As we have stated in previous commentaries, Supply Chain Matters does not tend to comment on the huge plethora of opinion research studies concerning the discipline and state of global supply chain management unless we feel the research is meaningful and based on sound research practices. By our view, there are too many outlets, beyond experienced analyst anchored firms, producing so called research vs. opinion of the day among a limited set of respondents.
In an October 2013 Supply Chain Matters commentary we highlighted some important findings from the Chief Supply Chain Officer Report conducted and compiled by SCM World. We were impressed with the research approach as well as the key findings. This year, we were able to obtain a copy of The Chief Supply Chain Officer Report 2014, Pulse of the Profession. Our thanks to Supply Chain Matters Sustaining Sponsor E2open for providing us with a copy of the 2014 report. We further had the opportunity to speak with Matt Davis, former Gartner analyst who recently joined SCM World in the role of Senior Vice President of Research.
This year’s report has a reported level of over 1000 cross-industry survey participants responding to over a hundred questions and sub-questions. As was the case last year, the goal of our commentary is not to re-produce the findings but rather to add some of our impressions and takeaways to the findings. SCM World, the authors of the report have done a great job of articulating individual findings.
In the 2013 report supply chain leaders had indicated that they were caught in the middle of rising customer demands and expectations and the global growth ambitions of their firm’s management teams. The conundrum of objectives was directed at continued reductions in costs while helping to grow the business. This year’s report describes 2014 attitudes as increasingly “schizophrenic, with operating cost reduction dominant as ever but closely followed by agility in meeting customer needs.” The authors summarize that supply chains are trying to be all things to all people including areas of enhanced customer service, accelerated NPI and stronger supply relationships. That pretty much tracks with the various supply chain developments Supply Chain Matters has highlighted this year, particularly in the consumer products sector. External pressures for increased, very short-term stockholder value, accelerating structural changes in market and customer behavior, conflict we needs for the supply chain to become more responsive or agile to the rapid industry changes that are occurring. It is a rather difficult challenge that has increasingly manifested itself for many years, challenges that cannot be addressed solely from a focus on financial-based performance outcomes.
A very significant 2014 finding indicates that senior supply chain leaders are intending to move away from the outsourced core competence model of prior years and moved toward more highly vertically integrated strategies in manufacturing and distribution in support of direct-to-customer delivery needs. The forces of Omni-channel commerce are definitely real. What should be of upmost interest to our community is the SCM World conclusion that today, a return to more emphasis on vertical integration and in-house production strategies are clearly underway. A quarter of the SCM World respondents further indicate pursuit of modular push-pull platform strategies managed internally, where final customer demand will be accommodated by a fulfillment network of third-party factories, retailers or partners located closest to customers. There is also a corresponding bombshell statement indicating that supply chain strategies going forward are less likely to depend on contract manufacturing, especially for critical elements of the production process. While we were not surprised by that conclusion, given the many examples that have unfolded this year, some of readers will be.
Other important SCM World findings relate to sourcing procurement strategies. Once again, the findings point to a consolidation of the supply base along with a need for deeper collaborative relationships with suppliers, more sharing of demand plans and deeper levels of collaboration on intellectual property innovation as well as cost savings opportunities. This is obviously another method to try to balance continued needs for cost savings while supporting broader business needs for customer responsiveness and managing important tenets of supply chain risk mitigation. The most attractive markets for growth again point to China, but at the same time, respondents indicate that China is the fifth most likely to be considered “too risky” to operate within.
Finally, no supply chain executive survey these days neglects to manifest the crrent challenges related to supply chain talent management. The 2014 SCM World CSCO respondents pointed to ever more challenges in building and managing supply chain teams over the past two years, nearly double the frustration expressed in 2011. SCM World points to raw recruitment as the most cited problem despite rising interest in supply chain among universities and significant investment in supply chain focused professional organizations. The need for well-rounded generalists possessing broader supply chain functional, business and team collaboration skills seems to remain an important need, with implications for significant job rotation across business areas. This obviously remains a key area of concern among senior industry supply chain leaders and consistent with predictions and findings from other industry analyst firms including the Ferrari Consulting and Research Group. It a challenge requiring far more concerted actions and supporting efforts involving academia, industry, professional organizations and supply chain professionals themselves.
Readers can download a summarized version of SCM World’s Chief Supply Chain Officer 2014 at this web link or view an SCM World blog posting by Kevin O’Marah which highlights the top 10 supply chain facts brought forward from the 2014 report. Alternatively, E2open is providing a download link on its web site Resource Center.
If our readers have had the occasion to travel to Boston, you might have experienced the public transit subway system which is referred to as the “T”. Typical to the historic nature of the city, its subway system dates back to the late 1800’s. Today, its subway lines are denoted by colors, namely the Red, Green, Orange and Silver lines.
Last week, another very important milestone took place.
The Massachusetts Department of Transportation awarded a contract to China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars. The important headline for this development was the awarded contract cost, namely $567 million, is a rather compelling sum for this amount of modern equipment.
It its reporting, Bloomberg News echoed that this was the first deal of this kind for a Chinese company in the U.S.: “The deal breaks new ground for Chinese train makers whose overseas push, backed by Premier Li Keqiang, has been mostly limited to developing markets.” According to CNR officials, this deal eventually places CNR equipment in all of the world’s six continents.
The contract calls for CNR to replace 152 Orange Line subway cars, that line’s entire fleet, which has an average of 1.5 million miles of service per car. Additionally, 132 Red Line subway cars which date back 27 years and have racked up to 2.3 million average miles will also be replaced. CNR will construct a new $60 million final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. The new production facility is expected to employ upwards of 150 factory workers.
Since the contract stipulates that 60 percent of the work to take place in the U.S., Supply Chain Matters speculates that the subway car components will be imported directly from China, most likely by ship via and expanded Panama Canal routing to an east coast port.
The timetable calls for a three to four year design phase, with initial pilot cars delivered in 2018, and production car output spanning the years 2019-2021. The deal has an additional option for the delivery of 58 additional Red Line cars.
The specifications for these new subway calls call for adding an additional 15 additional passengers per car, wider accessibility doors, LED lighting, regenerative braking systems, environmentally friendly HVAC and advanced customer information systems.
The Massachusetts Bay Transit Authority (MBTA), operator of Boston’s transit system has struggled with its finances for many years, falling behind in any efforts to invest in new operating equipment. Thus, the opportunity to replace this amount of equipment at the stated cost had to be a very attractive proposition for taxpayers. However, it has to a rather concerning development and omen for existing train equipment manufacturers.
A reported six companies bid on this replacement contract. Bidders were reported to have been evaluated on criteria ranging from technical and manufacturing experience, quality assurance, reliability as well as price. In its reporting, Bloomberg noted that the CNR price was a little more than half that of Bombardier and other bidders included Hyundai Rotem Co. of South Korea and Kawasaki Rail Car of Japan. An MBTA spokesperson later added that that agency found no human rights violations with CNR.
Rival state-owned CSR Corp. is reportedly keen to supply high-speed trains to the State of California. A published Reuters report indicates U.S.-based SunGroup USA indicated to Reuters earlier last week that it had teamed up with CNR and its unit Tangshan Railway in a pitch to supply California’s $68 billion project with up to 95 trains that can travel as fast as 354 kilometers per hour (221 miles per hour). That news is significant in that CSR could possibly team up with rival CNR, the recipient of the recent Massachusetts subway car contract, for the California contract. About a dozen firms are expected to compete for the California project.
And then there is one more development. An additional Bloomberg report published yesterday indicates that both CNR and CSR will make “a major announcement” in about a week. The report cites speculation that China’s State-Owned Assets Supervision and Administration Commission (SASAC) is seeking the merger of the two companies to boost exports of high-speed railway technologies.
Obviously, China has indeed set aggressive targets for exporting train equipment and supply chains to global markets and developments are moving rather quickly.
This week brings two visible and poignant reminders of the perils for being an Apple supplier. There are of course, the positives related to the sheer production volumes that doing business with Apple provides, along with being on the leading-edge of product or component innovation. Along with the positives come the perils for dealing with a highly demanding and influential customer.
Today’s printed edition of the Wall Street Journal cites suppliers and other sources as indicating (paid subscription) that because of the current surging demand for Apple’s newly announced iPhone 6 models, the Apple supply chain ecosystem has altered previous plans for ramping-up production volumes associated with new models of iPads, and instead are allocating current production resources to iPhones, specifically the iPhone 6 Plus. Apple’s Sales and Operations process has obviously issued marching orders that indicate all hands on deck supporting iPhone shipment needs. That implies a invariable delay for new iPad market availability plans as critical component supplies such as displays allocated their current efforts strictly to supporting current iPhone output demands.
Foxconn, Apple’s prime contract manufacturer has again placed in the role of doing whatever it takes to keep-up with demand, fulfill customer orders and not let lack of finished goods supply be an inhibitor to Apple’s financial results in this all important holiday shipping quarter. The WSJ reports that Foxconn’s Chairman Terry Gou is personally at the Zhengzhou assembly facility “… to monitor production closely.”
In prior Supply Chain Matters commentaries we have pointed out that Foxconn’s real desire is to continue to diversify its business models with less overall dependence on the ebbs and peaks of Apple. That includes building independent branded products. The contract manufacturer has thus been willing to assume a secondary provider role for other of Apple’s products such as the iPad Mini. But, when the stakes are really high, the Apple operational pattern is to turn to its long-standing CMS provider to pull the proverbial rabbits out of the hat in providing almost virtual capacity to move finished goods to consumers and channel partners.
Thus, one peril for being an Apple supplier is having the capability of high agility in the wake of what others would view as rather difficult obstacles.
The other supplier peril reminder comes from this week’s sudden and unexpected news regarding evolving sapphire glass supplier GT Advanced Technologies and its filing for Chapter 11 bankruptcy protection, sending its stock plummeting. This was a classic current day example of what various supply chain academics have noted as bad supply chain news directly correlated to negative stock performance. In GT’s case, it was literally wiping out upwards of $1 billion in equity value according to one report.
Since the GT news broke earlier this week, the reports we have been monitoring indicate that after further testing of the new sapphire glass material that GT was producing a its new start-up plant near Mesa Arizona, Apple engineers determined that the material was not appropriate for the new iPhone models, and reportedly, withheld the final seed investment payment involving upwards of $130 million. Today, the WSJ reports that GT Technologies will exit the business of manufacturing sapphire. A U.S. bankruptcy judge allowed GT to keep the details of its relationships with Apple secret, no doubt from the influence of Apple as a major creditor. Apple has apparently declined any further statements to business media regarding its relationship with GT.
We sense that this Supply Chain Matters commentary regarding perils will resonate with our readers residing within either Apple’s or other supply chain dominant customer supply chain business models. We know that there not much any of you can state publically. However, we as a broader community, in just one week, have open visibility and can dwell, albeit briefly, to such perils.
We usually strive to point out important takeaways for readers in our individual postings. In this particular case we rather play the observer role and state that perhaps this is today’s mission for supply chain, namely dealing with whatever is required to make the business model successful, including a can-do relationship with the most influential and important of customers. It is what is expected for today’s industry supply chains.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
General Motors Attempts to Turn to a New Chapter of Growth, Customer Loyalty and Supply Chain Practices
The public relations teams supporting General Motors have been in high gear these past weeks for obvious reasons. Lapses in product design and quality management practices, and what has been billed by business and general mediaas the worst U.S. product safety crisis in recent memory has led to a series of product recalls among multiple GM brands involving upwards of 2.6 million vehicles.
GM desperately needs to move beyond its current state and restore confidence in its brands and in its business management model. Suppliers and partners associated with supporting this U.S. based OEM need to also move on to more collaborative and win-win relationships, but that requires a different GM perspective.
When Mary Barra was appointed CEO of General Motors, this author communicated our Supply Chain Matters elation for this announcement. Our enthusiasm came from the dual fact that not only was Barra the first senior female executive ever to lead a global automobile manufacturer, but more importantly, because her 35 year background included plant management, manufacturing, product design and development leadership experience. She is also an engineer by training. Barra likely understands the elements of producing high quality cars and trucks and the important contribution of the GM supply chain ecosystem in achieving that goal.
If readers want to gain a candid perspective on Mary Barra’s current challenges in transforming GM, we recommend the recently published Time article, Mary Barra’s Bumpy Ride at the Wheel of GM. Author Rana Foroohar pens an insightful perspective on Barra’s management style and her efforts to change a rather in-bred corporate culture built around functional fiefdoms and little accountability. She describes Barra as the consummate “outsider-insider” with a far different style from most of her CEO predecessors. She has been put in charge to become the change agent and apparently has the support of many of GM’s employees in that task. In our previous commentary in December 2013, we called attention to the Wall Street Journal characterizing Barra as “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”
This week, business and general media are featuring reports of GM’s latest earnings announcement. The WSJ reported that after nine months, Barra wants to switch gears towards a multi-year strategy to deliver increased revenues and profits while restoring consumer trust. She explained to a group of GM’s top 300 executives that the company must do what it takes to be the “world’s most valued automotive company”. The going forward strategy leans heavily on reliance on planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. A goal is to have 47 percent of global sales to be fueled by these new models by 2019. It further includes market expansion and growth within China through investing in five additional auto assembly plants and he introduction of nine new Cadillac models in that country.
GM will further focus on the broader supply chain’s contribution to its renewed business goals.
According to a recent WSJ report, there is an internal belief that GM pays more than its competitors for materials and technology because the company bases parts purchases on unrealistically high forecasts that burden suppliers with high fixed costs when ultimate demand falls short. Our community is more blunt in such an explanation: it is lousy forecasting predicated on achieving functional stovepiped goals. The WSJ quotes some analysts as indicating that the automaker could save upwards of $1 billion a year with smarter purchasing practices, which as we know, is a typical Wall Street short-term perspective these days. Squeeze those suppliers!
GM’s existing product development chief, Mark Reuss, actually met with executives representing 700 suppliers indicating that the company is ready to share more financial risks if sales projections are high. At that same meeting, GM’s purchasing boss, Grace Lieblein indicated that the supplier base will likely need to add capacity to support growth plans. In a Detroit Free Press published report, she is quoted as stating: “we just have to be cautious and strategic about how we add that capacity and not move too fast.” Lieblein further communicated that an important strategy is convincing suppliers to locate closer to GM assembly plants to reduce transportation costs.
Obviously that’s a tall order for suppliers since transportation cost savings do not necessarily weight themselves to the benefit of the supplier. Adding production capacity to support additional volume and spreading that capacity further across the globe requires a significant financial investment. Add some history of throwing suppliers “under the bus” when quality plans go south because of component design flaws, well, you get the picture of legacy trust.
The new era of GM obviously requires what Barra has described as bold thinking and leadership. What this author was hoping to read is that goal of GM’s supply chain going forward is to support continued product innovation while controlling costs and accelerating productivity. Perhaps that will be articulated in the coming months.
It is this author’s view that such thinking can benefit by a broader and deeper perspective by GM’s executive leaders on how more modernized supply chain business practices, new product introduction (NPI) practices incorporated to supply chain impacts, more collaborative based inventory and supply chain planning practices have led to benefits among other industries as well as other automotive OEM’s. Today’s supply chain and B2B business network technology capabilities can further link the global end-to-end supply chain with more granular levels of planning and supply chain execution synchronization.
The business practices and enabling technology are available but it requires a good dose of change management infusion before real benefits can flow. We trust GM will hence forth nurture the leadership to set such perspectives.
© 2014 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.
UPS’s Latest Survey of Healthcare Supply Chains- Some Interesting Conflicts and Needs for Broader Perspectives
This week, UPS announced the results of its seventh annual “Pain in the (Supply) Chain” survey involving pharmaceutical and healthcare supply chains. According to the authors, the survey was conducted from phone interviews with 536 senior supply chain management decision-makers within the healthcare industry. Global coverage for this survey is noted as Asia, Canada, Latin America, the United States and Western Europe.
For the third consecutive year, the survey points to regulatory compliance as the top supply chain pain point, cited by 60 percent of the 2014 respondents, indicating that this trend alone is driving current business and supply chain changes. From our Supply Chain Matters lens, that finding is not a surprise since so many pharmaceutical and healthcare supply chain are indeed regulated, but more importantly, they are now globally extended for both supply and service demand needs.
The next largest concern was noted as product protection challenges, with 46 percent of respondents citing product security, and 40 percent citing product damage and spoilage as top concerns. Again no surprise, given the ongoing challenge of counterfeit drugs and global extensions of transportation and logistics networks.
However, what was surprising, at least for us, was that a mere 26 percent of these supply chain leaders cite contingency planning as a top supply chain concern. Perhaps this is an area that these supply chain leaders feel is being adequately addressed. Yet, 34 percent of those surveyed in Asia and 22 percent of those residing in Latin America indicated their firm’s supply chain was impacted by an unplanned event in the past 3-5 years. Cited reasons that were noted were:
- Events being too unlikely or infrequent
- Back-up infrastructure too expensive to deploy
- Little or no prioritization being given to this area vs. other challenges
For an industry that is required to spend so much on product development, brand value and patient trust, it is surprising to once again note such viewpoints. The industry need only look to the previous supply chain disruptions that occurred at Johnson & Johnson to ascertain how about contingency planning has become.
Deeper in the UPS news release perhaps finds a rather important assumption related to the above concerns in compliance, product protection and contingency planning. Many healthcare supply chains are not viewing production, distribution, logistics and transportation as a core capability and have thus outsourced these activities. According to this latest UPS survey, 62 percent of decision makers cited increased reliance on third-party logistics providers as a strategy into the foreseeable future. (3-5 years) Therefore business partners have become an important enabler in helping to overcome stated supply chain challenges.
In a previous Supply Chain Matters commentary, we called for a broader technology vision among supply chain execution partners, specifically 3PL’s. As more and more industry supply chains opt to outsource logistics, transportation and customer fulfillment to logistics and transportation partners, leveraging the potential benefits of newer technologies in item-level tracking, Internet of Things (IoT) and supply chain control towers become a de-facto capability requirement to overcome business challenges and deliver required business outcomes. Too often today, the outsourced 3PL decision has been driven solely by cost control vs. broader requirements for supply chain resiliency and responsiveness. While UPS and FedEx have embraced advanced technology, other 3PL’s have relied on customers to fund such investments, and there remains the conundrum. For us, these latest UPS survey findings concerning healthcare focused supply chains have special meaning to the new reliance on supply chain execution partners for joint goal enablement. Beyond logistics, globally dispersed contract manufacturers have an important enabling and support role as well.
The report’s executive survey indicates that healthcare supply chain leaders are themselves eyeing technology investments in two specific areas of the supply chain, namely front-end order fulfillment and overall product protection in the form of serialization and item-tracking. Supply Chain Matters advises these leaders to also consider the all-important supporting element for connecting the front and back-end of the extended healthcare supply chain. That would be a cohesive supply chain business network that synchronizes planning, execution and early-warning intelligence to unplanned events.
General Mills Reports Another Disappointing Quarter While its Supply Chain Remains Challenged with Conflicting Goals
Within our Supply Chain Matters 2014 Predictions for Global Supply Chains published in late 2013, we specifically called out the existence of extraordinary challenges for Consumer Product Goods supply chains in 2014, which is indeed playing out in many dimensions. Economically distressed but more health conscious consumers continue to drive fundamental challenges involving product demand, especially in specific meal, nutritionally based or convenience categories.
In an August posting, Supply Chain Matters highlighted a number of blunt statements from CPG industry CEO’s amidst continued disappointing financial and operating results. Such results are triggering additional cost saving directives for respective supply chain organizations, cutting more flesh from previous cost reduction efforts. In some cases, such cost savings are being applied to fund accelerated product development, sales and marketing efforts to more aggressively promote additional product demand.
While all of this is occurring, packaged food and beverage supply chains have been called upon to support higher levels of product innovation, SKU growth, and aggressive product promotional campaigns that are having mixed results.
Last week provided yet more evidence of this spiral. General Mills, a diversified CP products company behind such brands as Cheerios, Total and Wheaties cereal, Betty Crocker, Pillsbury and Bisquick in baking, Green Giant frozen vegetables and Progresso soups reported earnings for the period ending in August. Included in the results were a 2.4 percent reduction in overall sales, an additional 5 percent reduction in U.S. retail revenues and a near 25 percent reduction in total profits. A week prior to its earnings report, the company announced an $820 million acquisition of Annie’s Inc., an organic and natural foods provider. The company was willing to pay what has been described as a 37 percent market premium to add additional product and brand innovation in the area of organic foods. Also during the recently completed quarter, the company introduced 145 new products, described as a pace of 20 percent higher above the year earlier period.
In the earnings briefing, General Mills CEO Ken Powell exclaimed to analysts:
“The operating environment for food and beverage companies remains quite challenging and trends weakened for some markets in the latest quarter.”
Much more noteworthy, something that Supply Chain Matters has rarely observed was that John Church, Executive Vice President for the Global Supply Chain was invited to be an executive participant in the earnings briefing.
Mr. Church’s statements included the following:
“We’re continuing to deliver strong HMM (Holistic Margin Management) levels each year. Back in fiscal 2010, we set a goal of achieving a cumulative $4 billion in COGS HMM through fiscal 2020. I’m pleased to say that we’re already halfway to our goal. We are targeting another year of strong HMM delivery in 2015, with more than $400 million in COGS HMM in this year’s plan. I have great confidence that by the time we get to 2020 we will have met or possibly exceeded our $4 billion goal.”
Obviously, Mr. Church has described a supply chain being driven by a strategy of cost reduction or cash transfer to fund other strategic initiatives. This has become a common pattern for many CPG supply chains. By our lens, it is another form of financial engineering. None the less, it provides a conflict in capabilities which current supply chain leaders must deal with.
Mr. Church went on to describe that 2015 plans include contributions from all areas of the supply chain and will include involvement of external partners through an initiative termed GEOS or General Mills End-to-End Optimization Solutions. He further described Project Century whose objectives are directed at streamlining and simplifying North American operations and positioning the supply chain for future growth. (aka: Emerging market areas) This effort includes targeting an additional $100 million in cumulative cost savings by fiscal 2017 with material savings realized in beginning of fiscal 2016.
To support these efforts, the company further announced its decision to close a cereal plant located in Lodi California, which employs upwards of 400 people, by the end of 2015, subject to labor union negotiations. Also announced was the closing of a yogurt production facility, located in Methuen Massachusetts, which employs upwards of 100 people, in the summer of 2015.
In the question and answer period, a JP Morgan equity analyst asked whether the industry has reached a self-destructive period of heavy promotional marketing spending with marginal revenue growth payback. Management’s response was that product innovation and capitalizing on consumer trends would fuel higher levels of growth. Thus, the acquisition of Annie’s.
Thus presents a further ongoing challenge to the General Mills supply chain team, namely supporting higher levels of product innovation and market responsiveness. In a previous Supply Chain Matters commentary, we praised a conference keynote delivered by Steven Melnyk, Professor of Operations and Supply Chain Management at Michigan State University, whom this author has long admired. Professor Melnyk expressed a supply chain in harmony as being:
- Supportive of corporate objectives while making achievement of desired business outcomes inevitable
- A strategic asset to the business
- Helping in the identification and support of new business opportunities
Especially insightful was Professor Melynk’s differentiation of output-driven, such as reduced costs, vs outcome-driven supply chain strategies. His observation: “too many supply chains are driven by output-driven perspectives.” He instead defines five possible supply chain outcome models, each requiring different skill and leadership requirements. According to Melnyk, a supply chain can be either: responsive, security, sustainable, resilient or innovative driven. Each of these outcomes is not mutually exclusive, but rather blended according to market or business needs.
For General Mills, it would appear that its supply chain may well be challenged by the conflicts of aggressive cost cutting (output-driven) initiatives required to support and fund product transformation support (outcome-driven) business outcomes. This is yet another specific example of the challenges currently underway among today’s consumer product goods supply chains.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.