The 25rd Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals (CSCMP) was released earlier this week (free for CSCMP members and can be purchased for $295). This report has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals.
The report reflecting 2013 activity again notes a continued trend for increased logistics, transportation and inventory costs. More than ever, this should be of continued concern to manufacturers and retailers and their associated supply chain and product management teams. Similar concerning observations were noted by Supply Chain Matters in last year’s annual report.
Highlights and some observations of the latest report numbers are noted below.
The cost of the U.S. business logistics rose 2.3 percent in 2013 to $1.39 trillion, an increase of $31 billion from 2012. Logistics costs as a percent of nominal GDP were reported to have dropped to 8.2 percent, just about the same 8.3 percentage reported for 2012.
Most concerning from our lens, inventory carrying costs in 2013 rose another 2.8 percent, albeit less than the 4.0 percent increase reported for 2012. While interest costs rose slightly, inventory levels inched up leading to increased costs for taxes, insurance, warehousing, depreciation and obsolescence. By our calculation, the former components rose 9.2 percent or $28 billion from that reported in 2012. According to the report authors, the cost of warehousing was up 5.6 percent in 2013, as rates for warehouse space continue to rise. As a wise sage once exclaimed to this author, “warehouses are monuments to inefficient inventory practices.” That sage advice continues to reflect itself.
Overall inventory levels continued to rise despite the advent of advanced inventory management practices and historically low interest rates. The report includes a chart reflecting Total U.S. Business Inventories that visually indicates that total inventories in 2013 now surpass levels recorded in 2008, the peak before the great recession. With relatively low GDP growth levels, these numbers are alarming. With carrying costs increasing, industry supply chain teams need to seriously analyze why more overall inventory is being maintained. Consider that interest rates remain at historic lows, and what would be the incremental cost if they were not. We suspect that with high levels of global outsourcing and slower global transportation, that larger levels of pipeline inventory are being planned. We further suspect that planning and optimization models are not reflecting up-to-date inventory cost factors.
Another important concern brought out in the report is the current fragile state of the U.S. trucking industry with utilization rates remained close to 100 percent and fleet and driver capacity declining. High costs and regulatory issues are deterring new entrants to the industry. With the U.S. railroad industry operating at near capacity, reflecting building shortages of available specialty railcars, supply chain teams need to remain concerned about this area.
Data compiled in the 2013 report indicates the revenue growth trajectory of U.S. non-asset based services and Third Party Logistics providers continued in 2013 with revenues pegged at $146.4 Billion, an increase of $4.6 billion over 2012. Revenues broken out for 3PL’s rose 3.2 percent in 2013, lower than the 5.9 percent growth recorded in 2012. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 7.2 percent in 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones, funded by a new wave of private equity interest. We believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.
Supply Chain Matters submits that the overall takeaways from the 2013 State of Logistics are once again dependent on the reader frame-of-reference. If you reside anywhere in the transportation and 3PL logistics sector, your reaction may be positive. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding delivery of services. Distribution center operators and real estate interests are included. If your frame of reference involves a constant diligence for controlling overall transportation procurement and supply chain related operating costs, we again submit there are troubling areas that should motivate concern and attention.
Thus far in 2014, U.S. manufacturing activity continues to surge. According to the report authors, freight shipments are up 13.1 percent and so are rates. The global ocean container industry remains in a capacity crisis, and so is the U.S. rail and trucking industry. The State of Logistics, by our view is rather fragile, fueled by private investors looking to cash in on opportunities to make quick money without holding hard assets. That is not a healthy outlook.
Once again we offer the following insights:
- Procurement, supply chain planning, B2B and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost.
- Procurement teams who context transportation spend in the singular dimension of cost reduction remains not wise, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes.
- Similarly, S&OP teams must re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point trade-offs and costs of carrying inventory. With more sophisticated tools available to manage and optimize end-to-end supply chain inventories, the open question may be in the quality of the data that is fed into these tools, especially the realities of increased carrying costs. Teams are not fooling anyone by allowing data to remain static. Today’s global logistics environment is not static, but rather highly dynamic and complex. Decision-making data must reflect this state.
- The recent announcements from both FedEx and UPS regarding the initiation of dimensional pricing on ground shipments in 2015 will have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy. Be watchful of this area.
As was the case in last year’s Supply Chain Matters commentary, the U.S. economy continues to show even more promising signs of manufacturing renewal and export recovery. All of this is dependent on a business logistics infrastructure that demonstrates world-class competitiveness. If there is a clear learning from the past three to four years, it has been on reality that supply chains exist and are now dependent on a global network of business logistics. The major decisions related to supplier and product manufacturing sourcing is now more vested in the tradeoffs of global logistics and transportation costs and the industry coming to grips with troubling capacity constraint trends.
We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication toward shifts in global sourcing, and implication on current operations planning and procurement management processes.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Supply Chain Matters had the opportunity to attend the Gartner Supply Chain Executive conference held in mid-May. As an AMR Research alumni analyst who specialized in research coverage of supply chain software and network technology, I am fully aware that the roots of this particular conference are deep, extending to the late nineties. The conference featured many well-known and respected research analysts and its reputation was often that of “must attend” among any who either practiced supply chain leadership or provided technology and services to the supply chain community. While we have admittedly not attended this conference for the past several years, we decided at the last minute to attend this year’s conference. Overall, the conference provided some highlights and disappointments. We walked away with impression that the conference is not what is used to be in terms of research depth, insights, and analyst personalities, although it still draws a very influential audience.
The opening keynote was a highlight since it reflected on a look back of supply chain management for the prior ten years, and Gartner’s perspective of supply chain requirements and needs for the next ten years. Acknowledged was that the span of control among industry supply chains are indeed wider and that 40 percent of senior supply chain leaders now report to their respective CEO. As we at Supply Chain Matters can certainly attest, Gartner further noted that articles about supply chains have tripled in the Wall Street Journal. That is somewhat of good news, and not so good news aspect since what happens in the supply chain more directly affects business results and overall performance. Further noted was that the adoption of cloud-based technology within industry supply chain IT environments has increased 40 percent, which is a rather significant development when one considers that supply chain systems are often viewed as mission critical in nature and scope.
Reflecting on the next decade for supply chain management, Gartner’s viewpoint is that industry supply chains will continue to lead in the next decade. However, spaghetti-like networks with silos of conflicting goals, not aligned to singular, over-arching goal remain as an obstacle that needs to be overcome. According to Gartner, too many people are bogged down in trivial tasks. Analysts pointed to talent management as a continuing challenge and top priority for the next three years. Further noted was that universities are not keeping up with changing skill needs. We are not completely convinced about that conclusion, but colleges and universities that specialize in supply chain management need to do a better job at overcoming cross-curriculum barriers to insure that students are prepared with broader exposures to other required skills. For technology adoption needs, Gartner cited social, mobile, cloud, advanced information analytics and the Internet of everything as the only feasible way to manage supply chains more profitably.
Tom Peters, noted author of the iconic book, In Search of Excellence provided the second day keynote, and candidly, could have well been the opening keynote because of Tom’s unique, direct communication style. He opened with the statement that “there is no more sexier profession than that of supply chain management.” He pointed to the management conundrum of “damned if you do, damned if you don’t” as especially pertinent to supply chain professionals and made reference to the “huge, huge, huge issue of supply chain network vulnerability.” Peter’s viewpoint was that supply chains are the focal point of all operations and should be more responsible for sales and marketing goal fulfillment as opposed to reducing costs. His belief is that a supply chain must have formal research and development or center of excellence group, or go home. One quote that especially caught this author’s attention related to the critical importance of managing supply chain risk: “You (the supply chain), can destroy an 80-year-old brand in a matter of a week.” Dwell on that statement the next time Finance questions the overall supply chain budget. Peter’s final words of wisdom were to de-emphasize items, trucks and planes and concentrate on big “S”, services.
Two other sessions we found to be insightful were one titled: The New Realities of Digital Manufacturing delivered by analysts Simon Jacobson and Mike Burkett, and the session: Key Findings from Gartner’s Chief Supply Chain Officer (CSCO) study also delivered by research vice-president Mike Burkett. Both sessions stressed the needs for industry supply chains to think more about product management and its integration to the new era of digital manufacturing technologies. Both the digital and physical worlds of supply chain processes are indeed on the verge of coming together. Among the key highlights of Gartner’s latest CSCO study was data reflecting that new product introduction and sustainability capabilities have been the most often added in the last three years by either direct or dotted-line reporting responsibility. According to the Gartner CSCO study, the top priorities for supply chain centers of excellence are:
- Standardize and improve processes
- Performance management and analytics
- Supply chain strategy
- Supply chain technology enablement
Yet, talent and change management appears to be lower in priority and Gartner raised the concern of why so low, since both of these competencies are required for the above to succeed.
Another rather important takeaway from Gartner’s latest CSCO study was the survey reflecting expected levels of investment and expected benefits over the next two years. Without taking thunder away from Gartner, the important takeaway for us was that product launch and portfolio management along with supplier collaboration and flexibility are highlighted as emerging medium and top priorities for investment in the next two years. That correlates with what we have been hearing and picking-up with our conversations with clients and readers.
In our Part Two posting, we will provide additional comments of some other highlights of the recent Gartner supply chain conference including the annual Top 25 Supply Chains announcements, along with some interesting and noteworthy presence among supply chain technology providers.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
In conjunction with its Supply Chain Executive Conference held this week, industry analyst firm Gartnerannounced its annual Top 25 Supply Chains rankings for 2014. This author attended this year’s conference and the Top 25 Supply Chains announcement dinner held at the conference. Supply Chain Matters will feature our summary impressions regarding the messages delivered at the Gartner 2014 conference in a separate commentary.
As has been our tradition, Supply Chain Matters provides our readers with our perceptions of the named Gartner Top 25 Supply Chains in the context of both this year and with previous Gartner’s Top 25 Supply Chains rankings. We now include a five year span of history in our perspectives commentary. To reiterate our previous declarations, our commentary should not be construed in the context of positioning our own or any other firm’s proprietary ranking process, but as a voice that has observed and provided commentary and insights concerning global supply chain industry activities and developments these past six years. It is a means for ongoing social-media based interaction regarding what it takes to be recognized as a top-performing supply chain given today’s complex and constantly changing business challenges.
Readers can click on Gartner’s press release announcing the 2014 Supply Chain Top 25 which provides the detailed rankings and comparative scores that led to the rankings. Subscribers to Gartner’s supply chain management and certain other research have access to detailed research reports concerning the Top 25 Supply Chains.
As a reference to our Supply Chain Matters readers, below is the announced 2014 ranking compared to four prior years of ranking:
First and foremost, Supply Chain Matters extends congratulations to each of the named supply chain organizations for achieving such recognition. There is obviously hard work that goes into achieving such recognition and citation.
Overall, we were a bit taken back by the similarity of this year’s rankings to that of 2013. In assembling the above comparison, we noted just subtle changes. With the exception of two new well deserved entrants, Kimberly Clark and Seagate Technology, the named Top 25 Supply Chains remain essentially the same. Perhaps that is a sign that world class supply chain capabilities overcome multiple years of challenges. That is, of course how Gartner is communicating the 2014 ranking.
The supply chain of Apple now occupies the number one ranking for seven running consecutive years. However, this year, the peer opinion voting was recorded as much closer, with number three ranked Amazon.com’s peer votes noted as 16 points below that of Apple. That was not the case in the 2013 ranking. Candidly, we expected Amazon to be the best candidate for dethroning Apple for the number one ranking in 2014. Apple’s rival Samsung Electronics did not achieve a top-five recognition but the firm’s composite score of 5.13 fell just below number five ranked Procter and Gamble, a stalwart in the Top 25 rankings for many years. P&G’s composite score was recoded as 5.20 and garnered the second highest ranking from Gartner’s analysts.
Reflecting on consistently number one ranked Apple, the bulk of that company’s supply chain capabilities exist from the scale and constant responsiveness of predominantly outsourced manufacturing and logistics partners. The cited Gartner 2014 Top 25 Supply chains of 3M (#19), Intel (#8) and Seagate Technology (#20) are major suppliers to Apple. One wonders why other major Apple suppliers such as Foxconn Technology Group (Hon Hai Precision), Flextronics International and Pegatron, along with a collection of other global scale Apple suppliers, have not been recognized. Perhaps that is attributed to Apple’s zeal for supplier responsiveness at the cost of overall financial and margin performance among its major suppliers, as well as major suppliers having a considerable dependency on Apple’s new product release (NPI) cycles. We brought that out in a commentary reflecting on the financial results of Hon Hai Precision, the parent of Foxconn.
The supply chain of Unilever has made steady progress over the past three year window in achieving a top five ranking and deserves special recognition. As in 2013, we continue to be perplexed how a restaurant services firm such as McDonald’s can be consistently ranked in the top five given a far different supply chain services model that is less asset intensive than others reside in manufacturing-centric supply chains.
We continue to note the remarkable progress and recognition of Lenovo Group, which despite having an emphasis weighted toward vertical integration of its supply chain capabilities, has climbed to Top 25 Supply Chains recognition for the past two years. Supply Chain Matters has previously made mention of Lenovo’s efforts to leverage its global supply chain scale via two major product acquisitions.
Dropping out of the Gartner Top 25 Supply Chain ranking for 2014 was the supply chains of Dell and Ford Motor Company. At the announcement dinner, Gartner provided honorable mention significance to the supply chains of Dollar General, DuPont, Ford Motor Company and Walgreens, and indication of perhaps future Top 25 rank possibilities.
As noted in our Supply Chain Matters commentary concerning Gartner’s 2013 ranking, the unfortunate aspect of Gartner’s Top 25Supply Chain ranking remains the relatively high threshold of corporate revenues which precludes up and coming manufacturers and retailers to be recognized. There remains too much of a dependency on Return on Assets which favors firms who elect to outsource the bulk of their supply chain activities. Supply Chain Matters does not subscribe to the opinion that financial metrics should be the majority driver for recognizing supply chain performance. It precludes noteworthy turnarounds in performance, overall supply chain process innovation and abilities to rise to a challenge in rather difficult industry settings. However, we were pleased that Seagate Technologies achieved recognition primarily due to its supply chain response to market opportunity after the devastating flooding in Thailand in 2011, which severely impacted the high tech disk-drive sector.
Our takeaway from Gartner’s 2014 Top 25 Supply Chain ranking is that more supply chains need to be recognized. While each of the cited 2014 Top 25 Supply Chains have earned such recognition, far more deserve recognition. On this blog, we will continue to strive to provide such recognition.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
This commentary is a follow-up to our previous breaking news posting regarding the announcement that supply chain corporate and individual certification organizations Supply Chain Council (SCC) and APICS will unite as one organization.
Today, the official announcement was distributed along with additional information and details regarding the proposed merger. Members of both organizations as well as all others can access all of this information at this web link.
Plans call for legal filings to be completed by mid-July with an interim board of directors established for the remainder of 2014. In 2015, as terms of board members naturally roll-off, the combined organization will be led by a single board of 12 members. Officers and committee leaders will be chosen in compliance with bylaws in effect.
Make no mistake that this is significant news in supply chain management talent management circles.
Earlier today Supply Chain Matters had the opportunity to speak directly with Abe Eshkenazi, the CEO of APICS regarding the announcement. While the briefing materials are extensive, we wanted to gain some additional background information. As we noted in our initial commentary, prior collaboration among these two organizations have occurred for some time. According to Eshkenazi, the talks heated-up last spring and summer; the more that these discussions progressed, the more apparent it became that this was an “opportunity to advance the industry.” Because both of these organizations are classified non-profits, the effect of this merger is a combination of balance sheet assets, revenues and expenses. SCC has had some prior challenges with its balance sheet and expense controls.
Eshkenazi further indicated that an important consideration in the overall planning is retaining the value of the important brands among the two organizations. While the APICS brand will be maintained, the planned new branding for SCC activities will be branded as APICS Supply Chain Council, which will also oversee efforts that are currently organized under the APICS Foundation segment. Both organizations are content developers and there is recognition that this is the real power of this combination. Regarding certification programs, this merger provides the opportunity for a tighter integration between corporate and individual certifications along with combined body of knowledge and thought leadership regarding supply chain management.
A question we raised was the important yet significant differences among both of these organizations in the delivery of training programs. APICS currently provides the bulk of its member training through its local chapters offering a wide range of instructors while SCC delivers much of its training directly to corporate members by a smaller cadre of specialized instructors in regionally scheduled or corporate member training sessions within global chapters. APICS has a strong presence in North America along with roughly 90 instructional partners across 40 countries. Eshkenazi indicated confidence that the best of both models will be evaluated to assure continued value. He further pointed out that the combination with APICS provides SCC the benefit of increased scale and resources.
Finally, we wanted to explore with Eshkenazi what the impact of this proposed merger might be on other supply chain management focused organizations. Abe was very forthcoming in indicating that he has personally called the leadership of Institute of Supply Management (ISM) and the Warehouse Council and extended an open invitation for further joint collaboration. The APICS CEO will be personally attending the upcoming Annual ISM Member Conference that begins on May 9 and is invited to sit at the table of Thomas Derry, ISM’s CEO. Readers can certainly speculate on that conversation.
From our lens, after talking with a number of supply chain colleagues, it would appear that APICS is positioning itself as the evolving “kahuna” of supply chain management training, certification and process frameworks.
There is no secret that there are probably too many organizations currently marketing supply chain focused training and process excellence and this announced merger may be a forerunner to the thinning of the herd. Time and broader supply chain management individual and community endorsements will determine how all of these efforts ultimately turn out.
© 2014, the Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Today’s constantly changing business needs have dynamic implications in supply chain management, for product and services focused supply chains. One of today’s more important challenges relates to what companies can do to ensure that changes across supply chain networks are integrated to operations plans and strategies.
Professor Yossi Sheffi, founder of the MIT Center for Transportation and Logistics (CTL), recently noted in a commentary featured on Supply Chain MIT and LinkedIn the following: “An area where (supply chain) agility is sorely needed is distribution. Logistics networks are constantly being reconfigured in line with changing market conditions.” Professor Sheffi goes on to indicate that the pace at which networks are reconfigured will continue to increase as new innovations emerge, particularly as supply chains support combined discrete product and service package needs.
To further explore this challenge, Supply Chain Matters recently interviewed two executives at supply chain consulting firm Chainalytics. Vice President Steve Ellet leads the Supply Chain Design Practice focusing on applying large-scale optimization and simulation models to strategic and tactical supply chain network planning. Vice President Irv Grossman leads the Supply Chain Operations Practice where he is responsible for the delivery of services related to service supply chains, encompassing reverse logistics, after-sales service, and service-centric networks.
The following is a summarization of our discussion.
Q: How often should an organization be reviewing the supply chain network design plan?
Our conversation noted that supply chain network design is no longer a one-time exercise. There is a constant need to keep the supply chain network model refreshed to reflect current supply chain process activities. Strategy changes are occurring all of the time. Merger and acquisition, addition of new customers or required changes to customer fulfillment needs all can impact the network. Organizations need to have the model up and ready to be able to assess the implications of such changes.
Indeed, supply chain network design is no longer an annual or periodic exercise, but rather an active tool for strategic, tactical and operational assessment. Supply chain network design technology has become more and more mainstream for many teams. However, such models do require ongoing expertise and continuous refresh. Teams need to know what they are doing, and that is where a specialist comes into play.
In the specific area of B2C and retail focused supply chains, further consideration are the rapidly changing implications on Multi-Channel or Omni-Channel commerce where for instance, retail stores have become customer fulfillment centers or DCs service both cross-dock distribution, online fulfillment or direct ship needs. Retailers trying to manage two separate networks, one for brick and mortar and one for online, may well be sub-optimizing supply chain network capabilities. Retailers for the most part are just beginning to internalize such implications and these are important changes that need to be reflected in supply chain network design and fulfillment strategies.
Q: What should teams specifically be reviewing? Should supply chain network design be utilized as a means to evaluate different alternative business scenarios?
Noted in our discussion is that this is an area where Chainalytics consultants help all the time. Some supply chain decisions are constant, some are periodic and others ad-hoc. Teams need to be up-to-date with current data regarding the network. Transportation or fuel costs are changing constantly, coupled with changing key customers and suppliers. Each should be incorporated in the network model on a timely basis.
Certain tactical decisions that are easy to implement or do not require expensive capital can be continually evaluated with a vibrant supply chain network model. Examples may be moving a fulfillment site for supporting a key customer, adding a new production line, altering distribution patterns to reflect an expected product demand spike. Decisions focused on entering a new market, closing or adding a new facility are less frequent, but have considerable implications financially and otherwise. Models therefore can be configured so that data that is constantly changing is reviewed on an ongoing basis while other, more strategically focused network needs are reviewed periodically based on a particular business need. A decision as to whether to acquire another business or enter a new market can be quantifiably assessed as to impact on the current supply chain network.
The important tenet is that the network model provides a singular information reference point to depict profiles and changes, and is continually being refreshed.
Outside consultants add value when firms lack the knowledge for knowing what specific metrics to assess and how to represent them in a foundational network design. At what point does current supply chain performance imply an analysis of the current network to uncover bottlenecks in capacity, significant cost or service degradation? An experienced analytics team can help assess when it is time to evaluate or recommend needed changes.
Q: What best practices does Chainalytics recommend for clients to assure continuous supply chain network design processes are integrated into existing planning and operations proceeses?
Both Steve and Irv pointed out that performing a one-time large-scale network design consulting engagement is becoming less common in favor of ongoing assessments that make network modeling a continuous process that is part of the fabric of decision-making support tools. This makes it easier to assess network changes when constant business change becomes the norm.
Further brought out in our discussion is that change management competencies have become much more important for the network analytics team. Who is involved, who is brought in to assess various network scenarios, and how senior management becomes comfortable with recommendations from network design teams becomes integral to ongoing business planning and are now aspects of this change management component. While the analytics team has confidence in the results of network optimization, transference of that confidence to the broader business team to support such recommendations is often a stumbling area that is implied in change management. Chainalytics has advised clients on implementing a model value assurance scorecard process to assist in these efforts.
Q; Are there special considerations for service focused supply chains?
Service-focused supply chains are somewhat unique in that demand patterns are different, driven more from location of equipment, service facilities, or customer installations. There tends to be a lack of understanding on the overall elements and cost structures of the end-to-end value-chain network. Supply network changes constantly impact services businesses and, according to Ellet and Grossman, such supply chains can indeed benefit from use of supply chain network modeling to add more intelligence and context to decision-making. Consider that sometime in the not too distant future, parts or components can be produced by 3D printers located within key physical areas of the value chain.
While this segment has admittedly been slower than product-focused supply chains in the adoption curve, there are proven benefits. As an example, Chainalytics consultants have conducted previous network design and operations projects for an automobile parts distributor, a natural gas utility modeling the placement of service crews and parts, and a beverages supplier needing a model for network dispensing equipment with periodic maintenance and other needs.
In summary, today’s more dynamic clock speed of business change warrants consideration for continuous use of supply chain network design modeling, integrated with operational decision-making. We would like to thank both Steve Ellet and Irv Grossman for speaking with Supply Chain Matters on these important capabilities.
Disclosure: Chainalytics is a client of the Ferrari Consulting and Research Group LLC.
Boeing has announced the results of new commercial aircraft delivered in the first quarter, declaring the deliveries rose 18 percent from year earlier results. That headline seems to be somewhat of a misnomer.
First quarter 2014 deliveries included 161 commercial aircraft compared with 137 in Q1 of 2013. The misnomer is that all operational and in production 787 aircraft were in a grounded condition a year ago pending FAA investigation of suspected lithium ion battery fires, thus a comparison to last year’s Q1 has little meaning. Boeing re-started 787 deliveries in early May of last year.
Boeing delivered 18 new 787’s in Q1, a shortfall of the company’s planned 10 aircraft per month goal. That compares to 25 new 787’s delivered in Q4 and a continued sign of production and other supply-chain problems associated with the Dreamliner. On the positive side, Boeing delivered an incredible 115 new Next Generation 737 aircraft in Q1.
Supply chain glitches or issues involving the 787 have been ongoing. In early March, there were reports that inspections were being conducted for suspected hairline cracks on 43 yet to be delivered Dreamliner’s because of potential flaws in a manufacturing process concerning supplier Mitsubishi Heavy Industries. In late March, the FAA issued its fourth airworthiness directive involving the 787-8 model, ordering an immediate fix to aircraft containing certain General Electric power plants where a suspected software glitch could cause the engine to lose thrust when close to landing. There have been other reports indicating that Boeing has experienced some difficulties in ramping-up overall production volumes at its Charleston South Carolina final assembly facility, prompting a hiring surge to augment the existing workforce there.
Currently operational 787’s with GE engines are cautioned not to fly through severe thunderstorms after reports of some ice build-up incidents. In early February there was a report that Boeing was continuing to pressure suppliers for cost concessions and one major supplier, Sprit Aero Systems reported significant pretax charges for the final three months of 2013, including $385 million directly related to work performed on the 787.
Boeing’s stated goal for 2014 is to deliver 110 long overdue Dreamliner’s to airline and leasing companies, roughly 27-28 per quarter. Q1 was obviously not what the 787 supply chain ecosystem wanted in performance and bar has risen for Q2 and the remainder of the year.
In an era of high customer expectations and pay for operational performance, Boeing needs to quickly shift its 787 supply chain objectives from cost control to achieving and maintaining reliable delivery and operational performance for airline customers.