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A Supply Chain Matters Rant Regarding Headline Hype- Offshoring vs. Reshoring

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Throughout 2014, Supply Chain Matters has been tracking and highlighting the significantly increased momentum of U.S. and North America based manufacturing.  Increased U.S. manufacturing momentum was U.S. PMI comparison 2014 vs. 2007included in our predictions for 2014 along with some specific caveats. Throughout the year we have pointed out the obvious needs across certain industry supply chains for rebuilding world class supply and services ecosystems. We continue to believe that the signs are obvious.

Because of the growth potential within emerging up and coming markets across the globe, many manufacturers prioritized manufacturing and supply chain capital investments specifically within these growth regions. In September we highlighted business media reports citing a Morgan Stanley report indicating that the average age of industrial equipment in the U.S. has risen above 10 years. Growth of all types of capital spending by U.S. firms increased 3 percent in 2013, and is forecasted to be 3.8 percent this year, levels far below the historic average of 8 percent. Other commentaries have highlighted reports of manufacturers encountering obstacles in their U.S. sourcing efforts.

This week, this author was befuddled by two separate Wall Street Journal articles directed at the state of U.S. manufacturing.  Some would argue that business media sometimes enters the realm of headline sensationalism to attract eyeballs.  In the case of these two reports, we urge readers to ignore the headlines and focus on the prime takeaway messages.

On Monday, the WSJ headline was Offshoring Outpaces ‘Reshoring”. (paid subscription required) The report highlighted a recent A.T. Kearney study that pointed out the gaps between hopes raised by those advocating ‘reshoring’ and the reality of deteriorating U.S. performance. A highlighted quote from this report states: (Reshoring) “is not what it’s cracked-up to be” An additional quote from a Kearney partner: “There’s basically still more stuff being pushed out than is brought back.” However the Kearney executive acknowledges that the U.S. is on an upward trend and is gradually becoming more competitive.

On Tuesday, the headline was: Manufacturing Output Passes Pre-Recession Level. ”. (paid subscription required) That report notes that the U.S. Federal Reserve reported that factory output in November climbed 1.1 percent, its largest increase since February.  The previous October number was further revised upward. The October number placed manufacturing activity above its previous peak in December 2007. An extracted quote: “And overall industries- a category including manufacturers, utilities and mining- are now working nearer to full capacity than any other point in six years.

Thus are examples of two headline contrasts yet if you dig deeper, the themes are consistent.

The takeaway from this commentary is to ignore the tendencies for headlines and tailor your manufacturing sourcing strategies to where significant customer demand and economic growth originates now and in the future.  China and other emerging economies and markets cannot be ignored but the realities of current regulatory and other obstacles favoring local manufacturers cannot be ignored as well. A global sourcing strategy needs to be balanced for risk, market access, landed costs and other meaningful criteria such as logistics and transportaion.

A strategy that emphasizes added U.S. manufacturing investment should consider the realities that in some cases, supply ecosystems will have to be re-built to global competitiveness, or that certain components will have to remain sourced within other lower cost regions. From everything we have analyzed, the U.S. economy and North America based manufacturing resurgence looks to continue well into 2015.

Bob Ferrari


Report Card on Supply Chain Matters 2014 Industry and Global Supply Chain Predictions- Part Four

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We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  We not only publish our annualized ten predictions, but scorecard the projections as this point every year.  After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.

As a reminder, our self-scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.

In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014.

In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.

In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.

In this Part Four posting we re-visit Predictions Six and Seven.

 

2014 Prediction Six: Supply Chain Social and Environmental Responsibility Strategies Continue to Become Far More Visible and Have Business and Shareholder Implications

2014 Rating: 2.0

Throughout 2013, business headlines were focused on the occurrence of highly visible incidents of perceived or alleged labor abuses, coupled with environmental safety concerns among production facilities supporting multiple industry supply chains. Thus, our 2014 prediction called for higher levels of visibility to those supply chains proactively addressing social responsibility and unfortunately, those that are inclined in accepting past status-quo. We predicted consequent business and shareholder implications surrounding such practices.

This was a prediction that unfortunately, did not occur to the levels we anticipated and thus we have given ourselves a low self-rating.

On the positive side, labor activism continued to be a discernable trend among so-termed, lower cost manufacturing regions. Business media such as Bloomberg provided added visibility to worker safety and pay conditions among female workers within regions such as Bangladesh. In China, the workforce has turned toward male dominance and reports of sexual harassment have come to light. In a Supply Chain Matters commentary in May we noted trends reflecting  for the most part, a female dominated workforce in Bangladesh enduring workplace perils to sacrifice for the better good of their families.  A predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.

In the high-tech sector, Apple continued to undertake meaningful steps to initiate broader supplier responsibility practices including substance use regulations across its supplier network.  The highly visible consumer electronics provider published both its Eight Annual Supplier Responsibility report along with a new Regulated Substances Specification which was made available for open viewing. The substances specification called for the banning of cleaning agents’ benzene and n-hexane within all supplier factories. Unfortunately other high tech and consumer electronics brand owners appeared not to join in openly declaring higher standards for safe chemical use.

Many consumer products companies along with their respective supply chain suppliers made some continued strides in environmental and social responsibility particularly in the areas of palm oil and other agricultural commodity sourcing.

The apparel industry continued efforts by various industry consortiums to improve factory safety working conditions across countries such as Bangladesh and Cambodia. In an early November update, we were disappointed to observe that a large number of garment factories across Bangladesh failed safety inspections.  According to reports, the inspections uncovered critical structural deficiencies within 100 factories that require immediate repairs. In 17 of the inspections, factory conditions were deemed to be so unsafe that the factories were ordered closed. Around 110 of building inspections uncovered the need for immediate actions required to bring the facility above acceptable safety levels for production to continue. Garment workers in Cambodia have increasingly become more vocal in seeking higher wages within that country and some European retailers have pledged to offer higher wages.  However, industry consortium efforts appear to have bogged down with little outcry from external groups or stockholders.

Prediction Six was a disappointment in 2014, not just for us, but for various industry supply chains who still weigh lowest cost higher than active social responsibility practices and accountability.

 

2014 Prediction Seven: Increased Dimensions of Supply Chain Risk and Major Disruption Will Impact Global Sourcing Strategies.

Self-Rating: 2.8

 

Our prediction cited that the ongoing cumulative effects of increased financial and business related risks would motivate manufacturers and retailers to once again revisit multi-tiered global sourcing strategies.

Overall, 2014 has turned out to be a tame year in terms of global supply chain risk and major disruptions, with some notable exceptions, and that more likely has muted any major efforts for changed sourcing.

Natural Disaster

According to global re-insurer Munich Re, Natural disasters worldwide caused about $42 billion in economic damages during the first half of 2014, well below the average amount of $95 billion for the same period during the past 10 years,. Insured losses totaled about $17 billion during the first half of 2014, compared with a 10-year average of $25 billion. Increased volcanic and earthquake activity caused some concerns in Northern California and in Iceland during August while in Asia, there were constant incidents of major earthquakes, many of which located in non-industrial areas.

Social and Political Unrest

In the area of social and political unrest, early 2014 brought a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear while territorial hostilities among Russia and Ukraine presented threats of potential European supply chain disruption.  In May, a dispute over drilling rigs in the South China Sea precipitated rioting across Vietnam that caused disruption to hundreds of China-owned factories. The Middle East was a constant threat for continued hostilities, specifically related to Syria and Iraq.

Pandemic

One of the largest ever recorded outbreaks of the deadly Ebola virus that has struck certain West Africa based countries has the strong potential to impact industry and global supply chains if the outbreak is not controlled. The outbreak which initially began in March has now broadened to nearly 16,000 reported cases and nearly 5700 deaths. Potential threats are in global transportation and logistics as well as localized outbreaks that could impact specific industry supply chains in the light of past severe global outbreaks of SARS or influenza.

Humanitarian focused supply chain activities continue to provide the critical defenses for avoiding a broader pandemic outbreak involving far more countries and geographies. While a global pandemic might have been characterized as a low probability scenario among various industry supply chains, Ebola remains an acute current day reminder of a disruption that can impact many industry and global supply chains.

Merger and Acquisition

In the pharmaceutical and drug sector, business headlines reverberated with a slew of planned or attempted merger and acquisition activity as the major industry players jockeyed for strategic advantage in product pipelines, cost structuring and emerging market access. Any of these would have provided the potential for major supply chain disruption.

Specific Industry Disruption

Two of the most notable industry related disruptions in 2014 involved automotive and global shipping. An unprecedented level of product related recall announcements precipitated by lax product design and supplier management practices prompted the cumulative effect of multitudes of brands recalling millions of automobiles and light trucks that has brought automotive service supply chains to crisis stages. The most visible incidents involved an alleged defective design of ignition switches installed on multiple General Motors produced vehicles. The other ongoing crisis involves alleged defective air bag inflators produced for multiple automotive brands by Japanese supplier Takada.  Automotive OEM’s may well revisit their supplier sourcing, quality conformance and product design practices in the light of the current levels of risk exposure.

The other major disruption with ties to global sourcing was the perfect storm of near paralysis that impacted U.S. west coast ports at the very height of import and export shipment activity related to the 2014 holiday fulfillment period. As we pen this self-rating commentary, the port crisis continues, with little optimism related to easing, and the reverberations and effects of this crisis will likely alter global surface shipment routings in the months to come.

We continue in the belief that the days of global sourcing based on one-dimensional dimensions of direct labor or transportation are over. Consequent sourcing decisions that factor elements of possible risk will bring forward far different dimensions of balancing global sourcing with risk mitigation.  Since 2014 provided an overall tamer risk environment, out of sight was probably out of mind. However, the symptoms and casual factors remain evident.

 

This concludes Part Four of our report card on our Supply Chain Matters 2014 Global Supply Chain PredictionsStay tuned as we assess our remaining 2014 predictions in the final posting of this series.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 


Report Card on Supply Chain Matters 2014 Global and Industry Supply Chain Predictions- Part Three

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We continue with our series of postings reflecting on our 2014 Predictions for Global and Industry Supply Chains that we published in December of last year.

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  We not only publish our annualized ten predictions, but scorecard the projections as this point every year.  After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.

In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014. In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.

We now revisit Prediction Five.

2014 Prediction Five: Noted Industry Specific Supply Chain Turmoil and Challenges.

For the past few years, our annual predictions have specifically addressed particular industries that we felt would undergo extraordinary challenges during the calender year.  For 2014, we identified B2C Retail, Consumer Product Goods (CPG) and Aerospace industry supply chains as undergoing special challenges.

Retail and B2C Supply Chains

Self-Rating: 3.8

We predicted challenges for both the consumer demand and supply fronts.  On the demand side, many lessons were learned during the final stages of the 2013 holiday surge, not the least of which was consumers waiting until the very last minute to initiate their holiday purchases.  At the conclusion of 2013, many studies concluded that retail consumers were permanently altering their shopping habits in favor of online options with less visits to physical stores.

Throughout 2014, parcel firms FedEx and UPS concentrated on efforts to avoid being “thrown under the bus” which occurred during the final days of the 2013 holiday period.  FedEx, and especially UPS, re-examined their delivery network infrastructure practices for maximum peak surge periods.  UPS itself invested $500 million in augmented network infrastructure. For the first time in the parcel shipping’s firm’s 107 year history, UPS operated full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge.

Retailers themselves entered the 2014 holiday period with higher expectations regarding consumer spending. Both FedEx and UPS re-doubled efforts to influence major B2C volume retailers to stagger promotional programs during the 2014 holiday surge and increase two-way visibility into that status of last-mile delivery networks. The U.S. Postal service stepped-up its efforts in offering retailers a new alternative for Sunday delivery along with more price competitive shipping rates. As we pen our prediction rating, preliminary reporting data surrounding the four day Thanksgiving and Black Friday holiday shopping period for 2014 indicates that consumers have indeed shifted even more buying preferences towards online channels with some online sites suffering periodic outages.

On the supply side, the “perfect storm” scenario unfolded among U.S. west coast ports starting in August. A combination of factors: stalled labor contract renewal talks among the Pacific Maritime Association and the longshoremen labor union, a shortage of inter-modal truck chassis, the appearance of much larger container vessels, along with efforts by independent truckers in seeking added wages and benefits all converged to bring port unloading and loading operations to a near standstill. The backlog poses a major threat for retailers and exporters in fulfilling revenue and profitability targets for the December ending quarter.

By our lens there is no doubt that B2C retail industry supply chains have indeed encountered extraordinary challenges in 2014.

 

Consumer Product Goods Supply Chains

Self-Rating: 4.0

In 2013, permanent changes in shopping habits among the majority of consumers were already evident and our prediction called for CPG industry supply chains to be especially challenged with the effects of these actions in 2014.  Our prediction further noted the heightened influence and actions of short-term focused activist investors, applying dimensions of financial engineering to one or more CPG companies as continuing to have special impacts.  CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply networks.

Most all of these forces were in-effect during the year.

In February, we highlighted supply chain implications presented at Consumer Analyst Group of New York (CAGNY) Annual Conference by CPG firms Campbell Soup, General Mills, Hershey Company, Mondelez International and PepsiCo. Campbell Soup CEO Denise Morrison described market conditions as “tumultuous” “persistently challenging” adding that “a new normal is coming to food.” … “The winners will be the companies that adapt successfully to a changing world.”  Kraft CEO Tony Vernon described the industry challenge: “Our customers (are) coming to terms with changing shopping patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices. In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. In the short-term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base.”

By mid-year, multiple CEO’s from well-noted CPG branded companies were each describing the blunt realities of a rapidly changing industry scenario where revenue growth was at a premium and profitability pressures dominated. In August, Procter & Gamble announced a re-structuring of its businesses to once again shed under-performing brands.  Similarly, Coca-Cola, Mondelez, General Mills embarked on a business re-structuring efforts to boost sales and shed costs with a multi-year cost savings initiatives. Some CPG firms such as Kellogg, elected to acquired other smaller firms in growth segments.

Entering the closing month of calendar year 2014, many CPG supply chain organizations find themselves navigating the need to once again reduce long-term cost structures to free-up funds for strategic business initiatives while being called upon to be more nimble to rapidly changing consumer preferences and tastes. For some, these goals continue to add extraordinary challenge.

 

Aerospace Supply Chains

Self-Rating: 3.8

The unique challenges within aerospace supply chains have stemmed from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limitations have stretched into multi-year customer delivery windows to airlines and aircraft lessors. The literal duopoly of Airbus and Boeing did indeed dominate industry news in 2014 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. After publishing our prediction concerning continued unique challenges for aerospace in December, we were pleased to note a published Bloomberg report in late January, With Epic Backlogs at Airbus and Boeing, Can Business Be Too Good?. Bloomberg pretty much mirrored our prediction.

By mid-year, Airbus and Boeing reported first-half delivery performance that would slightly exceed 2013 levels, but not at the pace required to step-up production momentum for the coming years.  Once more, the latter part of 2014 featured considerable reductions in the cost of aviation fuel, and the open question is whether this will help or hinder the pressures for increased capacity and production of aerospace component supply chains.  Airbus completed international certification test trials for its new carbon fibre A350 XWB aircraft program as well as the maiden flight of the new A320 Neo in September and both programs are reported to be on-track for initial delivery of first operational aircraft to launch customers.  The A350 launch will represent a competitive offering to the Boeing 787 Dreamliner for wide aisle, long-distance travel, while the Neo version of the A320 will continue to compete with Boeing’s next generation 737.

Throughout 2014, Boeing announced a series of strategic, multi-year supply agreements to ensure supply of critical materials and components. The most notable involved strategic supply of material required for producing titanium, in a long-term supply agreement announced at the height of hostilities among Russia and Ukraine. The most recent announcement involved a 10 year agreement to supply carbon fibre composite material from a key supplier in Japan.

Other smaller industry OEM’s such as Bombardier, COMAC and Mitsubishi Industries continue to compete for smaller niche aircraft segment needs, and each of these players faced setbacks during 2014 as they dealt with the realities of more complex, globally dispersed suppliers sharing in product innovation. Bombardier encountered a significant program setback concerning its C-Series program as pre-maiden flight tests encountered an engine malfunction. Reports indicate that China based COMAC is also dealing with some unspecified setbacks.

Thus, the commercial aerospace industry did indeed manifest its own unique set of industry supply chain challenges this year, challenges that other industry teams would perhaps envy.  Order backlogs extending beyond 10 years, technology innovation as a driving force, and supply chain scale-ups remain critical challenges in the months to come and commercial aerospace may indeed appear as an extraordinary challenge for 2015.

 

This concludes Part Three of our report card on our Supply Chain Matters 2014 Global Supply Chain PredictionsStay tuned as we assess the remainder of our 2014 predictions in follow-on postings.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 


Report Card on Supply Chain Matters 2014 Predictions for Industry and Global Supply Chains- Part Two

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We continue with our series of postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  We not only publish our annualized ten predictions, but scorecard the projections as this point every year.  After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In our previous Part One posting, we score carded 2014 Projections One and Two.

 

2014 Prediction Three- Continued momentum associated with U.S. and North America based manufacturing.

Self-Rating: 4.0

A year ago, U.S. manufacturing activity as depicted by the Institute of Supply Management (ISM) PMI Index was recorded as 4.2 percentage points higher than the beginning of the year, and 6.2 points higher than the June reading, representing both the highest reading since June of 2011 and increased momentum from other geographic areas. As of this writing, the ISM PMI reading of 59 percent for October represented a 7.7 percentage point increase from the reading reported for January.  Throughout 2014, U.S. supply chain related activity has continued on a steady state.  As of October, 16 of the total 18 tracked industries were reporting growth momentum.

As noted in our original prediction, the continued growth of U.S. manufacturing comes from a number of factors not the least of which have been the ongoing double-digit increases of labor costs in China, increased positive momentum of the U.S. economy and more attractive energy costs throughout North America. . In mid-August, the Boston Consulting Group noted in its report, Shifting Economics of Global Manufacturing, that in some cases, the shifts in relative costs of manufacturing among China and North America are now startling placing Mexico as cheaper low-cost manufacturing alternative.

Specific efforts by Wal-Mart and other retailers and manufacturers concerning significant long-term commitments for sourcing products in the region have helped as well. The most significant development in 2014 concerned hefty manufacturing investments in Mexico, both in supporting North America product demand and as a strategic base of North America based exports to other global regions, particularly for the automotive industry.  Automotive OEM’s BMW, Honda, Mazda, Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment.

However, continued U.S. sourcing of U.S. and North America manufacturing continues to uncover gaps in globally competitive component supply chain networks, many of which still reside in Asia or China. This is especially the case in high tech and consumer electronics, footwear, apparel and other industries. Continued momentum is thus increasingly dependent on further re-building of North America based supply ecosystems among multi-industry supply chains.

 

 

2014 Prediction Four- Supply Chain and Manufacturing Talent Management Would Remain a Continual Challenge.

Self-Rating: 3.5

Our prediction declared that supply chain and manufacturing talent acquisition and retention would remain a challenge with considerable joint industry, government, academic, and indeed individual supply chain organizational work to be accomplished. We further predicted that some progress will be made with more innovative approaches and efforts and we had hoped to highlight these throughout the year so other teams can benefit.

In the 2014 Chief Supply Chain Officer survey report conducted by SCM World, supply chain leader respondents pointed to ever more challenges in building and managing supply chain teams over the past two years, nearly double the frustration expressed in 2011. SCM World points to raw recruitment as the most cited problem despite rising interest in supply chain among universities and significant investment in supply chain focused professional organizations. The need for well-rounded generalists possessing broader supply chain functional, business and team collaboration skills seems to remain an important need, with implications for significant job rotation across business areas.  Other executive and industry surveys conducted during 2014 further reinforce building concerns and frustrations regarding talent selection and retention. In August, we highlighted for readers and clients what executive recruiter Hiedrick & Struggles described as the white hot demand for supply chain executives in pharmaceutical industry settings.

Throughout 2014, we searched for continued insights and learning regarding successful ways to approach talent management. We were able to highlight some learning regarding the management of millennials. We noted how professional organizations such as APICS and CSCMP were adding young professional mentorship and global-wide student completion programs to boost career interest in supply chain management.

Although we feel we made good on a relative no-brainer prediction, we did not meet our expectation to provide added industry-wide learning in successful talent management. For this reason, we lowered our self-rating for this prediction and commit to re-double our efforts in 2015.

This concludes Part Two of our report card on our Supply Chain Matters 2014 Global Supply Chain PredictionsStay tuned as we assess the remainder of our 2014 predictions in follow-on postings.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 


Another Important Indication of Chief Supply Chain Officer Agenda

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As we have stated in previous commentaries, Supply Chain Matters does not tend to comment on the huge plethora of opinion research studies concerning the discipline and state of global supply chain management unless we feel the research is meaningful and based on sound research practices.  By our view, there are too many outlets, beyond experienced analyst anchored firms, producing so called research vs. opinion of the day among a limited set of respondents.

In an October 2013 Supply Chain Matters commentary we highlighted some important findings from the Chief Supply Chain Officer Report conducted and compiled by SCM World. We were impressed with the research approach as well as the key findings. This year, we were able to obtain a copy of The Chief Supply Chain Officer Report 2014, Pulse of the Profession. Our thanks to Supply Chain Matters Sustaining Sponsor E2open for providing us with a copy of the 2014 report.  We further had the opportunity to speak with Matt Davis, former Gartner analyst who recently joined SCM World in the role of Senior Vice President of Research.

This year’s report has a reported level of over 1000 cross-industry survey participants responding to over a hundred questions and sub-questions. As was the case last year, the goal of our commentary is not to re-produce the findings but rather to add some of our impressions and takeaways to the findings. SCM World, the authors of the report have done a great job of articulating individual findings.

In the 2013 report supply chain leaders had indicated that they were caught in the middle of rising customer demands and expectations and the global growth ambitions of their firm’s management teams. The conundrum of objectives was directed at continued reductions in costs while helping to grow the business. This year’s report describes 2014 attitudes as increasingly “schizophrenic, with operating cost reduction dominant as ever but closely followed by agility in meeting customer needs.” The authors summarize that supply chains are trying to be all things to all people including areas of enhanced customer service, accelerated NPI and stronger supply relationships.  That pretty much tracks with the various supply chain developments Supply Chain Matters has highlighted this year, particularly in the consumer products sector.  External pressures for increased, very short-term stockholder value, accelerating structural changes in market and customer behavior, conflict we needs for the supply chain to become more responsive or agile to the rapid industry changes that are occurring.  It is a rather difficult challenge that has increasingly manifested itself for many years, challenges that cannot be addressed solely from a focus on financial-based performance outcomes.

A very significant 2014 finding indicates that senior supply chain leaders are intending to move away from the outsourced core competence model of prior years and moved toward more highly vertically integrated strategies in manufacturing and distribution in support of direct-to-customer delivery needs. The forces of Omni-channel commerce are definitely real.  What should be of upmost interest to our community is the SCM World conclusion that today, a return to more emphasis on vertical integration and in-house production strategies are clearly underway.  A quarter of the SCM World respondents further indicate pursuit of modular push-pull platform strategies managed internally, where final customer demand will be accommodated by a fulfillment network of third-party factories, retailers or partners located closest to customers. There is also a corresponding bombshell statement indicating that supply chain strategies going forward are less likely to depend on contract manufacturing, especially for critical elements of the production process. While we were not surprised by that conclusion, given the many examples that have unfolded this year, some of readers will be.

Other important SCM World findings relate to sourcing procurement strategies.  Once again, the findings point to a consolidation of the supply base along with a need for deeper collaborative relationships with suppliers, more sharing of demand plans and deeper levels of collaboration on intellectual property innovation as well as cost savings opportunities.  This is obviously another method to try to balance continued needs for cost savings while supporting broader business needs for customer responsiveness and managing important tenets of supply chain risk mitigation. The most attractive markets for growth again point to China, but at the same time, respondents indicate that China is the fifth most likely to be considered “too risky” to operate within.

Finally, no supply chain executive survey these days neglects to manifest the crrent challenges related to supply chain talent management. The 2014 SCM World CSCO respondents pointed to ever more challenges in building and managing supply chain teams over the past two years, nearly double the frustration expressed in 2011. SCM World points to raw recruitment as the most cited problem despite rising interest in supply chain among universities and significant investment in supply chain focused professional organizations. The need for well-rounded generalists possessing broader supply chain functional, business and team collaboration skills seems to remain an important need, with implications for significant job rotation across business areas.   This obviously remains a key area of concern among senior industry supply chain leaders and consistent with predictions and findings from other industry analyst firms including the Ferrari Consulting and Research Group. It a challenge requiring far more concerted actions and supporting efforts involving academia, industry, professional organizations and supply chain professionals themselves.

Readers can download a summarized version of SCM World’s Chief Supply Chain Officer 2014 at this web link or view an SCM World blog posting by Kevin O’Marah which highlights the top 10 supply chain facts brought forward from the 2014 report. Alternatively, E2open is providing a download link on its web site Resource Center.

Bob Ferrari


China Branded Trains Appearing in a U.S. Subway System

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If our readers have had the occasion to travel to Boston, you might have experienced the public transit subway system which is referred to as the “T”. Typical to the historic nature of the city, its subway system dates back to the late 1800’s. Today, its subway lines are denoted by colors, namely the Red, Green, Orange and Silver lines.

Last week, another very important milestone took place.

The Massachusetts Department of Transportation awarded a contract to China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars.  The important headline for this development was the awarded contract cost, namely $567 million, is a rather compelling sum for this amount of modern equipment. 

It its reporting, Bloomberg News echoed that this was the first deal of this kind for a Chinese company in the U.S.: “The deal breaks new ground for Chinese train makers whose overseas push, backed by Premier Li Keqiang, has been mostly limited to developing markets.” According to CNR officials, this deal eventually places CNR equipment in all of the world’s six continents.

The contract calls for CNR to replace 152 Orange Line subway cars, that line’s entire fleet, which has an average of 1.5 million miles of service per car. Additionally, 132 Red Line subway cars which date back 27 years and have racked up to 2.3 million average miles will also be replaced.  CNR will construct a new $60 million final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. The new production facility is expected to employ upwards of 150 factory workers.

Since the contract stipulates that 60 percent of the work to take place in the U.S., Supply Chain Matters speculates that the subway car components will be imported directly from China, most likely by ship via and expanded Panama Canal routing to an east coast port.

The timetable calls for a three to four year design phase, with initial pilot cars delivered in 2018, and production car output spanning the years 2019-2021. The deal has an additional option for the delivery of 58 additional Red Line cars.

The specifications for these new subway calls call for adding an additional 15 additional passengers per car, wider accessibility doors, LED lighting, regenerative braking systems, environmentally friendly HVAC and advanced customer information systems.

The Massachusetts Bay Transit Authority (MBTA), operator of Boston’s transit system has struggled with its finances for many years, falling behind in any efforts to invest in new operating equipment.  Thus, the opportunity to replace this amount of equipment at the stated cost had to be a very attractive proposition for taxpayers.  However, it has to a rather concerning development and omen for existing train equipment manufacturers.

A reported six companies bid on this replacement contract. Bidders were reported to have been evaluated on criteria ranging from technical and manufacturing experience, quality assurance, reliability as well as price. In its reporting, Bloomberg noted that the CNR price was a little more than half that of Bombardier and other bidders included Hyundai Rotem Co. of South Korea and Kawasaki Rail Car of Japan. An MBTA spokesperson later added that that agency found no human rights violations with CNR.

Rival state-owned CSR Corp. is reportedly keen to supply high-speed trains to the State of California. A published Reuters report indicates U.S.-based SunGroup USA indicated to Reuters earlier last week that it had teamed up with CNR and its unit Tangshan Railway in a pitch to supply California’s $68 billion project with up to 95 trains that can travel as fast as 354 kilometers per hour (221 miles per hour). That news is significant in that CSR could possibly team up with rival CNR, the recipient of the recent Massachusetts subway car contract, for the California contract. About a dozen firms are expected to compete for the California project.

And then there is one more development.  An additional Bloomberg report published yesterday indicates that both CNR and CSR will make “a major announcement” in about a week. The report cites speculation that China’s State-Owned Assets Supervision and Administration Commission (SASAC) is seeking the merger of the two companies to boost exports of high-speed railway technologies.

Obviously, China has indeed set aggressive targets for exporting train equipment and supply chains to global markets and developments are moving rather quickly.

Bob Ferrari

 


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