Today’s edition of the Financial Times features a headline article on the growing threat of organized cyber threats on corporate systems.  (paid subscription required or free metered view) It outlines how criminal networks have increasingly been stealing information and extorting money not to release that information.

One of the examples cited was a 2008 hacking attack directed at today’s global leader in contract manufacturing, Foxconn, who happens to be Apple’s predominant manufacturing services provider. The same contract manufacturer performs manufacturing for some of the world’s premiere high tech companies including Dell, HP, IBM and others. FT cites sources with direct knowledge as indicating that hackers breached the contract manufacturer’s email system to exploit Foxconn’s then head-to-head rivalry with battery maker BYD. Both companies at the time were intensely competing in the design and manufacturing of alternative energy components. The plan was apparently to blackmail both parties with the threat of releasing the hacked information, but was aborted. Both companies declined FT’s requests to confirm this attack.

The article also cites reports late last year that heavy machinery producer Sany hired hackers to spy on its industry rival Zoomilion.  Three Sany executives were arrested as a result of this case.

A supply chain risk mitigation plan needs to umbrella, among other areas, the increased threat of cyber information attacks.  As is often the case, the weakest links in global supply chains, namely supplier networks, can sometimes be the target of such attacks. Insure that your supplier audits involving strategic suppliers include some basis of insuring that adequate information security measures are in-place.

This week, SAP conducted its combined 2013 ASUG and Sapphire customer conference in Orlando and Supply Chain Matters was able to view some of the executive keynotes and theatre presentations.  This author has attended many prior Sapphire events, and thus has a context of where SAP has come in this event and how overall customer messaging has evolved. In the near past, these events tended to be large on vision but lacking in details for customers to get excited about.

When we shared our Supply Chain Matters perception of Sapphire last year, our headline was one of bold vision but confusing messaging. That changed this year, and we were pleasantly surprised with the improvement in customer messaging and the crispness of product direction and strategy.  Customers should be much more of ease that SAP is now getting its full act together and has obviously completed its homework.

Co-CEO Bill McDermott’s opening keynote that featured an entire sports business theme candidly did not hit the mark for us, but subsequent executive keynotes from Co-CEO Jim Hagemann Snabe and Board member and CTO, Vishal Sikka were crisp and focused.  Snabe outlined SAP’s strategic advancements in three significant areas:

1. The ability to bring data and information, both transactional and analytical, of large global and other companies into one area.  In essence, a declaration that SAP will support all applications and information intelligence from main memory, vesting improving response times.
2. Introduce innovative new applications that can leverage the power of SAP HANA, as well as the power of cloud and mobile computing. This was the opportunity to introduce the Sapphire audience to SAP HANA Enterprise Cloud, which we previously commented on.
3. Much more increased attention by SAP on the end-user experience and how users desire to interact with SAP applications, which was described as completely new thinking on the user experience. SAP now views its benchmark for usability to not be contrasted with other enterprise systems but to consumer software such as Amazon.com and others.

In the context of B2B and supply chain messaging, there was a real effort to have Ariba, SAP’s most visible B2B acquisition, and gain maximum visibility in conference presentations. Similar to what occurred after SAP’s same-year acquisition of BusinessObjects, there was all gloss, with no real substance in articulating for SAP customers the all-important progress being made in integration of all of SAP’s current sourcing, procurement, electronic invoicing and catalog support functionality, not to mention the overall direct material B2B networking support strategy timeline. The emphasis was more to have SAP sales teams selling the potential of Ariba vs. the all important questions of what does Ariba bring to my existing product supply chain landscape vs. general procurement process support needs.

We did have the opportunity to view a presentation anchored by Hans Thalbauer, Senior Vice President, Line of Business Solutions for Supply Chain.  That presentation provided a bit more clarity as to long-term direction setting, including some integration among and between Ariba and other existing SAP supply chain applications.  However, for us, the important news from Thalbauer was that finally, SAP will begin to deploy SAP APO (Advanced Planning and Optimization) on a HANA architectural platform.

Last year, what seemed little noticed was a passing reference by SAP Supervisory Board Chairperson Hasso Plattner on the ability to significantly accelerate the performance of SAP APO by leveraging HANA capabilities.  In April of this year, SAP quietly announced in a News Byte the planned availability of SAP liveCache technology powered by the SAP HANA platform.  SAP APO users know all too well that liveCache was SAP’s original manifestation of in-memory computing and that it serves as the foundation of all data brought into the application.  Users, however, had to often deploy instances of SAP Business Warehouse (BW) in their landscapes as a supplemental repository of the APO information that could not be supported by liveCache.  In its earliest days of introduction, it was often referred to as “live crash” because of its limitations.  That has since greatly improved but make no mistake, this move to HANA will be the most significant announcement in the history of SAP APO.

It now opens the door for the application to support both planning and predictive analytical capabilities along with a more compressed footprint of data and information. It should also enhance the overall scalability and response times of not only APO, but other supply chain support applications in the SAP Business Suite.

We heard encouraging words from some customer presentations regarding the building interest with the SAP Sales and Operations Planning Powered by HANA application. We were previously disappointed with the released functionality at the time of announcement but it appears that gaps are now being addressed by SAP development teams and key implementation partners.

One other noteworthy mention was a clarification we heard regarding the near-term availability of both the SAP Business Suite on HANA and HANA Enterprise Cloud offerings.  Apparently the initial released versions will contain limited supply chain management support applications and no initial Ariba support.  That will hopefully change in the coming months.

Supply Chain Matters will follow-up with a more detailed commentary regarding SAP in B2B and supply chain management support in the coming weeks.

Bob Ferrari

We call reader attention to a recently released research study from AlixPartners, that firm’s Manufacturing-Sourcing Outlook. This is the third consecutive year of publication of this report.

It warrants a read from supply chain, product management and sourcing leaders.

The report concludes that the United States has reached parity with Mexico as a preferred nearshoring location and that the U.S. is on-track to achieve cost-parity with China by 2015. There are, of course, important caveats to surround the assumptions of these conclusions.  The latter conclusion is consistent with the well cited 2011 research report by the Boston Consulting Group.  After reviewing all of them, Supply Chain Matters believes that they are reasonable and pragmatic including considerations for China’s wage inflation rates and sourcing switching costs. One of the other more important criteria are assumptions related to the cost of transportation, which AlixPartners viewed as currently favorable to outsourcing.  As we have noted in previous commentaries, international ocean container and air freight carriers are awash in excess capacity and need to recover eroding revenue streams by cutting capacity or service.

Some of the other important takeaways from this report are:

• Decisions related to nearshoring are now very top-of-mind; the report states that 84 percent of respondents indicate that these decisions are important, up from 53 percent last year.
• The majority of executive respondents surveyed expect to reduce total landed costs in the range of 5 to 20 percent.  An editorial sidelight, when this author led research 8 years ago related to decisions to source production in China, this same bandwidth of cost savings was cited.  Thus, thresholds of cost savings opportunities remain consistent.
• The cost gap concerning China and the U.S. has been closed, on average by 70 percent in specific product categories that AlixPartners analyzed, which included fabricated parts, assemblies and consumer products.
• A caution that China still maintains an advantage of scale, and will aggressively protect its existing manufacturing capabilities.  We would add the caveat that protection should be assumed in defined strategic industries within the current five year plan for China.  That includes growth industries such as high tech and consumer electronics, alternative energy, medical and healthcare products and other strategic industries.

As we have also pointed out in our recurring commentaries, supply chain teams should expect more leveraged use of robotics and factory automation across China as it responds to these current global economic shifts.

We all know that product sourcing decisions are strategic and often involve longer time horizons.  Therefore it is very appropriate for sourcing and product management teams to be broadening their horizons out to 2014 and beyond. That would include, by our view, some discussion in the Executive S&OP process.

If you are asked to support these efforts, keep in mind that sound analysis and insightful information will go a long way to insure that decisions on continued outsourcing or nearshoring are made with all the facts and with consensus assumptions. We remind sourcing and product management professionals to absolutely include the voice and insights of transportation, logistics and supply chain operations in these ongoing analysis and decisions.

The good news is that newer analytical and business intelligence technology tools making their way into mainstream use will greatly help in these efforts.

Bob Ferrari

We have an update to our early April posting regarding the threatened labor strike at Amazon.com distribution facilities in Germany.

The Financial Times and other media report that a one-day work stoppage actually occurred yesterday in three separate distribution centers located in Germany.  About 500 workers took part in the work stoppage at the Leipzig facility, while several hundred more were reported as joining a work stoppage among two distribution facilities near Bad Hersfeld.  Striking workers demand to be paid at a similar rate to other mail order retailers while Amazon maintains that German staffs are logistics workers and are paid according to prevailing rates of that sector.

FT and other European business analysts are messaging this action as the most persistent reputational challenge faced by Amazon. No disruption in shipments was anticipated in this one-day action but tensions obviously remain.

The All Things Digital blog recently featured a summary of a teardown analysis of Samsung’s newest S4 Galaxy smartphone. This teardown analysis was performed by research firm IHS which pegged the total material cost of the U.S, version at slightly above $237 contrasted to a market entry price of $639 without carrier subsidies.

IHS and All Things Digital again confirm what we at Supply Chain Matters have observed for some time, the advantages that Samsung gains from sourcing many of its key Galaxy S4 components from Samsung’s internal component businesses to include the LCD display touch screen components, camera and wireless broadband chips.

The latest teardown also uncovered that Samsung is producing four different phone variants to support worldwide consumer fulfillment. The IHS teardown noted specific sourcing difference among both the Korea and U.S. model variations.  The U.S. version sourced the main applications processor chip with Qualcomm while the Korea and other geographic versions contain Samsung’s processor chip. In the graphics imaging processing chip, the U.S. version features a Fujitsu chip, while the Korea model relies on functions embedded in the Samsung sourced applications processor.  Supply Chain Matters believes that both of these are examples of risk aware sourcing strategy, insuring that there is more than one strategic supplier for important key components.

Samsung’s recent report of quarterly earnings indicates that over 70 percent of current operating profits stem from its mobile business, which includes smartphones, electronic tablets as well as conventional mobile phones.  Its component businesses such as semiconductor chips, LCD displays and components contributed the remaining profit.  Equity analysts are astute to note that three years ago, the contributions were reversed.  With product margins steadily decreasing in the lower tiers of consumer electronics value-chains, the supply chain vertical integration strategy undertaken by Samsung has paid a handsome return to date while providing the cash to fund more innovation in components.

The Wall Street Journal recently pointed out that while other companies cut-back on production related capital expenditures during the past market turndown, Samsung boldly continued investing in product, value-chain and factory innovation. That strategy has allowed Samsung to now become a peer level competitor to Apple, and in some cases, lead in overall global volume output.

Supply chain vertical integration may or may not apply to various industry or company strategic plans.  But, where it is being applied in Korea based firms such as Samsung, General Electic and Hyundai, it is contributing to positive business outcomes.

Bob Ferrari

As individuals progress in either a supply chain or product marketing career, they tend to learn the importance of understanding the various nuances of corporate business culture and for being astute in reading into executive level communications. Those of us who have acquired many years of practical business experience have sometimes learned this lesson the hard way, but, once learned, always retained. Regardless of your experience level, when the CEO provides a direct, unfiltered message, than all had better pay close attention to that message.

A couple of weeks ago, enterprise technology provider IBM reported a very uncharacteristic and unanticipated fiscal earnings and profitability surprise. Revenues were down 5 percent and profitability slipped 1 percent. The next day, investors punished IBM stock in an 8 percent decline, eroding $19 billion in market value.  As we have observed in the recent case of Oracle’s reported fiscal performance, management blamed this poor performance on the company’s sales teams, indicating it failed to close a number of pending hardware and software deals.  One of the company’s most senior executives was immediately re-assigned. As we noted in our Oracle related commentary, in the area of technology, poor sales performance is often a symptom of other problems.

IBM CEO Virginia Rometty has since delivered what business media has characterized as a rare event in IBM culture, a company wide reprimand.

Ms. Rometty recorded a five minute internal video message to all of IBM’s employees which the Wall Street Journal characterized as “salting praise with blunt comments about speeding-up the shift to new computing models and getting back on track.” The WSJ reported that it reviewed this video and that the CEO message indicated: “Where we haven’t transformed rapidly enough, we struggled.  We have to step up with that and deal with that, and that is on all levels”

In essence, this CEO’s message is that IBM is not moving fast enough to take advantage of dynamic market and customer needs.  When that message comes unfiltered, direct from the CEO, it had better be perceived as a call to action and accountability to achieve stated milestones, and that there are perhaps too many layers of management to achieve program and customer deliverables.

Since 2011, Supply Chain Matters has been commenting on the various acquisitions that IBM has made for the purpose of building broader and deeper capabilities concerning its Smarter Commerce suite offerings.  We have been impressed with the thinking concerning the strategic purposes of these acquisitions, but candidly disappointed at the overall timetables of progress in overall application to application and cloud based integration directed at solving customer business challenges. The various pieces of a broad B2B and supply chain management support capability are all present but the cohesion appears slower. This very week, SAP is conducting its combined ASUG-Sapphire customer conference and has already announced SAP HANA Enterprise Cloud. Oracle continues moving in the direction of applications deployed on both public and private clouds.

Next week, IBM will be hosting its Smarter Commerce Global Summit 2013 in Nashville, and Supply Chain Matters will be in attendance. The Summit is billed for “attendees to hear smarter ways to put customers at the center, including ways to synchronize the supply chain, optimize inventory, personalize promotions, micro-target marketing, increase relevance and exceed customer expectations at every touch point.” That in a nutshell, is a tall order of expectations and implied deliverables.

Thus, in the spirit of CEO Rometty’s charge, we will spend a lot of our time quizzing and evaluating how quickly IBM is progressing in its broad Smarter Commerce tactical rollout plans concerning the Sell, Buy, Service and other faces of B2B and supply chain technology offerings available for customers.Today, in advance of next week, IBM announced a major agreement with L’Oréal USA for expert procurement services using an advanced cloud analytics application to transform the way L’Oréal USA buys from its network of North American suppliers. The effort is characterized as a unique combination of IBM research, services and software delivery. 

Our goal during the Summit will be to provide our readers our assessment of overall cohesion and integration of various applications, and how they will make a difference for customers. We do not portend to be a blog solely for the IT community and thus our bias will be a perception from the broad functional audience of supply chain management.

If you happen to be attending this Summit as an IBM customer or partner, please seek us out and share your impressions.

Stay tuned.

Bob Ferrari