In conjunction with its Supply Chain Executive Conference being held this week, Gartner announced its often touted Top 25 Supply Chain Rankings for 2012. Supply Chain Matters provides readers an easy reference, not only to the 2012 rankings, but to previous ranking history:

To probably no reader’s surprise, Apple again tops the list for the third year in a row, despite some negative publicity this year. Another interesting side note, yesterday, The Wall Street Journal published a listing of the 20 highest-paid CEO’s in 2011.  Apple CEO Tim Cook tops that list with total 2011 compensation at close to $378 million. Mr. Cook, who is a highly experienced supply chain and operations executive, is obviously reaping the rewards of a supply chain completely aligned with business outcomes.  Congratulations to the entire Apple supply chain organization for their #1 recognition for the third straight year.

In terms of overall headlines for the 2012 rankings, Supply Chain Matters shares some of our observations.

We were pleased to note the addition of Caterpillar, Cummins and Kimberly-Clark to the 2012 ranking.  We were also pleased to note that Cisco was cited for its supply chain risk mitigation capabilities along with network collaboration and overall response management. All are well-deserved. Six major retailers were included in the 2012 rankings, up from four in the 2011 rankings. The supply chains with the most positive upward movement were Intel, McDonalds and Coca-Cola. Largest decliner was Research in Motion, slipping to #19 from #4 in 2011. The challenges of RIM in product innovation and management leadership have become highly visible.  Many in the Top 25 ranking have made leveraged investments in supply chain software technology to augment key process capabilities, collaboration and decision support.

Our biggest disappointment, as was the case last year, was noting that Johnson & Johnson would again appear in a top 25 ranking.  Readers of this blog can attest to our view that a litany of quality process breakdowns, multiple product recalls, and failure to have backup production plans for critical life-saving cancer drugs do not portend to meet the criteria best practices or cross-fertilization of ideas in process innovation.  We question how peer and analyst rankings can continue to place J&J above so many other well qualified supply chains. Another continued disappointment is the omission of the automotive group at Hyundai who has made remarkable strides in product innovation and industry market share gains, supported by a vertically integrated supply chain strategy. On the subject of automotive, Nissan demonstrated noticeable supply chain resiliency post Japan earthquake, gaining market share from both Toyota and Honda. In the category of remarkable turnaround should be Lenovo. We again note the absence of major contract manufacturer Hon Hai Precision Industries and its Foxconn contract manufacturing arm.  Perhaps Gartner’s Asia Pacific regional rankings will finally recognize this extraordinary supply chain that demonstrates scale and resiliency.

Dropped from the Top 25 ranking this year was IBM, Microsoft, Kraft Foods and Tesco.  Nokia which was once number one many years ago was dropped in 2011.  Electronics retailer Best Buy, currently dealing with significant business and senior management leadership challenges was dropped in 2010.

The unfortunate aspect of the Gartner Top 25 rankings is the high threshold of corporate revenues, which was set at $10 billion for the 2012 rankings.  Small and mid-market manufacturers, retailers and major distributors can also demonstrate world class supply chain process capabilities but often are lost in the tendency to focus on large enterprises with healthy budgets.

Bob Ferrari

Over the past two days, Supply Chain Matters joined over three hundred attendees for the The Future of U.S. Manufacturing Conference, jointly sponsored by the MIT Leaders for Global Operations, MIT Industrial Liaison Program, and MIT Forum for Supply Chain Innovation.  In our Dispatch One commentary, we provided some initial impressions from the first day of the conference, while our Dispatch Two commentary provided highlights of day two.  In this final commentary, we will highlight observations and important takeaways garnered from the entire conference.

We begin this summary impressions commentary by highlighting the final wrap-up session of the conference.  Professor Charles Fine of the MIT Sloan School of Management and noted author of book Clock Speed, was superb in helping the audience to focus on some key takeaways, and we begin there.

Takeaways were described as:

Manufacturing needs innovation and innovation needs manufacturing- Dr. Fine made the observation that disruptive process innovation is just as important as disruptive product innovation.  We as consumers can certainly cite Apple for its continuing legacy in disruptive product innovation but should also context companies such as Toyota, Southwest Airlines or McDonald’s for their tenets of process discipline and standardization. This author might add that as a supply chain community, we tend to focus on the incredible scale and influence that Apple may have on contract manufacturer Foxconn, but Professor Fine reminded the audience of companies like Compaq, Nokia and Dell who might have lost the edge of innovation through a higher dependence on contract manufacturing and value-chain capability. During the two days of this conference, there were a number of observations related to the power of co-locating product development with manufacturing and the important benefits of having collaborative and timely two-way interchange of ideas and concepts among each group. The implied conclusion is that innovation and manufacturing go hand-in-hand, and physical co-location is an important benefit to speed and agility of innovation.

Manufacturing is people- the requirement of increased manufacturing skills imply both “hands and brains”. A consistent message from presenters and panelists was the notion that motivated people drive faster improvement and people respond when their skills are respected and when contributions are valued. While the U.S., like any other country, has its unique differences, the value of attracting and preparing adequately skilled people for manufacturing occupations is an obvious need.

Attracting more young people to manufacturing or even supply chain careers has to translate to a belief that contributions to these areas matter monetarily and professionally. The community must somehow mutually share in the both benefits. One sobering statistic shared with the audience is that only 17 percent of U.S. school systems encourage students to pursue careers in manufacturing.

Firms complain that they cannot fill existing openings.  We submit these same firms need to challenge the long-term commitment of their own organizations to ascertain what other actions and/or joint initiatives can be undertaken to fulfill skill requirements.  As one panelist pointed out, people drop out of community college or training programs when they cannot see the end-result being a job or an occupation that has lasting short or long-term value.

Entrepreneurship- Fine observed that much of the private industry representation at this conference came from very large, global manufacturing companies without necessarily hearing the voice of smaller up and coming firms dealing with innovative products. He suggested two thoughtful tenets:

• Small entrepreneurs who master operations are more likely to grow-up to be large enterprises and employers.
• Small entrepreneurs who master operations are less likely to outsource or offshore operations.

These tenets triggered some other thoughts for this author.  In supply chains, especially in the high tech and consumer electronics sector, there has been a total dependence on the contract manufacturing services model.  The basis of these models was to allow innovation and investment to focus on product design, marketing and demand generation, without tying up capital and assets in manufacturing and/or operations. Perhaps hidden from those unfamiliar with the tenets of supply chain management was the risk of outsourcing a firm’s operational and value-chain innovation skills. If you were to ask supply chain professionals in high tech if contract manufacturing would ever return to the U.S., their answer would be no, primarily because the core value-chain capabilities down the supply chain are also outside of the U.S.

Finally, a couple of closing observations from our admitted supply chain bias. The tide of movement toward U.S. manufacturing is clearly evident right now, but cannot in any way be considered a lasting trend without continued candid dialogue on some of the challenges and needs brought out in this conference.  It was heartening to hear CEO’s and senior leaders state that manufacturing does matter in any vibrant economy, and that the U.S. requires a vibrant industrialized economy built on world class manufacturing and supply chain capabilities.

Beyond just one conference comes a commitment to collective action. We need to hold government, industry, academia and collectively ourselves, as a collective community, accountable not just to surfacing the challenges, but demanding action and forward movement from our leaders. As was clearly articulated by the CEO of Novartis, Joseph Jimenez, the future is determined by either the actions or inactions taken right now.

Continue to elevate the conversation in your firms, in schools, universities, your community, and with your U.S. federal and state legislative leaders.

Bob Ferrari

Supply Chain Matters joined over three hundred attendees for the The Future of U.S. Manufacturing Conference, jointly sponsored by the MIT Leaders for Global Operations, MIT Industrial Liaison Program, and MIT Forum for Supply Chain Innovation.  In our previous Dispatch One commentary, we provided some initial impressions from the first day of the conference. In this commentary, we highlight day two as well as some important takeaways.

Last evening, upon reviewing our notes from day one of the conference, it was a bit difficult to synthesize some overarching themes and messages emanating from the many presentations.  In day two, the themes became clearer.

The morning began with remarks from MIT President Susan Hockfield, who reminded the audience  that manufacturing represents over 12 million jobs for the U.S. and that manufacturing companies employ two-thirds of scientists and engineers in the economy.  She also provided a reminder that when MIT was founded in 1861, its initial mission was to speed the industrialization of the U.S.. That mission has morphed to global perspectives, but at the same time, MIT has recognized its role to help in the current research related to the new importance and required competitive capabilities of U.S. based manufacturing.

Ms. Hockfield than introduced U.S. Secretary of Commerce John Bryson, who spoke to the critical importance of the upcoming recommendations related to the President’s Advanced Manufacturing Partnership (AMP) of which MIT is among a small group of premier academic institutions contributing to this initiative.  Secretary Bryson highlighted three important areas that will be addressed in the first report of AMP:

• Improving the business climate for manufacturing companies
• Improving the talent pipeline for required manufacturing skills and talent recruitment
• Enabling further innovation within manufacturing.

The Secretary also reminded the audience that manufacturing economy has helped to lead the U.S. out of global recession, accounting for over a half million jobs.  That may be interpreted by some as a political statement in a Presidential election year, but none the less, it is a profound statement that reinforces the fact that the U.S. needs to refocus on moving toward a broader based manufacturing economy. The Secretary also added that Washington does not have all the answers, and that it must continue to look to partnerships of private industry, labor and academia to provide recommendations and roadmaps.

Cindy Estrada, Vice President of the United Auto Workers provided a passionate but eloquent perspective on the changing role and voice of unions in this ongoing dialogue. She thanked the conference organizers for inviting labor to overall discourse and reminded the audience on the actions and collaboration that the UAW played prior to and during the 2008-2009  auto crisis in the U.S..  Ms. Estrada also reminded the audience on the overall negative impressions that unions seem to have in media and business reporting, and that actions of the past are not necessarily reflections of today and the future. Her statement was that unions seek a level playing field, not just in fair wages and benefits, but collaboration and voice from the shop floor.  Her most profound statement, which we tweeted, was that you cannot have a legitimate conversation regarding the future of manufacturing without worker input regarding eliminating waste, improving quality or fostering more process innovation. We would add, union and non-union. That statement was later reinforced by Diana Tremblay, Global Chief Manufacturing Officer of General Motors who provided some praise for the new collaborative actions of UAW members in identifying and helping to solve manufacturing related problems.  A sobering reminder was Ms. Estrada’s observations that much additional work remains within the automotive value-chain where some suppliers have yet to reach beyond previous management and labor behaviors of obstructing worker participation in joint problem-solving.

There was an outstanding presentation delivered  by Joseph Jimenez, CEO of Novartis on the defining moment on the future of manufacturing in the U.S., which outlined  some rather significant manufacturing process investments not only being made in the U.S., but also on some potentially game-changing joint research with MIT on transforming pharmaceutical manufacturing from previous specialty batch to a more innovative and far less costly,  continuous manufacturing process.

Another significant highlight was a panel discussion focused on workforce of the future, moderated by William Green, Executive Chairmen of Accenture.  The panelists were:

• Diana Tremblay of General Motors
• Cindy Estrada of the UAW
• Denise Johnson of Caterpillar
• Professor Thomas Kochan, Co-Director, Institute for Work and Employment Research, MIT Sloan School of Management.

These panelists provided many insights on what may be required to fill the requirements of an entirely different skilled manufacturing workforce, on the complementary needs for joint leadership skills among manufacturing managers, and how to get younger people from the K-12 to the community college level far more attracted to a career in manufacturing. The panelists observed that the current perceptions of manufacturing among younger people is sometimes reflected in negative connotations of being a non-rewarded occupation in a sometimes dirty environment that requires long hours that begin early in the morning. Professor Kochan reminded to the realities of current data indicating that the U.S. needs 20 million jobs just to return to post-recession levels, and that 5-7 million of these jobs have to be contributed from the manufacturing sector. This requires political will and commitment to make the necessary investments in programs and initiatives and better alignment of all stakeholder groups.

This concludes our commentary of day two of this important and timely conference.  Our final commentary will reflect on our view of the key takeaways that both the conference and audience dialogue brought forward.

Bob Ferrari

Supply Chain Matters just came across a timely article published by Forbes, Apple’s Secret Plan for Its Cash Stash that we recommend for mandatory reading and discussion among senior supply chain and procurement sourcing executives in the high tech and consumer electronics sector.

In the article, author Connie Guglielmo cites an assessment made by Katy Huberty, a Morgan Stanley analyst that Apple may be deploying a portion of its current, rather lucrative capital appropriations budget in buying dedicated production equipment to outfit new and existing facilities within its existing supply chain. The author also cites unnamed sources who follow Apple as indicating that Apple is already executing this plan. The premise is that with a majority of current cash sitting in offshore accounts, protected from higher U.S. tax rates, that capex spending on expanding offshore capacity is a compelling use of this cash.

More importantly, the plan, as outlined, was cited by Morgan analyst Huberty as “frankly ingenious” and Supply Chain Matters would add the term brilliant. By providing dedicated production equipment to suppliers for sole use in producing Apple products, Apple can both lockout other competitors to supplier capacity in producing mobile phones or tablets and relieve certain suppliers of the risk of volatility in planning output levels  and incurring expensive capital costs. Apple has the opportunity to benefit from future depreciation expense benefits while its huge production volumes are assured by basis of owning its own production equipment.  The plan, if carried out, challenges the classic contract manufacturing model that has a premise of transferring expensive manufacturing assets to a supplier in order to achieve higher return-on-assets.  Given the recent labor practice audits underway CM provider Foxconn, we would logically assume that Apple may also consider higher levels of factory automation in its capex planning. Huberty estimates that a combination of strategies related to Apple’s pre-payment to suppliers for products coupled with a dedicated investment in production equipment could translate to a 15-20 percent cost savings per year, as well as afford the opportunity to produce lower cost versions of Apple products for broader geographic markets. That analysis may be conservative.

Of course, the success of this plan is highly dependent on Apple’s current suppliers, and in a certain sense, the reaction of consumers.  Removing equipment expense and providing more automation reduces a contract manufacturer or supplier to that of host supplying direct labor and utilities, limiting opportunities for margin growth. On the one hand there are compelling benefits, on the other, it can lockout certain suppliers from integrating further value-added components in their production strategy as well as lockout any potential future thrusts to release their own branded mobile phones, tablets or television products, at least not, involving Apple owned equipment. Keeping other customers will involve the need for more space and capacity, with the question of who funds that expense.  On the consumer side, the open question remains as to whether Apple’s investment in advanced production equipment cannot be made in country where the majority of Apple products are being sold.

Whether or not this plan comes to full fruition, industry executives representing both large and smaller firms had better be keeping abreast, since Apple may well be exercising a disruptive strategy that shifts industry supply chain balance for years to come.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

Supply Chain Matters recently provided a commentary on the potential resurgence in U.S. based manufacturing and specifically called attention to an upcoming MIT Leaders for Global Operations hosted conference, The Future of U.S. Manufacturing in the U.S..

We had the opportunity to speak with Dr. Donald B. Rosenfield, the Director for MIT’s Global Operations Program. Dr. Rosenfield’s research focuses primarily in manufacturing strategy and supply chain management and is a co-author of Operations Strategy, Competing in the 21^st Century, among other publications.

In our interview, Dr. Rosenfield discussed the background and goals for the upcoming MIT hosted conference. Recent shifts in the world economy, concerns for rising energy and direct labor costs involving current low-cost manufacturing regions, and needs for increased product and process innovation have sparked a renewed interest in U.S. based manufacturing among global firms. While shifts in economics, particularly labor costs within the southern coastal regions of China, have caused manufacturers to revisit strategies, the longer-term perspective for investments in U.S. based manufacturing will center on improvements in innovation capabilities.

The U.S. Presidential Commission on Manufacturing Competitiveness has also raised awareness to the importance of a manufacturing-based economy. This two day conference also coincides with the one-year anniversary of the Obama administration’s Advanced Manufacturing Partnership (AMP), a national effort co-chaired by MIT.

Dr. Rosenfield anticipates that conference attendees should expect to hear speakers address:

• The important imperatives for encouraging and sustaining U.S. resident manufacturing efforts.
• The categorization of specific needs in terms of policies, skills and workforce training.
• Some consensus on what policies need to be pursued among industry, government and academia.

A number of panel discussions and speakers will address the topics of innovation in manufacturing, workforce needs, and barriers to success in manufacturing. U.S. Secretary of Commerce John Bryson is expected to speak along with Bob King, President, United Auto Workers. Other speakers include senior executives representing Amgen, Boeing, Caterpillar, General Electric, General Motors, Johnson and Johnson, Spirit Aero Systems, among others.

We alert our readers responsible for manufacturing and supply chain strategies to consider joining Supply Chain Matters in attending this timely and important two-day conference which will be held May 8 and 9 on the MIT campus in Cambridge Massachusetts.  Dr. Rosenfield informed us that as of today, there are already 200 attendees registered for the conference, and prompt registration is advisable.

You can access the conference information and view a video overview from Dr. Rosenfield by either clicking on the MIT LGO logo located within our Conferences panel (right-hand side), or clicking on this conference link.

Bob Ferrari

Tomorrow, a new chief executive, Kazuo Hirai, will outline the specifics of a broad and painful strategy to turn around consumer electronics producer Sony.

The company is in crisis mode.  For the fourth time in less than a year, Sony had to slash its earnings outlook. It is currently on-track to announce the deepest financial losses in the company’s history, along with the fourth straight year of non-profitability. Current forecasts are that Sony will incur upwards of over a $6 billion loss for the fiscal year.

Mr. Hirai has taken the reigns from former chief executive, Howard Stringer, and has promised decisions necessary to return the company to profitability. Those decisions are reported to include major headcount reductions in the order of 6 percent of its global workforce and other painful operating decisions that concern its various businesses.

Supply Chain Matters has provided many ongoing commentaries concerning Sony’s business and related supply chain challenges. As far back as March and November of 2010, Supply Chain Matters noted major supply chain implications of an aggressive production outsourcing strategy with overly optimistic forecasts of Sony’s planned television output levels in the midst of a cutthroat market that was ripe for consolidation. Sony wanted to aggressively attack the 2010 holiday buying season with optimistic sales forecasts but limited supply chain follow-through.  Sony also failed to recognize consumer buying sensitivities to price over brand loyalty. In August of 2011, after the June ending quarter results, we noted how Sony executives continued to iterate the importance of the television business even though it continued to have over optimistic output and revenue forecasts. We speculated on S&OP whiplash as television output levels were slashed 19 percent in a matter of two months. In November, Sony announced a major restructuring of its TV business which included high volume contract manufacturing as a dedicated focus.

While all of this has been occurring, Sony’s supply chain teams have had to overcome the significant impacts of the March 2011 earthquake and tsunami and the later tsunami floods that impacted Thailand.

This week, the Lex Column of the printed edition of the Financial Times made the observation that in light of the current crisis, Sony’s workers have to be frustrated.  Previous large investments in restructuring have yielded limited results. The column also opined that Sony has been a terrible company for decades in terms of long term return on equity, and if the company has any chance of recovery, it should cease retrenching and start investing in its future.

From our lens, we believe that Sony’s future must include an emphasis on externally focused supply chain innovation. We continue to believe that Sony’s teams need to internalize the implications of more external faced value chain activities and their implications for more advanced supply chain capabilities. As more value-added component sourcing, production and logistics are outsourced to contract manufacturers and trading partners, Sony will require enhanced supply chain visibility and decision-making capabilities. A previous culture of rigidity in product demand forecasting needs to be replaced with product demand sensing and response capabilities linked to constantly changing consumer needs and market trends. The company’s internal S&OP teams can benefit from more scenario-based planning and coordinated execution and fulfillment capabilities.

Our respectful message to Mr. Hirai and the extended management team is to continue to make the required painful decisions required to restore Sony to greatness, and include in these decisions the need for business culture changes. At the same time, recognize that Sony’s supply chain capabilities need to be augmented to the business outcomes required in its future business models.

Now is not the time for wholesale supply chain cost cutting, nor unlimited process and technology budgets. Rather, it can be the time to focus on the differentiated supply chain process capabilities required to restore Sony to product innovation and competiveness in its future markets.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.