The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

Financial media is abuzz with the announcement of Google’s intent to acquire Motorola’s cellphone business in a deal valued at $12.5 billion.  The acquisition of Motorola Mobility Holdings Inc. is being touted as a response to Apple’s momentum in the smartphone markets and eventual possession of an arsenal of 17,000 patents held by Motorola in mobile technology. The deal, if approved, is expected to close in early 2012.

Another important implication however is Google’s access to a global supply, channel and supply chain fulfillment capability to produce and distribute smartphones and tablet devices. Readers will recall Google’s previous stumbles in late 2009, when it attempted a direct entry into the smartphone distribution channel by announcing the availability of the then announced unlocked Nexus One phone via an Internet ordering web site.  In our Supply Chain Matters commentaries at the time, we characterized Google’s effort as an attempt to dis-intermediate existing smartphone distribution and selling channels.  As anticipated, Google ultimately experienced multiple issues related to consumer difficulties in purchasing, activating and servicing their mobile phone purchases.  Contract manufacturer HTC, whom Google coerced into playing the role of global supply chain distribution and fulfillment, was placed in a rather challenging position. Eventually, Google pulled the plug on the grand experiment and withdrew that version of the Nexus One.  The intent was noble and classic Google, but the execution was naive.

With the acquisition of Motorola Mobility, Google has the opportunity to strongly influence the design of Motorola smartphones and tablets for tighter integration with the Android operating system. The deal opens the door for more options for search and online commerce, along with mobile computing needs for consumers and business. The path of innovative product introduction directly to consumers and businesses has the potential to become a lot quicker. Google also gains a global channel distribution network of mobile carriers which can help it compete with the likes of Apple or other competitors.  Consumers may have the option of an alternative to the likes of an iTunes online ordering site. Motorola could also become the premiere provider of Android mobile devices, while other manufacturers are offered different versions.

Congratulations to Google and Motorola on a savvy deal.  Supply chain and fulfillment capabilities may well prove to be instrumental for the combined companies in the coming years.

Bob Ferrari

This week, consumer goods provider Kraft made a surprising announcement that comes with global supply chain implications.

The company announced that it would split into two independent companies, one focused on the global snacks business, with the other being grocery.  The announcement was reported as a reversal from Kraft’s previous bigger-is-better growth approach.  The Wall Street Journal in its reporting of the story noted that just 18 months ago, CEO Irene Rosenfeld told investors that “scale is a source of great competitive advantage.”

Financial media are reporting that under the proposed split, the snacks business and confectionary business may consist of Kraft’s European business and developing markets groups, along with the North America snacks and confectionary businesses, amounting to a $32 billion annual business. Brands that could be included are Oreo cookies, Cadbury chocolates and Trident chewing gums. The grocery division is initially planned to include Kraft’s current North America grocery businesses, and include brands like Kraft Cheese, Maxwell House coffees, Oscar Mayer meats and Jell-O. Grocery would amount to a $16 billion business.

Supply Chain Matters has published multiple commentaries regarding Kraft, particularly its controversial $19 billion acquisition of European snacks and confectionary company Cadbury last year.  The most detailed was in February of 2010. In that commentary we noted that Kraft’s supply chain was about to undergo a rather dramatic transition, with challenges related to new geographic distribution channels and the need for more cost synergies in merging of two supply chains.  At the time of the Cadbury merger announcement, Kraft management issued a target of $675 million of cost savings required by 2012.  Cadbury itself was also under considerable external pressure to increase margins prior to the acquisition and was bloated with inventory.

This week’s announcement, we believe, puts an entirely different lens and perspective for Kraft supply chain strategies moving forward.  Snacks and grocery are driven from different business and distribution models.  The snacks business provides rather optimistic numbers for market growth but its distribution model is more focused to the higher touch and direct to store needs of convenience stores and smaller retail.  Snack food consumers are impulse buyers, with promotions, market timing and inventory strategies that require considerable sophistication and proper timing.

The grocery business provides a business model with much more conservative growth, higher margins, and more high volume focused warehousing, distribution and supply chain needs. Much of Grocery’s customer base is large supermarkets and retailers, with high dependency on either vendor managed inventory or store replenishment business process support.

The open question is how Kraft will respond with its supply chain and distribution strategies as a result of the proposed split. As noted, Kraft established a target of $675 million in potential cost savings through the combination of operations and supply chains. We presume that some of these savings may have already been garnered but then again, more may be required.  We at Supply Chain Matters were a bit perplexed as to how Kraft would be able to service both types of businesses under a singular structure.  Would cuts be made in the wrong areas?  Did grocery really understand the unique high touch direct-store needs of snacks?  How would supply chain costs be apportioned?

With this dramatic announcement of a corporate split, various other options will undoubtedly be put on the table and Supply Chain Matters speculates that the options could include independently splitting each business supply chain, creating some form of a centralized supply chain shared services model, or investigating some hybrid that includes various internal and externally sourced distribution services.

The good news is that Kraft recently recruited Daniel Myers, a former P&G executive at the company’s Beauty and Hair Care divisions, to be its new Chief Supply Chain officer.  Myer reports directly to Kraft CEO Irene Rosenfield and is a member of the Kraft senior executive team.  That reporting relationship will prove to be rather timely as Kraft embarks on its newest supply chain challenge, and will hopefully provide a more unbiased, outsider perspective to the challenges ahead.

The Gartner 2011 Supply Chain Top 25 supply chains ranking for 2011 pegs Kraft in the number 25 and last position and notes Kraft’s leading channel management strategy as its biggest strength. One wonders which of Kraft’s pending two companies will fare in future rankings.

Stayed tuned to our blog for more Kraft postings in the coming months.  In the meantime, Supply Chain Matters welcomes commentary from readers regarding Kraft’s new supply chain structural challenges.

Bob Ferrari

©Copyright 2011 The Ferrari Consulting and Research Group LLC

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

As many in the supply chain community are aware, the combination of a highly uncertain global economy combined with unplanned disruptive events such as the earthquake in northern Japan have created significantly more challenges to overcome.  On both Supply Chain Matters and the Supply Chain Expert Community, we have penned commentaries noting significant supply shortages occurring in multiple industries.  The most recent have been pharmaceuticals, high tech components, and especially automotive related.

Last week, the Wall Street Journal reported that while demand for new commercial heavy duty trucks is accelerating, supply shortages are hampering attempts to ramp-up production volumes.  Customer demand in the heavy duty truck industry has been severely challenged in the past three years because of new governmental regulations on pollution standards, which have driven up the cost of purchasing a new rig.  Now, customers are electing to re-equip their fleets and one forecast predicts a 64 percent increase in sales for 2011.  The WSJ noted that Paccar, Inc., manufacturer of truck brands Peterbuilt and Kenworth, jolted Wall Street by reporting Q2-2011 falling short of expectations because of reported shortages. Paccar had a stellar reputation for its record of profitability, hence an earnings miss was significant news.  Paccar is now in a position where the supply chain is gating the company’s ability to respond to increased customer demand for trucks.

During the earnings briefing, Paccar Chairman and CEO Mark Piggott had significant commentary to share regarding his company’s supply chain.  He noted shortages and supplier capacity constraints span many suppliers and include areas such as tires and chassis components. He further noted that the entire supplier base has suffered as a result of the severe ups and downs that have occurred in the industry, and incidents of temporary supplier shutdowns due to component shortages are occurring every week.  Suppliers in this industry serve both automotive and truck OEM manufacturers.  He observed that whereas the bankruptcy actions of General Motors and Chrysler in North America had severe impacts on certain suppliers, automotive suppliers in Europe were able to take advantage of broad governmental programs aimed at retaining employment in the midst of weak demand.  Rising commodity costs in cooling, electrical, filtration and precious metals are also having an impact on suppliers who need to finance more increased costs. To its credit, Paccar is increasing its investment in supplier capabilities.  Piggott notes: “So we want these suppliers to make money.  We want our dealers to make money. We want our customers to make money, so we’re going to see what we can do to help them.”…”There’s a lot of people that are rightfully cautious and conservative, and we’re working with them to meet our needs, but it’s not just all rosy out there.”

Supply Chain Matters applauds CEO Piggott for his obvious understanding and informed articulation of what is exactly occurring within his company’s and his industry’s supply chains.  Many more CEO’s should be just as educated and knowledgeable and share a perspective for win-win among suppliers and trading partners.

In the meantime, automotive and heavy duty truck industry supply chains will have to deal with the compounding effects of economic uncertainty, higher component costs, and the threats of more disruptive events.

Yet another industry under supply chain stress, and yet another industry scrambling to achieve some form of responsive supply chain planning and management.

Bob Ferrari

The second day of the Supply Chain World North America conference  was just as informative as the first, and the highlight was a presentation from a supply chain grounded CEO.

Readers can view our day one commentary at this link.

The morning keynote was from Alan D. Wilson, the CEO and President of McCormick & Company, Inc., who’s corporate headquarters were but a few blocks from the conference venue in Baltimore.  CEO Wilson’s presentation was insightful from two perspectives. First, Wilson comes from background and grounded experience in supply chains, having served in the military as a logistician, and having contributed in supply chain roles at Procter and Gamble.  He clearly understands and can relate to supply chain management strategy and importance.

More importantly, Wilson provided a live demonstration on how supply chain professionals can speak and relate to the language of the executive suite.  In his articulation of the shareholder and business goals for McCormick, he was able to clearly map these top level goals to required metrics in material conversion, supply chain and process reliability areas, all within a single, cascading slide. McCormick also has unique supply chain challenges in that its business model of spice and flavor products requires a high level of SKU’s, as well as the need to source inbound materials from over 50 countries.  It was great to observe a CEO who could also clearly articulate these challenges to an audience dominated by supply chain professionals.

Another important strength brought forward was McCormick’s strong emphasis and reinforcement of corporate culture being the fabric of the company.  This culture includes an obsession with quality and firm and demonstrated beliefs in respect, inclusion, recognition and collaboration. McCormick believes that taking care of employees will lead to employees taking good care of customers and suppliers. A noted example, during the darkest days of the past global recession, McCormick continued to invest in people and in benefit programs. Wilson firmly believes that this strategy, although counter to the prevailing industry norms, paid enormous dividends in commitment and performance. There is also a strong linkage between desired outcomes in business performance with organizational design and individual employee incentives.  The management tenet of measure and reward what you want to change is alive and well at McCormick.

McCormick is not immune to ongoing supply chain challenges in the area of sourcing risk, exploding commodity costs or overall improvement in inventory turns. However,  listening to Wilson, one gets a clear sense that the entire organization is aligned and focused on these challenges and remedial plans.

It would be great if every major supply chain conference could have a CEO guest speaker with the DNA of Alan Wilson.

Bob Ferrari

At this week’s Supply Chain World North America conference, Nick Little, Assistant Director, Executive Development at Michigan State University reminded the audience of the critical importance of any company to invest strategically in innovation and supply chain capability, even in the dark stages of a global recession. He reminded us that in July 2008, prior to the occurrence of the global financial crisis, Volkswagen decided to make a $1 billion commitment to U.S. resident manufacturing, and maintained that commitment even after the U.S. auto market collapsed in 2009/2010.

This week, Volkswagen conducted the grand opening of its new automobile assembly plant located in Chattanooga Tennessee, a plant which could employ 2000 workers and designed to produce upwards of 300,000 vehicles per year.  Volkswagen’s motivation to build a U.S. presence was to become more competitive in the North America market, and also buffer the current negative effect of currency fluctuations incurred by cars exported to the region.  The primary model for manufacture will be the Passat, and Volkswagen will aggressively price the new U.S. manufactured version of the Passat at roughly $7000 less than the current model.  The Passat was designed to compete head-to-head with the Toyota Camry and Honda Accord in the U.S.  As fate often plays out, both Toyota and Honda are struggling to recover from the March earthquake and tsunami that devastated northern Japan, and U.S. inventories of Camrys and Accords are at all time lows.

Volkswagen stands to benefit from more than $570 million in state and federal governmental incentives, and has designed the new plant for maximum efficiency. Up to 85 percent of parts will be source from nearby suppliers, eight of which are located on site to insure just-in-time delivery of parts.  The Wall Street Journal also noted that the average wage level estimated to be $27 per hour is the lowest of all current auto manufacturers with presence in the U.S.

Volkswagen is not the only company that maintained an investment in innovation supply chain capability during the past downturn.  We have previously noted on Supply Chain Matters how the specialized Mittelstand mid-market companies located throughout Germany utilized the recession to invest in more product innovation and production capability, and have been the first to benefit from the current boom of demand from emerging markets. These companies have a relentless focus on market niches, areas where bigger companies chose not to compete, and also in areas that demonstrate steady growth. German exports to China increased 45 percent in the first ten months of 2010, while other countries struggled.  While companies in the U.S. were quick to shed experienced workers, Germany’s industrial and legislative leaders pulled together to come up with innovate means to retain workers and prepare for the recovery.

Yesterday at a subsequent presentation at the conference, Alan D. Wilson, the CEO and President of McCormick & Company Inc., a global producer of spices and flavorings, proudly noted that during the recession, his company continued to invest in people and benefits, and that has paid off with a consistent track record of 4-6 percent sales growth and consistently exceeding Wall Street expectations.  McCormack continues to have a strong belief in continuous innovation and investment in supply chain capability.

Management books and business case studies often point to specific companies who were able to be best prepared to take advantage of a business upturn cycle, often disrupting existing industry participants.  It seems to us that a common trait was not so much growth by acquisition, but rather growth by consistency and follow-through in understanding customer needs, maintaining innovation and value-chain capability.

How many of today’s CEO and Wall Street players really understand this tenet?

Bob Ferrari