Today, industry analyst firm Gartner announced the findings from its annual Supply Chain Top 25 rankings, an annual event that comes with the usual fanfare held at the Gartner SCM Executive Conference.
As has been our previous posture, Supply Chain Matters is providing its social media voice of observation and comment and not an endorsement of any analyst firm rankings of supply chains. Our previous annual commentaries have well reflected our beliefs that such ranking criteria can be misconstrued, especially when ranking criteria would tend to favor supply chains that avoid major ownership of assets and inventory, or tend to weight other criteria lower, such as sustainability and social responsibility practices. We will, however complement Gartner for finally including much more transparency in disclosing the individual ranking scores in its press release announcement.
First and foremost, Supply Chain Matters once again extends our congratulations to those supply chain organizations cited in the 2016 Supply Chain Top 25 rankings. Such recognition often reflects a lot of hard work and responsiveness to changing business needs, especially in today’s fast-changing industry environments.
Unlike previous years, the 2016 rankings feature a healthy complement of movement as well as new entrants, which is good. As has been our practice in prior commentaries, we reflect below the history of Gartner Supply Chain Top 25 dating back to 2010. We believe that providing this broader context is more pertinent for contrasting usual players vs. those supply chains on a transformative journey.
For the first time, Unilever garnered a well- deserved number one 2016 ranking, having climbed from Number 25 in 2010. Rounding out the 2016 top five rankings were McDonalds, Amazon, Intel and H&M Hennes & Mauritz. Nestle’s 2016 ranking as #10 from last year’s #17 ranking is noteworthy and well-deserved.
Amazon’s drop from being number one in 2015, to the number three ranking in 2016 was somewhat a surprise, since it garnered by far the highest peer opinion votes. What might have led to such drop was Amazon’s current heavy investment in added supply chain capabilities in customer distribution centers, direct leasing of air freight and trucking fleet. We suspect that as this current last mile customer fulfillment strategy continues to manifest itself in the months to come, that peer vote will indeed be perceptive.
The five new entrants to the Top 25 Supply Chains were BASF, BMW, GlaxoSmithKline, HP and Schneider Electric. From our lens, HP was somewhat of a surprise given its corporate split as well as the magnitude of cost and headcount cuts that have occurred. HP being ranked higher than Lenovo (#25) is perplexing given what the latter has accomplished in three-year weighted global revenue growth and inventory turns.
In its announcement, Gartner cites an increasing emphasis on corporate social responsibility as an emerging competency. This author just returned from the ISM 2016 annual conference where I had the opportunity to view a presentation by PepsiCo on its efforts in this area. I walked away very impressed with PepsiCo’s far-reaching efforts that manifest not just supply chain focused sustainability practices, but overall business sustainability tenets that include social, environmental and business tenets. I was therefore disappointed in the 4.00 CSR Component Score attributed to PepsiCo, especially in the light of other food and beverage firms.
As noted in our Supply Chain Matters posting reflecting on the 2015 rankings, some supply chain teams along with their ecosystems will be pleased and others rather disappointed after lots of hard work. Industry peers may also be surprised. There is no pleasing in any form of ranking and consistency of objectivity based measures and process remains essential.
Once again, congratulations to all supply chain teams included in the Gartner 2016 Supply Chain Top 25.
Supply Chain Matters provides an additional update relative to our previous commentary regarding the Tesla Motors Model 3 Product Unveil that occurred several days ago.
Yesterday, Tesla delivered an update relative to its Q1 FY16 operational and delivery performance. The update indicates, among other items that the electric powered automotive provider delivered a total of 14,820 completed vehicles in Q1 consisting of 12,420 Model S and 2,400 Model X automobiles. While the statement indicates that Q1 operational performance was almost 50 percent more than the year earlier period, equity analysts were expecting an output number of upwards of 16000 vehicles.
Tesla further indicates that it is on-track to deliver 80,000 to 90,000 new vehicles in 2016.
The statement further indicates that deliveries were impacted by severe Model X supplier parts shortages in January and February that extended longer than planned. According to the update, build rates for the Model X in March rose to 750 vehicles per week once the parts shortages were resolved, but many of the vehicles were built too late to be delivered to owners before the end of the quarter.
Of more interest was a candid admission that the root causes of the parts shortages was:
“Tesla’s hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house.”
First and foremost, Supply Chain Matters applauds Tesla for its direct candor.
There are very few automotive manufacturers, and for that sake, other industry manufacturers that would publically state such candor even though internal operations was well aware of the challenges that were encountered and the efforts required to make the numbers. Tesla clearly indicates that the operational details disclosed for Q1 were provided because of: “unusual circumstances of this quarter and will not typically be provided in quarterly delivery releases going forward.”
We none the less, applaud this action because it provides the broader industry supply chain community another important learning relative to the importance of design for supply chain practices, where product design and product management teams work collaboratively with supplier sourcing, procurement and manufacturing operations teams to insure that product design and manufacturing specifications can adequately meet production volume scalability requirements. Obviously there is learning relative to supply chain risk mitigation, having back-up contingency plans in-place to account for supplier snafus or shortcomings.
Supply Chain Matters continues to admire Tesla’s boldness and embrace of modern supply chain and manufacturing practices and such public lessons are indeed learning that even the best can encounter a snafu.
When product design boldness outpaces the realities of the current supply chain, something will give. Apple, among other supply chain leaders, have previously stumbled in new product releases because of design for supply chain factors not addressed in the initial product launch and release cycle.
Tesla indicates that it is addressing root causes to insure that these mistakes are not repeated in the Model 3 launch. We raised that possibility in our prior commentary.
Time will eventually tell the final outcome.
Earlier this week, Tesla indicated that customer reservation orders for the new Model 3 had surpassed 276,000 orders. At current production rates of the Model X of 750 vehicles per week, that order backlog is the equivalent of 368 weeks or roughly 7.36 years of production at current volumes. That gap alone represents the critical tensions of elegant or leading-edge product design contrasted to customer delivery and experience expectations. The end-to-end supply chain becomes the important difference in meeting such expectations.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters had the opportunity to attend the 2016 Crossroads Conference hosted by the Massachusetts Institute of Technology (MIT) Center for Transportation and Logistics (CTL). Crossroads is an annual event that began 12 years ago for the benefit of MIT CTL corporate sponsors, and each year the conference brings together leading-edge industry and global supply chain trends and insights developed by MIT and external academic focused research. This Editor has been fortunate to be invited to this event for many prior years, and this year was no exception.
The agenda included a presentation by Sertac Karaman, MIT Assistant Professor of Aeronautics and Astronautics on the timely topic: Autonomous Vehicles: Driving Change in Logistics Networks. In the talk, Professor Karaman traced the recent history of self-driving cars after Google developed the first autonomous vehicle. What was most interesting was his predictions for what’s next in this area, which he indicated would be broader deployment of autonomous vehicles operating in distribution and logistics centers within the next two years, and within what he described as suburban focused driving environments within the next six years. One of the remaining challenges to be addressed, according to Karaman, was urban delivery and logistics requirement. Here, he referenced efforts underway from UK based Starship Technologies directed at a specialized autonomous delivery vehicle that can navigate urban landscapes. The summary conclusion is that there has been substantial technological advancement in autonomous vehicles over the past decade and the forthcoming two-year immediate impacts in supply chain environments will be in low-speed, low complexity environments in existing distribution centers and warehouses. Beyond that, there are many other opportunities as technology advances continue.
A presentation by Matthias Winkenbach, Director of the MIT Megacity Logistics Lab at CTL addressed the topic: Big Data and the Journey to a More Efficient Last Mile. Winkenbach reminded the audience that 60 percent of future GDP growth will emanate from 600 global cities, and that the logistics industry must tackle the current huge density of retail outlets that exist in mega city landscapes through more advanced use of big data integration techniques involving geographic, delivery requirements, physical sensor and other pertinent data sources. By combining publically available data such as income demographics, density of commercial establishments, road network density and capacity, with transactional data related to orders, MIT researches have been able to plot and simulate logistics needs for the delivery of food and beverage deliveries in some of the world’s most dense mega-city complexes. The integration of this data was described as the ability to correlate customer stops with special delivery services, to optimally identify delivery person walking time needs (off-vehicle operations) along with providing drivers information on optimal parking locations or congestion points to avoid at certain times.
A rather interesting insight from the Q&A session of this presentation was actual audience polling that revealed that a lot of data is actually being collected by organizations but is not being currently leveraged because of a number of challenges related to data accuracy, understanding, size and complexity as well as technical competence.
A fascinating but very concerning presentation came from Retsef Levi, Professor of Operations Management, MIT Sloan School of Management whose topic was: Adulteration Risks in Global Food Supply Chains Emanating from China. He addressed MIT research spanning over two years which was funded by the U.S. Food and Drug Administration. Observed was that imports of food shipments into the United States have dramatically expanded to include upwards of 80 percent of seafood, 70 percent of honey and other basic food commodities. The FDA sponsored Food Safety Modernization Act signed into law in 2011 was passed to prevent food safety problems rather than regulatory agencies having to merely react and respond to growing incidents. The act clearly shifted the responsibility and accountability for food safety with the industry, including validation of the food supply chain. MIT assembled a cross-departmental research team to address how does the structure of the food supply chain impact risk? Because of the FDA sensitivities related to this research, we will refrain from sharing more of details. Suffice to note to our readers that the research identifies compelling risk drivers that include unmonitored stakeholders, overall dispersion of food supply chains, regulatory strength and the targeting of key strategic commodities that are common to many food products.
An industry focused presentation came from Joel LaFrance, Supply Chain Visibility Lead at General Mills. The day before the Crossroads conference, a group of CTL corporate members identified supply chain visibility as their most important and compelling challenge. That theme was addressed as LaFrance addressed the importance of defining supply chain visibility lexicon, as contrasted with transparency and traceability. He described the new influences impacting General Mills supply chains including unprecedented complexity and volatility as well as the convergence of physical and digital processes. The consumer goods producer started it supply chain visibility journey nearly 18 months deploying a series of use cases and initiatives directed at supporting line-of-business needs. Further shared were top four learnings that included realization that connected data is critical, that insuring end-to-end supply chain visibility changes that way work is performed, along with prioritizing end-to-end visibility needs as opposed to targeting specific functional needs.
This author had to cut-short his attendance for the full agenda, because of a previously scheduled client commitment. However, we did obtain a copy of CTL Executive Director Chris Caplice’s presentation: Transforming Professional education: An Update from the Front Line. Addressed was MIT’s ground breaking efforts in delivering an online ‘Micro-Master’s’ Program for Supply Chain Management that features open enrollment, online certification and no admissions criteria. While the program is characterized as not an MIT degree program, it does provide a faster path towards a degree. The curriculum will include courses such as Supply Chain Fundamentals, Supply Chain Analytics, Supply Chain Design and Technology. The online learning experience includes on-demand, ‘bite-sized’ video segments of 3-9 minutes coupled with quick reinforcing questions and extensive practice problems after each section. Current enrollment in this online program now exceeds 28,000 and includes student representation from 181 countries which is quite a testament to the global interest levels in acquiring supply chain management skills. This innovative program was described as helping organization’s to identify supply chain talent because MicroMasters provide a proxy for grit. It further helps to recognize and foster high-potential achievers by recognition.
This was another informative Crossroads conference one providing broader perspectives on the direction of supply chain management.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
In an early December 2015 Supply Chain Matters published our commentary, Both China and the U.S. PMI Levels at the Same Values: Should This Be a Concern? In our posting we called reader attention to both the ISM PMI, the reflection of U.S. based supply chain activity, and the Caixin China PMI had recorded the exact same value of 48.6, a sign of troubling supply chain and production activity contraction. We elected to publish this commentary as a reference point, a time when the world’s two largest economies and engines of supply chain activity both reported similar PMI readings. While negative changes surrounding China’s PMI garners immediate business headlines, we opined that attention should be pointed to what’s going on in the U.S. as well.
As we pen this posting on the first Monday of 2016, the exact similar development has occurred, but this time, global equity markets are responding rather negatively to this news.
Today, stocks in China plunged nearly seven percent, triggering an emergency trading suspension after release of December’s manufacturing activity data. The Caixin China General Manufacturing PMI for December was reported as a value of 48.2 in December, down from 48.6 in November. The headline for this China PMI report was that December reflected the seventh time in the past eight months that production levels had fallen. According to the report authors, total new work continues to fall while new export orders declined for the first time in three months. With January traditionally being a slow production period because of the week-long celebrations and factory shutdowns related to the Lunar New Year, there is obvious cause for concern.
This morning, the ISM PMI, a reflection of U.S. production and supply chain activity was also reported as a value of 48.2. While the New Orders and Production indices registered higher readings than November, they each remain at contraction levels. Ten out of eighteen manufacturing industries reported contraction in December activity with an indication that contraction is faster. As we pen this commentary about two hours before the close of trading, the Dow Jones Industrial Index is down over 390 points, a reflection of both the China and U.S. supply chain news.
With the two largest economies reflecting continued manufacturing and supply chain contraction, the response at this point is even more pronounced. Events and growing tensions in the Middle East have further added to widespread concerns. The 4th quarter is traditionally one of robust activity as manufacturers close out the year with holiday and other end-of-year related orders, and now with two consecutive months of notable measured contraction, global investors have now taken pointed notice. Both of the globe’s largest economies face a greater risk of weakening economies and multi-industry supply chains are encountering the consequences.
The first of our 2016 Predictions for Industry and Global Supply Chains, available for complimentary downloading in our Research Center, predicts that industry supply chains should anticipate a year of slow or declining growth, with high uncertainty in planning product demand and supply needs. So far, the New Year is tracking toward such uncertainty, and once again, the two largest global supply chain hubs are reflecting another month indicating additional cause for concern.
Later in January, our Supply Chain Matters Quarterly Newsletter, sent to registered subscribers of this blog, will further analyze trends across broader global supply chain regional indices.
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.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.