The following posting can also be viewed and commented upon on the Kinaxis supply chain Expert Community web site.

Every now and then, it is important to take a step back from our everyday supply chain and procurement activities and reflect on the big-picture.  Such reflection could well uncover a brewing crisis before it becomes unwieldy, or worse, before it becomes a significant setback to business.

As I analyze various trends in cross-industry supply chain and financial performance, I have been reflecting upon why this post-recession recovery transition period has been demonstrating so many conflicting trends.  Large global manufacturing firms, for the most part, have generated rather impressive profitability results in the face of unprecedented business conditions.  Many months of cost-cutting in direct labor, overhead and supply-related costs have provided a far lower threshold to profitability, but a far leaner and vulnerable supply chain.  Some firms have taken a further step to attack any fixed cost associated with their supply chains, outsourcing the bulk of activities to contract manufacturers or key suppliers.

The end result is that many of these global manufacturing firms are amassing large amounts of cash.  The most recent analysis pegs that cumulative cash balance number in excess of $8 trillion, and Wall Street analysts are salivating on the potential for an upcoming period of increased acquisitions.  Others speculate why additional hiring has not begun.  However you view this situation, there are more fundamental stakes in play, and they directly concern supply chains.

This week, the Financial Times published an article , Industrial’s success squeezes suppliers (free preview account may be required), which perhaps gets more to the big-picture, namely that while the larger firms have been practicing financial engineering, they may well have done so at the financial risk to their smaller suppliers.

During the darkest days of the recession and continuing into this current transitionary period, smaller suppliers were forced by supply chain dominants to dramatically cut back on costs and capacity. In many cases, suppliers were mandated to absorb longer payment cycles on their accounts receivable.  Some suppliers have survived the crisis, others have not.

Now, continued uncertainty relative to the longer-term direction of the global economy has caused many of the survivors to be extra cautious before investing in added resources and/or capacity.  Those suppliers who are experiencing significant increases in demand are finding it rather difficult to borrow money to fund expansion.  The Financial Times reported last month that U.S. small businesses are having to pay more relative to the Federal Reserve’s benchmark borrowing rate then at any time in the last 25 years.

In essence, large firms have placed more strategic and tactical importance on supplier capabilities, yet still demand the same upside and downside agility as if they still owned these capabilities in-house.  In the FT article, the CFO of Caterpillar notes that this year, some Caterpillar facilities have ramped from near zero to as much as 70 percent with very little notice being provided to suppliers.  Japanese manufacturing firms who had previously built “kiretsu” partnerships with suppliers that included joint-financing assistance, are now aggressively outsourcing large portions of manufacturing to contract manufacturers.  In its article, FT concludes that “big manufacturers may well take the lesson that careful stewardship of the supply chain is important at all stages of the cycle.”

Perhaps we should not call all big manufacturing firms to task for transferring the bulk of supply chain capability to smaller suppliers without some strategic assistance.  Some firms have indeed reached out, but I suspect that the numbers are small.  What is becoming clearer, however, is that dependency on suppliers, whether large or small, is the ‘new normal’ and larger firms have higher stakes in the long-term success of these suppliers.  Perhaps some of the key parts shortages being experienced in the high tech and other industries may have root cause to the current conditions.  In any case, there is, at least in my mind, some basis for the effectiveness of “kirestsu” types of supplier partnerships.  The ‘big-picture’ is that some new form of partnership model is required, one that requires the involvement of business, financial and/or other parties.

The months of severe recession and cumulative cost cutting has shifted the supply chain risk profile.  Today’s volatile and uncertain global economy requires capabilities in supply chain agility. While technology can help with agility, strategic and partnership strategies related to suppliers may be a missing component in today’s environment.

Is your organization actively addressing this situation?

Bob Ferrari

Oracle is taking advantage of the International Supply Management (ISM) Conference being held this week to showcase the availability of both Oracle Supplier Lifecycle Management and Oracle Supplier Hub. Both applications are part of the Oracle E-Business Suite Release 12.1.2, being offered as Supplier Management support.

These applications were designed to be complimentary to each other and are being offered to companies who have a large number of suppliers to support.  They were designed to support needs for improving overall supplier visibility and to overcome supplier data fragmentation.  Oracle Supplier Lifecycle Management is positioned more towards business process applications needs, supporting supplier discovery, qualification, contract compliance, scorecarding and self-service registration and applications needs.  Oracle Supplier Hub is positioned more as a master data management hub to consolidate, cleanse and share supplier data with other applications.  The application creates a blended supplier record from multiple sources and supports a cross reference to each connected application. It further supports the importing of data via multiple means, including XML or spreadsheet uploads.

Interesting enough, Patni Computer Systems partnered with Oracle to jointly develop both of these applications is an unusual occurrence for Oracle. I was informed by Nagaraj Srinivasan, Oracle’s Vice President of Supply Chain and Procurement Applications Development that Patni will be a prime, but not exclusive implementation partner. 

Oracle is targeting a broad swath of vertical industries with these applications, to include not only manufacturing and retail, but communications, financial, insurance and public sector.  The common denominators are companies that must manage and support a very large number of suppliers at any given time.

 Bob Ferrari

On November 2^nd, mega retailer Wal-Mart informed over 1000 of its apparel suppliers about its new “Supplier Alliance Program”. Eligible suppliers will be able to get payment on their shipment invoices to Wal-Mart in ten to fifteen days vs. Wal-Mart’s typical 60 to 90 day payment cycle, by having the ability to factor their receivable invoice with a select group of banks including Wells Fargo & Company and Citigroup Inc.

 A Wall Street Journal article outlining this program indicated that this move is a obvious response to recent news of the bankruptcy filing of lender CIT, a lender to a large number of small and mid-sized businesses.  With such a major credit facilities being eliminated, Wal-Mart executives obviously want to insure a steady flow of supply while insuring that suppliers do not suffer additional financial risk. The WSJ did not qualify that the program was limited to just apparel suppliers. A Wal-Mart spokesperson later clarified both the limited scope as well as denied that the sole purpose was to provide an alternative vehicle for CIT.  The Reuters article provides a direct quote from Wal-Mart’s letter. “We are contacting you as part of our effort to proactively minimize the exposure of our supplier base to the financial difficulties of any particular factoring source.”

This move presents a double-edged sword.  Wal-Mart is practicing proactive supply risk mitigation by reaching out to its most vulnerable of suppliers with a means for getting paid more quickly.  One would question why the program was not extended to other types of smaller suppliers, other than apparel.  Perhaps Wal-Mart felt constrained in scope. Retailer chain Kohl’s launched a supply chain finance program in July, offering a 3.5%  rate of factoring interest to certain of its supplier base. Factoring of receivables is a common practice for certain cash-strapped smaller suppliers. Getting paid in fifteen days is far more preferable than the reality for getting paid in sixty days, and by offering more favorable interest rates, suppliers stand to gain relief.

On the other hand, such a program, particularly when it originates from such a large buyer as Wal-Mart, can place these suppliers either in a complete dependency on Wal-Mart, or more inclined to provide preferential treatment to any of Wal-Mart’s future needs in product innovation or preferences to product that may be in limited supply.  Some Supply Chain Matters readers might respond to that question with a “so what” statement.  That’s just the way business is conducted.  Others may take the opposite view, namely a business should never practice a complete dependence on a single buyer.

Time and events will provide the final report card to Wal-Mart’s Supplier Alliance Program.

I’m sure Supply Chain Matters readers would value the comments and/or feedback Wal-Mart’s smaller suppliers regarding their reactions to this new initiative.  Please utilize the Comments feature directly below this posting.

 Bob Ferrari

Jason Busch made some observations on his Spend Matters blog relative to a recent editorial appearing in the Wall Street Journal.  This opinion piece, United They’ll Stand, was written by Professor Robert Handfield from North Carolina State University in Raleigh, and essentially delivers the message that the decisions of supply-chain managers in the current aftereffects of the severe economic crisis may be among the most important they’ll ever make. This sometimes requires a rethinking of their relationships with their key suppliers.  I urge my readers to review this editorial, since Professor Hatfield delivers very succinct and timely messages for our community.

Jason calls attention to another blog posting penned by Gartner Industry Analyst Debbie Wilson.  Ms. Wilson’s premise is that while she conceptually agrees with Handfield, these recommendations are deeply flawed because of certain business or industry realities.  I disagree with Ms. Wilson, and will respond to each of her points:

1. Ms. Wilson states that many if not most companies simply do not have the funds available to provide financial assistance to suppliers, and protecting your own interests outweighs that of a supplier.  My response is that this is exactly the thinking that I suspect Dr. Handfield has challenged.  Making some efforts to keep key suppliers financially viable protects any customer’s interests.  Financial assistance can take many forms, from more timely payments for services, to a helping hand in any and all areas of business.  Toyota and other leading-edge companies do not shy from reaching out to key suppliers in times of crisis, and key suppliers have, in-turn reached out to Toyota in times of crisis. As many companies have learned the hard way, when major disruption occurs in your supply chain, you certainly expect your key suppliers to respond proactively.  So why not do the same when these same suppliers face crisis.
2. Ms. Wilson points out that many troubled suppliers require too much assistance for any one customer to get them on their feet again.  My response is that this statement is too generalized.  Not all suppliers fall into this broad generalization, so don’t use it.
3. Ms. Wilson further observes that the most vulnerable suppliers are those that populate a severely troubled industry, such as the U.S. automotive industry, and how can a buyer help out multiple distressed suppliers.  To some extent this is true, but not all automotive Tier One suppliers suffer from the most severe problems.  Some of the most savvy automotive suppliers have built new relationships with stronger OEM’s, some of which were foreign based such as Honda, Toyota, and others. It’s a two-way street.  In the specific case of the U.S. automotive industry, the government has deemed that the industry is strategic to the economy, and has stepped in to assist certain key suppliers.
4. Last, but not least, Ms. Wilson states that a supplier that has systemic issues achieving profitability isn’t the best candidate for being a “strategic supplier”.  This is once again just too broad a generalization. Isn’t it more difficult and costly to locate and qualify a new supplier, than to assist a trusted supplier? If Ms. Wilson and other procurement professionals were a bit more open-minded in their thinking, there would be a more open-minded lens that systemic issues of supplier profitability may have been caused by the strategies that always placed that supplier at a disadvantage in price negotiations or reverse auctions. Perhaps that supplier is strategic because they are one of few vendors that can supply a product, or hold patent to a product.  Again, let’s not generalize.

The bottom line is that Dr. Handfield has raised some practical observations and recommendations in his opinion piece.  I, for one, will include them in my consul to companies and clients, since they make very practical sense for these extraordinary economic times.

 Bob Ferrari

I have penned previous postings as far back as the summer of 2008, that comment on the remarkable attributes of Apple’s physical supply chain, as well as its ability to support major product launches, such as the iPhone launch in July of 2008. Readers may recall that Apple demonstrated the ability to sell and deliver over one million units in the first weekend of the iPhone product launch. In fact, it was a breakdown in the digital supply chain that proved to be the biggest problem during this previous product launch.

Apple has long operated in a veil of secrecy, seldom sharing information regarding its supply chain capabilities or pending product launches.  But in the specific case of Apple, this cloak of secrecy can be easily compromised by information leaks across the various tiers in its value-chain.

That evidence was clearly evident last week in a series of articles appearing both in Silicon Valley and other  blogs.  A blog posting in SiliconValley.com indicated that Apple had ordered 100 million 8GB NAND flash chips, mostly with Samsung Electronics, to support upcoming product build needs. Their source was the Taiwan based media site, DigiTimes, which also predicted an industry supply shortage of these memory devices, because of Apple’s supply requirements.  The order is double the reported size of last year’s supply to support the launch of the iPhone.  This blog post also cites other “supply chain scuttlebutt” indicating that component suppliers have started shipping iPhone parts to assembly plants on a schedule pegged to a “June launch”, to support a build plan of five to six million units, considerably higher than previous estimates. Similar information appeared on the Apple 2.0 blog, also appearing in Fortune, which cites Kaufman Brothers analyst Shaw Wu as assimilating the same information from various supply chain and industry sources.  Wu’s findings even speculate on the potential variety of models, and timing of the product launch.

Apple’s previous product successes have made the company the envy of consumer electronics.  Success often brings a thirst of inside information, in hopes of figuring out Apple’s next market move.  Those that understand the product’s value-chain can sometimes find key information leaking from this supply and contract manufacturing base.  Chock this up to another potential risk of having a totally outsourced supply chain, that being your ability to control such leaks in key information.

Bob Ferrari