Wall Street financial analysts and commentators were quick to pounce on Amazon’s recent quarterly earnings announcement.  In the latest quarter (Q4-2011) that included the 2011 holiday buying season, Amazon revenues grew 35 percent, but income was down 57 percent.  Wall Street was very disappointed. Not only were Street analysts anticipating more revenue growth, they have been savage in questioning Amazon’s increased spending and margin erosion.  During the recent quarter, operating expenses were up 38 percent which surpassed quarterly revenue growth.

The other continual topic of speculation revolves around how many Kindle tablets did Amazon really sell during the holiday season.  Supply Chain Matters is just as guilty as others in speculating on the fulfillment wars of Kindle vs. the Barnes and Noble Nook reader, and of course, the largest shadow, Apple’s iPad.  For its part, Amazon remains rather coy in providing very general statements regarding Kindle sales.  The online retailer was quick to point out that Kindle was, by far, the best-selling Amazon holiday product in both the U.S. and Europe. Then again, Amazon visitors were bombarded with constant reminders about Kindle.  While some industry observers and influencers speculate that Kindle sales may have topped six million, the final authority will be Amazon itself.

We all know that Wall Street’s lens on strategy to results centers on the next 90 days vs. a longer-term perspective of market influence.  If all the doom and gloom were taken literally, a short-term investor would have the impression that Amazon executives are spending for the sake of spending.  History, however, provides a far more long term strategy being deployed.

Like the Cheshire Cat, Amazon has a far broader strategy at play and retailers and other online providers had better be paying attention since Amazon is often characterized as the most competitive company ever built.  According to Morgan Stanley: “Amazon is the Wal-Mart of our era but it’s better, in our view — Amazon.com is the combination of technology + logistics company, allowing it to participate in a transition of physical to digital retail supported by store-less (in Seattle) business model that leads to higher long-term economic returns.”

What should concern all is where Amazon is investing.  The latest earnings briefings indicate that Amazon continues to invest heavily in global based sales fulfillment centers.  The online provider has plans to deploy an additional 17 centers on top of the over 40 global fulfillment centers already in-place.  Headcount has increased 67 percent from a year earlier, and Amazon reports that the majority of people investment is in operations and customer support areas. Add physical distribution and logistics to a virtual network of incredible online IT, cloud and customer intelligence data infrastructure, and the evolving business model becomes clear.

While some retailers and online providers elect to outsource physical fulfillment, technology and services under a strategy of lowest-cost provider, Amazon blends strategies and technological capabilities together as an unstoppable force in physical and digital based fulfillment of customer needs.  While some retailers such as Target are becoming more aggressive in product and price differentiation, Amazon can have the ability to leverage each of its tools and capabilities to always be the lowest-cost alternative.

Supply chain senior managers and strategists should heed the long-term game plan of Amazon rather than Wall Street’s convenient short-term outlook.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, All rights reserved.

E2Open has just announced the release of its Multi-Tier Cost Management application which was designed to orchestrate bill-of-material and product cost collaboration among an extended network of brand owners, contract manufacturers and suppliers.

In conjunction with this announcement, Supply Chain Matters viewed a demonstration of this new application several weeks ago.  The application allows supply chain procurement and buying teams the ability to propagate multiple product costing scenarios among an external network and was initially designed for E2Open’s high tech and consumer electronics client base. What impressed us the most was the means to leverage an alternative way of sharing product lifecycle and management data across the extended supply chain, since PLM (product lifecycle management) technology is typically deployed in a single tier of users.  This could pave the way for a more cost-affordable alternative for externally sharing this data rather than paying for extended PLM user licensing. The application potentially opens the door to leveraging PLM beyond just engineering and into more operational tactical utilization such as sourcing landed cost and broader transformational cost management purposes among trading partners.

The user interface for this application is straight-forward and the screens are relatively easy to understand. Cost data is extracted from any resident PLM system, users can elect different forms of cost management analysis, and an audit trail of changes is provided, helping product management teams to garner a perspective of change activities.

The announcement also represents efforts from a relatively new E2Open management steering team to invest more in internal development of network applications vs. reliance on other external partner applications. As an example, last year there were overt signs that E2Open and Kinaxis would build a stronger technology relationship but that effort seems to have subsided in favor of this internal development strategy.

Beyond high-tech industry -focused clients, it remains to be seen whether E2Open will also invest in the more stringent requirements among its Aerospace industry networks.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

On Wednesday, the White House blog announceda long overdue initiative, A National Strategy for Global Supply Chain Security. Overall, Supply Chain Matters applauds this initiative, and we urge our fellow supply bloggers, chain social media influencers, and professional groups such as CSCCMP to do the same.

The initiative, outlined in a White House PDF document, acknowledges that:” The global supply chain system that supports trade is essential to the United States’ economy and security and is a critical global asset.”  The effort is directed at articulating policies to strengthen inbound and outbound supply chains within the U.S. and its trading partners. The outlined document provides further details including the key objectives needing to be addressed in an implementation plan which readers can review.

The strategy includes two goals:

1. Promote the efficient and secure movement of goods, protecting the supply chain from exploitation and reducing its vulnerabilities to disruption.  This goal is described as strengthening the security of physical infrastructures, conveyances and information assets.
2. Foster a global supply chain that is prepared for, and can withstand, evolving threats and hazards along with recovering rapidly from any disruptions.  This particular goal umbrellas the management of overall supply chain risk through layered defenses.

The timetable for this initiative is rather aggressive and calls for the Departments of State and Homeland Security to provide recommendations in six months, with implementation of recommendations to begin immediately upon its release.  We believe that one of the most important aspects of this initiative is a White House encouragement of input from key stakeholders, including governmental and private sector interests and agencies.  The Department of Homeland Security has setup a custom web site that outlines how key stakeholders can submit recommendations.

What immediately concerns us is that this long overdue initiative has to address two very major issues, either of which would justify its own set of comprehensive initiatives.  This includes the threat of a major disruption event such as severe natural disaster or terrorist related, as well as countering a growing proliferation of goods that are illegitimate and not what they are represented to be.  The other aspect is that six months is not a lot of time to gather and assimilate stakeholder input, but we suppose that a longer timetable would only elongate this effort without near-term governmental actions in place.

Our hope is that industry bodies such as the Supply Chain Risk Leadership Council and the Global Risk Network shepherded by NYU will elect to be active contributors to this effort since each has developed much key learning and recommendations on supply chain resiliency and threats.

A final observation relates to the current toxic political climate that surrounds Washington DC.  No doubt, some on the right may elect to seize on the headline of this initiative as an election year political stunt, or another effort directed at more government regulation and oversight.  Supply Chain Matters emphatically declares that this initiative is much too critical to be tossed into the current toxic political discourse, and is rather one of the most important efforts needed to insure the economic viability of the U.S. economy.  Reflect back on the incidents of Hurricanes Katrina and Rita that previously impacted the U.S. Gulf coast and the tragic tsunami and floods that impacted Asia in 2011.  Consider the current vulnerabilities of the U.S. west coast or southwest, the U.S. power grid, and other potential threats.

In the coming months Supply Chain Matters will do its part to detail more of the activities and highlights of this effort.

Let us all enthusiastically get behind the President’s initiative on protecting global supply chains.

Bob Ferrari

Supply Chain Matters provides another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains failing to deliver reliable and life-saving supplies to doctors, hospitals and patients. The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments. Readers can reference our previous updates at the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

The latest developments relate to the U.S. Food and Drug Administration (FDA) becoming very concerned about unscrupulous and grey market suppliers taking advantage of the ongoing critical drug shortages. The FDA is now directly warning clinics and healthcare providers to only procure drugs from approved sources both within and external to the U.S… The advisory warns that “In these cases, patients were unknowingly placed at risk when they received medications of uncertain purity, storage, handling, identity, and sourcing.” The FDA also warns that importing these medications from foreign sources is in violation of the Federal Food, Drug, and Cosmetic ACT.

According to a posting by Phil Taylor on Securing Pharma, the FDA has indicated that it is aware of promotions and sales of unapproved injectable cancer medications being distributed direct to U.S. clinics including unapproved sources of AstraZeneca’s Faslodex (fulvestrant), Amgen’s Neupogen (filgrastim) and Roche’s Rituxan (rituximab) and Herception (trastuzumab). The Secure Pharma posting also makes mention of a federal General Accounting Office (GAO) report that concluded that the FDA lacks proper authority to tackle this issue including a means to require drug manufacturers to report actual or potential shortages. The web link provided takes you to a GAO site that notes that the report is no longer available. We found that strange and interesting. Supply Chain Matters feels that the FDA does have some teeth in these matters, but perhaps not all that is required.

The important takeaway is that the prime U.S. regulatory agency has now publically acknowledged that unregulated and uncontrolled sources of these critical drugs have now entered drug and healthcare supply chains and buying authorities must be diligent to not utilize these sources, despite the enormous pressures to secure life-saving supplies of drugs.

We continue to find this state of affairs rather disturbing.  The FDA now has to warn healthcare professionals and their procurement teams to buy only from approved sources and to openly question whether a price sounds too good to be true, that deep discounts may equate to a product that is stolen, counterfeit or unapproved. Procurement teams should and are most certainly attune to this condition.

As this crisis continues into 2012, we believe that there is likely to be a call for pronounced industry efforts directed at traceability and pedigree of drug supplies and the pressure on drug companies to get more serious on supply chain identity and serialization efforts. While the industry may feel that traceability is an expensive or unacceptable alternative, the fact that healthcare providers cannot insure a reliable and safe supply of life-saving drugs could prove to be a far more expensive alternative.

What is your view?  We once again implore industry participants to weigh-in on this important issue.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.

Last week Boeing announced a tentative agreement with the International Association of Machinists & Aerospace Workers (IAM) on a four year labor contract extension with its union labor force.  Reports indicate that the deal involves concessions from both sides. According to an article appearing on the Wall Street Journal, (paid subscription required or free metered view) secret talks began in late October to lay the groundwork for replacing a contract scheduled to expire in September 2012.

A posting on the IAM web site indicates that if ratified, the terms call for annual wage increases of 2 percent, plus cost-of-living adjustments; an incentive program intended to pay bonuses between 2 and 4 percent; a ratification bonus of $5,000 for each member and increases to the formula for calculating pensions in each year of the pact. Boeing has further agreed to source the production of its new 737 MAX aircraft, the newest planned version of the 737, scheduled for initial first customer ship in 2017, within the union facilities in Renton Washington.  The agreement further calls for the establishment of high-level monthly committees that will provide the IAM and Boeing the opportunity to review and discuss issues including market conditions, quality, safety, productivity, schedule and cost. The IAM also tentatively agreed to drop its opposition to Boeing’s use of the Charleston North Carolina facility as the second final assembly plant for the assembly of some 787 Dreamliners.

Boeing was already embroiled in an unfavorable ruling by the U.S. National Labor Relations Board (NLRB) on opening the second facility in South Carolina.  The NLRB had accused Boeing of moving production to South Carolina in retaliation for previous labor strikes and union opposition and was blocking the ramp-up of that facility. Facing the threat of a prolonged appeals process laded with political overtones, it would appear that Boeing chose a prudent path to deal with its union directly to resolve the dispute.

With a current $332 billion order book and a 787 program that is seriously overdue in customer delivery, Boeing needs to quickly bring the new Charleston facility up to speed as well insure stability in labor agreements for the next four years as other programs ramp-up volume production. Boeing’s supply chain partners also gain the benefit of a customer that is focused on meeting consistent operational execution rather than more unknowns. Boeing’s current plans call for ramping 787 production volumes from a current 2.5 787 aircraft, to a target of 10 aircraft per month by the end of 2013.

An article in today’s Wall Street Journal quotes Boeing’s head of commercial sales for China and Korea has indicating that if the company could free-up more production volume capacity, it would sell more planes in a “blink of an eye”.

The big question mark is whether IAM members will ratify this new agreement.  Reports indicate that union members were naturally taken by surprise by the announcement, and have been given only a week to understand the terms and vote on ratification. The actual union detailed summary of the contract, calling for member ratification, can be viewed at this IAM web link. IAM members have previously rejected some agreements reached by union leadership.

For everyone’s sake, we trust that this watershed agreement will be ratified and that all parties move forward with the challenges and work ahead.  The U.S. economy and Boeing’s extensive supply chain network need this company to continue to be an engine for economic growth and jobs.

Bob Ferrari

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