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.
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.