Tomorrow, this author will be joining a distinguished compliment of speakers at the 7th Annual Supply Chain Management Summit sponsored by Bryant University and Benneker Industries. This event is turning out to be one of few premiere New England regional conferences focused on current issues and learning in supply chain management. Last year’s event drew upwards of 250 attendees among many industry settings.
Since many of our readers are located across the globe, the purpose of this Supply Chain Matters commentary is to summarize the key messages and takeaways of my talk.
My presentation is titled: New Developments in Supply Chain Technology- What to Consider in Your Supply Chain Investment Plans. The key takeaway messages I’ll be delivering is that three converging mega-forces:
- Constantly shifting customer and business needs requiring sense and response, as well as more predictive business processes and decision-making capabilities.
- Supply chain process and IT technology convergence providing more cost affordable opportunities for integrating both physical as well as digital information and decision-making capabilities.
- Digitally enabled manufacturing enabled by the Internet of Things.
are aligning toward extraordinary opportunities for what has long been the Holy Grail of our community, namely, integrating information and decision making across physical and digital supply chain spectrums. The alignments of the above mega-forces are providing significant opportunities in management alignment and top management sponsorship which can be leveraged. New and emerging technologies, especially engineered systems, cloud computing, predictive and prescriptive analytics are becoming the technology catalysts. Besides touching upon the latest advances and significantly changed IT market dynamics surrounding supply chain technology, my primary goal in this talk will be to advise supply chain teams on the most important investments to focus upon in the coming months and years.
First and foremost, and without question, the most important initiative for any supply chain organization today is a concerted set of initiatives directed at Talent Management. The business benefits of advanced technology are marginal without people who have the necessary and required skills to be able to leverage and harness these technologies. Recruitment, retention and increased skill needs are constantly identified as the single biggest challenge across C-level, business, IT supply chain and manufacturing teams, and the challenge will continue as newer technologies make their presence among industry supply chains.
More than ever in the past, supply chain, procurement, customer fulfillment, product lifecycle management and service management teams must have active technology awareness and planning strategies. The umbrella and accountability of the supply chain now involves far broader dimensions of common information and related decision-making needs. The notion of the goal for pursuing Integrated Business Planning is not just IT vendor hype, but a necessary and required capability. An organization’s Sales and Operations Planning capability is thus the most critical to focus and improve upon. That stated, an important reminder for cross-functional and cross-business remains that final objective is not technology alone, but rather required business objectives and outcomes.
I’m also urging technology selection teams to broaden their context of their technology planning to include leveraging information and decision-making capabilities across an end-to-end, value-chain and B2B business network. With today’s pace of business change, supply chain planning or forecasting can no longer stand-alone as a capability, and must be augmented and synchronized with the sensing of actual events occurring across the supply chain network. The good news here is that the supply chain technology market has shifted its emphasis toward broader support capabilities in this area.
For those who plan on attending tomorrow’s Summit, I look forward to meeting and chatting with all of you regarding your organizational and personal objectives. For those unable to attend, be advised that next week we will post a PDF copy of the presentation in our Supply Chain Matters Research Center for complimentary reader downloading. Minimal registration information is all that is required.
As always, give as a call or contact us via email if you require further assistance or if this type of presentation can assist your organization or forum in setting its supply chain management objectives for the coming year. Our home page can be accessed at this web link.
This is a follow-up commentary related to Tesla Motors, specifically this electric powered automotive manufacturer’s efforts in supply in deploying a broader supply chain vertical integration strategy. In our Supply Chain Matters commentary in February, we noted Tesla’s announcement to build its own $5 billion electric battery supply facility which is termed the “gigafactory”, capable of supplying up to 500,000 electric vehicles per year. That level of supply commitment exceeds Tesla’s current planned output and implies providing a U.S. based manufacturing presence for electric batteries that would be available to other automotive and vehicle producers. Tesla currently supplies batteries for the ToyotaRAV4 EV and the Mercedes B-Class electric.
We noted that the strategy savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Tesla Motors Model S powered automobile, the batteries are indeed the highest portion of material cost. Tesla expects that the new factory would reduce its current battery costs by 30 percent in its first year,
In late July, during its second-quarter earnings report, Tesla executives made a side announcement indicating that the company had reached a final agreement with Panasonic Corp. as the supplier partner in the construction and operation of the planned gigafactory. Five western U.S. states continue to be cited as potential sites for either one or two linked supply facilities, although site work has actually begun in an area near Reno Nevada. Other potential U.S. states in the running are Arizona, California, New Mexico and Texas. The western portion of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries.
Journalist Michelle Quinn pens in a report posted by the San Jose Mercury News that the potential for landing this new battery factory with upwards of 6500 manufacturing continues to fuel a massive wooing and lobbying effort among each of the potential states. State legislatures are rushing through incentive packages to sweeten prospects in their individual states and Governors and city mayors have resorted to novel efforts in demonstrating enthusiasm and keen interest. One example, Texas Governor Rick Perry drove a Tesla Model S to California and taunted California officials about the overwhelming advantages of locating manufacturing in the Lone Star State. Quinn describes these lobbying efforts as a ‘beauty pageant” and: “if a song and dance could help (California), let’s do it.”
Readers should recall that Boeing launched a nationwide RFP bidding effort among potential U.S. states for selection of component and final assembly facilities for its new announced 777x commercial aircraft program. In our January posting, Collaboration According to Boeing, we noted that Boeing’s ultimate objective was to secure the most lucrative economic incentives related to production sourcing. Boeing was in-essence conducting a reverse auction, seeking the lowest economic bidder. In the end, a package of incentives described as the largest of its kind in U.S. history assured that new generation 777 production would remain in the OEM’s current Seattle area.
One of the learnings from the deep economic recession of 2008-2009 is that state, local and provincial governments will do all that is required to secure needed jobs and an economic future in times of uncertain economic growth. If that requires massive incentives in tax breaks, site location subsidies, workforce training and infrastructure developments, so be it. Current efforts among local and state governments to top one another only adds to the reality that manufacturers can hold out for the sweetest deal available with lucrative benefits. Appearances, stunts and lobbying add more leveraging power for the manufacturer.
In the specific case of Tesla, a company well known for its innovative and bold thinking. When the company announced that it would manufacture autos in California, many auto industry observers scoffed at that decision. California is not known as a low-cost manufacturing region.
The ultimate selection of its U.S. based battery gigafactory will accomplish four objectives:
- Bold supply chain vertical integration
- Proximity to key commodity supply and transport networks
- A well trained and technically savvy workforce
- Subsidies that may well defray the overall cost burden.
At this point, Tesla has more than likely honed its selection list based on the above objectives. The thinking is bold and timing is exquisite. It’s time to move beyond the politics and to the objective at-hand.
Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets.
Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.
If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers. That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.
However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S.
The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace. The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.
While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve. OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.
Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.
If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.
A Different Investment Environment Concerning China- Differentiating Market and Supply Chain Sourcing Strategies
If you have been keeping-up with business headlines over the past several months, you may have noticed an emerging trend involving doing business within China that is impacting both large and small manufacturers and services providers. Chinese regulators continue to intensify scrutiny of foreign-based technology, product and service providers and there is no reluctance to take on the highest profile companies. China’s business environment continues to change.
Supply Chain Matters has called attention to previous incidents. Restaurant services providers McDonalds, Burger King and Yum Brands were cited by Chinese regulators for serving expired chicken and beef meat products in restaurants. Within the ocean container shipping industry, the proposed P3 Network alliance was scuttled by Chinese maritime regulators in June after both European Union and U.S. Maritime agencies had given a green light. Previous developments have involved large pharmaceutical producers along with Apple and other consumer electronics companies.
Today’s Wall Street Journal reports that China continues to step-up its antitrust efforts targeted at Western firms. Surprise inspections were made in the offices of Microsoft and Accenture regarding suspected monopolistic practices. The WSJ notes that Windows XP has a nearly 55 percent market share within the country and consumers are angered over Microsoft’s prior decision to suspend support. Another agency is investigating Audi and Fiat Chrysler for alleged monopolistic practices. Previous reported investigations involved Daimler in its pricing of service and repair parts. In the wake of the recent NSA information spying incidents, Apple’s iPhone was recently cited by Chinese regulators for not having proper information security, raising added concerns for China’s telecom and cellular network providers in offering other buyer choices besides the iPhone.
On a previous earnings briefing involving a mid-sized technology company we heard the CEO openly declare that the company’s efforts to actively sell technology within China was being temporarily shelved because of market feedback that China based firms were uncomfortable with evaluating any foreign-based technology options.
It is no secret that many foreign based firms made significant direct and indirect investments in China to gain access to a huge market. Ten years ago, this author can recall hearing companies talk about the vast potential of China’s market, a more open, less regulatory intensive environment that made investments in facilities and infrastructure happen rather quickly. Much lower direct labor costs added the impetus for investing in production, supply chain and distribution facilities. While protection of intellectual and proprietary capital was always the most prominently identified risk factor, many companies made conscious decisions to invest anyway, given the huge potential of China’ markets.
Obviously the situation has significantly changed. China’s leaders continue efforts to moderate overall growth to avoid an economic bubble. Supply chain teams are well aware of the double-digit explosion in direct labor rates that continues to occur. A plundering of resources and energy has led to increased environmental concerns given high levels of pollution and dirty air. And now, China’s regulatory agencies have been given the power to crackdown on abuses.
Recall that after the global financial crisis, manufacturers declared that added investments in U.S. manufacturing and supply chain capability were not attractive because of higher corporate tax rates, overly restrictive regulations and higher labor costs. Similar arguments pursued regarding European Union investments. The discovery of new and cheaper energy sources in North America and global currency shifts have now altered the above noted concerns.
A lot has changed in the global environment, and will continue to change. The realities of doing business internationally have many facets and challenges. Efforts to seek lower costs and less regulation compelled industry supply chains to flock to China. This has now caused China to initiate protections of its economy, labor force and environment.
The takeaway for supply chain leaders is that business decisions reflecting global market penetration and for supply and production sourcing are two different strategies. Obviously there are important dependencies on each strategy but both remain distinct. New market opportunities must always be evaluated and leveraged.
Global sourcing of supply and production is predicated on a number of important and related factors, and cannot be one-dimensional. Ultimately, singularly chasing the next lower-cost production opportunity is a short-term strategy that could end up costing more. Sourcing strategy is far more strategic, that must include balancing of factors that include product innovation, labor, transportation, risk management and other landed cost aspects.
Sourcing and procurement efforts can no longer be made in isolation, nor can they be static. They require continuous cross-functional and cross-business involvement.
© The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Last week, Supply Chain Matters featured a commentary regarding the blunt business realities that are impacting many consumer product goods focused businesses and supply chains. Multiple corporate earnings reports bring home the compelling reality of an industry undergoing profound external and internal business challenges. Our conclusion was that invariably, CPG supply chains will bear the brunt of changes and needs required for more market adaptability and responsiveness while having to deal with continued pressures to reduce costs.
Another compelling evidence point is the latest announcement from Procter and Gamble which indicates that this CPG icon plans to divest, discontinue or merge more than half of its global brands as it once again, initiates an effort to focus on its most profitable brands.
This is a similar strategy that former CEO A.G. Lafley has initiated in times of profitability challenges and comes almost a year after he was compelled to return from retirement to lead P&G. The announcement comes after P&G reported both fourth quarter and fiscal year earnings. Earnings per share growth were reported as 5 percent in fiscal 2014 while organic sales growth was 3 percent. Net sales for the fiscal year grew by a mere one percent. In the earnings press release, Lafley states: “We met our objectives in a very difficult operating environment, delivered strong constant currency earnings growth, and built on our strong track record of cash returns to shareholders. Still, we have more work to do to deliver the profitable sales growth and strong cash productivity we are capable of delivering.”
From our lens, this is yet another acknowledgement of the short-term focused, external Wall Street and hedge fund pressures being exerted on industry players. It’s a two-fold vice. Consumers have permanently altered their shopping practices and buying choices and larger industry players are struggling to provide business responses. The Wall Street and activist community continues to have a very short-term financial results focus for industry players, viewing CPG companies as cash, dividend or acquisition plays.
According to published reports from both the Wall Street Journal and AdvertisingAge, the latest divestiture announcement implies major consolidation of 90 to 100 current P&G brands in the coming months or years. The company previously divested of its pet care business. P&G will retain 70 to 80 of its most profitable core brands, those reported to be fueling 90 percent of total revenues and the majority of current profits.
According to the WSJ, the brands being shed account for $8 billion in revenues and could prove attractive to private equity firms that specialize in orphaned brands or CPG focused companies in China or Brazil looking for more global presence. The scope of this P&G strategic initiative implies both opportunity and/or added challenges for existing industry chains, especially the commodity supplier community.
The WSJ once again acknowledges that the P&G announcement reflects the reality of a new environment of weak sales growth for consumer products, increased currency fluctuations and inbound commodity costs that are eroding profitability. Meanwhile, activist investor pressures to cut costs, consolidate and merge brands continue to influence industry behavior.
The adage that as P&G goes, such does the industry, is yet another poignant indicator of the current business challenges that are surrounding CPG focused supply chains.
Supply Chain Matters readers residing in the New England region are invited to join me at the 7th Annual Supply Chain Management Summit being held on Thursday, August 21 on the campus of Bryant University in Smithfield Rhode Island.
Over the years, this Summit has grown and matured into a northeast regional event focusing on a new burgeoning supply chain challenges and solutions. I was a featured speaker in the 2013 event which was very well attended and I’m pleased to be invited back to speak at this year’s Summit.
I’ll be joining a distinguished compliment of speakers for this year’s event including a dear former colleague, Dr. Larry Lapide who will be delivering the morning keynote, and Dr. Jim Tompkins who will deliver a very timely luncheon keynote.
My presentation is titled: New Developments in Supply Chain Technology- What to Consider in Your Supply Chain Investment Plans. This presentation will address:
- How senior industry executives view needs in business-wide decision-making, and what expectations they have for supply chain capabilities.
- The new requirements of Plan-Sense-Adapt- Synchronize and the new levers of information velocity-context- clarity
- A new thinking required to overcome current organizational and supply chain collaboration barriers
- What you should know as operations, planning, procurement or supply chain management professionals in terms of skills readiness and tool adoption
Individual registration for this upcoming conference is $150 with discounts available for organizational table sponsorships. Registration is available at this web link but act quickly since the event is a sure sellout.
If your organization has needs for a dynamic speaker, panelist or roundtable facilitator on compelling topics impacting supply chain management and B2B business networks, you are welcomed to review our Speaking Services page.