These past couple weeks have not provided positive news across consumer electronics supply chains.  This week, the latest quarterly earnings and financial advisories from key players provide a common picture of declining demand and concerning outlooks.

Panasonic Corp. forecasted its biggest annual loss in ten years, not only attributed to the continued effects of a strong yen, but declining sales in its television and semiconductor chip operations. Panasonic is cutting its annual television sales target to 19 million units, from a previous 25 million, and has included a whopping 404 billion yen ($5.2 billion) restructuring charge to re-structure its TV and semiconductor businesses.

Sony Corp., which has occurred seven consecutive annual losses in television manufacturing, finally announced its major restructuring.  Sony’s TV businesses will be divided into three groups, LCD operations, high volume contract manufacturing, and development of next-generation smart televisions. Also noted in the Bloomberg article is that rival Toshiba has had a 10 billion yen operating loss in its TV business for the six months ended in September.

Our previous Supply Chain Matters commentaryconcerning Sony reflected on how that company’s supply chains remain in turmoil not only from the continuing decline in its television unit, but also the disruption caused by the March earthquake and tsunami in Japan.   Sony recorded a $66 million charge for incremental expenses directly related to earthquake damage, repair and inventory write-off.  Thus far, it is unclear as to whether Sony’s other consumer electronics businesses such as digital imaging will be impacted by the flooding that occurred in Thailand. In our August commentary we speculated that difficult decisions and further dramatic announcements would be forthcoming, and this week, they came for the TV unit.

Another significant participant in consumer electronics value chains is contract design and manufacturer, Hon Hai Precision Industry.  Hon Hai indicated earlier this week that while total revenues marginally improved, its Q3 earnings dropped 9 percent fueled by further investment in expansion of operations to more interior parts of China.  However, the company noted that visibility to new orders remains poor, indicating trouble among its OEM clients. The company’s liquid crystal display unit, Chimei Innolux Corp. reported a Q3 loss due to severe LCD price erosion brought about by slowing television unit demand.

Finally we call readers attention to an insightful analysis performed by Mark Gomes of Pipeline Data LLC, featured on Seeking Alpha. Analyzing the early signs of the supply chain impacts resonating across consumer electronics as a result of the floods occurring in Thailand, along with the implication for long recovery times, Mark warns of a deluge of more impacts and earnings warnings.  Mark notes: “ ..my company (Pipeline Data LLC) forecasts that the implications will be very damaging for most of the tech sector.” Mark’s analysis point to pending 60 million unit shortfall of hard disk drives in the coming months, as existing inventories is exhausted. This is projected to impact large computer and data storage vendors such as Apple, Dell, EMC, IBM and HP, along with other providers who rely on PC and storage sales.

These are troubling times in consumer electronics, and supply chain planning and fulfillment teams need to be diligent to ongoing industry and component developments since the picture of demand and disruption is changing dramatically.

Bob Ferrari

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

It is once again time to pen another commentary regarding consumer electronics provider Sony and its ongoing supply chain challenges.  In our last Supply Chain Matters commentary in March of this year, we noted how Sony’s senior management had set a rather aggressive target relative to Sony’s television business, a planned 70% ramp-up in production in the upcoming fiscal year that ends in March of 2011.  This challenge was especially difficult for two primary reasons.  First, Sony had recently outsourced most of its previous owned manufacturing away from Japan, favoring instead an outsourced contract manufacturing deployment model.  Achieving such an aggressive ramp-up of production in a newly implemented outsourced environment would certainly test various aspects of external supply chain synchronization and control.  Second, the demand for high-definition or even 3D televisions has been tepid, especially in the previous core markets of North America and Europe, as consumers continue to cut-back on certain discretionary purchases.

The latest news from Sony reflects some of this reality, and adds an additional supply chain related twist.  The good news was that Sony returned to profitability in the latest quarter ending in September, reporting a $384 million profit compared with a previous loss.  Previous restructuring efforts, including supply chain outsourcing have paid-off in an environment of a stronger Japanese yen.  The company however acknowledged that a tepid market and cutthroat competition may cause its television business to again lose money in this fiscal year.  Sony also raised its net profit outlook by 17% for the fiscal year, but lowered its annual revenue forecast by 3%, a continued aggressive stance on the part of Sony’s senior management. Competitors such as LG Electronics, Panasonic, Samsung and Sharp however remain somewhat concerned about future results in light of an environment of tepid demand, intense competition and rising supply costs.

A Wall Street Journal article, Sony to Corral TV Inventory, (paid subscription may be required) further indicates that the company plans to maintain tight inventory controls heading into the holiday shopping season.  Sony’s CFO, Masaru Kato, is noted as indicating that the company has no intention of being “adventurous” in its supply chain management.  On the one hand, the company is banking on a big December quarter to meet its goal of selling 25 million LCD televisions, but the CFO is cautioning that pursuit of a volume number at the detriment to sound financial performance is not a sound strategy.  Mr. Kato is quoted: “Pushing products into the market without consumers is not the business that we are in.”  The WSJ article further notes that Sony has slashed inventory from 61 to 38 days, however in the September quarter Sony’s inventory stood at 59 days, in preparation for the upcoming holiday surge. Mr. Kato is also cited as indicating that he believes that this level of inventory is not too heavy at the moment, but this is not the time to be “adventurous” in adding further inventory.

In our view, Sony’s television-related supply chain team remains in a rather difficult and tough position.  The previous strategic plan was to drive significantly increased volume growth leveraging a newly outsourced contract manufacturing model.  The reality of today’s global market has added a significant other challenge of increased price competition, as multiple consumer electronics manufacturers compete for a limited pool of potential consumer sales, especially in the upcoming holiday driven quarter.

An environment of severe price competition either means that Sony maintains a pricing model based on consumer loyalty, or that consumers will forego brand loyalty in favor of more attractive pricing choices.  In either case, Sony’s supply chain team has made a bet on hopefully having the right inventory levels and mix to pull-off a robust quarter, and flexibility to respond to any sudden market changes may have been limited by edict.  We trust that teams have the right capabilities to quickly shift existing inventory and synchronize contract manufacturing with geographic and channel market demand.

It will be rather interesting to observe how this newest Sony supply chain capability chapter plays out over the remaining weeks of 2010 and 2011. Stay tuned.

Industry observers are welcomed to add their observations in Comments realted to this posting.

Bob Ferrari

There continues to be rather interesting movements occurring within the high tech and consumer electronics industry segments, movements that are strategically related to supply chain structure and composition.  During these past months Supply Chain Matters has commented on the contrasting strategic supply chain activity occurring among certain high tech consumer electronics companies.  In a recent posting in March, Will Sony’s supply chain rise to yet another challenge?, I noted that Sony Corporation had cut $3.6 billion USD in costs primarily from supply chain cost reductions, including closing 20% of its owned manufacturing plants, and now transitioning to an outsourced contract manufacturing strategy.  At the same time, the television business is rebounding and Sony has established a goal to ramp-up production by 70% in the upcoming fiscal year, while attempting to complete this same transition.  Panasonic Corporation, also based in Japan, is also increasing its dependence on external contract manufacturing while planning for increased demand. Rival Vizio, on the other hand, after seven years in the business and practicing a fully outsourced supply and contract manufacturing strategy, has become the second largest U.S. TV brand and is closing in on number one brand Samsung. In our recent Supply Chain Matters commentary on Vizio, we noted how the company is now offering two of its contract manufacturers equity stakes in the company as a means to ensure aligned goal fulfillment.

Overshadowing all of this activity is industry giant Samsung Electronics Co. which of late has made a dramatic presence in global television sales.  The key difference, however, is that Samsung is both an OEM and a key component supplier.  We previously noted that Samsung expects to dominate the market for the key component of plasma and liquid-crystal (LCD) displays.  Beyond being a critical supplier to the digital television market, Samsung is also a dominant supplier in flash memory devices and a strategic supplier to Apple.  Samsung has astutely placed itself in the strategic supply chain of many of today’s most popular electronic gadgets.

Within this industry backdrop, Samsung made a dramatic and bold announcement this week,  According to a recent Wall Street Journal article, (paid subscription may be required) the company plans to double spending on factories and equipment to a record $15.6 billion USD this year.  As noted in the article, most see Samsung positioning to gain a bigger lead in memory chips and flat-screen television components.  Samsung will build its first new LCD component factory since 2008, as well as other investments in memory chip and other electronic component production.

The article quotes one Asia-based market analyst as noting that the announcement may be a bit of showmanship on the part of Samsung.  I tend to believe otherwise.  It is rather an extension of a vertical manufacturing sourcing strategy that could place Samsung in an even more powerful position as both an OEM and a component supplier.  I believe that Samsung understands supply chain strategy, coupled with long-term market trends.  Its presence as both an OEM and a key supplier of consumer electronics markets is noteworthy, and as the major Japanese based players continue to transition to a more outsourced supply chain, could place Samsung at an ever more strategic presence.  To add more evidence, a corresponding Samsung related article appearing in The Financial Times  (free preview sign-up required) noted that Samsung’s chairman, Lee Kun-hee, would meet with Sony’s CEO Sir Howard Stringer.  While both companies will not elaborate on the subject matters of such a meeting, we can all comfortably speculate that strategic supply may be one agenda item.

Industry inflection points can often result in the recovery phases of major economic downturns.  The consumer electronics sector has and will continue to be under the looking glass as t undergoes such inflection changes, and in my view, supply chain strategy and movements will be the key determinant to the end result.

 We invite industry participants and other supply chain professionals to share their observations in the Comments section below this posting

 Bob Ferrari

Note: This posting can also be viewed and commented upon within the Kinaxis Supply Chain Expert Community web site.

Over these past months I’ve penned a number of Supply Chain Matters commentaries concerning Sony Corporation‘s massive restructuring across its electronics related global supply chains. In the last commentary in early February, we noted how this company had cut costs by $3.63 billion USD in a relatively short period of time.  Sony closed 20% of its manufacturing plants, eliminated 20,000 jobs and targeted additional supply chain cost reductions.  The most interesting part of this story thus far has been that most of these radical cuts, by Sony management’s own admission, have been primarily driven from top-down management directives.  There was a further acknowledgement that no business processes or system changes have been involved to this point.

An article in yesterday’s Wall Street Journal (paid subscription may be required) reflects yet another supply chain challenge. Sony announced that its television business, which has lost money for six straight years, will shift to an aggressive attack mode in the coming fiscal year in order to recapture lost market share to Samsung and LG Electronics. How aggressive? The article notes about a 70% ramp-up in production, to exceed 25 million units in the upcoming fiscal year. Once more, the company wants to gain the upper hand in the emerging 3-D television segment, thus one can further speculate that the planned ramp-up will include a lot of new 3-D models to make their market introduction.

The WSJ article specifically cites Yoshihisa Ishida, the architect of Sony’s prior supply chain cost cutting efforts, as the person who will lead this new ramp-up challenge in the television business.  He is described in the article as a no-nonsense cost-cutter who ran Sony’s personal computer business.

In previous commentary, I noted that the real work of supply chain transformation still remains a work-in-process for Sony.  I must now admit, that might have been a heck of an understatement, given these new ramp-up challenges.

I once worked for a very talented CIO in charge of all U.S. IT operations who was challenged by the existing senior management to reduce overall IT costs by at least 25%, and at the same time insure that existing up-time KPI’s remained in the high nineties.  He communicated that challenge to his senior management peers as the following: What you are really asking us to do is the equivalent of attempting to change one of the engines of a 747 aircraft while it is still flying.  Somehow, that same phrase came back to me when I reflected on Sony’s new challenges.

Mr. Ishida and his supply chain team indeed have a significant challenge in light of the need to complete a supply chain restructuring while insuring that the television business meets very aggressive market ramp-up goals.  One would hope that this team can quickly address business process and system changes, particularly in the area of broad supply chain visibility and responsiveness. This is a story that the supply chain community as a whole should keep eyes upon.

If you were asked, what advice would you provide to Sony’s SCM management team?

Bob Ferrari

Note:  The following posting can also be viewed and commented upon in the Kinaxis Supply Chain Expert Community web site.

About a year ago, Sony Corporation initiated a massive corporate restructuring after announcing its first annual loss in more than 14 years. Sony had a significant profitability crisis which specifically involved its consumer electronics and games businesses and Chairmen and CEO Howard Stringer was forced to take direct operational control of all operating businesses.

In May of 2009, Supply Chain Matters provided a commentary, Sony’s Supply Chain Challenges, in which we noted that the restructuring would involve aggressive cost reduction goals for Sony’s supply chain. Taking on a challenge to reduce overall material costs by 20% in two years has proven to be challenging for companies in profitable times, let alone in crisis situations. I noted that Sony would have no choice but to move quickly, given the economic and industry conditions that were occurring in the consumer electronics sector.

The corporate restructuring included a combined manufacturing, logistics, and procurement organization led by a longtime Sony executive, Yutaka Nakagawa. At the time, various reports indicated that the company would close three plants in Japan by the end of December 2009, and the number of plants around the world would be reduced to 49 from 57. Other efforts noted were that the company would also slash material costs by 20% ($5.3 billion USD), and cut total suppliers to 1200 from the current 2500 by March of 2011.

In a rather sudden and dramatic turnaround of events, last week Sony announced that it has actually turned a profit in its latest fiscal quarter and will narrow its previous full-year loss projections. A Wall Street Journal article notes (paid subscription may be required) that in the area of supply chain, Sony has already cut costs by $3.63 billion USD. That is indeed rather aggressive in such a short period of time. The article further notes that Sony has closed 20% of its manufacturing plants and now eliminated 20,000 jobs, 4000 in excess of last year’s target. In the area of material costs, the WSJ article makes note that Sony has targeted a 15% cost reduction for the PlayStation 3 by March 2011. Currently the company loses six cents for every dollar of PS3 hardware sales.

Upon reading the executive briefing transcript published on Seeking Alpha, there is management acknowledgement that the bulk of the supply chain cost reductions thus far were achieved mainly from top-down senior management directives specifically targeting headcount and excessive inventory levels. Payment terms to suppliers have apparently been extended although it’s difficult to decipher from the transcript. There is also an acknowledgement that no business processes or systems changes have occurred thus far.

The picture for Sony in its first year of crisis has the appearance of top-down, slash and burn cost cutting. While these efforts did result in the required significant take out of cost, the real work related to supply chain process transformation still remains a work-in-process for Sony. This next phase will be more significant in terms of making the right moves to insure that Sony’s supply chain capabilities can sustain both continued efficiency and adaptability to changing business conditions. I trust that Sony’s supply chain teams will utilize more advanced analytical methods in navigating this next phase since we all know that cost cutting alone does not bring the ability to innovate for customer fulfillment needs.

Supply Chain Matters will continue to monitor and provide ongoing commentary.

Bob Ferrari

Disclosure: Kinaxis is one of other sponsors of the Supply Chain Matters blog, and as such provides financial consideration for having its product logo and product information linked to this blog.