This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four

Predictions Five and Six

Prediction Seven: Expect additional M&A and strategic partnership activity among supply chain technology, consulting services and ERP providers as vendors shore-up application areas with the best prospects for sustained future growth.

This is the natural follow-on to predictions five and six.  As concepts of supply chain control tower, more leveraged deployment of predictive analytics, multi-channel supply chain operations management and cloud computing options gain more traction and interest among technology buyers, the vendor community will make additional market moves either in acquisition or strategic partnerships to shore-up overall product offerings for buyers.

While we predicted high activity in 2011 which do not come to pass, we believe that 2012 will provide more motivation, namely because overall spending on software is predicted to decrease in 2012. This makes any path to growth dependent on a keen focus on near-term customer buying needs, quickly filling gaps in technology offerings or gaining market growth by outright acquisition.

Supply Chain Matters believes that two smaller vendors in the planning area, and perhaps one or two vendors in the B2B procurement area are likely targets in 2012 from multiple larger acquirers and we will anticipate, as our readers, on what actually transpires.

We expect more acquisition efforts by the major ERP, B2B cloud services and procurement technology providers, and do not be surprised if some leading vendors in these new adoption areas get acquired by larger players. Some targets will be acquired with high multiples to prevent competitors from scooping them up.

B2B commerce and collaborative planning and execution networks will most likely be the hottest area for deals and shifting of players and anticipate more announcements as big players IBM, Salesforce, Amazon, Google and  possibly Microsoft square-off and bankroll for control of online commerce infrastructure and business process control.  Similarly, SAP and Oracle will continue to fill-in advanced supply chain technology software gaps, particularly in cloud and control tower areas.

Prediction Eight: The challenges related to higher incidents of counterfeit products, cargo theft and other unscrupulous activities within and across global supply chains will finally motivate government and industry to step-up process standards and corrective mitigation efforts.

This collective area has been percolating for many years and we anticipate that 2012 will be the year when government and industry finally become motivated to take action to address the growing incidents of non-conforming materials that have penetrated multi-industry global supply chains.

In the U.S., legislative leaders and industry groups have become much more alarmed with the existence of counterfeit electronic parts penetrating defense and industry oriented supply chains, much of which is alleged to be originating from China and other countries.   The U.S. government has already discovered 1800 cases of suspect counterfeit electronics being sold to the U.S. Defense Department from commercial and military suppliers.  The Semiconductor Industry Association testified that U.S. semiconductor companies face more than $7.5 billion in costs related to counterfeit parts each year as non-conforming electronic microelectronics are being embedded in automotive, aerospace, communications, medical device, and other industry supply chains.

In our industry-related prediction pertaining to Pharmaceutical and Healthcare, we noted that increased shortages of drugs has led to more unscrupulous and criminal behavior relative to grey market supply, cargo theft and prescription drug abuse.  Increased outsourcing of production to global contract manufacturers and API providers adds to the problem.

Regarding cargo theft, brazen criminals have stepped up their sophistication of methods in stealing whole cargo shipments, by utilizing active surveillance of driving patterns, GPS global tracking and other means to circumvent existing security measures.   A challenged economic environment often leads to increased criminal behavior, and in 2012, the criminals can leverage more sophisticated means and methods. Stolen cargo adds to the problem of non-conforming products.

Look for governments to increase the pressure on industry players to accelerate initiatives in authentication, tracking and genealogy of components, parts and raw materials. In the U.S., state wide initiatives and efforts were enacted to overcome lack of any concerted action by the federal government. In Pharmaceutical and healthcare, the looming deadline is the California anti-counterfeiting and diversion legislation which requires pedigree tracking.  After numerous industry lobbying efforts to postpone the implementation, the program remains target for implementation in 2015.  Serialization and authentication program mandates continue to evolve across the Eurozone countries and Brazil has called for implementation of serialization and track and trace requirements in 2012.

As the deadlines come closer, and the costs in terms of revenue, liability and implementation costs loom ever larger, we believe that industry teams will become much more actively involved in influencing some forms of global-wide process standards and inter-industry cooperation in sharing product movement information across global supply chains. We may finally have the opportunity to observe industry teams stepup efforts to actively influence global standards and enhanced mitigation initiatives in prevention as well the tracking and interception.

This concludes Part Six of our Supply Chain Matters 2012 Predictions.  In Part Seven, we will explore our Prediction Nine, our continued belief in wider-scale adoption of and leverage of in-memory computing technologies harnessed into predictive analytics and decision-making process needs.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

One of our 2012 Predictions for Global Supply Chains in 2012 calls for additional challenges and turmoil for the high tech and consumer electronics industry.  The issues  began manifesting themselves in a highly visible way in 2011 with the severe earthquake and tsunami that struck northern Japan and more recently, the effects of the severe monsoon related floods that impacted Thailand.  Supply Chain Matters provided multiple commentaries reflecting on these problems. This author had the opportunity to provide expert background commentary in a recent Fortune-CNN Money commentary regarding the new fragility of global supply chains.

The latest public acknowledgement of the turmoil that is occurring from behind the scenes comes from chipmaker Intel, who had to lower its fourth quarter sales outlook by $1 billion this week.  The CFO of Intel noted that reductions in inventories are occurring across the high tech supply chain, particularly over the last two weeks as OEM’s continue to adjust plans to deal with a significant shortage of hard disk drives in the first half of 2012.  Behind the scenes, personal computer OEM’s have been assessing how severe the shortage may be and appear to be allocating what supply they will have to higher margin, full featured and more expensive PC’s.  The cascading effect has apparently now reached Intel in its planned supply of microprocessors for OEM’s.  The Silicon Valley.com article notes industry analyst firm IDC indicating that PC sales volume could be 10 to 20 percentage points lower in Q1 of 2012.  That IDC number was in the range of 9 percent just a few weeks ago, which indicates that the severity of supply shortfalls are becoming more understood.

Meanwhile, Western Digital now indicates that it has been able to resume production at one factory much sooner than anticipated while also shifting some sourcing and production arrangements. The company will manufacture head sliders in both Thailand and Malaysia. Western Digital also indicated  a preliminary estimate of losses of $225-$275 million, beyond what it may recover from insurance coverage.

The Wall Street Journal has also reported that ON Semiconductor, which produces chips for audio and power management used in mobile phones, autos and portable electronics, has now indicated that it will end all production at its Sanyo Semiconductor production facilities in Ayutthaya, Thailand, and provide limited production at its Bang Pa site.  Most production will be moved to Malaysia, the Philippines and China.

We will certainly hear from more high tech OEM’s and component suppliers as the aftereffects of the Thailand floods continued to cascade across high tech and consumer electronics suppliers.  While larger companies may well have the financial and other resources to mitigate business impacts, it may well be a variety of smaller suppliers who suffer continued impacts or have to succumb. Time will tell.

As we noted earlier, if you plan to buy a new PC, you might want to do it now vs. postponing that decision to 2012.  The price may well be a lot higher, and availability to bit more scarce.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

In a previous commentary posted in October, we alerted our Supply Chain Matters readers to prepare contingency and risk mitigation plans concerning the deepening financial crisis occurring in Europe. In the commentary, we outlined three potential areas of risks in the coming months, and highlighted the ongoing broader risks for currency and cross-border trade. The biggest risks however unfortunately fall on small and mid-sized manufacturers.

A recent Financial Times article (paid subscription required or metered free view) brought to light a stunning effect of these risks.  A Swiss based manufacturer with a 350 year record of continuous operations was forced to outsource the majority of its production activity.  Cham Paper Group, a specialty producer of packaging papers indicated it would cease all production in the village of Cham Switzerland because of the dramatic appreciation of the Swiss franc.  Two-thirds of the company’s 312 jobs would be lost when production is moved to Italy, a country in another fragile financial state as well.

While larger firms can often adsorb financial and currency shocks, smaller as well as some larger firms can succumb. To buffer an unprecedented level of speculation among currency traders concerning the “safe-haven” Swiss franc, The Swiss National Bank has been actively supporting a SFr1.20 floor for the Euro against the franc, but that level may be too high for firms to do business with external customers. The Swiss franc has already appreciated upwards of 9 percent. Manufacturers have had to raise prices, cut costs, raise productivity or shift production to lower-cost regions. Many Swiss manufacturers are forcing workers into longer work weeks for the same or no overtime pay in order to buffer the effects of the currency appreciation.

The FT article also makes mention of Bobst, a SFr1.3 billion producer of packaging equipment with over 90 percent of its sales focused outside of Switzerland. That company has been forced to shed 8 percent of its 5300 workers, mostly in Switzerland.

In today’s global based economy, there are just a handful of companies that boast of a 350 year existence in one manufacturing location.  It is therefore a tragedy to read how a company like Cham Paper has had to forced to adjust and respond to the ongoing European financial crisis. It is yet another stark reminder that in today’s highly uncertain and turbulent business environment, no company is immune to risk.

Bob Ferrari

We have another reader update regarding the global supply chain impacts from the devastating monsoon floods that have impacted Thailand and other southeast Asian countries.

While current news reports indicate that some of the flood waters are receding and the situation is improving, the effects remain.  In human tragedy, the death toll no exceeds over 600 persons, and many continue to suffer from the after effects of this natural disaster. The Associated Press reports that over two-thirds of the country’s provinces have been affected by the floods. Seven of the country’s important industrial parks were flooded impacting what is forecasted to be two percentage points off Thailand’s GDP growth this year. The United Nations Food & Agriculture organization has warned on the potential for severe loses in agricultural food production across the region.  Rice supplies are particularly impacted since over 12 percent of rice farmland has been damaged across Thailand, along with another 12 percent in Cambodia This is also in addition to the rice crop damage caused by the tsunami in northern Japan.

Our last update noted the significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing. An article published in Bloomberg BusinessWeek this week features an interview with Seagate Technology CEO Stephen J. Luczo.  Seagate was one of the hard disk drive manufacturers whose factories in Thailand were largely spared, but Mr. Luczo indicates in the interview that the impacts are much longer than people are assuming, until at least the end of 2012. Average HDD drive prices have already spiked by 20 percent and higher and what supplies and capacity that remain are being bargained among major OEM manufacturers. According to Mr. Luczo, some have offered $250 million upfront to secure supply. Supplies and precision production equipment from as many as 130 suppliers may still be under water, and there are concerns that smaller suppliers may not have the financial resources to rebuild.  A spokesperson for disk drive motor manufacturer Nidec reported that divers were sent into its factories to unbolt production equipment to be floated to safe areas, and later transported to alternative Nidec factories in China and the Philippines.

Computer OEM’s Dell and HP have weighed in with statements related to their latest earnings announcements.  Dell indicated that it assembled a risk management team within 48 hours, and began pulling in component inventories from suppliers into its own warehouses. Dell expects the aftermath of the floods to be an issue for the next couple of quarters.  HP indicated that it began to make strategic buys of HDD inventory in October, and indicated tough sledding for others in the industry. Industry analyst firm IDC now forecasts that PC shipments will decline between 2.2 and 3.4 percent in the fourth quarter, down from a previous forecast for 5.1 percent growth. According to IDC, Q1 output may drop anywhere from 1.8 to 13.4 percent.

In automotive supply chains, Honda continues to appear as the most severely impacted OEM, having to previously cut-back production by as much as 50 percent in some regions. The company has now indicated that it will begin to increase production across its North American plants in the next two weeks. Toyota, who suffered a sharp drop in fiscal second quarter earnings withdrew its earnings forecast for the remainder of the year as it continues to navigate its way through this latest supply chain shock. Toyota indicated that between October 10 and November 12, the impact of the floods on closed facilities resulted in 150,000 units of lost production.

At this point there is little question that the supply chain impacts from the floods in Thailand will be an ongoing business headline for some months to come and supply chain response management initiatives will be critical for the many companies impacted.

Bob Ferrari

As we transition into the final month of 2011, it is time to re-visit the Supply Chain Matters 2011 Annual Predictions for Global Supply Chains which we outlined a year ago.  Our annual process is to first re-visit past projections made for the current year, in this case 2011, and declare some projections for the upcoming 2012 year, which will come in a later series of postings before the end of the year. In our Part One posting, we provided a scorecard of our first two predictions. In this Part Two posting, we will revisit predictions three and four.

Prediction Three: As in 2010, incidents of supply chain risk, disruption, and breakdowns in quality will unfortunately continue.

Our prediction was that similar to 2010, we believed that 2011 would bring even more severe incidents of supply chain risk, and consequently finally bring senior executive attention and leadership to the area of supply chain risk identification and proactive risk mitigation planning.  This was one prediction that we were more than willing to see unfulfilled, and looking back, we are astounded at the degree of severity and tragedy that continues to occur in this area.

A highlight of 2011 global supply chain disruption has to include two of the most devastating incidents that have impacted global supply chains, namely the severe earthquake and tsunami that impacted northern Japan in March, and the ongoing monsoon-related floods that are occurring in Thailand and in other Southeast Asian countries.

The Japan incident not only caused untold human tragedy, but it has had a permanent impact on companies residing in the automotive, semiconductor and high tech industries. Manufacturers discovered what supply chain sourcing vulnerabilities they really had, particularly in lower tiers of their supply chains. Global manufacturers such as Honda, Toyota and Texas Instruments saw their high volume production operations severely impacted for six months and beyond, and just when production volumes were beginning to reach normal levels, the flooding in Thailand added a new setback. Small and mid-market suppliers were severely impacted and are still struggling.  Our out-on-the limb prediction was that yet another corporation will experience a severe incident, and sadly, that was a no-brainer.   It has turned out to far more than one.

There were other incidents as well:

• Severe winter weather that impacted the entire globe earlier in the year.
• The Arab Spring and threat of cascading political turmoil that interrupted energy markets.
• The recall of thousands of pounds of ground turkey due to an outbreak of salmonella poisoning. Global agricultural giant Cargill incurred a 66 percent decrease in first quarter 2012 fiscal quarterly earnings, and attributed some of that erosion to the costs of the ground turkey recall and unprecedented floods in the U.S. Midwest.
• U.S. farmers had to endure not only severe spring flooding, but also severe drought conditions in other parts of the U.S. Southwest.

Regarding previous incidents of disruption, there was evidence that excessive cost cutting may have contributed to the systemic quality breakdown that impacted Johnson & Johnson, along  with an admission from Kellogg Company  that it had cut too deeply into operations and quality control processes.

A shout-out should be extended to many supply chain teams who worked countless hours and undertook enormous challenges to minimize what could have been more severe bottom-line impacts. We trust that their efforts were recognized by senior management.

On the topic of senior management, there is now little doubt that supply chain sourcing, risk identification and mitigation has reached the C-level agenda.  In our travels during the Fall conference season, we heard many supply chain executives speak to a new awareness and sensitivity to risk with some companies taking on a complete review of their global supply chain risk profile.

We will have more to state on this topic in our 2012 predictions.

Prediction Four: Supply chain technology deployment will remain tactically focused and buyers will remain in a favored position for negotiating technology acquisitions.

Similar to 2010, cost and profitability pressures caused investments in supply chain technology to continue to be tactically focused and highly scrutinized.  Many supply chain technology and service vendors reported continued elongated sales cycles, touch points and reference checks as buyers needed to insure that limited funds were invested in the right process and with the right vendors.

We predicted that the business process and technology enablement priorities in 2011 would manifest in needs of deeper and broader supply chain visibility / intelligence and more rapid planning and synchronization of supply chain fulfillment processes. We anticipated popular investment areas to be in improving inventory management, a more responsive and more extended sales and operations planning process, and adaptability to sensing and responding to changes in product demand.  All of these predictions have been evident.

We further predicted a slowdown in technology acquisition for strategic sourcing and P2P procurement because of shifting technology enablement priorities towards the more operational sides of the supply chain process needs.  That turned out to be an incorrect prediction. Many vendors in these areas reported healthy sales growth throughout the year which leads us to believe that procurement teams managed to gain more favor with CFO’s in investing in technology to yield more immediate material cost savings in direct, indirect, and services procurement costs.

We believed that 2011 would bring a renewed emphasis on quality oversight and process improvement needs, coupled with improved asset management. That turned out to be correct, especially when companies were under the gun to improve overall quality.

We believed that technology directed at supply chain risk mitigation would gain more attention and uptick, especially technology related to the tracking and identification of products throughout the extended supply chain. That turned out to be premature, since many companies are still struggling with identifying risk processes and who has organizational responsibility and accountability for the risk management process that umbrellas the global supply chain.  Then again, in today’s uncertain world, risk management is the most stressful of all supply chain jobs. Technology investments to help mitigate risk will not uptick until, and unless, these organizational processes are addressed.

This concludes our Part Two scorecard update of our Supply Chain Matters 2011 Predictions for Global Supply Chains.  In our Part Three update, we will revisit predictions five and six.

Bob Ferrari

©2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

The following posting can also be read and commented on the Supply Chain Expert Community web site.

Supply Chain Matters has noted in previous commentaries that Aerospace supply chains are now under stress.  Many factors have led up to this condition. A significant recent uptick in airline customer orders for new and more fuel efficient aircraft is locking-up industry delivery  capacity for many years to come.  Increased outsourcing of major components to suppliers has precipitated significant program setbacks with major OEM’s Airbus and Boeing both struggling with aircraft programs that have experienced multiple year delays for customers. Boeing’s latest Q3 earnings report provided a specific  backdrop to the highly visible 787 Dreamliner program, which just entered operational service, but remains three years overdue in production and customer delivery fulfillment of over 800 aircraft.  Customers and suppliers now seek financial consideration for these delays while Boeing makes plans for a serious supply chain ramp-up in production and final assembly of 787’s.

But alas, Boeing is not the only OEM dealing with setbacks.  Last week, EADS, the parent for Airbus, announced its second delay associated with the new A350 passenger aircraft. Initial delivery will delayed by up to six months because of supplier issues, pushing the time window into 2014. EADS also incurred a €200 million ($271 million)direct  charge as an immediate result of this delay. The A350 is made with more lightweight composite materials and is the Airbus competitive alternative to Boeing’s 787.

An article published last week in the Financial Times (paid subscription or free metered view) indicates that this latest Airbus delay was attributed to suppliers being late with planned delivery of key components. Of more concern, Airbus warned that some suppliers were struggling to renew bank loans in the midst of the current Eurozone debt crisis, and there are signs of a new credit availability crunch for European small and mid-range manufacturers. The article reports that EADS has started giving financial support to some subcontractors, and has had to acquire a German supplier, PFW Aerospace. At the height of Boeing’s issues with the 787, it was also forced to acquire some key suppliers.

In a mid-October commentary, Supply Chain Matters noted that that senior supply chain executives should be contemplating scenario plans and contingencies concerning the ongoing Eurozone crisis and its potential impact on global supply chain processes.  One of the outlined areas was the availability of credit to finance ongoing inventory and working capital needs.  A worsening of bank fragility or outright bank or country specific financial failures could cause an additional credit crisis to cascade across industry supply chains.  The latest Airbus announcement is evidence of this growing risk.  We suspect Boeing and other OEM’s are not immune since each has key suppliers located in Europe.

Within the aerospace industry there exists a paradox. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy.  Airbus alone now has an order book rate above €500 billion. Any company or industry would celebrate at having such a situation. On the other hand, supply chain process and program deficiencies, incidents of supply chain risk, and now the potential of financial crisis, are all compounding the ability to deliver the end product to customers in a timely fashion. This should be an industry humming on all engines, but success comes with a burden.

For aerospace supply chains, continuous scenario and contingency planning coupled with proactive response management may well be the S&OP agenda for many, many months to come.

Bob Ferrari