Today, industry analyst firm Gartner announced the findings from its annual Supply Chain Top 25 rankings, an annual event that comes with the usual fanfare held at the Gartner SCM Executive Conference.
As has been our previous posture, Supply Chain Matters is providing its social media voice of observation and comment and not an endorsement of any analyst firm rankings of supply chains. Our previous annual commentaries have well reflected our beliefs that such ranking criteria can be misconstrued, especially when ranking criteria would tend to favor supply chains that avoid major ownership of assets and inventory, or tend to weight other criteria lower, such as sustainability and social responsibility practices. We will, however complement Gartner for finally including much more transparency in disclosing the individual ranking scores in its press release announcement.
First and foremost, Supply Chain Matters once again extends our congratulations to those supply chain organizations cited in the 2016 Supply Chain Top 25 rankings. Such recognition often reflects a lot of hard work and responsiveness to changing business needs, especially in today’s fast-changing industry environments.
Unlike previous years, the 2016 rankings feature a healthy complement of movement as well as new entrants, which is good. As has been our practice in prior commentaries, we reflect below the history of Gartner Supply Chain Top 25 dating back to 2010. We believe that providing this broader context is more pertinent for contrasting usual players vs. those supply chains on a transformative journey.
For the first time, Unilever garnered a well- deserved number one 2016 ranking, having climbed from Number 25 in 2010. Rounding out the 2016 top five rankings were McDonalds, Amazon, Intel and H&M Hennes & Mauritz. Nestle’s 2016 ranking as #10 from last year’s #17 ranking is noteworthy and well-deserved.
Amazon’s drop from being number one in 2015, to the number three ranking in 2016 was somewhat a surprise, since it garnered by far the highest peer opinion votes. What might have led to such drop was Amazon’s current heavy investment in added supply chain capabilities in customer distribution centers, direct leasing of air freight and trucking fleet. We suspect that as this current last mile customer fulfillment strategy continues to manifest itself in the months to come, that peer vote will indeed be perceptive.
The five new entrants to the Top 25 Supply Chains were BASF, BMW, GlaxoSmithKline, HP and Schneider Electric. From our lens, HP was somewhat of a surprise given its corporate split as well as the magnitude of cost and headcount cuts that have occurred. HP being ranked higher than Lenovo (#25) is perplexing given what the latter has accomplished in three-year weighted global revenue growth and inventory turns.
In its announcement, Gartner cites an increasing emphasis on corporate social responsibility as an emerging competency. This author just returned from the ISM 2016 annual conference where I had the opportunity to view a presentation by PepsiCo on its efforts in this area. I walked away very impressed with PepsiCo’s far-reaching efforts that manifest not just supply chain focused sustainability practices, but overall business sustainability tenets that include social, environmental and business tenets. I was therefore disappointed in the 4.00 CSR Component Score attributed to PepsiCo, especially in the light of other food and beverage firms.
As noted in our Supply Chain Matters posting reflecting on the 2015 rankings, some supply chain teams along with their ecosystems will be pleased and others rather disappointed after lots of hard work. Industry peers may also be surprised. There is no pleasing in any form of ranking and consistency of objectivity based measures and process remains essential.
Once again, congratulations to all supply chain teams included in the Gartner 2016 Supply Chain Top 25.
Equipment and capital goods manufacturers have increasingly re-discovered new and growing revenue opportunities that reside in added services and service parts sectors related to in-service equipment. Such opportunities are especially pertinent across commercial or defense focused aircraft which have operational service that spans many years of service. However, when an industry dominant such as Boeing decides that it wants to take more control as well as revenue cut of all service parts, the financial implications and subsequent impacts will reverberate among all key suppliers.
Today’s edition of The Wall Street Journal reports such an implication as Boeing elects to secure a new source of revenue beyond building aircraft. (Paid subscription required) The report indicates that whereas in the past, Boeing’s largest suppliers such as Spirit AeroSystems or Rockwell Collins could sell respective manufactured parts directly to airline and aircraft operators for in-service service replacement needs, the OEM elected in late February to prohibit suppliers from directly selling proprietary service parts, along with suspending licenses to suppliers to sell any such proprietary parts to its customers. The WSJ characterizes this development:
“It is the most aggressive move to-date in Boeing’s year-long effort to assert control over distribution-and the resulting revenue- of parts.”
According to the report, Boeing is looking to nearly triple revenues associated with commercial and defense aviation parts and services business by 2025.
Supply chain teams in these sectors know all too well that margins on service parts can far exceed those for original equipment production needs. According to the WSJ, it can be upwards of 4X more than what Boeing pays for the part to support initial production. Suppliers will often forego margins on supply contracts to a customer such as Boeing with the expectation that multi-year margins can be garnered in service parts needs over the operating life of an aircraft model.
In a highly regulated industry such as commercial or defense focused aircraft, certain structural or key operating parts have designated service-life provisions which must be adhered to, thus assuring ongoing component stocking and service part demand needs.
The WSJ report further links these moves to Boeing’s ongoing Partnering for Success initiative addressing added cost control opportunities among existing suppliers. According to the report:
“Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised (supply) contracts were complete.”
The report cites a Credit Suisse aerospace industry analyst as indicating:
“The economics of being a Boeing supplier could be facing their greatest challenge yet.”
While airlines themselves have become increasingly concerned by the rising prices of service parts charged by suppliers, by our Supply Chain Matters lens, this revised strategy by Boeing does not necessarily address nor mitigate that trend. It obviously takes away profitability opportunities for suppliers while adding yet another intermediary in the service parts supply chain.
One of the most promising service management opportunities related to commercial and defense focused aircraft resides in the leveraging of Internet of Things (IoT) focused technologies that would allow operating equipment the ability to communicate service and replacement needs based on operating environmental conditions. Rather that static, fixed maintenance schedules, the opportunity is for the equipment itself to self-diagnose its parts replacement needs.
Many original equipment manufacturers are thus positioning to take advantage of such technologies in new service focused business models. That includes aircraft engine producers such as General Electric and CFM International. With this latest move by Boeing, a new participant is added to the overall business model, a participant that must share the same technology tenets being promoted in automated performance monitoring and service dispatch. Add the notion of IoT platform providers positing for their portion of the overall business model via platform adoption and subsequent dominance, and the picture begins to turn to one we have witnessed before with breakthrough technology. Every participant attempting to position for leveraged control of a promising new business model while target customers have to determine what all of this implies for added efficiencies or cost savings.
The dilemma of commercial aircraft supply chains that presented multi-year order backlogs and insatiable demand for more fuel-efficient technology-laden new aircraft has met the reality of more educated and aggressive airline customers, coupled with rapidly changing economic times. These forces are inserting their influence on aircraft pricing, delivery expectations and operating service needs.
Boeing is now responding to these needs by aggressive supply chain cost and headcount reductions, and now, demanding its proportional cut of service parts revenues. In essence, like too many supply chain dominants, the picture is again moving the need of cost reduction or added revenue needs down the supply chain.
More and more, the notion of we are all in this to share industry growth opportunities together reverts back to the supply chain dominant as the ultimate long-term benefactor.
Respective suppliers will obviously have to determine their own response strategies. Larger suppliers will be able to find means to remain resilient to such changes while smaller suppliers may feel the bulk of the pain. In the long-run, the party that ultimately controls the customer relationship along with product and process design ends up to be the eventual winner.
Supply Chain Matters has been observing how U.S. automotive producers continue to fall back on what we view as a bad habit- a reliance on big-ticket, larger margin trucks and SUV’s for profitability and hence manufacturing strategy. Perhaps you have noticed this same trend.
These past few days have featured troubling news that points to the same tendencies. It is like an unhealthy habit that does not seem to abate and it reflects on both product demand as well as supply strategy aspects of the automotive supply chain.
These past months of an unprecedented global oil glut has led to sub two dollar per gallon pricing for gasoline, although that trend is changing with the spring fuel composition conversion. As reflected in past history, it has apparently motivated many U.S. consumers to once again buy shiny new automobiles and trucks at a very healthy pace. According to The Wall Street Journal, nearly 57 percent of vehicles sold in the U.S. were classified in the light truck category. Many of these consumers are seeking out the biggest and most feature laden pick-up trucks and luxury SUV’s. Why not! With the occurrence of such low prices of gasoline, it’s like suddenly reverting back to a bygone era, and doing so before it is too late. Perhaps we can choke that up to short-term memory loss.
At the same time, other consumers (we will keep the term generic), foresee the continuing overwhelming implications of climate change and the need for the global economy to substantially reduce dependence on fossil fuels. They perhaps have the insight that the era of sub $2 per gallon gasoline is temporary and much more dependent on ongoing geopolitics among oil producing and consuming nations.
As noted in a prior commentary, last week Tesla Motors unveiled its latest Model 3 all electric powered SUV with a declaration that the vehicle achieves 215 miles of operating range per charge, delivering superior performance with a starting price of $35,000 before incentives. Immediately, the Model 3 has garnered over 200,000 customer reservations, and yes, it will produced in Tesla’s California assembly facility with the now infamous gigafactory producing lithium-ion batteries in Nevada.
A glance of this week’s business headlines indicates a confirmation from Ford Motor on investing $1.6 billion for a new auto assembly facility in Mexico to produce the Ford Focus and other smaller sized vehicles. This is incremental to prior announcements to invest $2.5 billion in other Mexican based factory and supply chain facilities.
Fiat Chrysler Automobiles, which previously touted that it could competitively produce smaller cars in U.S. factories, indicated it plans to cut upwards of 1600 jobs this summer at its existing Michigan based auto assembly facility which produces smaller vehicles. Overall, Fiat Chrysler is reportedly investing upwards of $1 billion to re-align manufacturing capacity towards larger vehicles.
Conversely, General Motors indicates that it will continue to build its smaller car models in the U.S. including the newly designed 2017 Chevrolet Bolt with an estimated 200 plus mile range and $40,000 price tag. That is in addition to the current hybrid powered Chevrolet Volt that provides 420 miles of driving range for a base price of $35,000. The Volt is assembled at GM’s Detroit Hamtramck production facility.
Beyond the current rhetoric of these announcements reverberating in the current U.S. Presidential Election cycle, it is important to focus on what is occurring. These are not, from our lens, solely temporary adjustments in existing manufacturing capacity to reflect near-term changes in product demand brought about from consumer buying euphoria from dramatically lower fuel prices. Instead, the level of new investments implies strategic shifts in manufacturing capabilities towards non U.S. sites, perhaps a reflection of pending new global trade agreements such as the Trans Pacific Partnership and NAFTA that view North America as a contiguous trading, supplier and production zone.
Business strategy pragmatists will probably view these events as smart moves to insure larger margins on smaller, lower-margin vehicles. This is the consistent strategy of lowest cost direct labor but the tradeoff is often in product design and management more than likely residing a plane ride away. The counter-argument is that with so much of the production process now highly automated with robotics and additive manufacturing techniques, shouldn’t direct labor costs be manageable regardless of location?
Organized labor likely views these moves as a betrayal of prior agreements made during the 2008-2009 bankruptcy crisis that surrounded the bulk of U.S. automotive OEM’s. Chrysler and GM subsequently sought government bailout funding with assurances that there would be a continued U.S. manufacturing presence in small and larger car production alike.
From the sustainability strategy lens, we submit it is yet another fallback to an old and troubling habit, trading-off direct labor savings with added logistics and transportation costs.
Larger vehicles with higher fossil fuel consumption are added to the nation’s byways while added surface transportation movements are required to transport smaller vehicles from Mexican supplier and final assembly facilities to various U.S. and Canadian consumption regions. The net result is more greenhouse gas emissions and an industry where certain producers view product strategy solely as a facilitator of near-term financial results vs. integrated product strategy and regionally based manufacturing flexibility that can produce either small or large vehicle models in any plant.
And so the habit of certain producers lives on, along with the overall implications. Short-term memory loss perhaps applies to certain consumers and producers.
Praise to Tesla and GM for continuing efforts toward broader strategy that insures sustainability for both the business and the planet.
© 2016 The Ferrari Consulting and Research Group and the Supply chain Matters® blog. All rights reserved.
In the first three months of 2016, media has been abuzz with the news that the United States elected to ease its business and trade relations with Cuba. The March visit to Cuba by President Barack Obama reflected a noted sea change in US-Cuban relations. Already, there are reports of pending new airline service, the opening of expanded tourism and the potential for new opportunities in supply chain and manufacturing sourcing.
Supply Chain Matters recently received notification from Knowledge@Wharton of a newly published E-Book, The Road to Cuba, The Opportunities and Risks for US Business, Revised and Updated Edition. This Editor had the opportunity to review this E-Book publication and we are passing along a reference for those multi-industry readers who may be thinking of Cuba as a potential for added business and supply chain activities.
The Wharton School authors point out in the document Forward:
“While significant political and ideological differences still separate the two governments, Obama’s historic visit, the first to Cuba by a US head of state since Calvin Coolidge traveled there in 1928, is an opportunity to widen the space for unfettered communication, trade and business between the United States and Cuba, for the mutual benefit of their citizens.”
“Whether you run a US business, are an investor, or are interested in exploring the opportunities, you need to know what now can and cannot be done in Cuba amid the complexities that surround the constantly evolving negotiations and normalization process between the two countries. If you already do business in Cuba, you need to understand the competition that is on its way.”
We specifically reviewed two pertinent chapters: Longer-Term Prospects: Manufacturing/Retail, along with Longer Term Prospects: Pharmaceuticals/Biotechnology.
From the manufacturing lens, Cuba’s close proximity to large U.S. consumer markets indeed makes this country attractive as a production and assembly center for consumer goods that are exported to the U.S. Noted is the current establishment of the Mariel Special Development Zone at Mariel port just west of the city of Havana. This development zone, initiated in 2013, offers tax breaks and duty-free concessions is already the home of food and beverage processing, light industry assembly, vehicle assembly and alternative energy ventures. The report cites Cuban authorities as indicating that more than 400 companies including US firms have expressed interest the Muriel Zone.
In January, Unilever, which has been investing in Cuba since 1994, announced an intent to build a $35 million soap and toothpaste processing facility within the Muriel Zone. The consumer goods producer established a 60-40 joint venture with the Cuban state company Intersuchel SA as a means to expand its presence. There is also mention of Nestle’s production of soft drinks and mineral waters with a Cuban partner as well as AB In-Bev, whose Cerveceria Bucanero venture distributes beer to the local market.
Another promising opportunity is that of biotechnology and pharmaceuticals and the report indicates that pharma exports are big business for the island. This sector is noted as growing with sales made to emerging market economies in Latin America, Asia and Africa. The report notes:
“Fidel Castro’s government pumped billions of dollars of domestic investment into the development of Cuba’s biotechnology industry, mostly based in Western Havana but with outlying clusters in other parts of the island.”
Main products thus far have been developed vaccines for combating Group B meningococcal meningitis, hepatitis B along with PPG, cholesterol –lowering product developed from sugar cane. Further noted is ongoing development of potential vaccines to combat HIV/AIDS, cholera, leptospirosis, dengue fever, hepatitis C and cancer.
Cuba also represents a market for U.S. medical and pharmaceutical exports.
The report includes noted words of caution: “The Door has Opened, But needs to Swing Wider.”
An important insight:
“However, an early boom in interest by US companies and entrepreneurs to trade and invest in Cuba has yet to be fulfilled in terms of concrete business deals and opportunities. These are still being held back, both by the persisting economic embargo, which can only be completely lifted by Congress, and by the Cuban government’s own apparent reluctance to fully embrace liberalizing reforms that would open up the state-run economy.”
We interpreted that statement as indicating that more time and patience is required in order to fully evaluate or take advantage of investment and new business opportunities for the island. It has over a year since the U.S. government announced its intention to loosen restrictions, and the actual visit by the President, and perhaps, the next phases will come sooner rather than later. The current U.S. Presidential and Legislative election cycle, currently underway, has to run its course as-well.
The overall transportation and logistics infrastructure for the island further needs modernization as witness to existing vintage delivery vehicles.
However, after our review, we certainly sense lots of long-term potential from product export and import lenses, and especially from a pharmaceutical supply chain perspective. Check it out for yourself by clicking on this web link.
Upcoming Webinar: The Paris COP21 Climate Agreement: Assessing Industry and Global Supply Chain Ramifications
Last December, 195 nations became party to the Paris Climate Agreement, now referred to as COP21, declaring that climate change is a global priority and committing the majority of nations towards holding the increase in global average temperature below 2 degrees Celsius from pre-industrial levels. In an upcoming Accenture Trend Talk webcast, Supply Chain Matters Executive Editor Bob Ferrari examines the more significant role industry and global supply chains will invariably play in helping their organizations achieve far broader and more aggressive efforts at mitigating the growth of greenhouse emissions.
Bob’s takeaway message will be that rather than adding significantly added challenges, COP21 and the Paris Climate Agreement should be viewed as the opportunity for broader and bolder product value chain strategy that places Sustainable Business as the primary objective.
This upcoming Accenture Academy Trend Talk formatted webinar is scheduled for Tuesday, April 19 starting at 10 AM Eastern Time. Only current clients of Accenture Academy are eligible to participate and can register at this Accenture registration web site.
After his Accenture Trend Talk, Bob will be sharing a synopsis of the key messages delivered in a subsequent Supply Chain Matters posting.