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Tesla Reports Q4 and 2016 Financial Performance with Most Eyes Affixed on the Model 3 Supply Chain

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Electric-automobile and solar power producer Tesla reported fourth quarter and full year 2016 results this week but it seemed that most eyes are focused on the ramp-up of the new Model 3 volume ramp-up production and supporting supply chain strategies. Tesla_Flag

On the financial front, the company reported mixed results. Q4 automotive revenues were reported down by 7 percent on a quarter on quarter basis while total year revenues increased 69 percent from the year-earlier period. Q4 gross margin in automotive nearly doubled from the year-earlier quarter while full year gross profit for automotive increased 74 percent.

Equity analysts remained concerned about Tesla’s current and anticipated cash-burn rate, particularly since the new Model 3’s ramp-up will require added capital spending. The Wall Street Journal today observed that total liabilities now stand at nearly $18 billion, compared with $7 billion a year ago. Total cash on-hand amounts to $3.4 billion with speculation that the company must raise additional capital. A further development is the pending departure in April of the firm’s current CFO Jason Wheeler who will be replaced by Deepak Ahuya, Tesla’s initial CFO for more than 7 years.

In this week’s letter to stockholders, Elon Musk, Chairman and CEO indicated that in the past quarter, combined net orders for the Model S and Model X increased 49 percent compared to the same period in 2015.  Vehicle production increased by 77 percent over the year-earlier period. I

In January, Tesla reported that it produced a total of 83,922 vehicles which was at the low-end of its mid-year forecast for producing between 80,000-90,000 vehicles in 2016. During the final quarter, the auto maker produced 24,882 vehicles, many of which were delayed until December because of a what have been described as short-term production challenges starting in late October and extending to early December. Like the rest of the auto industry, Tesla remains challenged by a gap of finished goods produced vs. vehicles actually delivered and signed for by customers. In the final quarter, the gap between vehicles produced and vehicles delivered was 2682 vehicles, which will be counted in the new fiscal year as revenue.

Yet, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles on an annual basis by 2018.

We previously alerted our readers to a published report that Tesla began pilot production of the new Model 3 vehicle earlier this month, to coincide with this week’s report to shareholders. In this week’s letter to shareholders, Musk declares that Model 3 product development, supply chain and manufacturing are on-track to support volume deliveries in the second-half of this year, while installation of manufacturing equipment is underway at both the Fremont California and the Nevada based Gigafactory. The company expects to invest somewhere between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production and by our lens, there is little tolerance for missteps in engineering and process design.

Upwards of 400,000 paid deposit reservations are believed to have been made so that prospective Tesla customers can be assured of a Model 3 delivery slot. Tesla executives however refuse to cite any number related to Model 3 deposits.

Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines. In this latest letter to shareholders, there is a statement indicating that all Model 3-related sourcing is on plan to support the start of production in July.

During the Q&A phase of management’s briefing to equity analysts regarding the latest financial results, there were multiple questions related to further background for the Model 3 ramp-up. Musk re-iterated that the goal for the Model 3 is to have production rates of 5000 per week by the end of this calendar year and that current supplier parts orders begin to ramp to increased volume cadence from July through September. He reiterated that the auto maker has refocused most of Tesla’s engineering, including design engineering into designing the factory. “I think in the future, the factory will be a more important product than the car itself.” Also stated: “I’ve said this before, but our goal is to be the best manufacturer on Earth. This is our real goal. I don’t know if we will succeed, but I think we’re making good progress in that direction.”

Responding to a question on the difference in the Model 3’s design, executives indicated that the amount of complexities in the overall design and vehicle complexities to assemble the newer, lower priced but higher volume model have been dramatically reduced, while the amount of operations that involve more judgment from production operators have been dramatically reduced, or almost eliminated. The Model 3 was described as designed for manufacturability.

A further acknowledgement was learning from the previous Model X production ramp-up where complex design changes hampered ramp-up, bottleneck and cost efficiency milestones, which we have pointed out in prior blog postings related to Tesla.

Another difference noted by Musk is that in earlier models, it was rather difficult to recruit established automotive tier-one suppliers for long-term supply contracts because Tesla was viewed as a start-up with financial risks. For the Model 3, component and subsystem supply contracts have been established with some tier-one suppliers and there is now renewed confidence in supplier capabilities to meet design, quality, and volume commitments.

Supply Chain Matters has previously praised Tesla’s vision, innovative thinking and its can-do perspectives concerning supply chain and distribution. Many eyes are now focused on Tesla’s next critical milestone, that being the ability to operate as a high volume, disciplined manufacturer of industry-leading and technology-laden innovate automobiles.  As many of our readers are well aware, Tesla is now embarking on a full-blown supply chain segmentation strategy, one that differentiates capabilities of full-featured, higher-priced vehicles from that of the high-volume, lower-priced Model 3.

The year 2017 will be the crucial test.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Predictions- Apparel and Footwear Producers and Respective Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

In prior industry-specific predictions posting, we dived into Automotive Supply Chain Residing Across North America .

We then dived into Commercial Aerospace Manufacturing Supply Chains.

Next came B2C, B2B-to-C and Traditional Retail Focused Supply Chains.

Next-up:

Apparel and Footwear Producers and Respective Supply Chains

Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel.  Apparel supply chains are global in nature with many interlinked flows and sometimes, hidden flows. Because of the high content of direct labor involved in the production of apparel and footwear, the cost of direct labor is a prime determinant as is the overall cost of transportation to move goods to designated geographic markets.

U.S. consumers have become very accustomed to expect cheaper apparel prices.  More affluent consumers demand higher and latest fashion and have been willing to pay a premium price for availability. The Trump Administration policies to initiate business tax reform and protect U.S. jobs will likewise have a significant impact to apparel and footwear supply chain sourcing and pricing strategies.

The geopolitical forces of increased trade protectionism is expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing NAFTA agreement, the goods flow freely and duty-free across borders in North America.

Any threat of a trade war among the U.S. and China, or a border adjusted tax on goods imported from other countries, will have a dramatic impact on apparel and footwear financial margins.

At the same time, traditional retailers are under enormous profitability pressures in 2017.  Retailers with volume buying clout may well force suppliers to shoulder the burden of increased footwear and apparel costs. They likewise can continue to turn a blind eye to the ongoing and elusive practices of hidden sub-contracting of production among low-cost region apparel producers. Similarly, industry efforts directed at better and fairer enforcement of social responsibility practices related to sub-standard factory working conditions and excessive daily labor hours’ burdens of apparel workers in low-cost global manufacturing regions could be re-railed by a new round of industry cost burdens.

Smaller, more specialty retailers may have little choice but to pass along cost increases in higher prices. More popular branded or in-demand producers may be able to pass along price increases as-well, but that can be risky.

Industry disruptors focused on “fast fashion” business strategies have been leveraging supply chain near-shoring strategies to provide far more agile responses to the latest and most prominent fashion trends. Their appeal to higher margin, in-demand fast fashion supports higher pricing and thus flexibilities to support near-shoring of fast production. The key to fast fashion has proven to be more agile supply chain sourcing strategies and that will expand in 2017. That may prove to be a significant strategic advantage and opportunity in 2017, but here again, if the existing NAFTA agreement is changed or eliminated in 2017, such strategies will need to be revisited or altered.

This concludes our 2017 prediction related specifically to apparel and footwear industry supply chains. Next up in the industry-specific category will be pharmaceutical and drug supply chains.

A final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


2017 Industry Specific Predictions- B2C, B2B-to-C and Traditional Retail Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.

As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America .

We then dived into Commercial Aerospace Manufacturing Supply Chains.

Next-up:

B2C, B2B-to-C and Traditional Retail Focused Supply Chains  hands-typing-4

In August of 2016, The Ferrari Consulting and Research Group, published a research advisory titled: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains. (Available for complimentary downloading in our Research Center) The prime takeaways from that advisory was that 2016 marked the beginning of the newest phase of B2C online retail fulfillment, namely the consequences of permanent changes in consumer shopping habits beginning to impact the long-term presence of brick and mortar retail and their supporting supply chain strategy frameworks.  Consumer preferences and desires have permanently changed in retail, and online platforms and consumer loyalty programs such as that of Amazon are rapidly garnering consumer loyalty and dependence. Amazon itself continues to pose a serious threat to traditional retailers as well other consumer-facing businesses, but the increasing cost challenges of online fulfillment and transportation also present an ongoing challenge for the industry as-well.

In early 2017, with the bulk of results of the industry all-important 2016 holiday fulfillment quarter now reported, the implications of permanent reductions in physical foot traffic among traditional retailers have become ever more profound. While retail sales grew an overall 4 percent during the holiday period, online sales will likely have increased in a range of 16-20 percent. Traditional retailers such as Kohls, Macys, Sears and Target reported declining sales involving physical stores.  Additional store closings are planned for 2017 as our efforts to invest more in online capabilities. Wal-Mart announced two rounds of headcount reductions in 2016, one involving retail store support positions and one involving a trimming of corporate staff including some initial online commerce executives an IT support staffers.

Amazon’s juggernaut as a dominant online retail platform notched more consumer market-share with one estimate indicating the online retailer captured nearly 40 percent of total online holiday focused sales.  The online retailer further demonstrated the first clear signs of integrated logistics, transportation and last-mile fulfillment that has been deployed since late 2015. Traditional retailers have now learned that competing head-to-head with Amazon is a daunting and rather expensive effort, with a likely better strategy being that of a differentiated strategy that emphasizes customer fulfillment capabilities that Amazon cannot. Retailer Best Buy has been the best example among specialty retailers while Dollar Shave Club served as a great example in the online services segment. There are opportunities and they will more than likely be focused segments that emphasize the brand and the experience.

As predicted in 2016, and now again in 2017, the retail industry will continue to come to grips with the notions that the physical store is now the virtual online store, and that the physical store may be one advantage over Amazon.  In this new online dominant environment, merchandising is now about analytics-driven knowledge of customer needs and inventory management is anchored in more sophisticated item level planning that involves the end-to-end supply chain supporting all retail fulfillment channels, both online and physical.

The physical store now serves as an extension of online, and supply chain strategy and business process must accommodate or influence this changed thinking. The supply chain is not a cost center to essentially support inventory warehousing and store replenishment, but rather a collection of collective capabilities directed as supporting an Omni-channel customer fulfillment capability.  In 2017 and beyond, the alternatives are in-house, outsourced, or hybrid capabilities.

The same principles apply to outsourced logistics, transportation and customer fulfillment partners. In addition to customer-facing capabilities, it is now clear that what Amazon has been building is a well thought out, customized online retail logistics, transportation and last-mile fulfillment capability to support multiple merchants in addition to Amazon. Third-party logistics and transportation providers seeking continued partnerships with retailers need to think more innovatively as well.

We predict that retail industry supply chains will begin to improve capabilities at supporting analytics-driven, demand-driven planning, multi-channel and more intelligence based customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics. The concepts of supply chain segmentation strategy will continue to take hold among traditional retailers supporting both online and physical stores.

The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-Suite executives. Supply chain leaders will either get on board with integrated capabilities or suffer the same consequences.

The industry implications and trends are compelling as well as inescapable in 2017 and the retail industry and its associated supply chains must adapt or suffer the consequences.  It’s tough messages, but then again, this an industry dealing with unprecedented forces of change.

 

This concludes our 2017 prediction related specifically to retail industry supply chains. We are still in the process of finalizing data and inputs for other industry specific supply chain sectors and expect additional postings next week.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


2017 Industry Specific Predictions- Automotive Supply Chains Residing in North America

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. We trust that our Supply Chain Matters readers are garnering insights from these prediction sand they have been helpful for setting objectives and work agendas in the coming year.

We have one prediction remaining which for this year is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year. This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.

As Editor, I has also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be posting these industry-specific predictions in a faster cadence.

We begin, to perhaps no one’s surprise, with the North America based Automotive sector.

 

Automotive Supply Chains Residing Across North America ford-f150_450

We cite unique challenges for automotive supply chains residing across North America for two specific reasons. One relates to the ongoing industry dynamics related to accommodating product demand mix with inventory and capacity levels. The other with the potential impact of the new Trump Administration policies related to both North America and global trade that has certain automakers in the cross-hairs of direct Presidential criticism, and of U.S. Congressional efforts directed at U.S. corporate tax reform policies.

Sales Trending

Record low gasoline prices in the first-half of the year boosted U.S. light vehicle auto sales to hit a record high of 17.6 million vehicles in 2016. That number was only slightly larger than the 17.5 million vehicles sold in 2015. Strong sales momentum in December reflecting 1.7 million vehicles sold during the last month had pushed the seasonally adjusted annual selling pace momentum to 18.4 million vehicles.

Of the total vehicles sold in the U.S. during 2016, 60 percent were classified as higher-margin light trucks. Promotional discounts heavily influenced sales of sedans and compacts, with the growth in demand for pricier pick-up trucks and SUV’s generally boosting auto maker profit margins.  That helped to fund innovation efforts directed at autonomous vehicle technologies and efforts to meet stricter emission standards in future years. At the end of the year, the industry-wide average of new vehicle unsold inventories was the equivalent of three months, while the average of U.S. big-three automakers averaged upwards of 100 days of unsold inventories.

Looking to 2017, some auto dealers were uncertain if the sales momentum would last, given the current length post-recession sales cycle and the growing credit burden of U.S. and North American consumers in outstanding auto loans. Finished goods inventory levels for certain auto and truck models trended higher in the final quarter and some U.S. based OEM’s elected to curtail factory output levels and lower inventories in late December and January. Factory headcount cutbacks were further being exercised.

The challenge for automotive product management, supply chain management, sales and operations planning teams in 2017 will therefore be effectively managing model and volume mix sales and production output and overall inventory levels while maintaining or exceeding line-of-business goals related to product margins and profitability. To cite just one-example, the traditionally largest selling sedan in the U.S. market has been the Toyota Camry. As we publish this prediction in early February, Toyota reported a 25 percent decline in Camry demand while the smaller RAV 4 SUV outsold the Camry in January.

A singular planning framework can sometimes be a daunting challenge for automotive producers with independent product business groups. The problem can come-down to unaligned business processes and a lack of consistent data and information standards. In October, we featured a Supply Chain Matters commentary reporting on how Ford Motor was addressing such challenges in an effort towards a singular, global S&OP planning framework.

From the longer-term perspective, consumer affinity towards ride-sharing services, higher tech electronics and autonomous vehicle capabilities and IoT enabled vehicle services weighs heavy on future model product planning. The open question is how long will most North American consumers favor trucks and all forms of SUV’s vs more fuel-efficient smaller cars and traditional sedans. It usually comes down to the average cost of gasoline and on the continuation of promotional buying incentives. It’s a constant back and forth among product management and supply chain teams shepherded by longer-term goal setting from sales and operations planning teams.

Tesla the Disruptor

There remains the presence of industry disruptor Tesla Motors, which has successfully captured consumer brand loyalty through leveraged advanced technology in alternative energy powered vehicle models. Tesla has broken the mold in the notions of a vertically integrated supply chain, and is now, with the acquisition of Solar City, rebranding the company to be one of alternative energy. Thus, far has the bulk of its supply chain strategy anchored in the U.S. but that may have to change to accommodate two evident challenges. In order to support required broader annual global sales growth and especially for the over 300,000 booked orders for the Model 3, production volumes need to expand significantly the strategy to source and construct the huge lithium-ion gigafactory in the U.S. may well turn out to be a brilliant decision in the light of increased U.S. protectionism forces. If the U.S. Congress adopts corporate tax reform that exempts exports and taxes imports, Tesla may well find itself in a strategic advantage with other alternative energy powered vehicles who sell in the United States and globally.

Global Sourcing Dynamics

Automotive executives, both global and domestic, with U.S. and North America production and supply chain presence had their primary attention focused on incoming U.S. President Trump and his vow to stop job losses at U.S. automotive factories in favor of job gains within other countries. In January, The Wall Street Journal observed: “Few industries have spent as much time in Mr. trump’s crosshairs as the U.S. auto sector.” Trump stunningly defeated his rival by winning key U.S. Midwest states whose populations have a high dependency on automotive industry and services focused employment.

Mr. Trump’s statements on trade, border or import taxes have rattled auto executives. The President has signaled intent to re-negotiate trade policies within the existing North America Free Trade Agreement (NAFTA) and to impose added tariffs or a border tax on automotive imports from Canada, China, Mexico, and other countries.  Mr. Trump specifically targeted Ford, General Motors, and Toyota for prior decisions to source new auto production manufacturing in Mexico. Auto executives have been packaging strategy announcements to invest more in U.S. based manufacturing.

The strategic stakes are high in that the entire industry has become globally integrated in production and supply chain component and finished goods flow. Mexico was especially being positioned as a North American product hub for lower margin vehicles and as a lower cost manufacturing hub for thousands of automotive component parts.

The larger concerns rest with the imposition of a border or import tax in conjunction with overall corporate tax reform. Such added costs may well tip the balance in landed costs significantly impacting existing margins and overall profitability. Imposing anywhere from a 20 percent to as much as a 40 percent tax on imports to the U.S. could force consumers to pay thousands more for new vehicles and similarly double-digit increases for auto component and aftermarket parts. Each could have a profound impact on future product demand and as we all know, it is quite difficult to predict the outcome of a political process.

As we pen our industry-specific predictions, such proposals remain a matter of speculation and a focus on intense lobbying efforts directed at the U.S. Congress. Where such efforts lead to will ebb and flow during the year, but a certainty is that automotive supply chains will have their teams quite involved in all levels of supply chain sourcing analysis and in supplier contingency planning. Supply chains that have a high product value-added profile dependency for importing component and finished goods parts into the U.S. will especially be challenged.

Further, there is the reality that automotive supply chains must continue to be globally focused to remain competitive and thus countries such as Mexico will continue to play a pivotal role in supply chain strategy. Bottom-line, the environment will be dynamic, and automotive supply chain teams will have little option but to serve as strategic advisors and counselors to line-of-business and product management teams.

This concludes our 2017 prediction related specially to automotive. In our next posting, related to Prediction Ten, we will dive into Commercial Aerospace manufacturers and respective supply chains.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Published Interview of Trump Trade Advisor Has Important Supply Chain Revelations

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We trust that our Supply Chain Matters readers are garnering insights from our ongoing 2017 Predictions series. We have one prediction remaining which will be our industry-specific supply chain predictions which will publish later this week.

While we are working on the final touches, we did want to share an important development, one that is the common theme that threads many of this year’s predictions for industry and global supply chains.

Some of our readers may well be of the belief that all of the news surrounding the actions or potential actions of the new U.S. Administration are speculation, with more moderate voices to prevail. Our response is perhaps, but then again, who knows what may develop in this current highly charged geopolitical environment.

Industry and global supply chains need to be prepared, at-least in the ability to educate senior management of the implications of such initiatives or changed policies. Thus we will continue to provide added evidence and insights as they become available.

This week, Peter Navarro, the newly appointed head for the U.S. National Trade Council, conducted an interview with the London based Financial Times. In the interview, Trump’s top trade advisor accuses Germany of currency exploitation (Paid subscription or complimentary metered view upon registration), Mr. Navarro commented on a number of European topics, including accusing Germany of currency exploitation, and unlike his predecessor, the new U.S. President prefers bilateral vs. multilateral trade accords. He further declared the death of the European sponsored Transatlantic Trade and Investment Partnership (TTIP) involving Europe and the United States.

Such statements alone are garnering global headlines but we wanted to hone in on some further specific statements directly related to global supply chains.

Specifically, this is what caught our eye:

Mr. Navarro said one of the administration’s trade priorities was unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.”

“”It does the American economy no long-term good to only keep big box factories where we are now assembling “American’ products that are composed primarily of foreign components,” he said. “we need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Further noted is that Mr. Navarro all but endorsed the import tax plan now being advocated by Republican leaders in the U.S. House of Representatives.

Readers can certainly have their individual impressions of the above statements.

From our lens, they represent the clearest indication yet of a U.S. policy targeted at building multi-tiered product value chain and supply chain capabilities across industry settings. That is a far different model than exists today. Think for a moment of the current supply chain network models of Apple, HP, Nike, Fiat-Chrysler and others to cite but a few.

Such tenets of bi-lateral and domestic goods movement imply far different supply chain profiles than exist today, and our collective community is going to be very busy dealing with any of the consequences.

Just as the nineteen nineties began the movement toward globally linked corporations and associated supply chain profiles and capabilities, what is on the table in 2017 can represent a far different dimension with a number of consequences.

Supply Chain Matters has in prior years advocated for re-building certain U.S. based industry supply chain multi-tiered capabilities, specifically that of high tech and consumer electronics. This proposed new direction is far more inclusive and broad based.

Our shared takeaway is to not dismiss the current geopolitical environment as a tempest in a teapot. There is significant change being pitched and industry supply chain leaders need to be aware and need to be ready to educate on the consequence and action plans as well as forming potential scenario plans.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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