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Evidence of a New Business and Supply Chain Headwind: A Stronger U.S. Dollar

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During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States.  That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.

P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.

The implications are obvious including a continued selloff of underperforming brands and businesses.  One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.

The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:

“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp.  to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”

Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.

The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.

We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a  booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.

Bob Ferrari


Apple Supply Chain Supports Spectacular iPhone Fulfillment Results

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Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product Apple Logointroduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.

Specifically in our mid-September commentary we noted:

“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”

We further declared:

While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts.  They have pulled miracles in the past, and the stakes get even higher.”

Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines.  The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.

Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.

Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.

Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.

Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.

All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.

The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.

Supply Chain Matters Tip of the Hat Award

 

 

We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance.  Let’s hope that the supply chain ecosystem will share in similar financial rewards.

 

Bob Ferrari

 

 


Yet Another Concerning Commentary of Supply Chain Bullying

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In our Supply Chain Matters commentaries focused on the challenges that are currently impacting consumer goods industry supply chains, we have called attention to the damaging effects that certain investor activism efforts have inflicted through mandates to either dramatically reduce costs, shed underperforming brands or consolidate CPG companies.

To clarify, an objective investor voice demanding excellence is and should be expected. Insuring shareholder return is always an important business outcome objective for supply chain initiatives and transformational activities. However, when that voice comes in the context of demands for short-term results regardless of consequences that is far different challenge. Years of transformational efforts can literally be destroyed by the effects of wholesale cost cutting mandates.

In our Twitter stream, we came across a re-tweet link from Huffington Post blogger David Weaver, referencing United Kingdom’s Daily Mail.com posting: The supply chain bullies: The giant household names that stand accused of hurting small suppliers. The commentary describes how consumer goods giant Heinz has doubled the time it takes to settle and pay supplier invoices imposing upwards of a 97 day wait for payment. Similarly, AB InBev is reported to have routinely taken up to four months to pay its suppliers.  These payment terms are written into supplier contracts and according to the commentary, most suppliers have little influence for pushing-back. It is a literal pay to stay practice. The commentary cites one source as indicating that a staggering £46 billion was overdue to suppliers in 2014.

While larger sized suppliers may have the financial means to borrow additional funds or adsorb such impacts, it is far more challenging for smaller suppliers who obviously lack such leverage. Once more, because of such practices, the EU community issued a prompt payment directive in 2011 requiring supplier payments within 60 days. As the commentary’s title implies: “It is a total abuse by certain large companies of their supply chain.”

We commend the messages of the Daily Mail commentary and would add that it further serves as a de-valuing of supplier relationships and needs for co-innovation.  During the severe global recession that began in 2008-2009, there were continual reports of large companies tending toward such practices to preserve cash, causing some suppliers to financially succumb. It is literally throwing your problem “over the wall” to make your supplier your banker.  Today, while the Eurozone sector continues to struggle to bounce back to growth from the same great global recession, news of such continuing practices is disheartening.

Disappointingly, it continues to be a practice that spans other industry supply chains, ones that have far higher margins.

As a community of supply chain analysts, we often echo the superior rankings of certain supply chains because of their extraordinary financial ratios or the productive benefits of advanced technology applied to procurement and other supply chain focused business processes. However, neither superior financial metrics nor advanced technology application be predicated on passing the burden of cost down the subsequent tiers of the supply chain in order to secure even more short-term financial benefits.  After all, that’s the far more-easier approach. Ignoring any longer-term implications, collect your performance bonus and moving on to the next short-term challenge or promotional opportunity seems to be a continuing norm, and that remains tragic.

We want to hear from our readers.  What’s your view on why such practices continue?  Is it out of the control of supply chain senior leadership or a manifestation of today’s leadership?

Bob Ferrari


Target Pulls the Plug on Canadian Retail Operations- An Expensive Learning

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We strive to bring learning for our Supply Chain Matters readers that supply chains, and flawless execution of customer fulfillment do matter in business strategy.

Last week, the retail industry took special notice of the news that Target, after less than two years of making its presence in Canada, made a painful decision to close all 133 of its retail outlets in Canada. According to business media reports, Target is now expected to report a pre-tax write-down of $5.4 billion in its fiscal fourth quarter and release over 17,000 retail workers as a result of its decision, a rather expensive lesson on the importance of supply chain strategy and execution. Target’s Canadian operations reportedly incurred upwards of $2 billion in losses.

To be balanced, not all of Targets challenges related to Canada rested solely to supply chain strategy and execution, but Canadian consumers witnessed the most visible aspects, namely large stores that consistently lacked inventory and products that were not competitively priced.

A New York Times published article (paid subscription or metered complimentary view) observed that while Target stores in the United States were long popular over the border destinations for Canadian consumers, it struggled to translate that formula directly within Canadian stores. Differences in suppliers and what was described as a poorly executed distribution network made goods in Canadian stores far more expensive than U.S. outlets.  Consistently empty shelves caused added consumer impressions “giving the appearance of the end of a going-out-of-business sale.” Consumers then avoided Target stores because of limited selection and an unproductive shopping experience. Further noted by the Times was that Target failed to distinguish its brand from other existing Canadian retailers such as The Loblaw Companies, Canadian Tire and others. Also noted is that Target was not the only large or even smaller specialty retailer to stumble in Canada because of in-depth experience in merchandising and distribution in international markets.

Fortune and CFO.com published articles noted that Target’s strategy was to take over existing retail stores operated by discount chain Zellers, which were located in predominately economically distressed Canadian neighborhoods.  That turned out to be a conflict with Target’s upscale sheik retail branding in the U.S.

That theme was brought forward in an article published by Canadian Broadcasting, CBC, Target Canada’s Failed Launch Offers Lessons for Retailers.  By our lens, it provides insightful perspectives on the unique retail challenges within Canada and that Target is one of many other retailers who have struggled. According to CBC, price matters: “The major sticking point is price.” It points out that if retailers are not providing a compelling experience and flawless execution, than price becomes the default decision criteria. Further noted is that many U.S. retailers turned their sights toward Canada after the severe economic recession of 2008-2009, since Canada was mostly spared from the economic effects. Target opened 124 of the former Zeller stores in less than a year: “a pace far too fast to execute the experience properly.”

In the end, Target’s Chairman and CEO Brain Cornell had to make and communicate the tough decision that enough was enough.  It was time to pull the plug on the Canadian effort.

In contrast, U.S. based retailers such as Costco, Wal-Mart and Zara continue to exhibit successful retail execution strategies within Canada.

We amplify this Target experience because of the important learning it provides to retail and B2C focused supply chains with international presence.  Know your market, understand its unique nuances and strive to have the voice of supply chain strategy and customer execution at the decision table. That may not always be easy, when marketing and merchandising teams have broad influence on senior management decision-making, but history provides constant learning that supply chain does matter. It is not just a cost center for conducting business.

Bob Ferrari

 


A Timely Call for Better Measures of Supply Chain Rankings and Success

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On Linked-In Pulse, noted MIT supply chain thought leader, author and fonder of the MIT Center for Transportation and Logistics (CTL),  Yossi Sheffi penned a timely and well-articulated editorial calling for better measures of supply chain success, particularly when it concerns ratings of certain industry supply chains. We wanted to call Supply Chain Matters reader attention to this insightful editorial because it is long overdue in our supply chain community.  It further echoes some of the very concerns and frustrations that this particular editor has been penning in prior Supply Chain Matters commentary.

Professor Sheffi makes specific mention that Gartner’s Top 25 supply chain ranking is one of the most followed indices but questions if it really provides meaningful assessments of the best performing supply chains. He argues that the assessment criteria may be flawed, and that supply chain teams get a false impression of what it takes to build and sustain excellent supply chains in particular business sectors. As Dr. Sheffi observes: “some supply chain leaders may get undeserved kudos while others receive criticism despite achieving strong performances.” Various industry supply chains have far different needs and requirements in supporting business objectives and outcomes.

Dr. Sheffi’s other pearl of wisdom is directed at peer ranking. He opines: “Apportioning more than approximately 10% of a company’s overall score to peer reviews is excessive and not reflective of reality, unless the peers are from the same industry or similar industries.”

We will not take away from the full impact of Professor Sheffi’s arguments and conclusions and encourage our readers as well as specific industry analyst firms that publish rankings to thoroughly read and absorb this well-timed editorial.

As noted in our Supply Chain Matters commentary in May of 2013, too often; these ranking exercises have far too much weighting towards specific financial metrics that depict outsourcing of supply chain assets and resources in a favorable context. Apple’s supply chain strategy and consequent top ranking is the best example, while Apple’s prime contract manufacturers or key suppliers hardly receive any prominent ranking. Heavy dependence on financial metrics of performance precludes noteworthy turnarounds in performance, overall supply chain process innovation and abilities to rise to a challenge in rather difficult industry settings. Privately-held companies and those from emerging markets are often precluded from rankings that place the majority of emphasis on financial metrics.

One wonders if certain retailers had not taken the risk to accelerate inventory investments in anticipation of a possible west coast port disruption, or bit the bullet to airfreight inventory at the last minute in order to achieve customer holiday fulfillment goals. While there certainly was consideration for financial impacts, customer responsiveness and grand loyalty was another weighted criteria.

Bravo to Professor Sheffi for once again challenging existing thought processes and criteria for how our community should measure supply chain success.

Bob Ferrari


Another Executive Leadership Change Affecting Bombardier CSeries Program

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In our industry specific coverage of commercial aerospace supply chains, Supply Chain Matters has featured  a number of prior commentaries concerning Bombardier’s CSeries aircraft program, and the program’s efforts to penetrate single-aisle commercial aircraft market with the likes of an Airbus, Embraer or Boeing. Recent setbacks have impacted the CSeries program and yesterday featured an announcement that Bombardier’s senior head of commercial aircraft sales had resigned due to personal reasons.

Bombardier C-Series

Source: Bombardier web site

We have provided a focus on the CSeries for three primary reasons.  First, the program was Bombardier’s attempt to emulate a globally dispersed ecosystem of supply chain of major aircraft components to spawn program innovation and reduce overall program and production costs.  Major components such as fuselage wings and tail are sourced in China, Ireland, Italy, and other countries.  The C-Series continues to be targeted towards operational service among regional airline routes while delivering upwards of 20 percent fuel savings over existing smaller, single-aisle regional aircraft. The goal of the program was to: “revolutionize the economics and network strategies for airline operations in the 100-149-seat commercial market.”

Bombardier is also one of the largest and most prominent manufacturers in Canada, and like other commercial aircraft manufacturers, hosted governments and supply chain partners have a vested interest in product success and increased employment of workers. Thirdly, as we have noted in prior commentaries, the ultimate success of the C-Series was predicated on a very timely and competitive market introduction along with being more nimble than other competing aircraft manufacturers. This aircraft was originally targeted for market entry in 2013.

Yesterday’s announcement is yet another symptomatic indicator of a continued challenged program. The firm’s former head of commercial sales was replaced in December 2013 and business media speculated the 2013 executive sales leadership change implied more aggressive sales tactics to gather more C-Series orders.

A Wall Street Journal front page article published today (paid subscription required) begins to cast doubt on both the product strategy and market competitiveness of the CSeries. The article notes that Airbus and Boeing, along with Embraer have sharpened their competitive responses through more timely development programs updating existing models such as the Airbus A320 neo version and the Boeing 737 Max. According to the article:

Bombardier, its suppliers and governments of Canada and the U.K., where the wings are built, are now on track to plow at least $4.4 billion into the CSeries program- up from the original plan of $3.4 billion and equal to nearly two-thirds of Bombardier’s total market value.”

The WSJ quotes an unnamed Bombardier executive indicating that the aerospace provider was blindsided with competitor’s actions to utilize the same Pratt and Whitney step turbine engine technology in upgrading existing models. Global airlines are thus electing to purchase the upgraded single aisle models from established manufacturers with Airbus having booked than 3400 orders for the A320 neo and Boeing garnering over 2600 orders for the 737 Max. Established fleets and infrastructure services make introduction of a new manufacturer more risky or perhaps most costly.

Unstated but another important development is that the price of oil has currently plunged allowing airlines more time and flexibility to schedule fleet equipment changes.

At this point, after restructuring efforts, the CSeries program reports directly to Bombardier’s CEO, including leadership of commercial sales.  There is a continued belief that the aircraft will ultimately be recognized for its value.  All hands and indeed the CSeries supply chain ecosystem are focused on completion of certification and first customer delivery with the belief that this aircraft family will eventually be recognized for its value and technological features.

For engineering-driven supply chain environments, program design objectives, a pulse of ongoing market dynamics and adherence to time-to-market milestones are all very important, especially in today’s more dynamic global industry landscape. These tenants take on a  special meaning when the program’s objectives are to take on existing larger competitors when first mover advantage becomes a factor.

The CSeries will be a test of all of these principles.

Bob Ferrari

 


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