On Friday, ThyssenKrupp AG announced that it would sell its troubled but state-of-the art Calvert Alabama steel finishing plant to the 50-50 joint venture of ArcelorMittal and Nippon Steel & Sumitomo Metal Corp. for $1.55 billion. The announcement concluded an 18 month effort to sell two packaged facilities, in essence a vertical integrated supply proposal. The price garnered in this sale was considerably lower than the $5 billion that Germany based Thyssen originally invested in the Alabama steel rolling facility.
Three years ago, the Calvert plant was paired with Thyssen’s other raw steel producing plant in Brazil in an effort to provide auto manufacturers located in the southern region of the United States a more technology laden supply of fabricated rolled steel for product design and supply purposes. It was an effort to benefit from the resurgence of auto manufacturing in the U.S., but ran astray because of the rising production costs involved in the Brazil facility, and lower than expected global steel demand. Thyssen initial attempts for sale involved both the Brazil and Alabama plants as a package, but that resulted in lack of attractive bids. Thyssen later agreed to sell the Alabama facility itself, and managed to garner five different bids for the facility, including U.S. based Nucor.
For the potential new owners is the ability to utilize raw steel supplies from other U.S. or Mexico based steel fabrication facilities. However, the deal reportedly includes a pledge to annually procure a minimum of two million tons of raw steel from Tyson’s Brazil facility over a 6 year horizon. The new owners can further leverage the higher capacity and productivity that the Alabama plant provides along with a shorter logistics chain for manufacturers with plants in the southeast U.S. region.
The deal itself is still subject to regulatory approvals. According to reports published in business media, AccelorMittal currently accounts for roughly 40 percent of the steel supplied to the North American market and that may be a sticking point for regulators. Nippon-Sumitomo currently operates a 2.9 million square foot finishing facility in Indiana that supplies U.S. Midwest auto and appliance manufacturers with rolled steel products.
Because of possible concerns, reports now indicate that the review process is not expected to be completed until at least July of next year. One would hope that regulators would have a strategic sourcing perspective for insuring that the current resurgence of auto, appliance and other steel focused manufacturing in the southeastern United States continues with an Alabama plant that now has other options for vertical integration.
Aerospace industry supply chains had a significant event this weekend, one that will resound for years to come. The event was the Dubai Airshow, and there were two significant industry statements that will have long-term industry implications.
The first was a significant statement from certain Middle East’s Gulf airline carriers that they intend to be a dominant force in international airline travel in the coming years. That statement involved the placing of in excess of $150 billion in aircraft purchasing power with aerospace manufacturers. That is indeed a considerable statement of both intent and global customer influence.
Boeing was a major recipient, receiving what is reported to be $100 billion in new aircraft orders from four Middle East Gulf carriers. Boeing utilized the event to formally launch the development of the new 777X aircraft and by booking orders and commitments for 259 of this aircraft. Orders received involve two models of this new long-range aircraft capable of transporting approximately 350 to 400 passengers per plane. The 777x family includes two models: the 777-9X and the 777-8X. Each model of the 777x aircraft has a list price in the range of $350 million -$378 million. The orders came from three Gulf based carriers: Emirates, Etihad, and Qatar Airways. Dubai based Emirates which is already noted as the globe’s largest operator of 777 family aircraft, alone ordered 150 of the new 777x valued to be in the range of $76 billion. The orders were in addition to a previously announced deal for 34 777x planes from German based Lufthansa which was announced in September. In its reporting, the Wall Street Journal tagged the 777x announcement as “the largest product launch in commercial-jetliner history.”
Current plans call for deliveries of the new 777x to begin in seven years, around 2020, even all goes according to schedule.
Boeing further landed an order for 30 additional 787 Dreamliners from Etihad, which is reported to make this carrier the ultimate largest operator of the 787 when all are operational. Budget carrier Flydubai placed an order for 86 new 737 single aisle aircraft.
Airbus was also a recipient, landing orders for 50 of its new A350 aircraft while Emirates announced that it is buying an additional 50 of the gigantic A380 aircraft estimated to be in the range of $23 billion in order value.
Another major benefactor of this weekend’s orders was General Electric and CFM International. The consortium landed commitments for aircraft engines and services value to be $40 billion at list pricing. Among the highlights was an Emirates commitment for 300 GE9X engines valued at approximately $11 billion to power the 777x which GE describes as “the largest ever commercial jet engine award from an airline.” CFM International, the joint venture of GE and France’s Snecma (Safran) was the recipient of orders for 450 of its LEAP engines. Both aircraft engine producers now have a record backlog of orders.
Over and above the flurry of announcements regarding new equipment orders are other important implications which will collectively make up the second significant implication from this year’s Dubai airshow. The Associated Press and Yahoo Finance reported that with almost $78 billion in purchasing commitments, Emirates has cemented itself as Boeing’s and Airbus largest and most influential airline customer for years to come, one that will be favored by each of these aerospace OEM’s. Upon review of the order split among both OEM’s, Supply Chain Matters is of the believe that Emirates is also practicing proactive risk management by splitting its orders for replacing its existing fleet of intercontinental aircraft among both a yet to be designed and delivered 777x from Boeing, and more advanced staged A350 and A380 aircraft from Airbus. The A380 is already a released and operational aircraft while the A350 completed its first maiden flight in June. The industry track record for development and producing an aircraft of the size and technological complexity of the new 777x is fraught with multi-year delays from both of these global OEM’s.
The other statement coming from this weekend is what the Wall Street Journal reported (paid subscription or free metered view) as a crucial part of both the Emirates and Etihad 777x deals with Boeing. A joint venture with Mubadala, an Abu Dhabi government-owned conglomerate calls for Boeing to add its technical expertise in making advanced composite materials for jets utilized in the UAE. It is reportedly part of a broader effort to increase the presence of aerospace technology production in the region and add advanced technology manufacturing to existing economies of the region. While specific details are lacking, the effort could lead to added local sourcing of suppliers in this region, the type of deal that Boeing made with crucial Japan based airlines for the 787 Dreamliner program, that led to significant sourcing in that region.
Boeing is already in the midst of a controversial negotiation with its Seattle based labor unions over ultimate engineering and production sourcing of the 777x. The principle labor union in Seattle has already turned-down Boeing’s latest offer for a multiple-year labor agreement extension that could extend for as much as seven years. That leaves the ultimate decisions for engineering and supplier sourcing, along with final assembly up for grabs. As noted in our most recent Supply Chain Matters commentary related to the 777x, current public threats by Boeing to source major design engineering outside of Seattle along with major sourcing decisions related to the production sites provides shades of whether past supply chain related learning of multi-year program delays and snafus with the 787 program have been internalized.
November 2013 is a significant customer related milestone for certain aerospace supply chains. It represents the implications of the emerging prominence of the Middle East Gulf airlines and their growing influence on certain aerospace supply chains for many years to come.
Supply Chain Matters provides a follow-up to the previously announced acquisition of noted consumer product goods manufacturer HJ Heinz. This multi-billion acquisition by the combination of 3G Capital and Berkshire Hathaway earlier this year sent shockwaves across CPG industry supply chains because of the ramifications.
Yesterday, Heinz announced that it is consolidating its North America production operations after previously announcing corporate restructuring impacting 1200 people.
According to a published report in the Pittsburgh Post-Gazette, Heinz management announced that it would close three plants in North America in the next six to eight months, affecting 1,350 jobs in South Carolina, Idaho and Ontario, Canada. The Leamington, Ontario production facility was making ketchup among other products for more than a century. When that plant closes next year, 740 jobs will be lost. The Florence, South Carolina plant, which employs 200 people, makes Smart Ones frozen foods and had only been open a few years. The Pocatello, Idaho, plants produces frozen entrees and snacks, and it employs 410 people.
In-turn, the company plans to shift production to five existing plants in Ohio, Iowa, California and Canada, adding a total of 470 positions at those sites. It further indicates that it intends to invest more in these remaining sites although specifics are lacking.
According to the Gazette article, Heinz trimmed 600 office positions in its North American operations, including 350 jobs in the Pittsburgh area this summer. Layoffs also have come in other parts of the global company’s operations. In September, Heinz reported in a regulatory filing that about 1,200 employees had been affected by its restructuring.
As noted in our February commentary, 3G Capital has demonstrated a previous track record of wringing-out operational costs from previous its M&A efforts at AB In-Bev and Anheuser Busch, along with Burger King. The Heinz effort now rapidly continues with these continuing series of announcements.
Wall Street insiders conclude that previous efforts at cost cutting and headcount reductions have run their course across the CPG sector and the new path to growth lies in more industry consolidation and financial engineering. In the light of challenging revenue headwinds, CPG company senior executives, in order to ward off these threats, continue to support aggressive stock buy-back programs with available cash to potentially block a hostile takeover.
Just this week, Supply Chain Matters noted a judgment in the dispute between Starbucks and Kraft over packaged coffee distribution. The awarded $2.8 Billion arbitration award in that case is slated to fund additional stock buy-back by Kraft spin-off Mondelez International, which is under threat from activist investors wanting to form a new global snack foods giant. The Kellogg Company has also embarked on a multi-year supply chain efficiency and effectiveness effort.
The threat of a renewed hunker-down emphasis has the potential to once again foster highly lean CPG supply chains with little flexibility or capability to respond to more demanding customers, market opportunities or global risk. It leads to a different set of dynamics where cost-cutting once again becomes the dominant force and efforts toward supply chain transformation take on more short-term orientation. Perhaps Heinz will be different- perhaps not.
Some would argue, in the spirit of Darwinism that this is the current natural order of things, and that financial engineering accomplishes transformation in far speedier manner. Some can argue effectively that the cost in employee dedication, loyalty and innovation takes an even heavier toll, especially when a chosen few reap the financial rewards while added debt burdens the victims.
It is unfortunate that this is the current state of affairs among CPG supply chains.
The Kellogg Company, a consumer goods icon with brands such as Kellogg cereals, Cheez-Itc rackers, Keebler cookies and Eggo waffles, earlier this week announced a billion dollar cost cutting plan that would extend over the next four years.
This effort is reported by business media to be motivated by increased competition in the breakfast and snack food industry segments along with softer demand from economically distressed consumers. Business media reports that these cutbacks would result in the estimated loss of 2000 jobs, however, with the four year window, Kellogg management aims to achieve headcount reductions through normal attrition. From our Supply Chain Matters lens, the new Project K efficiency program looks more like an effort to drive global supply chain wide efficiencies and create more integrated supply chain business processes and services across global product lines.
In its most recent fiscal third-quarter financial results, Kellogg reported essentially flat revenues and decreased operating profits. While global net sales are increasing, North America based sales declined by 1.3 percent. The company has been forecasting sales growth of between 4-5 percent for the current fiscal year.
According to a report published in the Wall Street Journal, the new Project K initiative involves a complete re-tooling of the company’s supply chains that includes spending $1.4 billion by the end of 2017 to relocate production lines and globally integrate business process services. Kellogg is targeting upwards of $475 million in annual cost savings as of 2018, as an outcome from this latest announced initiative.
Supply Chain Matters calls reader attention to our June 2012 commentary regarding the acquisition by Kellogg of the Pringles snacks business from Procter and Gamble. In 2012, Kellogg was handed a fortunate opportunity to acquire the Pringles business after the deal to sell that line to Diamond Foods was undone because of certain revelations. Kellogg quickly agreed to a $2.7 billion all-cash deal to acquire a global, well-run brand and become a top player in the global savory snacks industry segment. However, Kellogg had to bring on a high debt load in order to pull off the financing of this deal, reported to be upwards of $2 billion. In the latest fiscal quarter that ended in September, the Kellogg balance sheet reported $6.3 billion in long-term debt.
At the time of our 2012 commentary, the combined synergies of the existing Kellogg and Pringles snack businesses were reported to be $10 million in 2012 and a range of $50-$75 million after 2013. In 2012, Kellogg has been in the process of re-implementing SAP within its U.S. operations, and the addition of the Pringles business presented an added opportunity to integrate within the SAP environment. P&G itself has committed ongoing service arrangements to transition Pringles and was a very sophisticated user of SAP applications. We speculated that Kellogg teams would gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.
Prior to 2012, Kellogg had some previous supply chain related quality setbacks related to past product recalls involving its Eggo product line prompting its CEO to declare that the company had to restore investor confidence in Kellogg supply chain capabilities. The Pringles integration again offered opportunities to revisit needs in this area.
Of late, CPG companies continue to feel the Wall Street based reverberations of the previously announced $23 billion acquisition of HJ Heinz by Berkshire Hathaway and 3G Capital. Heinz, a stalwart of global brand identity was acquired to harvest the cost savings synergies of its global operations, and that tremor seems to haunt existing CPG manufacturers since activist investors continue to want to play-out the next cash generating opportunity. We have opined that In the light of challenging revenue headwinds, company senior executives have launched aggressive stock buy-back programs with available cash to ward off hostile takeovers. Alternatively, Wall Street analysts conclude that previous efforts at cost cutting and headcount reductions have run their course and the new path to growth lies in more industry consolidation and financial engineering. Thus another era of mega acquisition activity seems at the ready, and the psychology of CPG senior executives’ shifts. These pressures naturally flow to supply chain leaders who must deliver more cost savings to fund other business investment needs. Some supply chain analysts chastise supply chain teams for not delivering industry leading metrics of performance. We believe that the realities of current or future business outcomes have more to do with performance goal setting.
The new Project K multi-year cost saving effort presents opportunities to rationalize global production capacity, consolidate category product management to a regional focus and provide common supply chain related business processes across multiple regions. It is probably another response to ward-off mega acquisition industry pressures. This effort probably should have pre-ceded efforts to adopt a standardized systems platform. None the less, Kellogg is now a global CPG branded company and must demonstrate market and supply chain response capabilities that exhibit responsiveness to changing consumer needs across global markets.
The Kellogg corporate mission statement includes the following: “We are a company of promise and possibilities.”
From this author’s perspective, the success of Project K needs to be firmly grounded in the above principle.
Apple has initiated a supply agreement with GT Advanced Technologies Inc. to supply sapphire based materials to the consumer electronics provider. According to a Bloomberg published report. Merrimack New Hampshire based GT Advanced Technologies has entered into a multi-year supply agreement to provide the furnaces required to produce sapphire based materials. Apple will front-end a $578 million investment for a new plant to be located in Mesa Arizona that will produce these materials. The new plant is expected to generate at least 700 manufacturing-related jobs while an additional 1300 jobs are expected in plant construction. Bloomberg quotes IHS as indicating that Sapphire material was utilized for the camera lens cover in 2012 and currently the home button on the iPhone 5s model.
This investment represents the second new investment in U.S. based manufacturing. The first was the assembly of Apple’s new Mac Pro’s at a facility in Texas.
Speculation indicates that the sapphire based lens material will eventually be utilized in Apple’s line-up of smartphones and electronic tablets, with further speculation that the first application might be Apple’s rumored new smartwatch product rumored to be coming sometime in 2014.
This new announcement is consistent with Apple’s strategic sourcing strategies, namely expending up-front monies to secure strategic multi-year supply agreements for key materials and components along with up-front investment in capital equipment and tooling. Much of Apple’s investments in manufacturing process equipment are held at certain of its outsourcing partners. Apple utilizes this strategy to lock-in supply as well as supplier loyalty in areas such a processor chips, DRAM, LCD displays and other key components. However, the company’s 10K securities filing is quick to note: “Therefore, the Company remains subject to significant risks of supply shortages and price increases that can materially adversely affect its financial condition and operating results.”
There is nothing better than hedging your strategies, both in supply and with investors.
On Supply Chain Matters, our principle goal in the various commentaries we pen regarding global based supply chain developments is to provide insights for our readers. Our intent is not to disparage any single company or organization but to help readers and students of supply chain management relate supply chain, product management and information technology developments to key learning.
If you search our content on the topic of Boeing, you will discover a lot of commentaries. Boeing’s past efforts in outsourcing major portions of product value-chain have resulted in a lot of snafus, or so it seems so. The Boeing 787 Dreamliner program will no doubt serve as a living case study as to lessons in outsourcing.
Thus, it was with some surprise yesterday when we were alerted to a Reuters published article, Boeing to place much of 777X design work outside of Seattle.
Apparently, Boeing senior management has endorsed the decision to source a significant amount of the design work related to the company’s next generation wide-body aircraft in areas outside of Seattle. The 777x is speculated to be able to transport over 400 passengers and Boeing has been reportedly aggressively promoting this aircraft to Asia and Middle East based air carriers.
The designated design sites are to be Charlestown South Carolina, Huntsville Alabama, Long Beach California, Philadelphia Pennsylvania, St. Louis Missouri and Moscow, Russia. What’s interesting about this news is that Boeing indicates that no decisions have been made regarding the involvement of its Puget Sound engineering teams, home to the core design group.
Is this the same group that was marshaled to fix the numerous problems that were encountered on the 787, including the operational grounding?
Boeing has reiterated that no final decisions have been made regarding the sourcing of production operations of the 777X although speculation revolves around the Charlestown facility. One would have surmised that a lesson from the 787 program was the importance of co-locating engineering design with manufacturing, especially during the critical development phases. The Reuters story hints strongly that the engineering design decision was more about migrating work to lower-cost, nonunion states. Reuters further speculates that the timing coincides with efforts to lobby the state of Washington on tax incentives to source 777X design and assembly work in Everett Washington. The Governor of Washington state reportedly only knew of the announcement at the time of the Reuters report.
Boeing re-iterates that it would apply “lessons learned” from the 787 and 747-8 programs, and that bringing skills from across the company will foster more efficient use of engineering resources.
We certainly hope so, but then again, the timing and tone would indicate different motivations.