In preparing our overall 2017 Predictions for Industry and Global Supply Chains, and specifically our prior posting, Prediction One- What to Expect in Global Economic Activity, we had the opportunity to speak with both industry, supply chain and technology executives to gain current perspectives of what supply chains should anticipate in the coming months and how to be prepared.
One opportunity was a discussion with Paul Keel, Senior Vice President, Supply Chain for diversified manufacturer 3M Company. In my role as a supply chain industry analyst, my perspectives of 3M extend nearly 15 years, when I first interacted with members of the 3M supply chain leadership team. A lot has occurred since that time, and that came to be the context of the discussion with Keel.
The 3M of today is a $30 billion diversified manufacturer whose supply chains support 5 different business sectors that span both B2B and B2C focused market segments. Industry products are quite diversified spanning industries such as automotive, commercial aerospace, communications, healthcare, high tech electronics and transportation. The consumer segment is the wide variety of 3M branded products that many of us are familiar with including the iconic branded Post-It note pads. Today’s 3M has deeper roots as multi-industry supplier. The company has always been anchored in core manufacturing and today that includes upwards of 220 worldwide manufacturing plants. It all amounts to a considerable scope for 3M’s supply chain teams.
In our interview, Keel referenced Q4 of 2008 as an important milestone checkpoint for 3M, one that created acute awareness to the potential of heightened volatility of industry and global markets brought about by the global financial crisis. He described that point as “opening the aperture” of the 3M of 30 years ago, as a $3B manufacturer, and the aspirations of what 3M has become today in ten-fold revenue growth. The described anchor has been that of a complete product innovation and continuous improvement mindset across the company. It was also a wake-up call that supply chain capabilities do matter, and that 3M had to excel in all aspects of supply chain competencies.
Regarding 2017 predictions relative to heightened industry competition, continued market uncertainties and potential volatility, Keel remains of the belief that the supply chain will play an increasingly differentiating role for high-performing organizations. He states:
“In the hyper-competitive world of global business, we’re finding new ways that supply chain must lead. While historically organizations looked to their supply chains primarily for productivity and cost reduction, today high-performing companies count on us for much more – developing new products, protecting our environment, serving our customers, and driving meaningful value creation across the enterprise. Fully leveraging the power of supply chain begins with the proper mindset. ‘Make and deliver’ is no longer enough. To win in 2017, we’ll need to ‘amaze and delight.’”
Keel further described the notions of a bimodal supply chain perspective:
“There was a time when supply chains could settle for trade-offs…cost or speed, service or quality, flexibility or reliability. Those days are long gone. The equation has shifted from an imbalanced ‘or’ to an equilibrium centered on ‘and.’ Information and technology are central to achieving this synchronization. The leaders of tomorrow will be the organizations that can effectively manage a bimodal supply chain.”
We also discussed technology as the enabler of bimodal capabilities. Keel described 3M’s perspective as: “Asset-light and Information-heavy.” In the bimodal lens, it translates to enabling greater levels of efficiency in overall productivity levers, in an end-to-end supply chain risk mitigation approach to manage volatility, and general in moving forward with overall global optimization. The other technology lens is that of the business growth enablement lever, manifested by enabling continued end-to-end supply chain segmentation capabilities along with digitization of supply chain processes and decision-making needs.
Keel further pointed to corporate sustainability and social responsibility initiatives as an essential mindset going forward and a further component of bimodal. For 3M, this equates to declared responsibilities to communities, to employees and to the environment.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Deep Dives on 2017 Predictions for Industry and Global Supply Chains- Prediction One: Global Economic Activity
The following Supply Chain Matters blog begins our series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provides a series of predictions for the coming year. These predictions are provided in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In this initial drill down posting, we dive deeper into our first prediction.
2017 Prediction One- A Subdued World Economic Outlook and Heightened Political Uncertainty Will Test Industry Supply Chain Agility
There is little doubt that the year 2017 will present even more uncertainty and increased volatility for many industry supply chains. Organizations will once again need to be prepared.
Entering the new year, the picture of various indices and benchmarks at the end of 2016, shown in the accompanying chart indicate some problematic areas that include double-digit growth in general commodity and fuel costs, and continued strength of the U.S. Dollar.
By the end of 2016, political winds of change were blowing a strong gust across the global economy. Economies are entering 2017 in a year of heightened uncertainty in markets, brought about by more volatile, populist focused political environments among major developed nations including Eurozone countries and the United States. At the same time, select global-wide PMI and supply chain indices were all reflecting various signs of positive growth. The open question is whether existing global chain activity gets side railed in the coming year due to geopolitical and other economic events.
The widely unexpected election of Donald Trump as the new President of the United States is indeed sending out shockwaves around the world. The Eurozone, which was already attempting to deal with the unexpected results of Britain’s referendum vote to exit the EU (Brexit) faces yet another concern with Italy’s December vote to reject constitutional reforms, which prompted the resignation of Prime Minister Matteo Renzi. This could lead to a potential general election in 2017 that could have strong populist overtones including potential EU exit.
By late-December, the value of Euro was moving ever closer to parity with the U.S. Dollar, its lowest level since January 2003. Many analysts are predicting that in 2017, the Euro will indeed reach parity and could even drop below the value of the dollar at some point. That will add to the challenges of U.S. based companies to export products and services globally.
Also in 2017, a presidential election will occur in France with parliamentary elections scheduled for Germany and the Netherlands. With Brexit and the election of Donald Trump, fringe political parties are gaining a renewed voice, and with that, a whole lot of uncertainty relates to change in existing immigration policies, protected borders and restricted free trade policies to protect domestic employment.
This will cause industry and global supply chains to be challenged with the need for higher levels of agility in 2017. Supply chain risk factors will significantly rise across many industries and within many global regions, along with needs for educating line of business and senior executives on the supply chain implications of such risks. More informed and deeper analytical capabilities to ascertain various impacts to global component and finished goods manufacturing and supply chain sourcing will likely be an ongoing requirement and supply chain organizations who have not invested in such analysis and decision-making capabilities will be tested.
In its World Economic Outlook published in October 2016, The International Monetary Fund (IMF) cited a subdued outlook in 2017, with political tensions and an elevated policy uncertainty prevalent in the global economy. A stated common theme was the weak and precarious nature of the global recovery and consequent threats it was facing. That was before the sudden unexpected election of Donald Trump.
The October WTO forecast called for an anticipated global growth rate of 3.4 percent in 2017. The October forecast last year had called for a 3.6 percent growth level in 2016, but that was subsequently revised downward during the year to a current 2016 projected growth of 3.1 percent. Because of the ongoing uncertainty, the WTO forecasters clearly indicate that again in 2017, the potential for output setbacks are high as underscored by repeated markdowns in recent years.
Prospects were noted as differing sharply across countries and regions, with Asia in general, and India showing robust growth prospects. The 2016 growth forecast among Emerging Market and Developing Economies was projected to grow 4.6 percent. 0.4 percentage points higher than projected 2016 levels. Growth for China is 2017 was reduced to 6.2 percent vs. a 6.6 percent expected growth rate in 2016.
Growth among Advanced Economies, which includes the Eurozone, Canada, Japan, United Kingdom and the United States is forecasted to grow 1.8 percent in 2017, 0.2 percentage points higher than projected 2016 levels. While the WTO projects output in the United States to grow at an annual rate of 1.6 percent in 2017, current forecasts from economists are more optimistic, indicating a 2.4 percent growth rate reflected in increased output due to corporate tax reductions and potential added infrastructure investments.
The J.P. Morgan Global Manufacturing PMI, a composite index and recognized benchmark of global supply chain and production activity registered a value of 52.6 by the end of 2016, reflecting a surprising 1.9 percentage point increase from where this index ended in 2015, at a value of 50.7. By the end of December, global PMI indices pointed to spurred Q4 growth among developed economies such as the United States, Eurozone countries, Japan, and Taiwan. However, supply chain activity indices were generally declining among developing and low cost manufacturing regions apart from Vietnam. Currency pressures and a rather strong U.S. dollar were again having a discernable impact on output levels.
With major future trade agreements such as the Trans Pacific Partnership garnering little domestic political support in the United States and now other nations, other Asia-centric global trade initiatives will come to the forefront with China as a major influence.
As we have stated on prior annual predictions, industry and global supply chains should anticipate yet another challenging year with resiliency, adaptability, and risk mitigation as important competencies. For 2017, industry supply chains will again be called upon to help contribute to top-line revenue growth. We anticipate added pressures for cost controls and cost reductions, which will place additional pressures on capabilities. The ability to share important information and educate the business on supply chain impacts and/or risk tradeoffs will be an important differentiator.
In seeking other viewpoints regarding 2017, we had the opportunity to speak with Paul Keel, Senior Vice President of Supply Chain for 3M. His input was: “The leaders of tomorrow will be organizations that can effectively manage a bimodal supply chain.”
According to Keel, bimodal equates to continuous improvement initiatives equating to added supply-chain wide efficiencies, coupled with activities that can have direct impact to the revenue growth lever, such as supply chain segmentation, applied use of disruptive technology and continued corporate sustainability efforts. Both are not mutually exclusive and each can complement the other.
We could not agree more.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved. Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and our parent, The Ferrari Consulting and Research Group.
In August of 2016, this blog’s parent, The Ferrari Consulting and Research Group, published a research advisory titled: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains. The prime takeaways from that advisory was that 2016 marked the beginning of the newest phase of B2C online retail fulfillment, namely the consequences of permanent changes in consumer shopping habits beginning to impact the long-term presence of brick and mortar retail and their supporting supply chain strategy frameworks.
In a commentary, earlier this week, we highlighted how the Amazon effect continued to make a profound presence over the past holiday fulfillment quarter.
Over a period of two days this week, significant announcements from well-known U.S. retailers, Macy’s, Kohl’s, and Sears, adds more evidence to the reality of a disrupted and quickly changing retail industry.
Yesterday, Macy’s again alerted investors to disappointing holiday sales indicating that comparable sales declined 2.1 percent in November and December and warned of even lower full-year earnings. The broad-based full line retailer announced a series of actions to streamline its retail store presence, intensify cost reduction efforts and execute a revised real-estate strategy.
Included is the closure of 68 retail stores, part of the 100 retail store closings previously announced in August 2016. Most of the store closures are expected in early 2017. The total retail store count for Macy’s was 730 stores prior to this week’s actions. The planned store closures will be accompanied by the reorganization of the retailer’s field structure that will manage remaining retail stores. An additional 3900 workers are expected to be displaced or reassigned because of such closures.
The retailer’s ongoing strategic real estate strategy calls for securing added value from existing store real-estate. Macy’s remains under pressure from activist investor Starboard to garner more cash from its real-estate holdings. To that end, this week’s announcement points to upwards of $95 million in cash proceeds already garnered from real-estate transactions involving stores. That is further validation of our conclusion that declining foot traffic makes the cost, service impact and financial value of the physical store the new determinant of long-term presence.
Additional actions initiated are elimination of current layers of management and other efforts to reduce non-payroll costs. Reports indicate that upwards of an additional 6200 employees will be impacted by job cuts, bringing the total impact from actions taken to upwards of 10,000 jobs.
These combined actions are expected to generate annual expense savings of $550 million beginning in 2017, enabling the retailer to invest an incremental $250 million in existing online retail platforms. Retiring Chairman and CEO Terry Lundgren indicated in the announcement: “Our omnichannel strategies continue to evolve based on the changes in our customers’ shopping behaviors, including a focus on buy online, pickup in store and mobile-enabled shopping. In addition, we have invested in and enlarged our customer data and analytics team, which will help drive our new marketing strategies for 2017.”
In a prior Supply Chain Matters blog posting in December, we questioned whether there was s more immediate financial crisis involving Sears after the sudden departure of two high-ranking executives and increased speculation among internal employees and suppliers that this retailer may soon file for bankruptcy.
Today, Sears Holdings announced that retail sales have continued to be challenging during the quarter to date. Same store sales at Sears and Kmart branded stores for the first two months of Q4 reportedly declined in the range of 12-13 percent, which is rather significant in the most critical sales period.
Hedge-fund manager and Sears Holdings Chairman Edward Lampert disclosed a series of actions to infuse an additional $1 billion of cash to revive operations and execute a revised strategy. The additional financing includes a $500 million loan secured by mortgages on 46 existing properties, a $300 million secured letter of credit, and a $200 million unsecured loan from Seritage Growth Properties, a real-estate trust that was previously spun-off that predominately consists of Sears and Kmart retail properties.
Sears Holdings further announced a series of additional strategic actions to increase its financial flexibility and improve long-term operating performance. The actions were billed to facilitate the transformation of Sears from a store-based, asset-intensive business model into a membership-focused, asset-light business model. Actions include:
- Intentions to close an additional 108 Kmart and 42 Sears unprofitable stores over the next few months, as the holding firm looks to stem its operating losses. These retail stores collectively generated about $1.2 billion in sales over the past 12 months.
- An agreement to sell the iconic Craftsman tools business for a cumulative $775 million, together with use of a perpetual license for the Craftsman brand, royalty free for 15 years, coupled with a 15-year royalty stream on all third-party Craftsman sales to new customers.
- The formation of a special committee reporting to the Board of Directors tasked to market certain real estate properties with the goal of raising over $1 billion.
Industry watchers and this blog itself question how long Sears Holdings can continue to stem the tide of declining sales and the loyalty of consumers who now shop online.
Kohl’s Corporation today reported that its comparable sales decreased 2.1 percent in the fiscal months of November and December 2016 combined, compared with the prior year period. Total sales for the combined fiscal November and December period decreased 2.7 percent. The retailer further lowered prior guidance on earnings and margins as a result of the announced holiday sales declines. Kohl’s had already undertaken store closures in 2016.
As a consequence of today’s news, Kohl’s stock plummeted 19 percent to mark their biggest-ever one-day decline.
Our August Advisory outlined the tenets and impacts of the current new phase of an omni-channel driven retail business model. This week’s news, and similar type news to follow will add additional evidence as to the implications of an industry that is increasingly impacted by disruptive market forces that challenge prior strategy. Consumer preferences and desires have permanently changed in retail, and online platforms and consumer loyalty programs such as that of Amazon are rapidly garnering consumer loyalty and dependence.
With the accelerating trend toward the closing on non-performing brick and mortar retail stores, supply chain strategy and tactics must now align around unified organizational leadership. Investments need to support capabilities geared to a digitally-driven retail customer fulfillment business model driven by demand-driven response vs. traditional merchandising linked to bulk store replenishment.
Today’s online world requires analytics-driven planning, agile marketing and multi-channel customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics. The physical store is now the virtual store, merchandising is now about analytics-driven knowledge of customer needs, and inventory management is anchored in more sophisticated item-level planning and pooling algorithms.
The industry implications and trends are compelling as well as inescapable.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
What is fast becoming a new norm for business risk is that of a direct public attack via a Twitter “tweet” from U.S. President Elect Donald Trump. Before formally taking office on January 20th, Mr. Trump has already attacked corporations such as United Technologies for presumably outsourcing U.S. jobs to Mexico. Other public confrontations have involved Boeing and Northup Grumman for perceived excessive development costs related to new U.S. government aircraft.
Today, this Presidential social media campaign took on direct industry supply chain implications.
In a series of Twitter postings, the President Elect took direct aim at General Motors regarding the Chevrolet Cruze model. Mr. Trump accused GM of importing this vehicle from Mexico to U.S. dealers without having to pay U.S. import duties. GM quickly responded that the bulk of the Cruze was produced in a plant in Lordstown, Ohio.
Trump’s other automotive industry target has been Ford Motor, who had previously announced plans last February to build and staff a new manufacturing facility in Mexico to produce smaller vehicles. An editorial at the time published by The Wall Street Journal reflected that Ford’s strategic sourcing moves were indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raised direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates were indicated as being one-fifth that of unionized workers in the U.S.
Today, Ford suddenly scrapped its plans to build the previously announced $1.6 billion small car factory in Mexico in favor of a modified plan that would share production among existing plants in the U.S. and Mexico. Ford’s CEO Mark Fields took to the business airwaves to declare a new meeting of the minds regarding the incoming POTUS to include a planned $700 million incremental investment in the Flat Rock Michigan assembly plant.
We call reader attention to a CNBC business network report which we believe provides far more insight as to what is really at-stake in this developing direct public confrontation of U.S. auto manufacturers. That insight involves the current automotive value-chain of parts and component sourcing.
The CNBC report notes that under the existing North America Free Trade Agreement (NAFTA) the parts components that make-up a finished automobile and truck are increasingly sourced in Mexico. In 2015 alone, 60 percent of the $5 billion in direct foreign investment associated with Mexico’s automotive industry sector was associated with parts and component manufacturing. As we have previously noted on this blog, Mexico’s direct labor costs averaging in some cases $2.50 per hour are a compelling attraction for parts producers, especially when various global OEM producers demand that a contiguous component supply chain be developed to support both Mexican and other North American production needs.
In 2014, we called Supply Chain Matters reader attention to the then prevalent trend that for the automotive industry, Mexico was fast becoming a North America production and global export production hub. We echoed that global automotive brands BMW, Honda, Kia, Mazda, Nissan, Volkswagen, Nissan, and others had announced strategic Mexican production sourcing decisions that amounted to billions of dollars of investment. This was beyond U.S. automotive branded companies, reflecting that Mexico would soon become an alternative global automotive manufacturing hub for smaller, lower-margin vehicle line-ups.
The CNBC report cites U.S. trade data for the first 10 months of 2016 indicating that “parts imports from Mexico totaled $89.6 billion, dwarfing the next biggest import nations, Canada with $54 billion and Japan, at $44 billion. While vehicles were the main imports from Canada and Japan, more than half- $46.8 billion of the automotive-related imports from Mexico- were vehicle parts in that 10-month period. U.S. government data show that car parts imports into the U.S. nearly doubled in the past five years.”
It would appear to this blog, that Mr. Trump has gathered advisors who appear very knowledgeable of automotive supply chain sourcing strategies particularly as it relates to current NAFTA agreements. The Trump campaign promises to thwart the exodus of U.S. jobs has obviously already begun, and the stakes are threatened import tariffs involving imported auto parts originating from Mexico and Canada. Thus far, it would appear that Ford has been willing to meet the incoming Administration halfway with new concessions. Perhaps, GM and others will follow in a meeting of minds or the Republican dominated Congress will act on Trump’s threatened NAFTA agenda.
With the first direct skirmishes involving public confrontation underway and other U.S. based industry supply chains should be prepared for an environment of changing assumptions related to the landed cost of component sourcing.
Where all of this give, and take ultimately lands is very much uncertain especially in the new tendencies toward direct confrontation. The sheer facts of dramatically different direct labor costs among Mexico and the U.S. workers remains. Worker productivity and automation are the new variants in global sourcing coupled with threatened new import tariffs or open market retaliation.
Preparation and timely detailed knowledge of component sourcing and production costs coupled with backup contingency sourcing plans are fast becoming a required capability in this evolving new era of populism and anti-global trade.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Ever Larger Bets in the Next Generation of Semiconductor Technology and the Key Dominance of Product Value Chains
As many of our high tech and consumer electronics supply chain readers are aware, there has been a wave of consolidation occurring across semiconductor industry sectors. The reasons are many. They include making bets on the next generation of chip technology that will drive specific industry applications such as artificial intelligence, autonomous driving and Internet of Things. Of late, acquisitions have also focused on the mitigating the rather expensive cost of investing in the next generation of chip technology as well as leveraging the influence and investment in semiconductor design and foundry capacity. This ongoing consolidation not only impacts high-tech product value chains, but other key industries as well.
A reminder of this implication of such trends has come from contract semiconductor chip fabrication producer Taiwan Semiconductor Manufacturing Company (TSMC). The “fab” chipmaker has recently announced plans to build a $15.7 billion new design and fabrication facility that would produce the world’s most advanced 5-nanometer and 3nm chips.
A recent published report from Nekkei Asia Review observes that Apple currently utilizes TSMC’s 16nm process technology for core processor chips utilized in the iPhone7. TSMC will begin producing 10nm processor chips in 2017, and with this new investment, could conceivably produce 3nm chips as early as 2022.
The report further observes that only premium tech players with deep pockets such as Apple, Huawei, Qualcomm, Media Tek and Nvidia can afford investments in these next generation chip technologies. According to the Nekkei report, TSMC’s most dominant customers are Apple and Qualcomm, each accounting for 16 percent of the company’s revenue. In late October, Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media, and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, to enter automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. Industry speculation is that Qualcomm will turn to TSMC for 7nm chips which are scheduled for production sometime in 2018.
Further, more and more fabrication capacity is being consolidated around just a few “fab” owners. The report notes that TSMC current accounts for 55 percent share of global fabrication production needs, which by any standard points to growing market dominance. Other fabrication players that make-up the bulk of industry needs are Intel and Samsung, and to some extent Global Foundries which acquired the Former IBM microelectronics and semiconductor business unit.
Intel indicates it will begin producing 10nm chips in late 2017 while Samsung plans to introduce 7nm chips by the end of 2018.
Thus, the most critical link for high tech and consumer electronics supply chains is indeed semiconductor design and manufacturing capability, and forces are accelerating toward consolidation of the major players. More and more, the required investments in the next breakthrough in technology are becoming far more expensive and will require bigger and more deep pocketed players willing to make such bets.
The race is indeed about major control of not only the high-tech product value-chain, but increasingly key levers of automotive and equipment manufacturing value chains as well. Tesla Motors is already demonstrating the dominance of high technology components in the production and operation of electrically powered vehicles.
In today’s multi-industry environment of short-term focused investor value, not a lot of industries can tolerate a $16 billion bet on a new technology and production capability. Sharing the investment risk among fabless designers and fabrication producers is a practice increasingly being consolidated among key players.