Industry analyst firm Gartner has been conducting is annual SCM Executive Conference this week. Besides educating its clients on supply chain business and technology topics, this conference serves as the platform for announcing Gartner’s annual Top 25 Supply Chain rankings. This Supply Chain Matters commentary provides our initial impressions of this year’s rankings based on our attendance at tonight’s awards dinner.
First, to reiterate our previous declarations, this commentary should not be construed in the context of positioning our own or any other analyst firm rankings, but as a voice of being an observation post of global supply chains for nearly 10 years. It is a means for social-media based interaction regarding what it takes to be recognized as a top-performing supply chain given today’s industry challenges, complexities and increased clock-speed of business.
Supply Chain Matters again extends our congratulations to each cited supply chain organization for achieving such recognition. There is obviously a ton of team focused work and commitment that goes into achieving such recognition.
Our stated impression of the 2014 Top 25 ranking was that with the exception of two new entrants, the Top 25 was essentially the same. We were not alone in that impression. Gartner obviously worked on that feedback and produced some significant surprises in this year’s rankings. The primary 2015 headlines are twofold: Amazon.com has now assumed the number one ranking despite some acknowledged marginal return on assets performance. After seven consecutive years of being ranked as primo, Apple’s supply chain enters a newly designated category of Supply Chain Elites, along with supply chain icon Procter and Gamble. Both of these supply chains now enter this separate archival category. As noted in a Twitter posting, Top 25 has become Top 27. Perhaps maybe Top 25 Plus.
We extend praise for Gartner in being creative.
As a reference for our readers, below is the announced 2015 Gartner ranking, in the context of rankings since 2010. We believe that providing this broader context is more pertinent for contrasting either the usual players vs. those supply chains on a transformative journey.
Other headlines for 2015 were fashion apparel producer Inditex jumping five spots to number five this year primarily based on peer ratings. Fashion retailer H&M jumped seven spots to the number seven rank. Gartner attributed this jump to strong peer ratings and a track record of recognized ethical supply chain practices. Specialty coffee retailer Starbucks jumped five spots to the number twelve ranking based on strong financial metrics and positive efforts in supply chain talent management.
New entrants this year included Loreal (#22) , Toyota (#24) and Home Depot (#25). Honorable mentions, or runners-up, mentioned by Gartner included BASF, Caterpillar, Hewlett Packard, Nokia, Schneider Electric and Woolworths of Australia.
Obviously, there will lots of additional commentary forthcoming related to this year’s Gartner Top 25 rankings. Some teams will be pleased and others rather disappointed after lots of hard work. Industry peers may also be surprised. There is no pleasing all in any form of ranking and consistency of measures and process are essential.
Since we are penning our commentary very late into the evening, we’ll reserve further commentary into the weeks to come.
This has been a highly visible week for Apple and its supply chain ecosystem. Included was Apple’s announcement of obscene earnings for its latest fiscal quarter and perhaps too much visibility to supply chain related information related to the newly introduced Apple Watch.
On Monday, Apple reported operating results for the March-ending quarter reporting a 27 percent increase in revenues and a startling 33 percent increase in profits. Gross margin climbed to 40.8 percent above previous Wall Street estimates of 38.5 – 39.5 percent. The overall business media headline was that Apple’s iPhone line-up is gaining market-share while commanding higher prices. The average selling price of an iPhone has risen to $659, up $60 in the last year, while iPhone shipments were up 40 percent from the year earlier period to 61.2 million units. Emerging market demand, in particular China, Hong Kong and Taiwan is reportedly fueling this latest iPad sales volume increases. Revenues associated with the Mac personal computer lineup trended positively, up 10 percent in the latest quarter, bucking an overall industry trend of declining PC sales. Apple closed its latest quarter with over $193 billion in cash, up $15 billion from December.
However, there are some warning signs. Sales for the iPad declined by 23 percent in the latest quarter, an indication of a further sales decline trend.
Yesterday, The Wall Street Journal reported (paid subscription or free metered view) that one of the key technology components within the Apple Watch has experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers. Citing people familiar with the matter, the WSJ report indicates that reliability testing has discovered that the taptic engines supplied by AAC Technologies Holdings of Shenzhen China, have demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp. have reportedly not experienced the same problem, with Apple reportedly moving all remaining sourcing of this component to Nidec. However, it may take more time for the new prime supplier Nidec to increase production volumes.
Although the WSJ indicates that it is unclear whether the tactic engine reliability has contributed to short supply, by our lens, this may explain why existing orders for Apple Watches have been in a backlog condition since product launch. On Monday, Apple CEO Tim Cook confirmed that “demand is greater than supply” for the Watch.
The WSJ further indicates that Apple has now communicated to other watch component suppliers to slow delivery volumes until June, without explaining why, which has surprised suppliers who were in full blown ramp-up. Neither AAC Technologies nor Nidec elected to respond to the WSJ in a request to comment.
The WSJ cites additional sources as now indicating that Apple is further considering the addition of a second final assembly contract manufacturer to supplement Taiwan based Quanta Computer. That second CMS is rumored to be none other than Foxconn, Apple’s principal go-to contract manufacturer when supply chain volume output challenges occur. However, even if Foxconn is brought online, it will be several months before the CMS can make its contribution to boosting output. The WSJ sources indicated late 2015 as an estimate.
As Supply Chain Matters has frequently pointed out, Apple practices dual-sourcing of key technology components as part of its supply chain risk mitigation strategy. This is especially prevalent in new product introduction and ramp-up phases. There are currently three prime suppliers for Apple’s existing iPhone LCD screens with reports indicating the introduction of another for the next model iteration of iPhone. In the case of the tactic engine report, the dual-sourcing strategy has obviously proven effective.
Finally, today’s Wall Street Journal calls attention to IHS Technology’s recent teardown analysis of a 38-millimeter Apple Watch Sport, the entry level model for the product line-up. (Paid subscription or free metered view) The IHS teardown analysis indicates that overall costs of component materials and manufacturing labor cost amount to $83.70 contrasted to a retail selling price of $349. That according to IHS equates to a 24 percent ratio for parts and manufacturing cost, lower than the average 29-45 percent equivalent cost for Apple’s other product lines. This is an indication that the Watch is a product line with even higher profitability potential. The taptic engine component noted above has an estimated cost of $16.50, the second most expensive component. The touchscreen and display module was estimated to cost $20.50, the most expensive component.
In two weeks, analyst firm Gartner will again unveil its annual ranking of the Top 25 Supply Chains. Apple has consistently commanded the number one ranking for many years, and with these latest operating results, we suspect that the Apple supply chain will again command the top spot. Financial performance alone is compelling and when considering supply chain risk mitigation and segmentation strategy, the result is obvious.
A posting on Strategy and Business (S+B) (formerly Booz and Company) portal, Demand Growing for Supply Chain Execs, has drawn some mixed views and/or headlines among supply chain media outlets. The commentary itself reinforces the good news, and sometime, not- so-good news that this author often reminds audiences about. In this Supply Chain Matters commentary, we weigh-in with our own observations and insights regarding study takeaways.
The good news that is communicated by S+B are statements that supply chain management has become of crucial concern to multinational firms. As we often remind our readers, there is not a week that goes by without business media news directly related to any firm’s supply chain management strategies and/or developments. The article further reinforces evidence that more senior executives have keen awareness and/or backgrounds within the broad tenets of supply chain management. We have pointed out in our postings, senior executives and yes, CEO’s from firms such as Apple, BMW, General Motors, McCormack Foods and others that came through the ranks of manufacturing, operations and supply chain management.
The not so good news is portrayed by a reference to a recent study conducted by Swiss Federal Institute of Technology, which is billed as to document the presence and impact of supply chain managers on large U.S. firms. More specifically, the study’s conclusion is that studied firm’s that have a Chief Supply Chain Officer (CSCO), have posted lower operating profit margins than those without one. This was the basis of mixed reactions among supply chain media.
This author will state up-front that I have not had the opportunity to review in-detail, the referenced Swiss Institute study. However, we do feel compelled to also weigh-in.
The S+B commentary clarifies that about three-fourths of the firms surveyed in the Swiss Federal Institute study had no top manager directly responsible for supply chain management. Further noted was that the percentage of high-level officers with supply chain management backgrounds is “exceedingly low”, accounting for less than 3 percent of top executives. Thus, by our view, any conclusion that firm’s with CSCO’s posted lower operating margins is not all that meaningful, since the majority of firms surveyed had no senior supply chain management leadership influence among the top ranks.
The commentary however, makes a more pertinent observation:
“It could be that firms with especially low performance and earnings tend to be the ones that need to install a CSCO in a bid to restructure operations, slash costs, and lays the groundwork for better future returns. Perhaps firms that are doing well simply have less impetus to alter the status quo.”
In other words, executives granted the broadest end-to-end supply chain leadership and accountability have certain mandates to address existing value-chain challenges and to improve business outcomes.
By the lens of Supply Chain Matters, that is the real takeaway message, namely that effective supply chain management is indeed crucial for today’s manufacturers, retailers and service providers and that the accountability for required business outcomes now jointly rests with senior supply chain executives and their other top management peers. We are transitioning from an era of measures of Key Performance Indicators (KPI’s) to those related to Key Business Outcomes Indicators (KBO’s).
The sub-headline, “There’s value in elevating supply chain management to the domain of the top management team”, is really the main headline, and should be viewed as such.
Supply chain management leaders and their teams now have the opportunity to directly impact business and bottom-line results, each and every day, and that is good news.
Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.
One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk. In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.
During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.
Now there is new news leaking from Apple’s supply chain universe. Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.
Since the Digitimes report, other Apple community blogs have amplified the report. The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.
Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.
Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains. In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.
© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.
The turmoil among consumer product goods focused supply chains promises to increase with the implication of today’s business media headlines concerning Nestle and Unilever. These implications relate to ongoing merger and acquisition developments and the continuing effects of foreign currency headwinds, which are negatively affecting U.S. producers while positively impacting European based firms.
While speaking at its Annual Meeting this week, Nestle’s Chairmen acknowledged that the combination of H.J. Heinz and Kraft Foods, being orchestrated by 3G Capital Partners and Berkshire Hathaway would create a formidable competitor, particularly in the United States. Because of this, the global CPG provider indicated to shareholders that it will accelerate its shedding of marginal performing businesses.
Readers may recall that CPG industry icon Procter & Gamble is similarly involved in a shedding of non-performing or non-core businesses.
According to a report published by The Wall Street Journal, Nestle Board Chairmen and former CEO Peter Brabeck-Letmathe indicated that Berkshire Hathaway and 3G have “pulverized” the food industry.
The CPG company has already sold off ice cream and water related businesses, has struck deals to sell the bulk of its Jenny Craig diet business as well as an ice cream business and is reported to be in talks to sell its frozen food business. The CEO further indicated that Nestle needs to better leverage its global scale more effectively. According to the WSJ, that could imply even more added pressure on suppliers for better buying terms.
Earlier today, Nestle announced its operating results for the March-ending quarter. Those results included an overall 4.4 percent organic growth of which 2.5 percent was attributed to pricing moves. Sales increased a mere 0.5 percent with the effects of negative foreign exchange attributed to 4.5 percent. In its full-year outlook, the company remained committed to achieve organic growth of around 5 percent while improving margins.
That level of sales growth challenges many of today’s large global CPG producers.
The positive or not so positive shadow of foreign currency effects was further evident in the operating results of Unilever, whose first-quarter total sales rose 12 percent largely due to the effects of a stronger valued U.S. dollar, amounting to a 10.6 percent boost. Once more, Unilever indicated that factoring current exchange rates, its full-year earnings growth would be in the 7-8 percent range.
On the flip side, U.S. headquartered CPG producer Colgate Palmolive indicated a 9 percent negative impact on sales while Procter and Gamble indicated in January that it was anticipating currency swings to curb profit by as much as 12 percent.
Thus the pending Heinz-Kraft combination coupled with the current foreign currency shifts is indeed precipitating more industry turmoil. Many CPG businesses are being pitched for sale and/or consolidation.
When penning our Supply Chain Matters commentary related to the Heinz-Kraft announcement we opined that a clear message was now sent to consumer product goods supply chains that business-as-usual was no longer acceptable, and that further industry changes and developments were inevitable.
Add the current effects of currency and those in the industry negatively impacted may well initiate changes in product sourcing, promotion and distribution to help offset currency effects. Meanwhile, product innovation in more natural and less processed foods remains the key to longer term growth, whether by acquisition or by supply chain sourcing and development.
There is literally a new playbook for global based CPG firms and their respective supply chain teams, and be prepared for constant change in the months to come.
Since the beginning of the 2014 holiday fulfillment surge period in September of last year, Supply Chain Matters has featured commentaries related to potential impacts to multiple industry supply chains located in the United States. This week, the ISM PMI Index provided quantification of such impacts.
We provided numerous commentaries, insights and updates related to the U.S. west coast port disruption that dragged on past December and into early this year. Those ports are still trying to recover and multiple manufacturing and retail focused industry supply chains were impacted by the delayed arrival of components and finished products. We featured two commentaries on the current surge in the value of the U.S. dollar, and its impact on U.S. imports and exports. Finally, weather patterns brought severe cold and winter storm conditions across the U.S., particularly among the northeast states and across the New England region.
Earlier in the week, the Institute for Supply Management (ISM) disclosed the PMI value for March which indicated the fifth consecutive month of decline and the lowest reading since May 2013. The March value of 51.5 while a continued indication of expansion is considerably below the average PMI reading of 57.7 recorded for the 3 months in Q4. U.S. supply chain activity led all global regions throughout 2014 but has since fallen back due to headwinds.
According to ISM, PMI survey participants indeed pointed to lingering problems from the west coast port disruption, unusual winter weather and the stronger dollar as current challenges. Noted was that 11 industries reported slower supplier deliveries in March. Export orders declined for the third consecutive month. Eight industries reported higher inventories in March which could likely be an indicator of select shortages of key components or unplanned contraction in product demand. According to the ISM report, customer inventories were noted as being too low, yet another indicator of disruption. The Backlog of Orders index declined two percentage points from the February reading. There were mixed indications relative to the current lower cost of crude oil.
However, based on trending data, ISM indicates some optimistic news indicating a likely rebound in the index in the coming months. Of the total 18 industries reported in the index, 10 of these industries reported growth in March. Nine industries reported growth in New Orders as well as growth in Production.
We will have further insights when we produce our review of select global-wide PMI Indices in our March quarterly newsletter. All registered subscribers of this blog automatically receive a copy of our quarterly newsletter. You can register via the Join Our Mailing List box located on the right side panel.