferrari

Many industry supply chain management teams have a keen recollection of the aftereffects of the Tsunami that struck northern Japan and the severe floods that impacted Thailand in 2011, especially their implications on automotive supply chains.

In a May 2012 commentary published on both Supply Chain Matters and the Supply Chain Expert Community, we pointed out that while Toyota and Honda supply chains were both severely impacted by the floods, the implied winner turned out to be Nissan, who bounced back the quickest of Japan’s big three auto makers.  This same resilience was also reflected in the earlier northern Japan tsunami, where the Nissan supply chain team demonstrated stronger resiliency to supply disruptions.  Two weeks after the tsunami disaster, Nissan was able to assess all of its suppliers and was able to be the first to resume volume production.

But, as we all know, in today’s dynamic world of business, no company and no organization can rest on its previous achievements, benchmarks or track record.  As the lyrics of that popular Eagles tune laments: “in a New York minute, everything can change.”

Thus, late last week, Nissan reported a 35 percent drop in net profit because of sluggish sales in two of its largest markets, China and the United States.  Unlike its Japanese rivals, Toyota and Honda, the automaker was not able to seize on the momentum of increased sales in the U.S. market. Production snafus involving core models in the U.S. and the ongoing political tensions between Beijing and Tokyo effected sales in both countries which underpin Nissan’s operating profits. Profit in Nissan’s North America segment dropped nearly 40 percent in the latest quarter.

The Wall Street Journal reported that miscommunication with suppliers caused snafus in the ramp-up of the newly remodeled Altima sedan, Sentra compact and Pathfinder SUV. A production handoff of the Frontier pickup truck among the Smyrna Tennessee and Canton Mississippi plants also experienced snafus. Supply Chain Matters previously noted a product recall involving nearly 14,000 newly designed Altima sedans caused by four transverse link bolts and two power steering rack bolts that were apparently not torqued to the required specification.

In the WSJ reporting, Nissan Vice President Joji Tagawa was quoted as indicating the following: “In an effort to do a lot of things at the same time, there was a bit of disarray that affected production through the end of the year, not only in the U.S. but also for some models in China.”

Perhaps some of readers can relate.  Success brings a culture of boldness and aggressiveness, which can be lead to further success, provided feedback mechanisms are allowed to input given realities. A supply chain that performed admirably in the past, now stumbles because events and internal initiatives perhaps got ahead of control mechanisms.

The takeaway is fundamental.  No organization can rest on its past laurels, and every organization needs to have vibrant and open feedback to management. As noted in our commentary last May, we as a supply chain community need to continue to have a more risk-aware perspective, along with the ability to effectively communicate which areas need to be shored-up for mitigating operational risk in the future.

Bob Ferrari

In conjunction with Prediction One of our Supply Chain Matters 2013 Predictions for Global Supply Chains, we will provide periodic commentaries throughout the year related to any noteworthy shifts in global supply chain activity, as reflected in recognized indices.

Various global purchasing and production indicators reflecting on January 2013 indicate positive signs of optimism, particularly in China and the United States.  Probably the most positive indices and signs of optimism came from the Eurozone sector.

U.S. purchasing and factory activity reflected in the Institute of Supply Management (ISM) January 2013 index indicates strong activity. The ISM PMI in January rose to 53.1, up 2.9 percentage points from the December 2012 index, and also the second consecutive month of increased activity. New orders, production and employment each had positive gains.  A 3.6 percentage point gain in new orders is an especially noteworthy sign of increased momentum along with a 2.1 point gain in manufacturing employment.  Inventories increased significantly, over 8 basis points, after two consecutive months of contraction, which should also be an optimistic sign.  The purchasing price index increased slightly but according to ISM, 67 percent of supply executives reported paying similar stable prices.

China manufacturing activity reflected in the HSBC China Manufacturing PMI recorded a two year high in January. The reported 52.3 number reflected a .8 point increase from December, and reflected the third consecutive month of manufacturing sector growth. The January new orders index signaled the fastest growth rate in two years and also adds signs for continued momentum. HSBC survey respondents suggested strengthened demand from customers in Europe and the U.S. However, input costs were reported as rising for the fourth month in a row while supplier delivery times are also on the rise.

The Markit Eurozone Composite PMI recorded a 48.6 value in January, a 1.2 point increase from December.  While the Eurozone sector still has a long way to go in terms of normalized output activity, the chief economist of Markit notes” The Eurozone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilisation in the first quarter.” Also noted was that Germany saw new orders rise for the first time in 11 months, while France, Italy and Spain each had easing over their previous rates of decline.

Taiwan also improved as reflected in the HSBC Taiwan Manufacturing PMI reading of 51.5 in January, up nearly a point from December, and reflecting a ten month high. This PMI reading was reported as the fastest rate of expansion since March 2012.  New orders also trended higher and once again, there was mention of increased demand from customers in China, Europe and the United States.  However, input costs were reported as rising rose sharply in January.

The HSBC South Korea PMI was reported as 49.9, down slightly from December’s 50.1 reading. The survey recorded a marginal fall in new orders as domestic market demand contracted slightly, with modest growth in new export orders.

All taken, the PMI indices are reflecting signs of optimism for the first quarter which should please global procurement and supply chain management teams. Perhaps our prediction of rather difficult top-line revenue and profitability challenges in 2013 may not totally come to pass and for that, readers should be pleased.  Let’s all observe what transpires in the months to come.

Bob Ferrari

Industry analyst firm IDC published actual Q4-2012 worldwide tablet shipment numbers (paid subscription required or free metered view) which should be of interest to B2B and B2C fulfillment teams. Supply Chain Matters readers might recall our late November commentary which contrasted the latest IHS teardown analysis of various Tablets to supply chain strategies addressing the desired business outcomes.

According to IDC, worldwide shipments of electronic tablets grew by 75 percent to a fourth quarter record, thanks to lower selling prices and new product offerings.  Tablets were also high on the holiday wish lists of global consumers. Nearly 53 million tablets were shipped, up from a near 30 million shipped in the previous quarter.  That is quite a hockey-stick uptick and kudos to the supply chain fulfillment teams that managed this surge in product demand.

This author does not subscribe to any notion that supply chains may be failing- quite the contrary.  Supply chains and fulfillment teams, for the most part, have successfully responded to unprecedented challenges related to economic uncertainty, supply disruption, volatile markets and more demanding customers.

Getting back to the IDC numbers, as Supply Chain Matters previously noted, shipments of Apple’s iPad tablets grew 48 percent from a year earlier, boosted by the introduction of the iPad Mini. This was accomplished in a mainly supply constrained period where demand stayed ahead of supply. However, IDC notes that Apple’s overall market share in the Tablets market actually slipped roughly three points, which brings home the severity of market competition.

Samsung’s shipments almost quadrupled on a year-over-year basis, shipping upwards of 8 million combined Android and Windows tablets in the quarter. We previously called for due recognition of Samsung’s supply chain prowess and consistent fulfillment capabilities. IDC names this vendor as second in overall tablet sales.

One of the most anticipated questions for this blog prior to the holiday buying season was how would Amazon, Barnes and Noble and Microsoft tablets fare in the quarter? It turns out that Amazon shipped more than 6 million of its Kindle line of tablets.  IDC notes however that Amazon market share slipped over 4 points.  This author was candidly surprised to read of that number.  The Nook family from Barnes and Noble shipped close to a million units, also suffering a significant market share decline.  Rounding out the top five players was Asus and its Nexus 7 line which IDC notes as experiencing the highest year-over-increase of the top five players, but also slipping 2 points in market share.

IDC reports that Microsoft’s Surface tablet shipped just shy of 900, 000 units. In our view, the Surface suffered from a late introduction to the market, a tepid response to the Windows 8 operating system and limited channel distribution leverage.  Microsoft purposely limited production and distribution because of the sensitivity to its existing hardware partners who did not take well to the company’s direct market entry. Considering that Microsoft’s strategic purpose was perhaps to make a credible market presence, more work may be required.

I don’t know about you, but reviewing these market results leads to this author’s conclusion that the competitive stakes in the Tablet and the impacted PC markets have dramatically accelerated, and synchronized planning, response management and fulfillment are mandatory just to stay in the game.

Congratulations to all teams in their accomplishments in this dynamic market.

Bob Ferrari

For the past few days, Supply Chain Matters has been focusing on various financial reporting results from select manufacturers to highlight significant supply chain implications.  We would be remiss if we did not comment on the reported financial results from one of the world’s most dominant online retailer and market disruptor, that being Amazon.

The diversified retailer reported it Q4-2012 and full year 2012 financial results this week.  For the crucial holiday focused fourth quarter, total worldwide revenues increased 22 percent, operating income increased 56 percent and gross margin increased over 3 basis points to 24.1 percent. Operating income, however, remains challenging at just 1.9 percent, rising slightly from 1.5 percent a year earlier. Increased profitability was attributed to improving business results in Amazon’s cloud computing and web services business. Sales increases were also reflected by increased participation of third-party merchants utilizing Amazon’s back-end fulfillment services.

Full year 2012 results featured a 27 percent increase in revenues to slightly over $61 billion. Consolidated operating income increased 6 percent to $1.6 billion.  North America revenues grew 30 percent while international grew 23 percent.

Supply Chain Matters will focus this commentary primarily on important signs stemming from Amazon’s physical fulfillment capabilities, which is a prime concern for some in our reading audience. Overall, the retailer’s operating expenses rose by 22 percent to almost $22 billion dollars, primarily from increases related to a 56 percent increase in technology investments and continued additions of physical distribution centers. A total of 20 fulfillment centers were added in 2012, with another 20 planned for 2013. The strategy unfolding is one of fulfillment located closer to major cities, to accommodate faster turnaround and same-day fulfillment capabilities while decreasing overall fulfillment shipping costs.

As we have noted in previous commentary, Amazon is deploying a strategy to tradeoff collection on individual U.S. state sales taxes, with leveraging state tax incentives to invest in fulfillment resources within that state.  While some may presume that Amazon’s long overdue payment of state sales taxes levels the retail competitive playing field, this retailer extracts further financial advantage. The online retailer has plans to have 20 million square feet of distribution and fulfillment capability by 2016, which is more than Wal-Mart. In the earnings briefing, Amazon’s CFO acknowledged that being closer to customers from a fulfillment standpoint helps to leverage distribution and transportation costs.

Much has been written and opined about Amazon and its threats to the traditional retail and online fulfillment model.  This author recently heard a superior presentation from Jim Tompkins, President and CEO of Tomkins International delivered at our local CSCMP Executive breakfast series. Jim’s charge to the audience is that every company and its associated supply chain arm needs to have a strategy regarding Amazon, and I totally concur with that statement. We may well view more corporate casualties in the coming months as a result of the “Amazon effect”.

Thus, it is rather important to dive into the Amazon numbers to determine important sign posts and trends regarding direction.  For instance, year over year inventory investment increased 21 percent while inventory turns decreased by a full turn to 9.3 turns. That reflects an increased burden of on-hand inventories most likely from taking on new fulfillment business models such as Amazon Supply in the industrial supplies sector.  Accounts payable, the determinant of how quickly Amazon pays its suppliers was 76 days, an increase of 2 days during the year.  Thus, being an Amazon  supplier comes with a financial working capital burden.

One of the wonders of the Internet is the ability to find important information.  Thus, we found a commentary featured on Seeking Alpha and penned by Timothy Phillips, Amazon Missed On All 5 Key Metrics, which uncovers some truly interesting metrics that should capture our community attention.  The premise of Phillips commentary is that while equity analysts may be pleased on the surface by Amazon’s latest performance, there are some “smoking guns” regarding five key metrics.

He analyzes the last eight quarters of E-Commerce revenues and concludes that while revenues have increased an average of 36 percent year-on-year, paid units shipped has averaged a 46 percent growth, equating to a 15 percent decline in average selling prices over the past two years. The implication is that fulfillment and shipping costs must improve by near 8 percent annually to have a positive impact on margins. We would add that ASP decline is a universal trend that concerns many supply chain executives. Also noted is that the trend of adding significant fixed costs with its continued deployment of fulfillment centers will have to be offset by other efficiency costs or increased revenues. Phillips argument is that any increase in fuel costs will add more direct margin pressure, and that the online retailer will have to find a way to garner increased shipping and fulfillment fees.

Finally, there is a conclusion that: “The law of large numbers is catching-up with Amazon in the North American E-Commerce market.” The argument is that growth in North America E-Commerce revenues have been on a steady two-year decline when compared with the aggregate market size potential.

Whether you agree or disagree with these and other conclusions, the important takeaways, in our view are the following:

• By its corporate culture, Amazon is an industry disruptor, and always has more cards that haven’t been played or held beyond the public eye. A recent FORTUNE article describes the business strategy as “sell low- or no-profit devices to pump ever more volume onto its platform”.  Then again, the laws of the market, scale and sheer volume may be catching-up with the goliath, and thus Amazon may have to fine tune its business and stocking strategies. Inventory and fixed costs have risen and Wall Street will continue to demand higher expectations in revenue growth and margins.
• What is playing out in same day or localized fulfillment capabilities needs to be carefully monitored, since it could disrupt the notions of today’s “last mile” delivery models.
• If you are considering offering your products on Amazon’s platform, beware that Amazon will most likely seek an additional cut of revenues to justify its growing fixed cost fulfillment overhead.
• If you are considering being a supplier to Amazon, be prepared to be abused in longer payments and vendor owned inventory practices.
• If Amazon is a potential fulfillment threat, than your best strategy is to differentiate any way you can on better service for customers and suppliers.

Bob Ferrari

It has long been the contention of Supply Chain Matters that companies whose senior management team has a solid grounding and understanding in principles of operations and supply chain management can often have their supply chain serve as a competitive differentiator for business outcomes.  There are many industry examples. We can turn to names like Apple, McCormack Foods, and global apparel retailer Zara,part of Spain’s Inditex Group.

We call reader attention to an article published in the January issue of FORTUNE and featured on CNNMoney, Amancio Ortega Gaona- the Third-Richest Man in the World.  The article traces the personal history of a man who is described as difficult to know, impossible to interview, very wealthy, and serves as the original founder and continued chairmen of Inditex Group.  It provides some context to a man we often did not know much about, one who came from the roots of poverty to surpass Warren Buffet as the third wealthiest individual on the planet. Mr. Ortega has built a fashion empire that spans more than 80 countries and consistently delivers growth and profitability in both good and challenging economic environments.  One profound article quote: “Beginning 40 years ago, Ortega ripped up the business model that had been refined over decades by Europe’s fashion houses and replaced it with one of the most brutally fast turnaround schedules the industry has ever attempted.  Decades later Zara is the world’s biggest fashion retailer.”

What is stunning is that Ortega built this business upon two fundamental and clear principles:

1. Give customers what they want.
2. Get goods to customers faster than anyone else.

The result is described as:  “ …  a global retailer that is more of an optimal supply chain than a traditional retailer.” Once more, few retailers have managed to challenge Zara’s industry success.  While Spain and other parts of Europe are suffering from severe economic stress, Zara reported a 17 percent increase in total revenues for the first three months of fiscal 2012. The retailer just opened its 6000^th store , with over 300 outlets now in China. The track record of growth consistency in revenues and profits is admirable.

What this author appreciated in reading Ortega’s background was his innate understanding of the industry and of the methods to control the supply chain. In the formative years of Zara, he organized thousands of local sewing cooperatives while providing opportunities for supplemental family incomes.  He insisted that speed and production agility be the driving force of the business model, and even today, Zara stores refresh their inventory within 48 hours. The essence of Zara remain its employees, a flat organizational structure, and its supply and logistics teams.  Chairmen Ortega prides himself and his management teams in their ability to connect with all levels of employees. Today, Ortega continues to live by modest means, living in the same Spanish community of his youth.

The legacy of Mr. Ortega and Zara will obviously remain as an important case study in agile and resilient supply chain management.  More importantly, the takeaway is having a leadership culture that understands that supply chain agility, responsive logistics and operations management and valued people do matter in successful business.

Bob Ferrari