Every now and then we reach a point when it is time to make a statement about the current challenging business environment, especially when it relates to global supply chains, and this is that time.

Catching-up on last week’s reading, in particular two related articles published in the Financial Times, triggered this commentary.  One article noted that the biggest U.S. companies currently have an estimated $2 trillion in cash balances as a result of healthy earnings in 2011.

Reflect on that number for a moment, TWO TRILLION.

What a problem to have!

Where do you think a good majority of this cash is going to be directed?  If you speculate stock buyback and dividend payout programs, you are absolutely correct.  Amid a perceived uncertain economic environment, and not to mention a presidential election year, companies seem very reluctant to either hire or invest in longer-term capabilities. According to FT, analyzing the most recent figures available, last year, from Q4-2010 thru Q3-2011, U.S. companies diverted $336 billion into share buybacks,  That is the highest volume since 2007. Corporations also raised dividend payouts by 11 percent in 2011.  Some large companies actually issued more debt to finance buybacks of more than $2 billion.

That brought us to recall a January 4^th FT Insight Commentary article penned by John Plender (paid subscription or free metered view).  He observes that corporate profit margins are at all time highs because of savage labor shedding or shifting of labor costs to lower cost regions.  The open question raised by Plender relates to where will this cash be routed in 2012.  Pender opines that the obvious outlet again will be share buybacks.  Why? Because the compensation incentives of many of today’s senior executives is pegged to increased earnings per share measures.  He points out that academic evidence shows that a high proportion of CFO’s admit to a willingness to sacrifice economic value to meet short-term earnings target.  These trends are referred to as financial engineering.

Both articles are cause for considerable concern.  Manufacturers should not be faulted for being cautious given the current uncertain economic environment.  There should be some cushion of cash as a contingency.  However, the upcoming challenges in 2012 point to a significant need to reassess supply chain strategies and invest in longer-term capabilities.

Supply chains have been under enormous stress these past few years.  They have had to respond to relentless pressures to cut costs, reduce overhead and increase productivity.  For well over ten years, a flight to low-cost manufacturing regions was fueled by these pressures for cost reduction. However, the year 2011 offered stark evidence that the era of low-cost sourcing of manufacturing comes with significant risk, especially when supply chains are profiled in the leanest dimensions, or the sourcing of key components is too focused and vulnerable to disruption occurring in a single region.

Supply chain professionals had to perform yeomen activities and work countless hours to respond to assess and respond to major supply disruptions. Interestingly enough, the companies who managed the disruptions best were those who had healthy inventory safety stock levels.

We heard one senior supply chain manager express it best- we are perhaps in an era of the one quarter supply chain, configured for short-term measures and financial results.

Thus, the purpose of this commentary is to send a wake-up call to corporate boardrooms.

There is ample and proven evidence that companies who invest for the long-term, whether in people, process or technology, will reap the rewards of long-term industry competiveness.  Even in times of uncertainty, those that invested where far more able to leverage market opportunities when opportunities presented themselves in the market.

We all, as stockholders, whether direct or through our long-term retirement savings, need to send a clear and loud message to CEO’s that while languishing in earnings in cash is great and leads to healthy bonus compensation, the tradeoff can well be more financially damaging to the economy and to the corporation..

How about channeling some of that cash into investments in people, process, and in longer-term supply chain capabilities. Executives need only review our 2012 Predictions for Global Supply Chains to understand that challenges remain and investment in a longer-term window is way overdue.

Bob Ferrari

This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four

Predictions Five and Six

Prediction Seven: Expect additional M&A and strategic partnership activity among supply chain technology, consulting services and ERP providers as vendors shore-up application areas with the best prospects for sustained future growth.

This is the natural follow-on to predictions five and six.  As concepts of supply chain control tower, more leveraged deployment of predictive analytics, multi-channel supply chain operations management and cloud computing options gain more traction and interest among technology buyers, the vendor community will make additional market moves either in acquisition or strategic partnerships to shore-up overall product offerings for buyers.

While we predicted high activity in 2011 which do not come to pass, we believe that 2012 will provide more motivation, namely because overall spending on software is predicted to decrease in 2012. This makes any path to growth dependent on a keen focus on near-term customer buying needs, quickly filling gaps in technology offerings or gaining market growth by outright acquisition.

Supply Chain Matters believes that two smaller vendors in the planning area, and perhaps one or two vendors in the B2B procurement area are likely targets in 2012 from multiple larger acquirers and we will anticipate, as our readers, on what actually transpires.

We expect more acquisition efforts by the major ERP, B2B cloud services and procurement technology providers, and do not be surprised if some leading vendors in these new adoption areas get acquired by larger players. Some targets will be acquired with high multiples to prevent competitors from scooping them up.

B2B commerce and collaborative planning and execution networks will most likely be the hottest area for deals and shifting of players and anticipate more announcements as big players IBM, Salesforce, Amazon, Google and  possibly Microsoft square-off and bankroll for control of online commerce infrastructure and business process control.  Similarly, SAP and Oracle will continue to fill-in advanced supply chain technology software gaps, particularly in cloud and control tower areas.

Prediction Eight: The challenges related to higher incidents of counterfeit products, cargo theft and other unscrupulous activities within and across global supply chains will finally motivate government and industry to step-up process standards and corrective mitigation efforts.

This collective area has been percolating for many years and we anticipate that 2012 will be the year when government and industry finally become motivated to take action to address the growing incidents of non-conforming materials that have penetrated multi-industry global supply chains.

In the U.S., legislative leaders and industry groups have become much more alarmed with the existence of counterfeit electronic parts penetrating defense and industry oriented supply chains, much of which is alleged to be originating from China and other countries.   The U.S. government has already discovered 1800 cases of suspect counterfeit electronics being sold to the U.S. Defense Department from commercial and military suppliers.  The Semiconductor Industry Association testified that U.S. semiconductor companies face more than $7.5 billion in costs related to counterfeit parts each year as non-conforming electronic microelectronics are being embedded in automotive, aerospace, communications, medical device, and other industry supply chains.

In our industry-related prediction pertaining to Pharmaceutical and Healthcare, we noted that increased shortages of drugs has led to more unscrupulous and criminal behavior relative to grey market supply, cargo theft and prescription drug abuse.  Increased outsourcing of production to global contract manufacturers and API providers adds to the problem.

Regarding cargo theft, brazen criminals have stepped up their sophistication of methods in stealing whole cargo shipments, by utilizing active surveillance of driving patterns, GPS global tracking and other means to circumvent existing security measures.   A challenged economic environment often leads to increased criminal behavior, and in 2012, the criminals can leverage more sophisticated means and methods. Stolen cargo adds to the problem of non-conforming products.

Look for governments to increase the pressure on industry players to accelerate initiatives in authentication, tracking and genealogy of components, parts and raw materials. In the U.S., state wide initiatives and efforts were enacted to overcome lack of any concerted action by the federal government. In Pharmaceutical and healthcare, the looming deadline is the California anti-counterfeiting and diversion legislation which requires pedigree tracking.  After numerous industry lobbying efforts to postpone the implementation, the program remains target for implementation in 2015.  Serialization and authentication program mandates continue to evolve across the Eurozone countries and Brazil has called for implementation of serialization and track and trace requirements in 2012.

As the deadlines come closer, and the costs in terms of revenue, liability and implementation costs loom ever larger, we believe that industry teams will become much more actively involved in influencing some forms of global-wide process standards and inter-industry cooperation in sharing product movement information across global supply chains. We may finally have the opportunity to observe industry teams stepup efforts to actively influence global standards and enhanced mitigation initiatives in prevention as well the tracking and interception.

This concludes Part Six of our Supply Chain Matters 2012 Predictions.  In Part Seven, we will explore our Prediction Nine, our continued belief in wider-scale adoption of and leverage of in-memory computing technologies harnessed into predictive analytics and decision-making process needs.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four

Prediction Five: The concept of “supply chain control tower” will come to the forefront, but in 2012, there will be a need for vendors and consultants to focus on further market education and early adoption support.

In our discussions, presentations and attendance at 2011 supply chain forums and events, we have discussed and heard from manufacturers on the need for a “supply chain control tower” technology enablement.  The term itself is not one that was primarily conceived by technology vendors, but rather industry visionaries who now acutely understand that there is need to have complete visibility and decision control of all that is occurring across the extended global supply chain.  The clock speeds of business change have increased dramatically, along with their subsequent impact on supply and demand planning and fulfillment execution needs. Sequential planning cycles predicated on historic data views and incorporation of the impacts of the latest real-time events are the new challenges for managing highly dynamic supply chains.

The control tower concept stems from OEM’s primarily in the high tech and consumer electronics industry that are deeply involved in supply chain planning and fulfillment execution in a highly extended and complex network.  They have come to understand that constant volatility in product demand, supply, and other unplanned events are exposing the vulnerabilities of cadence or process driven planning, execution or S&OP processes.

Supply chain teams require more-timely, and more forward looking decision making vs. just visibility to what has occurred. A control tower can become a single utility view for tracking information related to supply chain wide events, decisions and information flow. In essence, it can provide an information hub that supports two-way decision-making, interaction and extended collaboration for what is occurring and what needs to occur. Consultants and systems integrators have also honed-in on this new requirement, and some pilot process implementations will continue in 2012.

Technology vendors have greatly overhyped the terms “supply chain wide visibility” and we believe that users demand much more supply chain business process control specifics and capabilities with this new concept.  Our prediction is that in 2012, the supply chain control tower will come to the forefront of discussion, but this is still an early phase period of market adoption and early adoption. The notion of a supply chain control tower will benefit from more discussion among both functional and IT support teams and will require more market education of the various technology elements that can enable this concept. The payoff in industry competitiveness and financial benefits can be huge.

We anticipate that the technology vendors themselves will converge on this area from four separate perspectives: supply chain execution, supply chain planning and business process management (BPM)/ business intelligence (BI), and B2B trading network perspectives. This will place the burden on consultants, system integrators and end-user teams to sort out the best approach for specific needs.  Vendors and consultants will also need to provide more hand-holding support to early adopters in their deployments.

Prediction Six: Cloud computing and broader managed services options directed at enabling selective supply chain business processes will continue to gain more traction.

The momentum for cloud computing technology adoption continued during 2011 as manufacturers, retailers and service enterprises filled-in tactical holes within supply chain problem areas such as procurement efficiency, overall spend reduction, broader supply network collaboration and deeper insights into demand and supply patterns.

The prospective of a much more challenged global economy and added pressures to reduce cost and improve service levels directed at maintaining or acquiring key customers is a given in the coming year.  External clouds can provide more flexible options for supply chain networks to exchange information with key customers and partners and collaborate more effectively on planning and execution needs. We therefore believe that more organizations will turn to broader cloud computing adoption or managed outsourced service options for selective supply chain process areas during 2012.  Cloud deployments will continue to include both private and public cloud options, with private clouds continuing to be favored within supply chain mission critical management process areas.

The cloud computing option provides enterprises with a further means to limit large up-front costs for the acquisition of key technology, and further provides the flexibility for offsetting the traditionally high annual software maintenance fees associated with enterprise level behind the firewall software use. Cloud-based technology further provides a role in helping supply chain networks to foster “plug and play”  process support capabilities. A key sign of acknowledgement of cloud computing market adoption occurred in late 2011 as dominant ERP providers made acquisitions to shore-up their cloud computing options for customers.  In late October, Oracle agreed to acquire cloud customer service provider RightNow Technologies, and in early December SAP agreed to acquire HCM cloud provider SuccessFactors. The ERP providers will have to mask their desire to sell more “seat-based” revenue opportunities with the need for customers to have meaningful cloud options that do not require major upgrades of the existing ERP technology stack.

Smaller, specialized cloud oriented supply chain technology vendors will continue to gain more market visibility.  Selection however should consider that some vendors may be targets of acquisition from bigger players in 2012 (see Prediction Seven).  Insure that your service-level agreements include provisions for carryover, in the case of acquisition or merger.

Managed Services

We also continue to hear reports from vendors and consultants that more managed services options directed at select supply chain process areas are gaining interest.  A big help in this area has been a broader understanding and education of the concepts of Vested Outsourcing, as advocated by the University of Tennessee. Vested Outsourcing calls for a outcome-based partnership among the outsourcer and the managed service provider for establishing goals for defined outcomes, joint oversight, and win-win incentives.

Look for more uptake in 3PL / 4PL partnerships in logistics and order fulfillment process needs, procurement of indirect services, and some areas of supply chain planning related to steady-state product offerings. In the U.S., 3PL’s are mindful of the likllihood of a truck capacity shortage if overall manufacturing activity increases, and are continuing to take advantage of cloud delivered technology, intermodal modes, optimized shipment structures and a heightened focus on collaborative capacity utilization.

Managed service options will continue to provide an attractive option for small and mid-sized businesses, but cost competitive, develop or buy factors will remain a part of the process.

This concludes Part Five of our Supply Chain Matters 2012 Predictions.  In Part Six, we will explore our Prediction Seven, reflecting on added M&A And strategic partnership activities among technology providers, and Prediction Eight, a move toward stepped-up standards and mitigation efforts on the part of industry and governments to combat the growing problem of counterfeit parts and supply chain theft.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

One of our 2012 Predictions for Global Supply Chains in 2012 calls for additional challenges and turmoil for the high tech and consumer electronics industry.  The issues  began manifesting themselves in a highly visible way in 2011 with the severe earthquake and tsunami that struck northern Japan and more recently, the effects of the severe monsoon related floods that impacted Thailand.  Supply Chain Matters provided multiple commentaries reflecting on these problems. This author had the opportunity to provide expert background commentary in a recent Fortune-CNN Money commentary regarding the new fragility of global supply chains.

The latest public acknowledgement of the turmoil that is occurring from behind the scenes comes from chipmaker Intel, who had to lower its fourth quarter sales outlook by $1 billion this week.  The CFO of Intel noted that reductions in inventories are occurring across the high tech supply chain, particularly over the last two weeks as OEM’s continue to adjust plans to deal with a significant shortage of hard disk drives in the first half of 2012.  Behind the scenes, personal computer OEM’s have been assessing how severe the shortage may be and appear to be allocating what supply they will have to higher margin, full featured and more expensive PC’s.  The cascading effect has apparently now reached Intel in its planned supply of microprocessors for OEM’s.  The Silicon Valley.com article notes industry analyst firm IDC indicating that PC sales volume could be 10 to 20 percentage points lower in Q1 of 2012.  That IDC number was in the range of 9 percent just a few weeks ago, which indicates that the severity of supply shortfalls are becoming more understood.

Meanwhile, Western Digital now indicates that it has been able to resume production at one factory much sooner than anticipated while also shifting some sourcing and production arrangements. The company will manufacture head sliders in both Thailand and Malaysia. Western Digital also indicated  a preliminary estimate of losses of $225-$275 million, beyond what it may recover from insurance coverage.

The Wall Street Journal has also reported that ON Semiconductor, which produces chips for audio and power management used in mobile phones, autos and portable electronics, has now indicated that it will end all production at its Sanyo Semiconductor production facilities in Ayutthaya, Thailand, and provide limited production at its Bang Pa site.  Most production will be moved to Malaysia, the Philippines and China.

We will certainly hear from more high tech OEM’s and component suppliers as the aftereffects of the Thailand floods continued to cascade across high tech and consumer electronics suppliers.  While larger companies may well have the financial and other resources to mitigate business impacts, it may well be a variety of smaller suppliers who suffer continued impacts or have to succumb. Time will tell.

As we noted earlier, if you plan to buy a new PC, you might want to do it now vs. postponing that decision to 2012.  The price may well be a lot higher, and availability to bit more scarce.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

 The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four: Three specific industry sectors will be especially affected by significant supply challenges or turmoil in 2012.

In 2011, we correctly predicted that two industry sectors, B2C and Pharmaceutical/Healthcare would be especially affected by process impacts. For 2012, we predict the continuance of significant supply chain challenges within our 2011 selected industries and we add High Tech / Consumer Electronics as a third industry facing significant supply chain challenges.

B2C Sector

The B2C sector will continue to be impacted by the momentum of online multi-channel commerce and a more technology empowered consumer who demands multiple buying options and service experiences. Retailers have quickly come to discover that their supply chains need to have the ability to respond and execute holistically across all consumer buying channels, including online, in-store, vendor direct-ship, or combinations thereof.  Even as we pen these predictions, the headlines for Black Friday and Cyber Monday 2011 indicate an online traffic increase of a whopping 43 percent.  What has become even more apparent is that added investments in online and mobile capabilities and web tools in 2011 must also be complimented with investments in advanced supply chain inventory management and multi-channel commerce fulfillment technology.

While Amazon has become the unstoppable goliath of online commerce and fulfillment capabilities, an announcement by Google in early December 2011 could provide for some industry disruptive dynamics in the coming year.  Google entered talks with select major retailers and shippers to affix its product search capabilities with a one-day quick shipping option.  The capability was pitched to retailers such as Gap, Macy’s, OfficeMax and others. When shoppers place an order on retail web sites, Google’s quick ship would include the capability to scan available store and regional inventories for one day ship fulfillment execution. If adopted, Google has the clout to well become a supply chain fulfillment enabler by the 2012 holiday buying season.

When the dust settles after the 2011 holiday buying season, retailers and online commerce providers will be challenged in 2012 to continue to augment their back-end supply chain fulfillment competencies to seamlessly support multiple buying channels.  By Q4 2012, the holiday focused buying surge will make the notions of Black Friday and Cyber Monday meaningless since consumers will leverage online and mobility tools at will when bargains or available inventory of in-demand hot products are evident.

Pharmaceutical and Healthcare

An article published in Strategy and Business in mid-November re-iterates that the Pharmaceutical industry must fundamentally re-think its supply chain.   The article notes: “There is minimal communication, little effort toward mutual improvement, and no real desire to pursue efficiency gains.”  That reality manifested itself in 2011 as certain Pharmaceutical and Generic Intravenous Drug supply chains failed to deliver on-time and reliable supply, and we do not anticipate any recovery until the latter part of 2012, if at all. Frankly, the industry has shown no public signs of resolving a myriad of supply chain issues involving the increased complexity of a global supply chain involving generic and contract manufacturing relationships. Rather than a mentality that views supply chain as a burden of cost centers, the industry must embrace supply chain efficiency and responsiveness, disciplined and meaningful sales and operations planning as a competitive differentiators. Hospitals, pharmacies and healthcare providers who have faced severe or ongoing shortages and /or allocation of life-saving chemotherapy and intravenous drugs will continue to be challenged in securing reliable supply. Reliable price control, grey market and counterfeit drugs also remain as threats to overcome in an increased environment of scrutiny and regulatory oversight, and a more empowered set of customers.

The year 2012 will be the first major test of former blockbuster drugs losing patent protection and having to compete with high volume generic drug producers. Pfizer’s highly successful cholesterol reducing drug Lipitor will lose its patent protection and the end of 2012.  To hold market share, the company plans to sell Lipitor directly to patients at generic prices.  Pfizer has partnered with Diplomat Specialty Pharmacy to mail the drug directly to patients via online prescription fulfillment.  A dual tier pricing model would be maintained, with generic pricing for Diplomat and higher pricing for existing Lipitor channels. According to a Wall Street Journal article, if successful, the implication would be a distribution model that no major drug maker has implemented to date. Meanwhile, generic drug producers Ranbaxy Laboratories, based in India and Watson Pharmaceuticals plan to produce and distribute generic versions of Lipitor during 2012.

High Tech and Consumer Electronics

We have added High Tech / Consumer Electronics because of the residual impacts of the devastating monsoon related floods that impacted Thailand and other Southeast Asian nations in the fall of 2011.  There are all indications that a significant shortage of hard disk drive components and production capacity will extend to the mid-2102, possibly to through the end of the year.  The production of electronic devices such as laptops and personal computers, storage appliances and disk arrays destined for data centers or cloud computing facilities, and other consumer electronics devices that include a hard disk will all be impacted.  While some large hardware and storage OEM’s will manage to buffer the impact with their buying power and supplier leverage, others may fall short. Readers should not be surprised to hear of well-known brand names impacted by disruption and turmoil during the year.  Prices, both component and finished goods related, will also spike in 2012.

The Wildcard

A fourth wildcard industry mention for 2012 is the Aerospace industry.  A huge backlog of customer orders has caused major OEM’s Airbus and Boeing, along with key component suppliers, to have to aggressively ramp-up planned production output levels.  Boeing itself has a $332 billion order book and has plans to ramp existing production over 30 percent in the coming three years. Its 787 Dreamliner program is three years plus behind schedule, and must ramp-up a second final assembly facility in South Carolina. Airbus, as of October, reported a current backlog representing more than seven years of production output.  Aircraft engine maker Rolls Royce will be opening its first external production facility in Singapore.  Any further major industry glitches, or negative consequences from the Eurozone financial crisis could cause this industry to also be challenged by disruption and turmoil in 2012.

This concludes Part Four of our Supply Chain Matters 2012 Predictions.  In Part Five, we will explore our Prediction Five, where the supply chain control concepts will come to the forefront, and Prediction Six, the increased adoption of cloud computing and managed services adoption in 2012.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.