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Highlights of the 2014 Supply Chain World North America Conference

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Last week, this author had the distinct opportunity to both attend and participate in the 2014 Supply Chain World North America conference sponsored by the Supply Chain Council.  The conference was a combined global member meeting of Supply Chain Council and of the 2014 Annual Conference. This year’s overall theme was The Tuned Supply Chain, From Strategy to Resources.

Supply Chain Council Executive Director Joe Francis kicked off the conference by sharing his observation that media today converses much more in the vernacular of the “supply chain” vs. manufacturing, procurement or logistics.  The fortunes of companies now stem from their end-to-end supply chain capabilities.  He reiterated that demand for supply chain talent is consistently identified as one of the top three issues facing businesses today.  A similar theme was reinforced by Michael Burkett, Research Vice President at Gartner, who observed that supply chain professionals are now thinking more about how the supply chain can be the competitive differentiator for their firms, particularly in the area of bringing more operational and business insights to the table and harvesting more insights from various sources of data.

Among the many highlights last week was a series of presentations from other than manufacturing focused supply chains, which included speakers from media & entertainment, oil exploration and national defense focused supply chains. Theodore Garcia, Executive Vice President, Customer and Alliance Management at FilmTrack addressed how today’s more rapid adoption of digital technology has disrupted media and entertainment focused supply chains. He spoke of one particular example where the late approval of a photo image of a global film movie star added an additional $6 million in unplanned added transportation costs. William Knittle, Global Procurement Director at BP spoke to the importance of managing cross-functional internal and external relationships and of moving BP toward a broader view of procurement capabilities.  Shabana Farooqi and Brian Dunch, senior consultants for PwC addressed efforts for implementing a version of the SCOR Framework (Supply Chain Operations Model Framework) for improved availability and access to much needed medicines for certain countries on the African continent where theft and counterfeits are a significant challenge.  They called for cross-industry special industry group consisting of government agencies, NGO’s, private industry and academia in collaborating on additional efforts to formulate more effective supply chains to improve the delivery of healthcare focused goods and services in developing regions.

Among the many other conference sessions, I especially enjoyed the closing keynote delivered by Steven Melnyk, Professor of Operations and Supply Chain Management at Michigan State University.  This author has enjoyed many of Professor Melnyk’s presentations which are both insightful and practical, and help in taking a bigger picture focus on supply chain management strategy. This year’s keynote talk addressed the topic of interoperability as the key to harmonizing the supply chain. 

A supply chain in harmony was expressed as being:

  • Supportive of corporate objectives while making achievement of desired business outcomes inevitable
  • A strategic asset to the business
  • Helping in the identification and support of new business opportunities

Especially insightful was Professor Melynk’s differentiation of output-driven, such as reduced costs, vs outcome-driven supply chain strategies.  His observation: too many supply chains are driven by output-driven perspectives. He instead defined five possible supply chain outcome models, each requiring different skill and leadership requirements. According to Melnyk, a supply chain can be either: responsive, security, sustainable, resilient or innovative driven. Each of these outcomes is not mutually exclusive, but rather blended according to market or business needs. As an example, Melnyk ranked the supply chain outcomes of the Apple supply chain as:

  1. Innovative
  2. Security
  3. Responsive

Cost is a necessary output in the context of the above outcomes. When one considers this context, it helps to communicate to senior management and the broader supply chain team the overall purpose and objectives for the supply chain’s contribution to business goal fulfillment.

Finally, this author had the distinct pleasure to moderate a supply chain industry analyst and thought leader panel discussion where we dived into a number of topics related to balancing required supply chain outcomes with technology investments, what’s really behind the quest for supply chain talent management along with competency roadmaps, and a number of other discussion topics posed by our audience and panel members.  Judging from the direct feedback, the panel was well received and very helpful for our audience. I want to again express my sincere thanks to the panelists for their dynamic participation and insights:

Jake Barr, CEO, Blue World Supply Chain Consulting and former P&G supply chain executive

Michael Burkett, Research Vice President, Supply Chain Research, Gartner, Inc.

Brad Householder, Principal, PwC Management Consulting

Steve Melnyk, Professor of Operations Management, Michigan State University

 

A final thought that came to mind on my flight back from Nashville is that supply chains, both product and services focused, have come a long distance in efforts directed at articulating value to the business. However, much work remains in helping the business to navigate a more dynamic nature of today’s faster pace of business events and technology, networks and organic process frameworks will play a more important role in the next iterations of supply chain management.

Bob Ferrari

 


P&G Selling Bulk of its Pet Food Business to Mars- A Supply Chain Leverage Opportunity

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Supply Chain Matters would venture a guess that many of our readers are under the impression that privately held Mars, Inc, the producer of delicious M&M chocolates and Snickers candy bars was primarily a candy and snacks provider.

Not so.

Mars Pet Care Division which includes brands such as Pedigree and Whiskas is, according to the Wall Street Journal, this company’s largest and fastest-growing division.

Thus, yesterday’s announcement that Procter & Gamble is selling the bulk of its pet food business, with brands such as Eukanuba, Iams and Natura, to Mars is a rather significant development. The value of the deal is estimated to be $2.9 billion, but it does not include distribution of brands in the European Union.  The transaction is expected to close in the second half of 2014.

Reuters and other business media reports have indicated that P&G’s current multi-year restructuring program called for the exit of low-growth brands such as the P&G pet food portfolio. P&G CEO A.G. Lafley is quoted that the exit from pet food was “an important step” toward focusing on core businesses.

For Mars, this may well be the opportunity to leverage the company’s supply chain and channel distribution capabilities in the pet food market segment. Both the WSJ and Reuters cite data from Euromonitor, indicating that Mars currently has a 23.4 percent market share in the pet food segment, just slightly higher than Nestle. With the completion of this deal, Mars will have access to specialty pet food retailers as well as club stores and mass retailers. which features the Friskies and Purina pet food brands with a 23.1 market share?

With the addition of P&G’s pet food brands, it will be interesting to observe how both Mars and Nestle supply chain ecosystems respond to a new heightened competition and a changing industry dynamic.

 


Supply Chain Matters Guest Contribution: Web 3.0 Enables the Smart Supply Chain Network

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A Supply Chain Matters Guest Contribution

by Rich Sherman

In my previous Supply Chain Matters guest contribution, I outlined the concept of Web 3.0 enabling a fundamental transformation in supply chain management from linear, sequential thinking and communication to a demand/supply network, systems thinking, and dynamic communication. As we evolve in the Connected Age, the transformation is emerging as the Smart Supply Network 3.0 (SSN 3.0). It’s an extension of the vision I painted of a Smart Supply Network in my book. Two years later that vision is becoming reality as Web 3.0 is becoming a reality.

Smart Supply Network 3.0

Smart Supply Network 3.0

Smart Supply Network 3.0

Supply chain problems are caused from the uncertainty, time delays and amplification of variability based on linear communication of demand changes from one function to another and from one organization to another. The parts of the chain don’t work together. They often work against one another. They may be linked physically; but, rarely are they “plugged” into one another.

They don’t have or share data and information about the plans and performance of their operations or their changing demand/supply requirements. They are consistently “out of sync” with one another. As a system of supply responding to demand variation, they generate uncertainty, waste, cost, time delays, over and under stock, increased transportation cost, inefficient capacity utilization, and, well, you name it. In short, supply chain management is managing the complexity of the never ending consequences of unplanned events. The supply chain is a dysfunctional system that increases the cost of all participants in the system.

Web 3.0 will fundamentally transform the supply chain from a dysfunctional chain of unconnected organizations working separately to create inefficiency into a connected system of organizations supported by smart analytics that simultaneously and synchronously respond to variability to increase accuracy, visibility, and velocity.

We have to lose the notion of a “Supply Chain”. It is not a chain. It is not sequential. It is a system. It is omni-directional. Organizations participate in a dynamic network of other organizations to satisfy demand at a consumption point. The organizations in the network are not “links”, they are nodes. They work together in conjunction with other nodes to distribute material and information across the network to satisfy demand at consumption nodes. Connectivity is provided physically by transportation lanes and carriers and information is provided by communications lanes (Web 3.0) and telecommunication carriers. Forget about supply chain, in the 21st century we must operate and manage a Smart Supply Network 3.0.

What does it look like? Simply stated, SSN 3.0 enabled by Web 3.0’s ubiquitous communications network, automatic identification and data collection, location based services, and business intelligence provides end to end predictive and prescriptive analytics, decision support, and transparency that transcend visibility within the system of systems to synchronize the flow of material, services, and information. More accurate timely data, shared simultaneously, enables the organizations comprising the network to work together to optimize resources and physical flow to reduce time, inefficiency and inaccuracy, and cost while increasing service and capacity utilization to serve the demand of the connected consumer and customers across industries. SSN 3.0 is simply the way to operate and lead in the connected age.

Break the chain and jump on the network.

 

About the Author: Rich Sherman is an internationally recognized researcher and author on trends and issues across supply chain management. He currently serves as a Principal Essentialist at Trissential LLC in their supply chain consulting practice. His book Supply Chain Transformation: Practical Roadmap for Best Practice Results (Wiley, 2012) has received praise by practitioners, academics, and non-supply chain executives as a great read on business transformation.


Reports of Suitors for IBM’s Semiconductor Operations

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The Wall Street Journal is citing familiar sources (paid subscription)  as indicating that Globalfoundaries Inc. has emerged as the leading candidate to potentially acquire IBM’s semiconductor production operations unit. The WSJ reports that other interested candidates were Intel and TSMC, but the latter has apparently dropped out of ongoing talks because its primary interest was in IBM’s semiconductor R&D capabilities. The publication further reports that a deal is not imminent because it involves thorny issues including total asking price as well as intellectual property (IP) protection and long-term supply agreements with IBM for future semiconductor needs.

For the supply chain and B2B community, this move, if consummated, obviously represents a significant  strategic  shift for IBM. After the now pending sale of its low-end x86 server based operations to Lenovo, a sale of the semiconductor operations would position IBM in essentially a totally outsourced supply chain footprint while retaining  product design. That may afford IBM greater flexibilities in sourcing of supply agreements or in accelerating product innovation across global market segments. Then again, it may springboard IBM’s ongoing shift into broader information technology , cloud computing and services segments.

This will be an interesting ongoing development worthy of community observation.


Two Contrasts in Contract Manufacturing Direction for Apple Suppliers

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Supply Chain Matters has featured a number of commentaries regarding the challenges for being selected as a key component or contract manufacturing supplier to Apple.  On the one hand, the designation for being a key supplier in the Apple value chain can lead to enormous revenue potential and scale along with providing much cache for landing additional industry business.  On the other hand, Apple aggressive product margin   Apple Logogoals   coupled with steep and constantly changing production volume ramp-up or ramp-down requirements can challenge any supplier organization.  Apple sets high expectations and expects total responsiveness and virtual flexibility from its key suppliers, especially those residing in lower-cost manufacturing regions such as China.

The past two weeks have provided two interesting contrasts in terms of strategy and financial results among two of Apple’s key contract manufacturers. 

In May of 2013, Supply Chain Matters reinforced and amplified the observation that Apple had begun to actively pursue its own supply chain risk mitigation and supply chain segmentation plan by electing to dual source some of its contract manufacturing needs with the use of Pegatron, one of Taiwan’s largest contract and original equipment manufacturers, in addition to longstanding CMS provider, Foxconn. We cited a Wall Street Journal report indicating that Pegatron was willing to accept thinner profit margins in courting Apple’s massive business.

However, Pegatron was put to the test with last year’s massive pre-holiday production ramp-ups and ramp-downs to support the changing volume production requirements of the new iPhone 5c and iPhone Mini.  The market reception for iPhone 5c was not as originally planned, prompting Apple to cut-back on original pre-holiday production forecasts. The iPad Mini however, experienced high consumer acceptance. Pegatron had other challenges and there were reports indicating the alleged use of underage workers in some of this company’s factories in China, along with allegations from China Labor Watch related to excessive working hours and challenging working conditions. At the time, China Labor Watch alleged that worker conditions at Pegatron factories were worse than those of previous Foxconn conditions.

Last week Pegatron reported fiscal fourth quarter results and posted a 22 percent jump in net profits even though its overall revenues fell slightly from year ago results.  Revenues derived from the manufacturing of communications products, gaming consoles, smartphones and tablet computers rose 20 percent while those associated with PC’s and consumer products including televisions, declined.  In its latest reporting regarding Pegatron’s earnings, the WSJ cites a KGI Securities analyst as indicating that Apple now represents upwards of 40 percent of this company’s revenues, which is significant considering the brief history of relationship.  Further cited was that initially low yield rates in producing Apple’s products have now improved.  Operating margin improved to 1.9 percent from a previous 1.6 percent, but how many firms can sustain at such a low margin?  Once more, without any planned launches of new Apple products in the first-half of 2014, Pegatron is forecasting that shipments of smartphones, tablets and game consoles will likely decline in a range between 15 and 20 percent in the current first quarter.

The parent of Apple’s other longstanding prime contract manufacturer Foxconn, which is Hon Hai Precision Industry, last week reported that its profits rose 13 percent, boosted by increases in iPhone and iPad sales. Total revenues increased slightly to 3.95 trillion new Taiwan dollars. It is estimated that Hon Hai garners more than 40 percent of its revenues from its various supply relationships with Apple. 

However, this company continues to exercise a broader diversification strategy as revenues and margins derived from contract manufacturing continue to decline.  In a Supply Chain Matters posting in July 2013, we observed that Foxconn continues in its process for diversifying by moving downstream and upstream in the consumer electronics value-stream, possibly resulting in some Foxconn branded consumer electronics devices.

Last week, Hon Hai announced investments  of $90 million in various strategic manufacturing related projects with a focus toward higher value chain activities along with advanced automation.  These investments include $42 million to establish a trading and manufacturing unit for China based components, $30 million in a new software development unit and $15 million in a robot manufacturing and sales unit. In early February, Supply Chain Matters commented on Foxconn’s current collaboration with Google in the area of advanced robotics.

Foxconn is once again shifting some of its manufacturing presence into lower-cost, more interior regions of China. According to a WSJ report, facilities will be built in the central and western provinces of Chengdu, Wuhan and Zhengzhou where direct labor rates are as much as two-thirds less than those in the coastal regions.

Wall Street and business media has increasingly been skeptical of Apple amid stronger competition in smartphones, tablets and other consumer electronics devices. Doubt has been raised as to whether Apple has lost its mojo in product innovation cycles.  In exercising a supply diversification and segmentation strategy among its contract manufacturing supply base, other dynamics are underway. While Pegatron has pinned its fortunes on Apple to offset other areas of declining business,  Hon Hai is exercising a broader diversification strategy that will likely lessen its dependence on Apple.  How both fare in these different strategies will be certainly worth observing in the coming months.

Bob Ferrari

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

 


BMW Announces Significant Investment in U.S. Manufacturing

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Two of the most strategic markets for global automotive supply chains are that of China and the United States. That is especially pertinent in the premium model segment.

Thus, it was rather noteworthy that last week, German premium auto maker BMW AG announced plans to invest a $1 billion dollars to expand its existing sports utility production facility located near Spartanburg South Carolina.  This plant currently produces all of BMW’s X3, X4, X5, and X6 sports utility models for global market needs and serves as the global competency center for BMW SUV’s.  BMW had previously invested upwards of $900 million in Spartanburg.

When completed by 2016, this additional investment will make the U.S. based Spartanburg facility, BMW’s only manufacturing presence in the United States, the largest manufacturing plant for BMW globally, a significant milestone for a German based OEM. The added investment calls for increasing the production capacity of this facility by 50 percent to 450,000 vehicles.  This expansion is further expected to add several hundred new jobs, making this facility one of the largest auto plants in the United States. The Wall Street Journal cites familiar sources as indicating that plans call for construction of a third body shop that would help produce the new X7 sport utility vehicle.

According to a published Bloomberg report, Audi, BMW and Mercedes-Benz are each planning at least a fourth consecutive record of volume deliveries in China and the U.S. as the European market continues to be weak. Demand for SUV’s continues to outpace other models.

Separately, Daimler AG, the parent of Mercedes-Benz announced plans to invest upwards of $1 billion to double capacity at its Beijing production facility, to increase capacity to 200,00 units by 2015. Mercedes currently produces SUV’s at its plant in Tuscaloosa, Alabama with plans to incorporate production of it C-Class sedan in June of this year. Mercedes CEO Dieter Zetsche further indicated that his company may set-up a new plant in North America to add more capacity.

Audi, a division of Volkswagen, is constructing a $1.3 billion factory in San Jose Chiapa, Mexico that includes plans to produce the Audi Q5 SUV in 2016.

One of our Predictions for 2014 (available for complimentary download in our Research Center), called for continued momentum in the resurgence of U.S. and North America based manufacturing. In the case of the premium automobile market, a favorable exchange rate, a lower-cost labor environment and a more productive workforce are all favorable trends that adding to these significant new investments.


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