Our readers among high-tech and consumer electronics supply chains are well aware that the supply and costs of rare earth minerals continues to be a supply chain. China has positioned itself to the primary global supplier of such strategic materials and has in the past exercised export quotas to favor its own domestic high tech industry needs. Supply Chain Matters touched upon this challenge in a 2011 commentary related to Phillips Electronics.
Bloomberg recently reported that a closely held miner from the country of Chile, Mineria Activa, has come up with a far different, green-mining and perhaps more sustainable approach for the mining of rare earths. The report indicates that elements such as neodymium and dysprosium are contained in clay soils near the city of Concepcion in concentrations similar to China. The difference, however, is rather than pumping chemicals into the ground for extracting these minerals, methods have been derived to dig out the clay, place it in a tank-leaching process with biodegradable chemicals and return the clean clay to the ground, while replanting displaced vegetation and trees.
The bet here is that certain manufacturers and OEM’s such as Apple, ThyssenKrupp or Raytheon are willing to pay a premium knowing that the supply is not destroying the planet.
Bloomberg points out that given the current recent capacity glut resulting in declines in the prices of certain rare earth materials, the timing of this development may not be ideal. The again, companies such as Apple with strong commitments to sustainability and green supply chain practices may be willing to consider a strategic supply alternative.
This Supply Chain Matters posting serves as a backdrop to our ongoing commentaries focused on the consumer packaged goods industry, specifically the dramatic business challenges being posed by consumers demanding fresher and more natural sources of ingredients. We have noted how specific CPG firms are scrambling to either re-formulate existing products or acquire smaller firms with higher growth prospects within the natural and sustainable foods segment.
Today, Campbell Soup Company, which has experienced declining sales of the company’s packaged soups decline, announced that it has entered into an agreement to acquire Garden Fresh Gourmet, the producer of the number one branded refrigerated salsa in the United States, along with hummus, dips and tortilla chips. The fresh salsa producer, headquartered in Ferndale, Michigan has approximately 500 employees with operations in Grand Rapids, Inster and Detroit Michigan. The announced cost is $231 million, roughly double Garden Fresh Gourmet’s $100 million in 2014 revenues. The transaction expected to close in the fourth quarter of fiscal 2015 subject to regulatory approvals and customary closing conditions.
Original founders Jack and Annette Aronson started making fresh salsa in the back of their small restaurant in Ferndale, Michigan. The recipe involved small batches using only the highest-quality ingredients. Before long, people began to flock to his restaurant just for the outrageously good salsa, and that morphed to providing the fresh salsa to local supermarkets. On its web site, Garden Fresh Gourmet states its commitment to sustainability, from how ingredients are sourced, to the manufacturing methods and to the packaging materials employed in its processes.
Today’s acquisition is Campbell’s fourth acquisition directed at higher growth, more natural foods segments. Prior acquisitions included fresh products producer Bolthouse Farms in 2012, organic baby-food producer Plum and biscuit maker Kelsen in 2013.
According to today’s announcement, Garden Fresh Gourmet will become part of the Campbell Fresh division which will now oversee upwards of $1 billion in revenues while leveraging the Bolthouse Farms refrigerated fresh platform business model. Plans call for the new addition to retain its corporate presence in Ferndale Michigan, led by Todd Putman, General Manager. Founder Jack Aronson will stay on as a business advisor and in a letter to customers, pledges that the same values of quality and caring will continue with the Campbell relationship.
In a matter of four years, Campbell continues its transformation into packaged fresh and organic foods segment which now includes four prominent brands. The next chapter is growing these businesses to scale broader geographic market segments while retaining the tenets of brands that stand for fresh and sustainable supply chain practices.
Today is Earth Day, the celebration of preserving our planet and its resources.
Any blog with a focus on the broad umbrella of manufacturing, supply chain and product management is compelled to acknowledge that supply chains and their actions have a lot to contribute to preserving our planet, its resources and its air. The good news, we feel, is that a lot has been accomplished in sustainability and green supply chain initiatives across multiple industry sectors. However, much more work remains, particularly in low-cost manufacturing regions such as Bangladesh, China, Cambodia, Vietnam and other countries.
Led by many multi-national manufacturers, sustainability efforts directed at reduced use of water, natural resources and packaging have both added creditability to brands as well as saved money for businesses. Likewise, food producers have invested in more organic and ethical supply chains. Producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Consumers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. Indeed consumers are the most important stakeholders in influencing the way in which corporations manage and respond to societal expectations. Our commentaries and observations of today’s consumer product goods industry reflect how consumer expectations are radically changing former processed foods business practices. Likewise, suppliers have an ever more important contribution to make in these efforts.
However, supply chains that have high consumption of water, chemicals, and resource intensive energy have far more work to do. Today they predominately reside in low-cost manufacturing regions where governments and businesses sometimes look the other way when it comes to active commitments to curb abuses to the environment. Recent reports indicate that China senior leaders are getting more serious about pollution and environmental abuses, which is long overdue. We have read reports of gross pollution and waste in countries such as Bangladesh. While multinationals such as Apple, Cisco, Hewlett Packard, H&M and others are actively establishing, monitoring and enforcing sustainability goals across their extended supply chains, too many others have turned a blind eye, perhaps far more concerned with lower costs. Supply Chain Matters recently highlighted National Resource Defense Council’s ongoing efforts in the greening of China’s textile and apparel producers, helping suppliers to cost justify more sustainable practices.
There is a lot more to do, and supply chain leaders and teams need to be actively supporting additional green and sustainability efforts. The good news is that our up and coming millennials, the leaders of tomorrow, are very tuned into sustainability of the earth’s resources as well as innovative ideas to make a difference.
These efforts are good for business as well as the environment.
We congratulate all that are demonstrating commitment and we urge others in our community to add their continued influence.
Supply Chain Matters has featured numerous prior commentaries regarding the difficult challenges and structural business challenges facing large consumer packaged goods producers and their associated supply chain ecosystems. Yet while the industry continues to respond with severe cost cutting and a sense of crisis, the industry may well be overlooking the more important strategic need for meaningful investments in organic and sustainable food supply chain capability and supplier development.
Currency headwinds and activist investors focused on short-term shareholder value and increased earnings add more cost cutting pressure to the crisis. Signs of increased merger and acquisition activity, most recently the announced HJ Heinz and Kraft Foods mega merger, add more turmoil and stark actions surrounding CPG supply chains.
Today’s consumers demand healthier food choices and more natural ingredients, shunning high volume, well-known iconic food brands. Consumers are more interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonalds, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers.
In a previous commentary, we advocated the need for CPG producers to focus on increased product innovation and quicker introduction of new and healthier products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. However, we have wondered how the ever increasing consumer needs for more organic and sustainable food products can be fulfilled among current food supply chains. Is there a discernable capacity shortage?
A recent report published by The Wall Street Journal, Hunger for Organic Foods Stretches the Supply Chain (paid subscription or complimentary metered views) brought forward such a perspective. According to the report, the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Mentioned specifically are organic and natural foods producer Hain Celestial Group, soup maker Pacific Foods and fast casual restaurant chain Chipotle Mexican Grill recruiting, financing and training more farmers willing to utilize and adhere to organic methods. Some producers such as Hain Celestial have had to initiate long-term buying agreements, as much as three to five years, to insure the transition to more organic supplies. Two years ago, Chipotle began providing financing incentives to help black bean farmer’s transition from conventional to organic production. This fast-growing restaurant chain that prides itself on higher quality, ethically based food ingredients recently took the bold step of suspending sales of its pork product in nearly a third of its restaurants after discovering a supplier was not complying with animal welfare standards.
With increasing reports of supplier bullying and cost squeeze tactics occurring among the larger traditional packaged foods producers, we wonder if that approach actually lends itself to required investments in organic and sustainable food supply. If the ultimate strategy among activist investors is ultimately to squeeze existing costs across the entire conventional processed food supply chain to free-up cash to fund acquisitions of smaller, more organic and healthier food producers, will such innovative and dedicated producers wither amidst an environment of draconian cost-cutting?
By our lens, it may be an argument for supply chain and individual brand segmentation anchored on market differentiation and segments.
For us, one tenet appears obvious, the industry needs to respond to growing consumer tastes by actively investing in boosting capacity and capability in organic, sustainable and healthier food products. To do otherwise is opportunity lost.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters ® blog. All rights reserved.
Among industry supply chains, two rather important ongoing initiatives involve expanding efforts directed at developing more sustainable products along with greater attention to social responsibility practices involving the global sourcing and production of products.
UL, also known as Underwriters Laboratories has provided a legacy of services directed at compliance and consumer trust. The firm has historically worked with multiple product brands and service providers to assure the compliance of products to known standards and the firm presents itself as a globally independent safety science company. For the past two years, UL has been working to broaden its capabilities for being a broader provider of one-stop services for material, component and product safety insights.
UL announced an expansion of that firm’s Information & Insights (I&I) service offerings directed at assisting supply chain organizations in their efforts to provide more sustainable products an ensure more timely regulatory compliance. According to our Supply Chain Matters discussion with UL spokespersons, these services leverage and expand on UL’s reputation as a known neutrality platform for assurance and safety. The stated goal is to provide the right kind of ‘preventable intelligence’ needed by product designers and product sourcing professionals.
As the announcement indicates, many products are being created with materials that may be dangerous to use, caustic to consume, poisonous for the environment or a threat to workplace safety. Recent Supply Chain Matters commentaries have called attention to products produced or assembled through socially unacceptable practices or nefarious sourcing and third party benefit. The recent filing deadline for industry supply chains to declare potential sources of Conflict Materials has been recent evidence of the difficulty in securing and tracking such information.
The newly launched UL I&I services are reportedly designed to provide supply chain teams and decision-makers with broader information insights into non-sustainable materials. That includes access to UL’s existing network of scientists, an extensive service network for product certifications, onsite audits and trusted product evaluation and safety testing services. Material buyers can request certification documents or engage UL teams in conducting supplier audits. The goal is to help decision makers to enhance sustainability and regulatory monitoring efforts in a broader and more visible context. It has been described as a marriage of science, technology and tech platform infrastructure.
One of the recent acquisitions of UL I&I is a product service known as GoodGuide which has caught the eye of brand owners and major retailers. UL is positioning this service as a B2B platform and centralized repository for information related to the efficacy of products and good practices. According to the UL I&I web site, GoodGuide makes it easy to find safe, ethical and environmentally-friendly products and provides health, environmental and social performance ratings for more than 120,000 food, personal care and household products.
This announcement is rather interesting and adds further credence that efforts directed at assuring supply chain sustainability have broadened and technology providers such as UL are offering enhanced services to serve such needs.
Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.
This week, general, business and social media as abuzz with the announcement that electric automobile maker Tesla Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory” capable of supplying up to 500,000 electric vehicles per year. This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost. The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored. The area of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Tesls’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.
According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.
Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.
Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.
From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States. It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.
Investors seem also impressed since Tesla stock has shot-up since the announcement.
Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.