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

Supply Chain Matters has previously penned ongoing commentary regarding the supply chain related challenges of Japanese consumer electronics provider Sony.  Supply chain community members can’t help but observe the multitudes of business challenges that have been a part of Sony these past months. The devastating earthquake and tsunami that occurred in northern Japan in March impacted a number of Sony production facilities. A series of multiple large-scale computer hacking attacks directed squarely at the company’s online communities created considerable financial harm and eroded consumer trust  Sony’s television business has not achieved profitability for the past seven years. A tops-down directive to slash supply chain costs remains to make a significant impact on bottom-line results.

In our commentary in March of last year, we noted how the company’s television business was planning for an aggressive market share attack for the coming fiscal year, planning a 70 percent ramp-up in production, to 25 million units, for the fiscal year that ended in March 2011. Sony’s senior management continued to take an aggressive stance on returning the business to profitability, thus creating a conflict for television.  Sony has closed 20 percent of its manufacturing plants, including the closing of four of Sony’s eight television production plants, and eliminated 20,000 jobs. In our commentary in November, we noted that Sony’s CFO, Masaru Kato indicated that the company had no intention of being “adventurous” in its supply chain management and that “pushing products into the market without consumers is not the business we are in.” The company slashed inventory and began an aggressive plan to outsource additional television manufacturing outside of Japan.  Production outsourcing agreements surrounding the company’s Slovakia and North American facilities have been struck with global contract manufacturer Foxconn Technology Group. Senior management also entered into joint manufacturing ventures with industry rivals.

Sony recently released its fiscal Q1 quarterly earnings (June ending) and the results were not optimistic. While operating income was reported at $340 million, the company reported a net loss.  Sales for the quarter declined 10 percent, with the consumer business unit recording a 17.9 percent decrease in sales.  The company acknowledged that operations were negatively affected by the earthquake, with $66 million recorded as incremental expenses directly related to damage, repair and inventory write-off. Lower LCD television sales were noted compared to the previous forecast in May.  The financial press echoed headlines that Sony has cut its profit forecast for the remainder of the fiscal year by 25 percent, while management has called for more supply chain cost reductions, including further outsourcing of production. Meanwhile, Sony executives continue to re-iterate the importance of the television business to Sony’s strategic direction.

An article published in Bloomberg BusinessWeek notes that as of two months ago, Sony was optimistically forecasting an annual production output of 27 million units for the current fiscal year.  Sony’s annual production forecast has now been lowered to 22 million units, a 19 percent reduction in a matter of two months. The magnitude of the change raises speculation on the effectiveness of Sony’s executive level S&OP planning.

Another business and management re-organization is in the works and we all have to wonder that the company’s television related supply chain and S&OP planners have been suffering from whiplash. Eroding market conditions, severe competition, overly optimistic forecasts and an unprecedented earthquake event have all taken a toll. Of more concern, Sony has been surrounded by competitors who have closed the gap in innovation and quality perception. A strategy of market share gain has been subsumed by that of lower cost, market share defense, while the overall market remains challenging at best.  The precipitous events of financial markets this week have not helped to improve consumer confidence and sensing the market is ever more critical.

Some difficult decisions lie ahead for Sony’s senior executive and supply chain teams, and Supply Chain Matters anticipates further dramatic announcements. One thing is clear however, over optimism needs to be replaced with more pragmatic, forward oriented and fact-based decision-making. The forecasting logic of the past needs to be replaced with more responsive planning that is tuned to the realities of Sony’s markets. A lot is at-stake.

Industry and community members are welcomed to share their observations.

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, which is now approaching 5000 registered members.

Yesterday’s announcement from American Airlines indicating a split order for new aircraft to be supplied by Airbus and Boeing has a tremendous amount of significance from many business dimensions, not the least of which are supply chain strategy related.  For those unfamiliar as yet with the announcement, currently noted as the largest aircraft purchase in history,  American, which was a former loyal customer of Boeing, announced that it would purchase 260 Airbus A320neo, along with 200 Boeing 737 aircraft. Deliveries of both aircraft are slated to be in the 2017-2018 time period.

In a few short months, airlines have voted with their wallets, with a driven need to bring more fuel efficient and lower operating cost aircraft into their fleets.  Since announcing the A320neo in December, which promises 15 percent better fuel efficiency, Airbus has managed to capture more unit backlog than what currently exists for Boeing’s 787 Dreamliner, an aircraft three years overdue and targeted at lower operating costs. Backlog for the new A320 is approaching 1000 while the Dreamliner stands at 880. With continued new orders now pushing deliveries out seven years, other airlines will be compelled to make their own fleet decisions or risk having a disadvantage over competitors in operating costs.  A buyer herd mentality is occurring. As an example, discount carrier Southwest Airlines has yet to announce a replacement plan for its single aisle aircraft.

Readers who currently support the aerospace industry are obviously feeling lots of optimism since the current backlog of orders among Airbus and Boeing combined is now seven years and rising.  While elation is in order, we would advise that the time for celebration be brief, since aerospace related supply chains will have many challenges to overcome in the coming months. These challenges will also require different supply chain competencies.

This week, the Financial Times provided a pre-cursor introduction to this new era in a published article (paid subscription or metered view required) that noted that swollen aerospace supply chains, already showing signs of stress, have been increasingly concerned as to whether suppliers will be able to meet surging demand.  Aerospace is an engineering-driven environment where specifications and conformance to quality are strict, and qualified raw materials and suppliers are limited.  The latest wave of innovation in components has been breakthrough, but has added many new challenges. Capacity has been and will remain a significant challenge, but other capabilities will also be required. A snafu or failure from one supplier can stop an entire OEM final production line, and with this level of growing combined order backlog, a stoppage will be ever more expensive in dollars and reputation.

The aerospace supply chain dominants, Airbus and Boeing, remain intensively competitive and reputations are at stake. Other OEM players like Bombardier, Embraer and Comac want their share of orders for their aircraft offerings. Snafus and delays surrounding outsourced supply chain of programs such as the Boeing 787 Dreamliner or Airbus A380 programs speak for themselves and Supply Chain Matters has provided multiple commentaries regarding the lessons learned. Candidly, the industry has not presented a stellar record around sourcing criteria, program management, operational consistency two-way communication and predictability.

The FT article noted through select interviews with suppliers that that was the past, and this new era will be different.  Some suppliers have been proactive in leveraging delay time to enhance capacity and their own value-chain capabilities. We certainly hope so for everyone’s sake, since as FT indicated, the stakes are now ever higher. To echo the words of Jim Albaugh, head of Boeing’s commercial aircraft business, the supply chain needs to be ready and able to deal with the implications of this amount of business, the pressure is now on, not only Airbus and Boeing, but the other OEM players as well. Airline and carrier customers remain under pressure to find all means to reduce operating costs and cannot afford any future delays in aircraft deliveries. In short, the stakes are higher and growing.

Supply Chain Matters offers some recommendations to aerospace industry participants, and encourages readers to add their own as well.

For the OEM’s:

Continue to extend supplier collaboration efforts and practice win-win vs. other strategies. Much learning has hopefully occurred from previous supply chain outsourcing efforts and that learning needs to be quickly translated toward insuring suppliers are ready People, processes, and tools are indeed the criteria, but also consider two-way program management, communication and timely visibility to schedule or engineering changes. In our view, Airbus has demonstrated that it has learned from past setbacks, and the introduction of the A320neo is a demonstration of active supplier collaboration and involvement.

S&OP processes for OEM’s should consider including more key supplier participation and involvement.  Contrary to traditional S&OP methodology, it would wise for OEM’s to also extend the planning windows of the S&OP process, both deeper into the value-chain, and broader in time windows. Some form of an executive level S&OP in our view, is mandatory to insure no surprises. Automation of S&OP processes should garner serious consideration if has not done so.

For value-chain suppliers and trading partners the challenges are more acute:

Total upstream and downstream supply chain visibility is essential in an environment that has coordinated or synchronized scheduling.  That includes visibility among all suppliers to OEM production schedules and early warning to any planned or unplanned supply disruptions.

More emphasis will be required in response management and business intelligence capabilities.  Utilizing standard MRP or lean six sigma methods coupled with static logic can fall short in the forthcoming highly dynamic backlog environment.  OEM schedules will surely change, orders will be shifted in priority and supply disruptions are inevitable.  Airlines who desire earlier delivery of new aircraft may opt to select an OEM other than Airbus or Boeing, and those OEM’s may come knocking for your capacity. Suppliers who have current business supporting other industry or service parts needs will have to make intelligent decisions on smart allocation of existing capacity, balancing different customer needs. Having agile business processes that incorporate more real-time planning and execution information coupled with supply chain intelligence helps suppliers to proactively respond to additional business opportunities as well as changing day-to-day operating priorities from existing OEM’s.

Supply chain risk identification and mitigation will be a significant competency.  The Japan earthquake and tsunami was our wake-up call to the reality that any single-sourced component, compound or material can affect the entire value-chain.  Boeing and other OEM’s are initiating supplier risk assessments and suppliers should be doing the same for their value-chains. Supply chain disruption due to political, governmental or natural disaster events is a new reality for more occurrences, and all suppliers need to have a plan to identify risk areas and insure business continuity.

The aerospace industry is in a very enviable position with lots of business and robust demand.  Unfortunately, business processes of the past will not cut the mustard in this more dynamic and looking-glass environment.  Consistent execution, end-to-end visibility, constant collaboration and timely response are the new business stakes for participants.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group. All rights reserved

Many consistent themes occur in our continuous commentary on Supply Chain Matters and one of the most consistent over these past months has been the supply chain setbacks within Boeing’s infamous 787 Dreamliner manufacturing program. One of the most innovative aircraft in terms of bold design was burdened by a supply chain sourcing strategy that has provided multiple setbacks and frustrations.

In August 2010, Supply Chain Matters revisited the admission by Boeing’s CEO of the key importance that Boeing had on its supply chain capability, which was a statement of the obvious. August also provided yet another setback, the admission that important issues with engine supplier Rolls Royce and workmanship problems at Alenia Aeronautica led to a decision to postpone delivery to first initial customer All Nippon Airways (ANA) to the end of 2010.  ANA has 55 Dreamliners on-order. In November, an in-flight incident of an electrical fire and power failure on one of the 787 test aircraft caused another unanticipated and potentially serious delay that pushed back first customer delivery to Q3 of this year.

In May and June of this year, a political eruption occurred when the U.S. National Labor Relations Board (NLRB) filed an unfair labor charge against Boeing in April, related to the company’s intent to open and operate a second final-assembly production line in South Carolina. The decision was based on comments allegedly made by Boeing’s senior management that indicated that the second production line was payback for past labor strikes by Boeing’s union members in Seattle.  The NLRB claimed that Boeing illegally punished its labor union by building the 787 facility in a non-union state, and proposed that the second facility be opened in Washington state. A political firestorm then developed as Boeing motivated national; Republican legislators to shout government intervention. The Boeing PR machine cranked into overtime on developing a Wall Street Journal editorial, authored by CEO Jim McNerney, claiming that Boeing is pro-growth and not anti-union. Mr. McNerney stated in the commentary, “The NLRB is wrong and has far overreached its authority. Its action is a fundamental assault on the capitalist principles that have sustained America’s competitiveness since it became the world’s largest economy nearly 140 years ago.” Mr. McNerney continued with the argument that government overreach could accelerate the flight of middle-class American jobs. Boeing has further stated that it will fight the forced relocation all the way to the Supreme Court, if necessary.

In spite of the PR, the issue of operating the second final assembly line in South Carolina is still in doubt, and the judicial and appeals process adds the potential for more delays.

For the past two weeks, Boeing has been in the process of conducting final certification and acceptance testing of the initial 787 in conjunction with ANA.  The testing process is being conducted in Japan and on Asia air routes, allowing pilots and engineers to mimic ground and air operations. Reports indicate that ANA will begin operation of the 787 initially on domestic routes before moving to international routing.  Reports have been that both Boeing and ANA teams are excited about the testing and pending certification. We checked Jon Ostrower’s Flightblogger and noted a posting that indicates that the timeline of Boeing’s announcements have been very carefully worded, and according to Ostrower, “Either Boeing has decided to add a bit of variety to its wording for 787 first delivery or there is ground work being laid for a delivery after September.”

An article in the Wall Street Journal on July 14 notes more disappointing supply chain news.  Boeing acknowledged that it was halting final assembly of 787’s at the factory in Everett Washington for about a month, to address termed supply chain issues. Ostrower penned another entry quoting Boeing wording that indicates “supplier spot shortages’ and “remaining engineering changes” were the motivator for this newest delay.  Boeing additionally stated that it will comment on any impacts to all downstream deliveries during its July 27 Q2 earnings report.  There has also been speculation as to whether some of Boeing’s suppliers were seriously impacted by the devastating earthquake that occurred in Japan in March.

Boeing faces tough supply chain challenges regarding the 787.  The program is over three years late in deliveries, and the operation of a second final assembly facility to help catch-up on production remains unresolved.  Suppliers have been patient and so have 787 customers, but patience is often fleeting. There is a limit to financial incentives or penalties.

While supply and other visible issues continue, Boeing’s attention is drawn away from other programs.  A previous Supply Chain Matters commentary noted speculation that decision delays on the long-term design of the popular 737 workhorse has led to explosive order rates for the Airbus 320neo aircraft.

We all want and need Boeing to succeed, but events are not lending themselves toward supply chain or customer excellence. Any sustained manufacturing resurgence for the U.S. needs to have Boeing as a key contributor.

As a final note, we continue to reach-out to Boeing to perhaps gain another perspective, but our efforts have not yielded any response.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site where this author is a featured guest blogger.

This posting is a follow-up to our previous community commentary regarding the impact of higher inbound material prices on global supply chains. In January, Supply Chain Matters noted that the two most significant challenges in global supply chains for 2011 would be rising inbound material costs and product demand uncertainty. Two corporate statements this week now point to a pending business slowdown in emerging markets as another indicator of the interrelationships of these challenges.

An article in the Europe Business News section of The Wall Street Journal (paid subscription may be required) quotes the Executive Vice President of Nestle SA as indicating that natural and man-made disasters coupled with the spiraling costs of raw materials will impact sales in emerging markets in the coming months, especially China. Higher inbound material costs have caused price increases among food companies and these price increases are fanning inflationary forces as well as consumer unrest and pullbacks. Nestle’s Asia-Oceania-Africa zone was the fastest growing region in Q1 and accounted for around two-thirds of exposure to emerging markets. That region may now experience reduced growth. Although these forces will slow the rate of expected growth, Nestle cautions that overall growth from emerging markets will continue, albeit at a slower pace than originally anticipated.

As we noted last week, Nestle has acknowledged that price increases have to be selective, especially in the price-sensitive emerging markets, and is further implementing a number of strategies to overcome the impact of rising inbound costs. Mentioned strategies in this latest report are reducing waste and packaging, along with re-engineering products with cheaper materials. The article notes that target prices for goods distributed in countries such as Vietnam or China have been determined and where costs exceed these targets, other means of cost reduction need to be made.

Supporting these market slowdown announcements are media reports of a wave of violent worker unrest across urban areas of China as migrant workers feel the impact of lost jobs caused by industry sourcing shifts and vastly higher food prices brought about by inflation. China’s rate of inflation was reported as 5.5 percent in May. Violence has been reported in the southern China city of Zengcheng, a city of about 800,000 located close to the Guangzhou manufacturing region, along with other rioting in central China. Readers may recall that the recent multiple uprisings across the Middle East, or the so-termed “Arab Spring” have also been motivated by population unrest over the higher cost of food and staples. Civil war in the Ivory Coast caused Nestle to shut its factories in that region, and flavorings producer McCormick had to secure alternative sources of supply as a result of the uprising in Egypt.

Glencore International plc, who controls a large share of international trading among metals, minerals and agricultural commodities, also issued a warning.  In an article published in the Financial Times (paid subscription of free preview account required), the CEO of Glencore, Ivan Glasenberg, warned that high inflationary prices and the Chinese government’s actions to curb those forces have caused a pullback in China, and added his hopes that this pullback would be temporary. He in turn noted that China’s monetary tightening would be temporary and the pullback could be short-lived. Since industrial commodities are the first stage of many different industry value-chains, this current pullback will be felt within upstream portions of supply chains over the coming weeks.

The effects of rising inbound costs are not just reflected in internal supply chain impacts. They also impact external demand trigger points. This is an important consideration for having the sales voice on emerging markets demand as part of the sales and operations planning (S&OP) process. If there have been aggressive assumptions made relative to product demand growth stemming from emerging markets, now may be the time to revisit those assumptions and run some additional scenarios of lower growth.

What is the view from your organization?

Has product demand from emerging markets such as China started to decline or taper-off?

Bob Ferrari