While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our 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. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One- global supply chain activity during the year, and Prediction Two- trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three- the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four- wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
As we approach the annual peak period of global transportation over the next three months, there are additional troubling signs related to global transportation trends, trends that indicate more excess capacity remaining in ocean and air cargo, but continued restricted capacity within U.S. trucking.
Ocean Container Segment
Drewry Maritime Research recently reported that a the half-way point of 2015, east-west container trade was flat, and that the firm will likely be downgrading its global container traffic forecast for 2015 from 4.3 percent to roughly 2 percent in growth. Drewry pointed to some optimism related to Middle East traffic as a result of the possible lifting of economic sanctions related to Iran, causing the need for increased goods volumes. Keep in mind that many global ocean container carriers were previously forecasting global container volume increases averaging three to four percent, while adding more mega container ships to the global fleet. In August, ocean container carriers were motivated to significantly cut back on scheduling. The Wall Street Journal reported that freight rates at the time between Shanghai and Rotterdam barely covered carrier operating costs, hence the announced cutbacks. The WSJ noted that carriers were significantly reducing capacity to insure higher freight rates, in spite of dramatically reduced fuel costs. During that same period, industry leader Maersk Line revised its estimates of global container volume down to a range of 2-4 percent from the previous 3-5 percent growth estimate and vowed that it would defend and even expand its industry market share position.
The Drewry forecast downgrade comes in midst of the National Retail Federation’s (NRF) Monthly Import Tracker report indication that import cargo volume at the nation’s major retail container ports is expected to increase 1.2 percent this month over the same time last year as retailers head toward the holiday season. The Tracker reported that import volume was up 2.9 percent from June and 8.1 percent from July 2014. The Tracker indicated that inbound container volume for the first-half of 2015 totaled 8.9 million TEU’s, up 6.5 percent over the same period last year. That may be an indicator that retailers elected to position holiday inventories much earlier, given last year’s port disruption. The NRF further reports increased inbound U.S. volumes for September through November, but that number may be skewed by last season’s U.S. West Coast port slowdown. The NRF additionally notes that U.S. retailer inventories are “plentiful’ and that “Shoppers should have no worries about finding what they’re looking for as they begin their holiday shopping.” By our lens, reports noted above are an indication that ocean container volume will indeed level off for the remainder of this year.
Air Cargo Segment
On the air cargo front, the International Air Transport Association (IATA) indicated a decline in air cargo demand in July. IATA reported that disappointing July air freight performance was symptomatic of a broader slowdown in economic growth, most likely caused by a slowdown of activity in China and other Asia based countries. The news comes as passenger airlines continue to add more air freight, as IATA indicates that in July, available air cargo space expanded by 6.7 percent.
IATA’s CEO noted to The Wall Street Journal:
“The combination of China’s continued shift towards domestic markets, wider weakness in emerging markets, and slowing global trade indicates that it will continue to be a rough ride for air cargo in the months to come.”
On the U.S. surface trucking front, the American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.5% in June, following a revised gain of 0.8% during May. The soft June volume number was attributed to flat factory output and falling retail sales. However, the June, the index equaled 131.1 (2000=100) somewhat below the all-time high of 135.8 that was reached in January of this year. During the second quarter, the index fell 1.7% from the first quarter but increased 2% from the same quarter in 2014.
The ATA recently extended its U.S. Freight Transportation Forecast to the year 2026. The report forecasts a 28.6 percent increase in freight tonnage and an increase in freight revenues of 74.5 percent by 2026. However, the not so good news for industry shippers is a forecast indicating that the number of Class 8 trucks in use will grow from 3.56 million in 2015 to mere 3.98 million by 2026. That current demand-supply imbalance does not bode well for trucking cost projections. Factor the current building wave of acquisition activity among non-asset and asset based transportation and logistics providers and the picture becomes far more troublesome for industry supply chains that do not plan accordingly.
How different can the clock speed of industry business change occur- consider the current plight of the U.S. railroad industry. Last year, the industry was booming, and was strategically placed to take advantage of the explosion of new oil exploration methods occurring throughout North America. Crude transport by rail was the new phenomenon that restored profits and expansion for U.S. railroads.
The continued plunging global based cost of crude oil and sudden glut affecting global commodity needs has changed that dynamic dramatically.
Union Pacific, a major U.S. railroad recently disclosed that 2300 workers are currently on temporary layoff or alternative work status as that railroad initiated efforts to adjust its current cost structure toward lower transport demand needs. UP’s shipping volumes are down 4 percent year-to-date with reported declines in chemical, agricultural and industrial goods segments. Industry rival, Burlington Northern Santa Fe (BNSF) is now part of Berkshire Hathaway, and it may be some time before similar news leaks out regarding the effects of the declines in crude-by-rail shipments.
Reports concerning other U.S. railroads indicate similar trends with hundreds of idle tank cars now parked and idle after recently being utilized to transport dedicated crude-by-rail trains. Railroads are now reportedly pushing-back on end-of-year regulatory mandates regarding positive-train control and tank car safety upgrade initiatives. The U.S. rail industry now has a capacity imbalance related to commodity transport, the bread and butter of volume and profits.
Thus, as we approach that last three months of 2015, different capacity dynamics across global transportation lead to a similar impact and concern that being far more turbulence in global transportation circles in the months to come. Rest assured, these different imbalance situations will be included in our 2016 predictions for industry and global supply chains.
We want to hear from our readers on these trends. Is your organization currently concerned and is your organization actively planning contingency scenario? You can email your comments and feedback to: feedback <at> supply-chain-matters <dot> com.
The Renaissance of Available-to-Promise Capability to Support Retail and Online Omni-Channel Fulfillment
Supply Chin Matters has featured prior commentaries exploring the supply chain impacts of Omni-channel and online customer fulfillment for retail supply chains. Such impacts are many, but one of the more important relates to the needs for efficient overall inventory management while exceeding more demanding customer fulfillment and satisfaction needs.
In B2C retail, and in online B2B, inventory investment has a major impact on margin and profitability, and Omni-channel strategies that allow customers different fulfillment options can cause havoc with the proper balance of inventory.
Consumers increasingly prefer to buy online, and at the same time, seek flexibility to either have their orders ship direct, or pick-up or return in a local retail store or outlet. This new paradigm is why so many Omni-channel retailers are seriously re-visiting inventory management strategies. Some are building dedicated online customer fulfillment centers to directly support online order volumes while allocating separate inventory to support brick and mortar retail needs. Other Omni-channel retailers have rightfully determined that the same inventory has to be efficiently managed to support fulfillment needs across all channels. This changes the role of the brick and mortar store to be an added node within the fulfillment network with the ability to support in-store pick and pack.
Within this increased retail business challenge, available-to-promise capability (ATP) has taken on a new significance as a key capability to assist in more efficient and responsive inventory management. As Supply Chain Matters sponsor JDA Software describes it, ATP is experiencing a new renaissance.
Last week, The Wall Street Journal provided further evidence of the business importance of efficient inventory management. In the article, Retailers See Gains in Serving E-Commerce Supply Chains (Paid subscription or free metered view), the WSJ reports that while retailers view online shopping as a boon to sales, it can provide a drag on profits especially in the light of parallel delivery networks. Some retailers, however, may be on the way toward figuring out the logistics and profitability potential of Omni-channel. Examples cited was that Home Depot which grew online sales 25 percent in the second quarter while improving overall logistics, including higher efficiencies in its distribution network. Target, grew online sales 30 percent and reported a small increase in margins.
Last week, Supply Chain Matters contrasted the financial results and supply chain strategies of Wal-Mart and Target. Wal-Mart’s financial results were perceived by Wall Street as disappointing. To address Omni-channel, the global retailer is currently implementing a new inventory management system. That strategy includes shifting inventory to regional and dedicated customer fulfillment centers, rather than from the retail store backrooms. That would allow the flexibility to meet both online and in-store demand from a distribution center centric inventory strategy. The downside is a de-emphasis of the retail store as a fulfillment node and a greater potential for stock-outs at retail store locations as online orders consume available inventory.
Target on the other hand, has recently demonstrated improving financial results, but at the same time has been candid to Wall Street that balancing inventory across its network and leveraging resources at store level are an integral part of strategy. Senior management candidly admitted that in-stocks within physical stores have been unacceptable so far this year, but a newly appointed role of Chief Operations Officer will have as an initial priority, beefing up the capabilities and responsiveness of the supply chain. Target’s strategy includes the retail store as a direct fulfillment node. Thus far the retailer’s is shipping online orders direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target senior management further noted that an important enablement of ship-from-store will be will be testing and deployment of a new ATP system that provides specific online customer delivery commitments.
On JDA Software’s Supply Chain Nation blog, Kelly Thomas writes on the renaissance of: Order Promising and Demand Shaping in a Segmented, Omni-Channel World. Thomas observes that ATP married with demand shaping provides an increasing number of fulfillment options as well a means to determine profitability profiles for fulfillment channels. It provides a basis in making the most informed decision on the source of inventory for a given customer order line and the pick-up or delivery location of the online customer.
Rightfully noted is that nearly 20 years ago, elements of what is today JDA Software (i2 Technologies) pioneered and patented allocated-driven ATP functionality for discrete manufacturing and other industry supply chain environments. Today’s JDA Order Promiser application is now being applied to the evolving needs of Omni-channel retailers for facilitating more responsive online fulfillment as well as improved inventory investment and bottom-line profitability.
The technology has come a long way and has found new meaning in more efficiently managing inventory in a B2C and B2B Omni-channel world.
Disclosure: JDA Software is one of other current sponsors of the Supply Chain Matters blog.
Yesterday, after the stock market closed, Apple announced its fiscal third quarter financial performance and Wall Street’s headline was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. Gross margin was reported as a whopping 39.7 percent which is extraordinary for the majority of today’s consumer electronics providers. Yet within minutes of the earnings report, Apple’s shares plunged 7 percent in after-hours trading and today, dropped as low as 21 points before a small rebound.
What the investment community is primarily concerned with is a perception that Apple is trending toward a one-product company, that being the iPhone, which with the latest results, accounts for 63 percent of Apple’s overall sales. That is a ten percentage point increase from a year ago, prompting concerns that other products such as the iPad are declining in sales, while new products such as the Apple Watch have yet to provide an offset. Unit sales of the iPad are believed to have declined 18 percent in the latest quarter, making a sixth consecutive quarter of year-over-year declines. Once more, the previously touted partnership among Apple and IBM, designed to provide more business applications leveraging the Apple tablet, do not appear to be stemming the declining trend.
In the fiscal third quarter, while Apple reported shipping 47.5 million iPhones, an increase of 35 percent from the year earlier quarter, that number was 23 percent lower than shipped units reported for fiscal Q2. According to a report by The Wall Street Journal, analysts noted previous quarter-on-quarter iPhone volumes fell by 19 percent and 17 percent respectively, and remain concerned for a steeper rate of decline. Apple attributed unit shortfall to the lowering overall inventory by 600,000 units during the quarter. Fiscal Q3 has traditionally been Apple’s slowest volume quarter.
In an interview with the WSJ, CEO Tim Cook indicated that he refuses to accept the thinking that Apple cannot sustain its existing growth rates. He further indicated that Apple has pried open the door to untapped markets such as China, and that the company is sensing a larger conversion rate from Android powered devices to iPhone.
Apple did not provide any breakdown of Apple Watch performance but CEO Cook indicated to analysts that the “sell-through” of the Watch was better than the iPad and iPhone at their product introduction phases. We will have to wait and observe what that means over the next two critical quarters.
From our supply chain lens, the upcoming quarters will provide Apple’s planning teams with added challenges. Earlier this month, we highlighted that Apple is now actively planning the ramp-up of the planned next release of iPhone. Reports indicate that the company is requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, This is despite anticipated modest hardware changes.
Planners are obviously reducing existing model inventories but must be diligent to not impact Apple fiscal Q4 results. With expectations for increased sales of the Watch, as well as a newly introduced iPod Nano, additional effort will be focused on ramp-up production milestones. An added challenge has got to be focused on what to plan for inventory and fulfillment needs for the iPad, given that there may well be a product change coming.
And then there is that mega “elephant in the room”, what to do with $200 plus billion in cash.
The adage for Apple’s and indeed many other global supply chain teams is often, not what you did yesterday, but what are you going to do tomorrow, next month, and next quarter.
Does that resonate?
As our U.S. based readers are likely aware, Wednesday of this week was not necessarily a good day for the IT community. In the course of a few hours Wednesday morning, mission critical systems of the New York Stock Exchange, United Airlines and The Wall Street Journal failed, and respective customers were not pleased.
With the cascading breaking headlines on Wednesday, just about everyone’s initial impression was that this was some form of a coordinated cyber-attack. After quick investigations from various federal agencies, that premise was later negated.
Since Wednesday, the NYSE communicated to its brokerage customers that the outage was likely caused by a planned software upgrade that was underway. The outage resulted in a four hour outage, but remarkably, had little impact on the exchange of stocks because ancillary systems took on the task of transacting trades. According to a report in today’s WSJ, the problem started with a new software program designed to more precisely time-stamp data that was installed during the prior evening.
The WSJ outage was reportedly caused by a volume surge that overwhelmed the publication’s home page. It remains unclear, at this point, as to why the volume surge occurred.
The United Airlines outage, which extended upwards of 90 minutes, causing the cancellation of 60 flights and consequent delays to hundreds of U.S. based flights, was attributed its outage to a failed router in its computer network. As anyone who has flown lately can attest, airlines like United have cut back on airport customer service agents. Thus, system-wide interruptions cause significant passenger disruption, particularly when backup planning is inconsistent. Given United’s continual history of computer failures, schedule interruptions and poor customer service, the Wednesday incident was yet another source of continuous disappointment from United’s long-standing customers. (This author is included in that category).
As a supply chain community who deal with business and mission-critical systems each and every day, Wednesday’s litany of IT incidents provide us poignant reminders. The first and obvious reminder for IT teams themselves is that no mission-critical system should have a single-point of failure. While that appears to a simple statement, the existence and complexity of global-wide outsourced systems and/or networks has added new vulnerabilities which must be communicated and addressed. There is the further theme of complex software upgrades that can precipitate outages. It is no wonder that IT and business functional teams remain very concerned about the potential risks of complex ERP or supply chain business critical system and applications upgrades.
For functional supply chain and line of business team leaders, the prime takeaway is twofold. First, listen to your IT support teams when they raise concerns regarding system vulnerabilities or needs to invest in IT redundancy in specific business critical systems. Too often, functional business and supply chain teams become too impatient with planned system maintenance downtime or extra time needed to complete a planned software upgrade. Better to invest that energy in preparing consistent contingency back-up plans. Insure that there are plans associated with each and every business critical system. Take the time to thank and reward both IT and functional teams for their diligence in planning.
A final message relates to senior executive leaders and their zest for cost control. A theme surrounding Wednesday’s concurrent outages is that larger and more complicated business critical systems require adequate resources to support testing, monitoring and reliability. That includes not only adequate defenses to guard against hacking and cyber-attacks but day-to-day operations as well.
Many years ago, I worked for a very insightful CIO who mastered communications to senior executive management. Often, when he received pressure regarding systems maintenance budgets associated with mission critical business systems such as order fulfillment, he would use an analogy of flying on a jet aircraft. “Do you expect the pilots to upgrade or change an engine while flying at 30,000 feet.” Of course not, and that is why diligent and timely maintenance and backup plans exist.
Don’t let your firm be the next headline for a supply chain systems failure.
In order to boost relatively flat revenue growth among its U.S. physical retail outlets, Wal-Mart recently raised salary levels for its respective U.S. retail associates to improve customer service and responsiveness. The retailer further continues to invest heavily in its online fulfillment channel. All of these actions provide adding pressure on margins.
In April, Supply Chain Matters echoed business media reports indicating that this global retailer was ratcheting up pressures on its suppliers to squeeze costs. Earlier this month, Reuters reported and somewhat validated a significant effort to offset increasing costs, namely imposing added charges among most all of Wal-Mart suppliers. Supply Chain Matters is of the belief that this effort will have added implications for both parties.
According to the report, added fees will relate to warehousing inventory along with amended payment terms, affecting upwards of 10,000 U.S. suppliers. In one cited example, Reuters indicates that a food supplier would supposedly be charged 10 percent of the value of inventory shipped to new stores or warehouses, along with one percent to hold inventory in existing Wal-Mart warehouses. It reportedly was not clear if the one-time charges apply only to the initial shipment or would cover a specific period of time. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In our April commentary, we observed that these appear to be signs of yet another wave of supplier squeeze tactics in order to improve a retailer or manufacturer’s overall margins. While these actions are not new for Wal-Mart, their application to a far broader population of suppliers is noteworthy. Such efforts that add to the cost burden of doing business with a retailer are bound to provide setbacks in efforts towards deeper collaboration and supplier product innovation. Consider that Wal-Mart continues with the construction and opening of new online fulfillment centers to support is WalMart.com fulfillment needs. The addition of supplier inventory fees to stock these new centers may cause some suppliers to consider alternative inventory stocking strategies of their own, that balance the needs of Wal-Mart with other retailers such as Amazon, Target or Costco. Indeed, unilateral efforts directed at transferring the cost burden among suppliers can often lead to counter-productive consequences, particularly during seasonal buying surge periods such as the holiday season.
Suppliers can take advantage of the same fulfillment decision-support technology as retailers, namely to determine the profitability potential for each major customer, and providing preferential service for customers that financially support needs for added responsiveness and fulfillment collaboration.
Too often, it seems that these mandates are handed down by the most senior management responding to investor pressures for more short-term profitability and margin growth. These efforts cascade from retailers and manufacturers, to first tier suppliers, and throughout other tiers of the supply chain. It’s unfortunate that there supply chain teams are rewarded more for enforcement of such actions as opposed to efforts directed at joint supplier process and product innovation.