subscribe: Posts | Comments | Email

WTO Moves Closer to Tariff-Free Classification of IT Products: Supply Chain Opportunities and Impacts

0 comments

Late last week, the World Trade Organization (WTO) reached a landmark $1.3 trillion deal that addresses the categorization of 201 information technology products that will be freed from import tariffs. Among the products covered in this agreement are new-generation semi-conductors, GPS navigation systems, medical products which include magnetic resonance imaging machines, machine tools for manufacturing printed circuits, telecommunications satellites and touch screens. Once approved, the agreement will update an Information Technology Agreement that has not been updated for the past 18 years.

According to the WTO, the tentative accord reached by 54 of its members was confirmed as the basis for implementation work to begin. Ministers from the participating members will now work to conclude their implementation plans in time for the WTO’s 10th Ministerial Conference which will be held in Nairobi this December. Five of the total number of countries needed for final signoff has thus-far not signed up.  Those countries include Colombia, Mauritius, Taiwan, Turkey and Thailand. The Director of WTO has indicated to news sources that approval from the remaining countries is due to process delays, and expects the required additional countries to sign-up soon.

This latest categorization is being billed as the first global tariff-cutting in 18 years with the implication that globally-based consumers should eventually benefit in purchases of computers, game consoles, touch-screen devices and other consumer electronics products.  All 161 WTO members are expected to benefit from this agreement, as they will all enjoy duty-free market access in the markets of those members who are eliminating tariffs on these high tech products. According to the WTO, the terms of the agreement will be formally circulated to the full membership at a meeting of the WTO General Council on 28 July.

A published Reuters report indicates that high-tech manufacturers General Electric, Intel, Microsoft, Nintendo and Texas Instruments are among those firms expected to benefit from the free-up tariffs. A U.S. trade representative indicated to Reuters that more than $100 billion in U.S. exports alone would be covered by the updated agreement.

The implication to hi-tech and consumer electronics industry supply chains is significant.

A considerable amount of new products and product categories have been added since these tariffs were originally created 18 years ago, and with over 200 products designated to be free of import tariffs and duty-free trade, the industry as a whole stands to benefit by increased global market access and more streamlined, direct flows to end markets. The notions of offshore and near-shore production as well as new opportunities for push-pull customer fulfillment strategies can well benefit from this development of tariff-free components and products. On the other hand, the competitive landscape of regional brands competing with global brands will magnify.

By our Supply Chain Matters lens, the agreement will have implications to current manufacturing sourcing of high-tech and consumer electronics products since the assumptions concerning added tariff costs will obviously change.  Supply chain strategy teams should therefore plan on a refresh supply chain network design models in light of these tariff-free assumptions to uncover any new opportunities for more efficient or enhanced customer fulfillment focused manufacturing and sourcing of end-products.

Bob Ferrari

 


Tesla Motors Moves Forward with Battery Gigafactory

0 comments

Seventeen months ago, business and social media was abuzz with electric automobile maker Tesla Motors’s audacious plans to build its own $5 billion electric battery “gigafactory within the United States, capable of supplying up to 500,000 electric vehicles per year.  Plans indicated that the plant, would ultimately be able to produce batteries at 30 percent less cost, and when operational, would provide the capacity to be the single largest battery manufacturing volume plant in the world.  To state the obvious, the strategy was a bold and savvy thrust involving vertical integration, given that of the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost.

Tesla battery gigafactory

Source: Tesla Motors

Since the February 2014 announcement, a far broader strategy has been unfolding, one that will extend beyond automotive supply chain needs. In September of last year, Tesla selected a site within the state of Nevada, just outside of Reno. Thus far, the steel structure and roof of the new factory have been completed. Tesla has partnered with Japan based Panasonic to assist in the setup of production processes within the new gigafactory. By autumn, Panasonic will dispatch hundreds of its employees to Nevada to assist in the plant internal design and setup.

In June, Tesla entered into a research partnership with a noted professor at Dalhousie University in Nova Scotia, known for his work in innovating lithium-ion batteries. The goal of this research partnership is to determine methods to incorporate more voltage as well as less cost of materials within batteries without eroding their longevity. According to a published report, Tesla is further investigating its own sourcing and processing of lithium, cobalt, graphite and nickel.

This week featured news indicating that Tesla has now increased its land holdings surrounding the new plant, purchasing an additional 2000 acres. The land purchases reportedly occurred during April and May with the majority of the land, according to Tesla, serving as a buffer zone in which solar arrays are to be constructed to provide internal power to the new factory.

According to a published report from The Wall Street Journal, battery cells will begin to roll-off production lines by the end of 2016, with plans for additional phased ramp-ups extending through the year 2020. Once more, up to 25 percent of the new plant’s capacity is expected to be allocated for production of static storage battery needs for homes, businesses and utilities. Tesla recently unveiled a new line of home storage batteries and the firm’s iconic founder, Elon Musk recently indicated that there has been positive interest from other industries in exploring potential battery supply agreements.

Tesla’s corporate culture of thinking big continues to extend across the supply chain and the new gigafactory will be the most significant testament to that boldness in supply chain vertical integration.

For added information regarding this new factory, readers can review Tesla’s conceptual design.

Bob Ferrari


An Excellent Supply Chain Executive Perspective

0 comments

A lot of electronic alerts come across the desk of Supply Chain Matters regarding web content focused on key topics and challenges involving today’s supply chains. We only elect to share content that we feel will serve the interest levels of our global based readers.

Thus we recently came across a blog posting on EBN: Talking about Supply Chain with John Kern, Cisco.

EBN Editor-in-Chief Hailey McKeefry recently interviewed the Senior Vice President, Supply Chain Operations at Cisco.  This author has heard John Kern speak at prior industry conferences and has spoken with John on past occasions. I find John to be a visionary leader.

In the EBN interview, John articulates the mission of supply chain management- namely on enabling the success of the company strategy. He further speaks to the uniques challenges underway within high tech supply chains, in-particular, customer shifts from capital investments to services investments.

John further articulates Cisco strategies regarding the challenge of demand and available supply of supply chain talent.  Pay particular attention to what is defined as the “landing zone”, which is defined as what the supply chain needs to look like in three years in terms of locations, skills, generational mix, roles and leadership.

By our lens, this is an insightful interview and worthy of reading and reflection. Take some time on the beach or in the yard to review it.

Bob Ferrari, Executive Editor


Report Indicating the Profit Power of Apple

0 comments

A firm’s supply chain exists to support and enable specific business outcomes.  Such outcomes might include increased profits, broader product selection or higher levels of customer satisfaction and service. Supply chain strategy setting can often stumble when specific outcomes are not clearly defined or outcomes become conflicted. Consider the notion that a strategy driven to overall supply chain cost efficiency can sometime hinder needs for more agile response to market opportunities.

Supply Chain Matters has often praised Apple’s supply chain capabilities, not only from aspects of product and supplier innovation, but in overall agility as well as enhancing product margins. By our lens, few supply chains exhibit such a track record.

That point was driven home by today’s published report from The Wall Street Journal, Apple Gets 92 Percent of Smartphone Profit. (Paid subscription required) The report cites estimates from Canaccord Genuity concluding that in the first quarter: “Apple recoded 92 percent of the total operating income from the world’s top smartphone makers.” That was an increase of 65 percent from a year earlier. According to this report, the combination of Apple and Samsung accounted for more than 100 percent of industry profits since other makers broke even or lost money.

According to the report, what stands out even more regarding this achievement is the fact that Apple sells fewer than 20 percent of total volume, yet manages to garner the highest average prices and occupy the high end of the smartphone market.

Once more, as we have pointed out in our numerous Supply Chain Matters commentaries, Apple has the ability to practice highly agile sales and operations planning, segmented supply risk and multi-channel customer fulfillment while supporting the industry’s highest product margins.

From our lens, a lot of the success of the Apple supply chain stems from the ecosystem of responsive suppliers who can scale with Apple’s relentless requirements. And in fact, some suppliers have succumbed because they could not continue to meet Apple’s requirements while attempting to support individual financial outcomes for profitability.

Some will speculate that Apple’s advantage may eventually succumb to the track record of other high tech or consumer electronics OEM’s that eventually over-saturate their market and are attacked from more innovative producers. For now, however, Apple and its supply chain remain the ‘best of show”.

Bob Ferrari


Kraft Heinz Merger Moves to the Next Critical Step

0 comments

Just before the 4th of July holiday in the United States, and after the blockbuster news announcement in March, HJ Heinz has now indicated that its proposed merger with Kraft Foods had been approved by Kraft Foods Group shareholders, forming what is to be called The Kraft Heinz Company, subject to certain customary closing conditions. A preliminary count of the voting results was noted as more than 98 percent of votes cast in favor of the transaction.

The transaction will reportedly create the third-largest Food and Beverage Company in North America and the fifth largest Food and Beverage Company globally. Business media previously reported that initial talks had begun in January, and now with half the year completed, the merger has moved to its transitional management stage.  This is obviously, very swift action and perhaps a sign that planning was well underway.

As noted in previous Supply Chain Matters commentary, this Heinz-Kraft deal is backed by infamous private equity firm 3G Capital Partners, with financing from Warren Buffet’s Berkshire Hathaway. 3G Capital’s has a track record for aggressive cost-cutting, which has since sent further tremors among consumer product goods supply chain industry players.  Since assuming operations management of HJ Heinz, upwards of 7000 jobs were eliminated in a 20 month span. New CEO Bernando Hees ultimately cut a third of the staff at Heinz’s headquarters including 11 of the company’s top 12 executives. The new combined Kraft-Heinz is seeking upwards of $1.5 billion in additional annual cost savings.

Further announced was the new senior leadership team for Kraft Heinz.  The new senior leadership team will be headed by former Heinz and 3G Capital executive Bernardo Hees. The appointments are dominated by current Heinz executives, another indication of the aggressive cost-cutting practices to follow in the coming months. Of the 10 senior management roles, eight will be filled by Heinz executives. There is but one female executive as part of the new senior leadership team.

Included in these announcements is the appointment of Eduardo Pelleissone as Executive Vice President of Global Operations with direct global responsibility for supply chain, quality, and procurement and operations functions. Mr. Pelleissone joined Heinz in 2013 with the acquisition of 3G Capital, as Head of Operations. Before joining Heinz, the executive was heading operations at All America Latina Logistica S/A.

Noted in the announcement is that Robert Gorski, previous EVP, Integrated Supply Chain at Kraft Foods will depart upon completion of the merger. In a previous Supply Chain Matters 2013 commentary, we praised Gorski for his leadership style and efforts in transforming Kraft Foods supply chain business processes after its former split involving Mondelez International. Gorski exhibited an active and inclusive leadership style.

Melissa Werneck was appointed SVP Global Human Resources, Performance and IT. She also joined Heinz in 2013 and according to the announcement, led an Integrated Management System that included a Management by Objectives (MBO) Program.  This appears to be an interesting mix of MBO and IT under a singular executive leader.

The new senior leadership team is further comprised of four Zone Presidents who will manage Europe, Russia, Asia Pacific and Latin America regions.

Newly appointed Kraft COO George Zoghbi has now been appointed COO of U.S. Commercial Business and will lead five commercial business units. Certain direct reports of Zoghbi will be part of Bernardo Hess’s termed Extended Leadership Team, and includes elements of corporate marketing, U.S. sales and budgeting.

As noted in a previous commentary, the new combined company will be driven by zero-based budgeting methods. Andre Maciel was promoted to head of U.S. Commercial Finance that includes U.S. Budget and Business Planning (BBP). Maciel directly reports to COO Zoghbi and is a member of the termed Extended Leadership Team.

Advertising Age was quick to note that the new Kraft-Heinz will not have a Chief Marketing Officer (CMO) in its senior leadership team. The top ranking marketing position will be a Vice President, Marketing Innovation role assumed by Kraft veteran Nina Barton who will report to COO Zoghbi and will also be designated as part of the Extended Management Team.  Current Kraft CMO Jane Hilk will reportedly also leave the completion upon completion of the merger.

From our lens, this appears to be a sign that product and brand marketing will not take a lead presence in business strategy which has been the practice of CPG firms.  Instead, revenue growth and increased profitability will take center stage.

The new combined Kraft-Heinz company will surely garner lots of business, supply chain and industry media attention in the months to come, from many different contexts. Of more interest, other industry players, suppliers and investors will be closely monitoring the actions taken as well as the results.

Business as usual no longer will suffice among CPG focused supply chains.

Bob Ferrari

 


The State of U.S. Logistics Remains Concerning and Requires Attentiveness

0 comments

The following Supply Chain Matters commentary is our annual reflection on the Annual State of U.S. Logistics Report. Normally, our postings typically average 350-400 words of blog content for reader benefit. Rather, this is a longer length advisory report to educate our readers that will be also be made available for separate complimentary downloading in our Research Center within the next few days.

 

The 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report, the latest which reflects on 2014, has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and Container_Termprocurement professionals. Since our inception, Supply Chain Matters has provided specific commentary and our view of the key takeaways from the report.  With the latest report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.

Our editorial commentaries for both the 2012 and 2013 State of Logistics reports expressed concern towards a continued trend for increased logistics, transportation and inventory costs. The latest report depicting 2014 activity is no exception.

The report summary begins: “Total logistics costs increased only 3.15 percent in 2014.” The underline and emphasis of the word “only’ is ours since we were astounded by such use depicting normalcy. Considering the low rate of inflation, interest rates and the dramatic reduction in the costs of crude oil in 2014, from our lens, an overall 3.1 percent in the cost of logistics in the United States should remain a concern for industry supply chains. These total costs have now climbed beyond the peak level reached in 2007, prior to the global recession.  In theory, U.S. logistics efficiency and productivity should be trending positive.

We first call attention to the report’s references to U.S. GDP values as a point of reference comparison.  The report authors have utilized nominal GDP as a consistent baseline as compared to real GDP. Nominal GDP includes all the changes in market prices that have incurred during any year including inflation or deflation, while real GDP is reported as a percentage increase from a specific base year. To provide our readers a sense of the difference for 2014, nominal GDP growth for the U.S. was reported as 3.9 percent while real GDP averaged between 2.6-2.9, percent, depending of which cited source, over the past six quarters. For the 2010-2014 recovery period from the severe economic recession, The World Bank reported annual real GDP growth as averaging 2.2 percent annually. This difference is significant when reporting and charting logistics costs as a percentage of GDP.

Lesson in economics aside, we advise readers to pay close attention to specific logistics and transportation cost increases. As an example, total U.S. logistics costs rose by nearly $43 billion in 2014, compared to a $31 billion increase reported for 2013. For the period 2010-2014, U.S. logistics costs have risen 18.2 percent or $223 billion, almost 7 percentage points higher that real GDP growth in that same period. Factor whatever GDP growth number you want but the takeaway message should be one of concern and diligence to the trends of why such increases are occurring.

Other highlights and some observations of the latest 2014 report are noted below.

  • Inventory carrying costs in 2014 rose another 2.1 percent, compared to the 2.8 percent increase reported in 2013 and the 4.0 percent increase reported for 2012. Overall business inventories were reported as rising by $52 billion or 2.1 percent in 2014. The second and third quarters were noted as high water marks for 2014 and that obviously reflects the impact of the U.S. west coast port disruption, as industry supply chain teams increased safety stock levels in anticipation of contract labor talks. Manufacturing inventories were reported as down slightly. Interest costs remained well below 1 percent and thus increased costs for taxes, insurance, warehousing, depreciation and obsolescence occurred. The cost of warehousing rose 4.4 percent, reflecting near capacity utilization rates.

 

  • Overall transportation costs were reported as rising 3.6 percent, with the largest component, trucking, up nearly 3.0 percent. The current fragile state of the U.S. trucking industry was again highlighted. The report cites anecdotal evidence indicating that loads are heavier and more trucks are moving near full capacity. Cited are estimates from the American Trucking Association (ATA) estimating the current truck driver shortage as being between 35,000 and 40,000 drivers, which should remain of concern.

 

  • U.S. rail costs were reported as increasing 6.5 percent on top of a similar percentage increase reported for 2013. Total carloads were up 3.9 percent, the highest since 2006 and overall rail traffic was reported as increasing 4.5 percent. The U.S. railroad industry operating remains operating at near capacity, despite the addition of 1300 new or rebuilt locomotives and nearly 4500 new rail cars put into service.

 

  • Costs for water based transportation rose 8.9 percent in 2014, the second highest reported growth sector. U.S. East Coast ports were noted as experiencing the biggest percentage gains in traffic pick-up because of the West Coast port disruption. Another challenge that manifested itself in 2014 was the impact of the larger, mega container ships calling on U.S. ports, and resultant disruptions related to the availability of container truck chassis, along with the time required for unloading and re-loading. One rather important trend noted was that the monthly average number of containers imported from China was more than 10 percent higher than average monthly shipments for the last four years. From our lens, that seems to be a reflection of even more freight being routed by ocean container vs. air. Air freight revenues were reported as declining 1.2 percent with international air freight down 3.6 percent.

 

  • The revenue growth trajectory of U.S. non-asset based services and Third Party Logistics (3PL) providers continued in 2014. Revenues pegged for the third-party logistics (3PL) sector were reported as $157.2 billion, an increase of $10.8 billion or 7.4 percent over 2013. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 20.5 percent in 2014, on top of the 7.2 percent growth reported for 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones. We continue to believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.

 

The Looking Ahead portion of the 2014 report provides another important takeaway for our readers, one that we have already reinforced in our predictions for this year. The report specifically states:

The capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.

The report later summarizes:

To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”

Thus, our 2015 Supply Chain Matters Prediction for a turbulent year in global transportation more likely will take on a multi-year context.

Supply Chain Matters submits that the overall takeaways from the 2014 State of Logistics are once again dependent on the reader frame-of-reference.

If you reside anywhere in the transportation and 3PL logistics sector, your reaction is likely positive. Business is very good indeed. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding added investments in capacity and delivery of services. Distribution center operators and real estate interests are included, especially in light of the pending shift of more ocean container traffic in favor of U.S. East Coast ports, as well as the dramatic changes in distribution flow-through and drop-ship footprints required by more online customer fulfillment needs.

If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.

 

Once again we offer the following insights:

  • Procurement, supply chain planning, B2B business network and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of 2014 data is to insure that the cost, service and inventory benefits derived by contracting services with respective 3PL’s outweighs the continuing pattern of increasing 3PL services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s will have to invest more in technology and services, adding more motivation to increase fees.

 

  • Approaching transportation spend as the singular dimension of cost reduction remains an unwise move, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes. The data for 2014 indicates that more and more supply chain teams are exercising strategies to assure consistent and reliable transportation capacity and logistics services.

 

  • Similarly, we again encourage S&OP teams to re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point and fulfillment center trade-offs and costs of carrying inventory. Today’s global logistics environment remains dynamic and complex. Decision-making data must reflect this state, along with the assumption that overall logistics costs are trending higher.

 

  • In order to reduce overall cost and asset investments, senior supply chain leaders in certain industries have contracted more and more services to 3PL’s and other service providers. Insure that your teams are continually analyzing cost and benefit tradeoffs. Maintain periodic reviews of costs and benefits on a more frequent basis.

 

  • Both FedEx and UPS initiated dimensional-based pricing on ground shipments effective in 2015, and initial financial results from both of these carriers indicates positive impacts in revenues. This area continue to have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy for certain classifications of products. Be watchful of this area.

 

  • Last year’s Supply Chain Matters commentary reflecting on the State of U.S. Logistics observed that the U.S. economy showed more promising signs of manufacturing growth. The latest report of 2014 activity paints a more cautionary picture regarding manufacturing and logistics growth. The logistics industry must tackle troubling capacity and productivity constraint trends along with their impact on customer costs. There has also been too much of a tendency to maintain fuel surcharges and fees to boost revenue and profitability levels even higher.

We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication on supply chain objectives and needs.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


« Previous Entries