In our prior Supply Chain Matters posting we called attention to the evolving attraction for leveraging predictive analytics in supply chain decision-making practices which has added to the continued pent-up demand for data scientists. We highlighted a guest contribution indicating that big data and more predictive analytics capabilities can be non-effective if not preceded by a rigorous review in determining if current key performance indicators (KPI’s) and business metrics are actually capturing the true drivers of business outcomes.
During SAP’s recent 2015 Sapphire and ASUG conference, SAP co-founder and Supervisory Board Chairmen Hasso Plattner’s conference keynote touched upon this very aspect, which warrants repeating. He touched upon the notion of the boardroom of the future, not being occupied by reviewing historically based KPI’s but rather “fact-based management.” Hasso described this as a “massive change on how companies manage information” and further, “we cannot hide data anymore”.
That last statement may well resonate with our readers since too often, KPI’s are selected to measure can-do performance areas tied to individual organizational, team and personal bonuses that do not necessarily link to an overall business outcome required for products, processes, margins and/or risks. They are too- often, anchored in past performance coupled to a consensus of what can be comfortably accomplished vs. what should be expected given the industry and business environment. Concerning or bad news can be hidden until it is too late for the business to overcome the effects.
In his keynote, Hasso addressed such a change as “moving from dashboards to active boards.” That is an important and far different metaphor.
It implies continuous and changing analysis grounded in overall outcomes and assumes that business events will indeed be constantly changing and that performance metrics should set both a target and a constant moving analysis of potential outcomes based on various business and product scenarios. Such a moving analysis assumes that organizations and teams can be fluid and flexible, responding to market opportunities, threats or risks in a more proactive and collective manner and in the context of best desired outcomes. It further implies that management is very actively engaged in understanding how the end-to-end supply chain is contributing or detracting from desired and/or expected outcomes. Bonuses and performance are tied to best enterprise outcomes vs. individual outcomes.
Such a change does not occur overnight and will take time to evolve. As noted in a previous commentary, executives need to be granted the broadest end-to-end supply chain leadership and accountability with certain mandates to address existing value-chain challenges and to improve business outcomes. Supporting staff with data science skills, while critical, are not the primary skill need. Knowledge of the business, the end-to-end supply chain, and organizational change management needs to be coupled to data science skills.
In the meantime, we advise supply chain leaders to indeed recruit talent with data science skills, and then rotate these new superstars among various supply chain functional and geographic assignments. Challenge them with local problems and with introducing positive overall change. Insure active mentorship and sponsorship with the end goal being a select group of business analysts that can take on the most difficult challenges while garnering the respect of others.
Supply shortages involving critical drugs across multiple pharmaceutical focused supply chains should not be a surprise to our Supply Chain Matters readers. We have called attention to this situation since 2011-2012. However, what should be of concern is the ongoing persistence of this problem and how it impacts timely and quality-focused delivery of life-saving healthcare services. Further, there are now brewing perceptions that the industry may have other intentions, namely, not concentrating on the increased supply needs of generic drugs.
On Monday, The Wall Street Journal featured a page one report: Drug Shortages Plaque U.S. Medical System. (paid subscription required) The report cites University of Utah Drug Information Service stats indicating that the number of drugs in short supply in the U.S. has risen 74 percent in five years. Once more, a graph indicating the reasons for such shortages has the top three categories listed as: “Unknown” accounting for 47 percent; “Manufacturing shortages” accounting for 25 percent; “Supply and demand” accounting for 17 percent. These statistics, by our lens, should not by any stretch, be viewed or perceived as being complimentary to pharmaceutical supply chains, especially when “Unknown” is the leading reason.
The article’s authors cite interviews with company executives, pharmacists and regulators pointing to several causes that are noted as not building enough production capacity, not adequately maintaining production equipment and failure to control contamination in aging plants. There is a further observation that crackdowns on shoddy quality by the U.S. Food and Drug Administration (FDA) have worsened the shortages because some companies have responded by shutting down all production of a particular drug. But the authors also point to another theme: (we quote)
“Many of the scarce drugs are older, injectable treatments that can be complex and costly to manufacture, but which command relatively low prices because they aren’t protected by patent. Hospitals and doctors’ offices are the main buyers of the drugs. Companies can’t easily increase prices because insurers reimburse many generic hospital-administered drugs under a payment system that is more frugal than for other medicines.”
This theme of generic drug shortages is similar to previously reported shortages.
A U.S. federal law passed in 2012 provides the FDA with increased powers to prevent and resolve drug shortages. Supply Chain Matters called reader attention to the new powers of the FDA in a 2012 commentary on the crackdown on Ranbaxy. According to the WSJ, the number of declared new shortages decreased by 44 in 2014, from a peak of 251 in 2011. That obviously is some progress made in the last four years but more is definitely needed.
The article goes on to call attention to continued global-wide shortages of critical drugs such as BCG, a potentially life-cycle drug utilized to treat bladder cancer and how specific manufacturers have not responded to market need. It notes how doctors have been forced to either postpone or suspend BCG treatments since shipping delays are expected to persist in next year.
Supply Chain Matters is calling attention and making wider visibility to the continued supply shortages because we feel strongly that the industry needs to face up to its problems and work with regulators and physicians in constructive solutions to such problems. Supply shortages will continue to motivate illicit and unsavory global distributors to introduce more counterfeit or lower quality supply in the market.
The open question remains as to which organization is directing supply chain supply strategy. In the meantime, quality healthcare outcomes continue to be at-risk.
Industry analyst firm Gartner has been conducting is annual SCM Executive Conference this week. Besides educating its clients on supply chain business and technology topics, this conference serves as the platform for announcing Gartner’s annual Top 25 Supply Chain rankings. This Supply Chain Matters commentary provides our initial impressions of this year’s rankings based on our attendance at tonight’s awards dinner.
First, to reiterate our previous declarations, this commentary should not be construed in the context of positioning our own or any other analyst firm rankings, but as a voice of being an observation post of global supply chains for nearly 10 years. It is a means for social-media based interaction regarding what it takes to be recognized as a top-performing supply chain given today’s industry challenges, complexities and increased clock-speed of business.
Supply Chain Matters again extends our congratulations to each cited supply chain organization for achieving such recognition. There is obviously a ton of team focused work and commitment that goes into achieving such recognition.
Our stated impression of the 2014 Top 25 ranking was that with the exception of two new entrants, the Top 25 was essentially the same. We were not alone in that impression. Gartner obviously worked on that feedback and produced some significant surprises in this year’s rankings. The primary 2015 headlines are twofold: Amazon.com has now assumed the number one ranking despite some acknowledged marginal return on assets performance. After seven consecutive years of being ranked as primo, Apple’s supply chain enters a newly designated category of Supply Chain Elites, along with supply chain icon Procter and Gamble. Both of these supply chains now enter this separate archival category. As noted in a Twitter posting, Top 25 has become Top 27. Perhaps maybe Top 25 Plus.
We extend praise for Gartner in being creative.
As a reference for our readers, below is the announced 2015 Gartner ranking, in the context of rankings since 2010. We believe that providing this broader context is more pertinent for contrasting either the usual players vs. those supply chains on a transformative journey.
Other headlines for 2015 were fashion apparel producer Inditex jumping five spots to number five this year primarily based on peer ratings. Fashion retailer H&M jumped seven spots to the number seven rank. Gartner attributed this jump to strong peer ratings and a track record of recognized ethical supply chain practices. Specialty coffee retailer Starbucks jumped five spots to the number twelve ranking based on strong financial metrics and positive efforts in supply chain talent management.
New entrants this year included Loreal (#22) , Toyota (#24) and Home Depot (#25). Honorable mentions, or runners-up, mentioned by Gartner included BASF, Caterpillar, Hewlett Packard, Nokia, Schneider Electric and Woolworths of Australia.
Obviously, there will lots of additional commentary forthcoming related to this year’s Gartner Top 25 rankings. Some teams will be pleased and others rather disappointed after lots of hard work. Industry peers may also be surprised. There is no pleasing all in any form of ranking and consistency of measures and process are essential.
Since we are penning our commentary very late into the evening, we’ll reserve further commentary into the weeks to come.
This has been a highly visible week for Apple and its supply chain ecosystem. Included was Apple’s announcement of obscene earnings for its latest fiscal quarter and perhaps too much visibility to supply chain related information related to the newly introduced Apple Watch.
On Monday, Apple reported operating results for the March-ending quarter reporting a 27 percent increase in revenues and a startling 33 percent increase in profits. Gross margin climbed to 40.8 percent above previous Wall Street estimates of 38.5 – 39.5 percent. The overall business media headline was that Apple’s iPhone line-up is gaining market-share while commanding higher prices. The average selling price of an iPhone has risen to $659, up $60 in the last year, while iPhone shipments were up 40 percent from the year earlier period to 61.2 million units. Emerging market demand, in particular China, Hong Kong and Taiwan is reportedly fueling this latest iPad sales volume increases. Revenues associated with the Mac personal computer lineup trended positively, up 10 percent in the latest quarter, bucking an overall industry trend of declining PC sales. Apple closed its latest quarter with over $193 billion in cash, up $15 billion from December.
However, there are some warning signs. Sales for the iPad declined by 23 percent in the latest quarter, an indication of a further sales decline trend.
Yesterday, The Wall Street Journal reported (paid subscription or free metered view) that one of the key technology components within the Apple Watch has experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers. Citing people familiar with the matter, the WSJ report indicates that reliability testing has discovered that the taptic engines supplied by AAC Technologies Holdings of Shenzhen China, have demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp. have reportedly not experienced the same problem, with Apple reportedly moving all remaining sourcing of this component to Nidec. However, it may take more time for the new prime supplier Nidec to increase production volumes.
Although the WSJ indicates that it is unclear whether the tactic engine reliability has contributed to short supply, by our lens, this may explain why existing orders for Apple Watches have been in a backlog condition since product launch. On Monday, Apple CEO Tim Cook confirmed that “demand is greater than supply” for the Watch.
The WSJ further indicates that Apple has now communicated to other watch component suppliers to slow delivery volumes until June, without explaining why, which has surprised suppliers who were in full blown ramp-up. Neither AAC Technologies nor Nidec elected to respond to the WSJ in a request to comment.
The WSJ cites additional sources as now indicating that Apple is further considering the addition of a second final assembly contract manufacturer to supplement Taiwan based Quanta Computer. That second CMS is rumored to be none other than Foxconn, Apple’s principal go-to contract manufacturer when supply chain volume output challenges occur. However, even if Foxconn is brought online, it will be several months before the CMS can make its contribution to boosting output. The WSJ sources indicated late 2015 as an estimate.
As Supply Chain Matters has frequently pointed out, Apple practices dual-sourcing of key technology components as part of its supply chain risk mitigation strategy. This is especially prevalent in new product introduction and ramp-up phases. There are currently three prime suppliers for Apple’s existing iPhone LCD screens with reports indicating the introduction of another for the next model iteration of iPhone. In the case of the tactic engine report, the dual-sourcing strategy has obviously proven effective.
Finally, today’s Wall Street Journal calls attention to IHS Technology’s recent teardown analysis of a 38-millimeter Apple Watch Sport, the entry level model for the product line-up. (Paid subscription or free metered view) The IHS teardown analysis indicates that overall costs of component materials and manufacturing labor cost amount to $83.70 contrasted to a retail selling price of $349. That according to IHS equates to a 24 percent ratio for parts and manufacturing cost, lower than the average 29-45 percent equivalent cost for Apple’s other product lines. This is an indication that the Watch is a product line with even higher profitability potential. The taptic engine component noted above has an estimated cost of $16.50, the second most expensive component. The touchscreen and display module was estimated to cost $20.50, the most expensive component.
In two weeks, analyst firm Gartner will again unveil its annual ranking of the Top 25 Supply Chains. Apple has consistently commanded the number one ranking for many years, and with these latest operating results, we suspect that the Apple supply chain will again command the top spot. Financial performance alone is compelling and when considering supply chain risk mitigation and segmentation strategy, the result is obvious.
Since the beginning of the 2014 holiday fulfillment surge period in September of last year, Supply Chain Matters has featured commentaries related to potential impacts to multiple industry supply chains located in the United States. This week, the ISM PMI Index provided quantification of such impacts.
We provided numerous commentaries, insights and updates related to the U.S. west coast port disruption that dragged on past December and into early this year. Those ports are still trying to recover and multiple manufacturing and retail focused industry supply chains were impacted by the delayed arrival of components and finished products. We featured two commentaries on the current surge in the value of the U.S. dollar, and its impact on U.S. imports and exports. Finally, weather patterns brought severe cold and winter storm conditions across the U.S., particularly among the northeast states and across the New England region.
Earlier in the week, the Institute for Supply Management (ISM) disclosed the PMI value for March which indicated the fifth consecutive month of decline and the lowest reading since May 2013. The March value of 51.5 while a continued indication of expansion is considerably below the average PMI reading of 57.7 recorded for the 3 months in Q4. U.S. supply chain activity led all global regions throughout 2014 but has since fallen back due to headwinds.
According to ISM, PMI survey participants indeed pointed to lingering problems from the west coast port disruption, unusual winter weather and the stronger dollar as current challenges. Noted was that 11 industries reported slower supplier deliveries in March. Export orders declined for the third consecutive month. Eight industries reported higher inventories in March which could likely be an indicator of select shortages of key components or unplanned contraction in product demand. According to the ISM report, customer inventories were noted as being too low, yet another indicator of disruption. The Backlog of Orders index declined two percentage points from the February reading. There were mixed indications relative to the current lower cost of crude oil.
However, based on trending data, ISM indicates some optimistic news indicating a likely rebound in the index in the coming months. Of the total 18 industries reported in the index, 10 of these industries reported growth in March. Nine industries reported growth in New Orders as well as growth in Production.
We will have further insights when we produce our review of select global-wide PMI Indices in our March quarterly newsletter. All registered subscribers of this blog automatically receive a copy of our quarterly newsletter. You can register via the Join Our Mailing List box located on the right side panel.
Earlier this week, this author had the pleasure of delivering a JDA Software sponsored webcast titled: Supply Chain Segmentation- The Key to More Predictable and Profitable Business Outcomes. We have since received positive feedback regarding the content.
- Industry supply chains increasingly cannot support one-size fits-all supply chain fulfillment
- Supply chain segmentation continues to garner increased interest and multi-industry deployment
- This is a transformative level strategy and needs to be approached in this context
- Advanced technology is an ever more important key enabler
- Consider more predictive and prescriptive planning capabilities within your strategy framework
In the one-hour webinar, I provide grounding perspectives for today’s industry and business environments, convergence of technology trends, as well as insights on analytics focused strategies. I further provide a more succinct definition of supply chain segmentation and address the various process components to this strategy.
Among the key takeaways for supply chain segmentation teams were:
- Segmentation strategy has to be grounded in detailed analysis and intelligent on the entire value-chain.
- Consider the need for the process to be oriented toward externally focused, predictive and responsive capabilities focused on expected business outcomes in contribution margin, service levels and other key metrics as well as the velocity, clarity and context of information needed for more timely decision making.
- Focus on smarter data strategies when considering analytics in this process.
- Do not neglect the all-important skills impact that segmentation requires.
There is certainly much more and JDA Software has graciously made this webcast available on-demand, for viewing at your convenience. The webcast is available by accessing this web link and providing some basic registration information.
If your organization is considering a supply chain segmentation strategy or if your current efforts in this area are in need of a re-look, I believe you will gain some insightful learning within the webcast.
Bob Ferrari, Founder and Executive Editor
Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters blog.