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

Last week, Rapture World in Europe hosted a follow-up webcast concerning AMR Research/Gartner designation of the Top Twenty-Five Supply Chains for 2010.  This webcast was designed as an opportunity for European supply chain professionals to ask some specific questions related to the process, criteria, and characteristics related to companies that were named Top 25, and the questions were all very probing and insightful.  You will find other commentaries related to this year’s AMR Top 25 within this community.

One of the questions that really caught my interest, and perhaps readers as well, concerned why any contract manufacturing service providers (CM’s) were not included in the listing.  Kevin O’Marah, senior vice-president of supply chain research at AMR Research (Gartner) responded quickly that in his view, contract manufacturers should have been considered.  He did however raise a rather interesting qualification to this consideration, namely, how much of the total global supply chain responsibility does any one contract manufacturer have?  What process capabilities and competencies do certain CM’s provide, and how does this compare with the OEM’s that are also considered for Top 25 designation?  The answer may be closer than once believed.

I believe that is an interesting question for discussion and comment and not being bashful, I would like to get the ball rolling.

From my perspective, contract manufacturers most definitely should be considered in anyone’s top listing of supply chains.  The scope of supply chain activities performed,  the volume / scope of supply purchasing, manufacturing and distribution, the adoption of SCM related technology and the agility in managing all forms of globally-based manufacturing are noteworthy.  Hon Hai Precision Industry Co. Ltd. (Foxconn) alone is probably one of the world’s largest manufacturers in terms of volume and headcount, and other CM’s bring their own set of unique competencies. A recent article appearing in Electronic Design makes note that a recent three-in-one merger completed by Hon Hai could allow this CM to be one of the most vertically integrated manufacturers of LCD TV’s.  The merger included control of three top suppliers of LCD panel displays that make-up the majority of component material costs in today’s high tech devices.  In addition, OEM Sony, under considerable cost and profitability pressures, has been outsourcing a significant portion of its previous owned LCD TV manufacturing capacity to Foxconn. When Foxconn’s current original design manufacturing (ODM) capabilities are combined with a horizontally integrated supply chain, this CM could well be positioned to control a significant portion of the entire LCD TV market, or at least provide significant competition to existing players such as Samsung.

When I ponder the broader criteria of being demand-driven, overall financial performance, time-to-market, sales and operations planning and customer responsiveness, I can’t help but stumble upon a conflict.  If a CM indeed demonstrates most of the outlined supply chain competencies or characteristics of anyone’s Top 25, then by definition, they are actually a self-contained independent entity as opposed to a ‘supplier’.  In the case of Foxconn in LCD TV’s and perhaps other consumer electronics products. the only missing element is ownership of the brand. (e.g. Apple, Cisco, Dell, HP, Sony…)

Now some readers may be chomping to point out at this point that I may be making too many broad assumptions and disparaging the complete set of competencies and proven capabilities that have been established by Top 25 designees.  I’m purposely being provocative to point out a broader view and spur a discussion.

If and when a global CM makes the Top 25 listing, it will most likely be at the displacement of an exiting brand owner.  In another words, that CM will be a de-facto brand owner.  And when that happens, it will be not only a breakthrough but a huge wake-up call to the existing industry players.

Those that control all aspects of the supply chain, including product innovation, ultimately control the brand.  That is when and industry has been disintermediated.

Should CM’s be considered- yes!  When they make the list- watch out!

What’s your view? How close are CM’s to becoming Top 25?

Bob Ferrari

In January of 2009, Apple Computer stock went into a tailspin as rumors about Steve Jobs’ failing health fueled speculation of an imminent leadership crisis for this icon of consumer electronics.  Steve Jobs response was to appoint Tim Cook, Apple’s COO and able supply chain leader to the interim post of CEO while Mr. Jobs was on medical leave. I penned a Supply Chain Matters commentary at the time that noted that Cook’s solid supply chain operational background and focus on consistent execution may be just what Apple needed  Our final commentary closed with the following: If you believe as I do that cutting your teeth in supply chain is a great proving ground for “C-level” success, than rest easy.  All will be fine.

It is now one year later, and a Wall Street Journal article reports (paid subscription required) that Mr. Cook has been awarded a $22m cash and stock bonus based on his achievements as interim CEO.  Not bad for one year’s work!

In reality, Mr. Cook’s 12 years of performance speaks for itself and we should not resent the fact those years of grounded cross-functional operational experience and the existence on enviable supply chain process capabilities certainly led credence to his performance bonus. While I have absolutely no quantified evidence, my suspicion is that Mr. Cook may well be the leader in the ‘world’s wealthiest and best paid supply chain executives’ category.

Perhaps there will be more highly experienced cross functional supply chain executives occupying the CEO slot in the future of global businesses.  Then again, all of this compensation might go to their heads and perhaps cloud their former judgment skills.

 Bob Ferrari

Earlier in the week this blog provided commentary and reaction to a recent financial news headline that the world’s largest shipping line, A.P. Moller Maersk, reported its first financial loss in the company’s history.  I noted that to anyone involved in supplier sourcing, procurement and logistics, the news is of little surprise given the massive after-effect on global trade as a result of the global recession.  I further concluded that a U.S. exporter should remain in the drivers seat for contracting so-called backhaul ocean transportation, freight moving from the U.S. to Asian or European ports.  Apparently, this does not turn out to be the case, and something is amiss in terms of customer and supplier relationships.

 Today’s Wall Street Journal features a well-written front page story, Export Revival Threatened By Shipping Bottlenecks (paid subscription required), that outlines a landscape of frustrated shippers attempting to ship bulk goods to Asian markets in a timely and cost efficient manner. According to the story: …”producers (U.S. based) of everything from hazelnuts to cardboard are complaining they can’t get their goods shipped in a timely manner.” Shipping delays of three to four weeks have been common, and shippers have become increasingly frustrated with ocean carrier service levels. The picture seems to be one where the ocean carriers want to defy the notion that the customer should be the focal point in determining acceptable service levels. Another concern brought in this article is that some U.S. ports lack the capacity to handle larger outbound shipping activity, having instead placed a primary focus on servicing large volumes of imported container laden volumes.

The picture is one where severe drops in global trade destined to U.S. and European ports has caused ocean carriers to not only severely idle fleet capacity, but also slow down the cruising speeds in existing ships in order to save on fuel.  That is like an international airline indicating to a prospective passenger that because the airline has severe financial difficulties the previous eight hour transpacific journey has been extended to 10 hours, so deal with it.  Air passengers have the option to select far more options in other air carriers, not so for ocean carriers.  We called attention in our previous commentary that the CEO of A.P. Moller Maersk indicated that carriers have too long neglected the less-profitable “backhaul” shipment of goods from U.S. ports, and that there would subsequently be a renewed focus on more customer service.  That seems to be the understatement of the year.

It seems to me that ocean carriers, as well as shippers, have lost fundamental perspectives regarding solid supplier and buyer relationship building, and it would be interesting to hear additional commentary from our readers.

Two questions come to mind that may provide more perspective to this ongoing problem.

In the end, do ocean carriers exist solely to serve their shareholders, or to serve shippers? Are cutbacks in service levels, fuel surcharges or fleet capacity impacting the cost and service level needs of shippers? Have these carriers become too arrogant in their view of shipper relationships?

Conversely, shippers have also been mandated to respond to the effects of severe recession. There has been resurgence in the application of reverse auctioning and other hard nose procurement negotiating practices directed toward services-related procurement, including transportation. Has this trend soured any notions of supplier collaboration and mutual trust-building?  Have procurement practices subsumed any notions of building long-term carrier relationships?

Share your views and let us collectively ascertain what the real problems may be.

 Bob Ferrari

I would like to call attention to our readers who have either been laid-off from their positions as a result of this nasty economic cycle, or remain as survivors of constant rounds of  such cutbacks, to a recent article that was published in Newsweek Magazine. This article, Lay Off the Layoffs was written by Jeffrey Pfeffer, professor of organizational behavior at Stanford’s Graduate School of Business.  It is not an academic’s dry view of business trends, but rather a sobering and powerful set of arguments regarding the impacts and lack of benefits to business from frequent layoffs. This article really resonated with thoughts that have been percolating in my mind for months, and perhaps you might have the same response.

Pfeffer outlines a number of strong arguments that layoffs are mostly bad for companies, very harmful for the economy as a whole, and devastating for employees.  The article rightfully notes that over the last two decades, layoffs have become an increasingly common occurrence of corporate life, in good times as well as bad.  While layoffs may well be justified in a dying business or industry, too often of late, shedding people has been the prescription to maintain or enhance profits when sales volumes are down. Pfeffer argues that whether you term the practice as downsizing, right-sizing or restructuring, the damage will linger well beyond a perceived recovery in business activity. While companies argue that lack of financial resources or credit preclude the ability to begin large scale hiring, they can still marshal the financial resources to perform a large acquisition.

From the Supply Chain Matters lens, we have commented on how various supply chain activities have been impacted during these past months.  Cost reduction mandates have been targeted squarely to supply and value-chain activities, and as we have pointed out all too often, senior management expects even more in process and product innovation.  Layoffs reduce morale and add to workloads, causing other activities to slip.  Surveys conducted specifically among supply chain professionals point to a disenchanted workforce, looking to make a move from their current employer as soon as the economy will allow.  The burnout rate is increasing.

That is skilled talent wasted and abused.

Supply chain risk has been severely elevated because of the fragile financial and staffing conditions among key suppliers in many industry segments.  It seems that incidents of product recalls and contamination have risen dramatically.  There is certainly ongoing debate as to whether Toyota’s latest recall debacles were motivated by too much of an emphasis on reducing cost at the expense of consumer safety. Pfeffer cites a recent Gallup finding that active disengagement, defined as working to sabotage the performance of your employer, ranges from 16 percent to 19 percent.  You can certainly read of all of the other effects in the article.

No doubt, some readers may react in a political or social context that implies that layoffs and right-sizing are a reality to today’s business, so suck it up and move on.  After all, if your skills are that good, you should have no problem in finding new work. But what about the future of any cogent manufacturing and supply chain capability that remains in the U.S.?

I subscribe more to what Jeffrey Pfeffer’s powerful observations imply. The immense pressure for short-term results and strong action that management feels from the financial media, analysts and industry peers has indeed made many blind to the cumulative effects of such actions.

Too many of today’s surviving managers believe that the TV game “Survivor” provides the key to that million dollar bonus.  Is it the effects of the game on people and process, or is it how you play the game to win that matters?

What’s your view?

 Bob Ferrari

In our Part One posting, Supply Chain Matters provided commentary on the background and current situation facing Kraft global supply chain management team.  In this posting, we will focus on the upcoming future challenges, particularly those related to the Cadbury consolidation.

Future Challenges

Kraft’s supply chain is about to undergo a rather dramatic transition.  According to a presentation delivered by Chairwomen and CEO Irene Rosenfeld at this week’s GAGNY conference in Boca Raton Florida, over half of Kraft’s future business volume will reside outside of North America.  The company itself will morph to primarily be a confection and snacks oriented business with a presence in 160 countries.   Kraft’s current business lines lie primarily in beverage, cheese, grocery, and convenience foods business segments. One PowerPoint chart notes that if both Kaft and Cadbury were combined today, over $3.4 billion in revenues will reside from the so-called BRIC (Brazil, Russia, India, China) countries.  All of this has significant implication for Kraft’s future supply chain presence and capabilities.

With the acquisition of Cadbury, Kraft senior management has laid out $675 million of targeted cost savings required by 2012.  Of that total, the bulk of the target, $300 million, has been slated for procurement, manufacturing and logistics, another $250 million in general and administrative cost reduction, and $125 million in marketing and sales cost reduction.  This is in addition to separate aggressive productivity and overhead cost savings that are also required in order for Kraft to meet its new shareholder margin targets. Cadbury, itself, was also under considerable external pressures to increase margins prior to acquisition by Kraft, and its existing senior management team was calling for more supply chain innovation.

According to Kraft senior management, the initial consolidation plan calls for all backroom systems and processes to be consolidated to the Kraft platform.  Two senior managers, one from Kraft and one from Cadbury, have been targeted to co-lead the consolidation, and my sense is that the consolidation will need to be pushed on a rather aggressive timetable.  Kraft’s CFO noted that within 90 days, he expects the company to have identified some consolidation decisions and in 6 months to have a determination of the combined manufacturing and distribution network. There is no doubt that certain select Kraft and Cadbury supply chain team members will be increasing their frequent flyer status or at the least, getting intimately familiar with web conferencing techniques.

Summary of Pros and Cons

It is fairly obvious that the stakes are now very high for Kraft’s combined supply chain organization. On the positive side, one nugget of good news is that Cadbury also runs on an SAP backbone system, which should make the IT systems transition a bit less onerous.   We trust that the transition team will also make some impartial decisions on which supply chain analytical and business intelligence applications should be retained for best use in combined operations.  My view is that inventory optimization needs to be at the top of that list followed by smarter sales and operations planning and what-if analysis.

Another positive was recently noted in a Reuters press report that the combined company stands to be one of the top players in chocolate and confectionary industry by revenue, and thus will have increased buying clout in the current and future global cocoa market.  Cocoa futures achieved a 31 year price high in December, an indicator of a highly volatile market.

On the challenges side, overall inventory levels are a huge anchor of cost for Kraft. Consolidation of inventory with Cadbury, further extensions of supply chain to other global regions, and need for further new product introductions will now add to the complexity of the challenge to streamline overall inventory growth.  Kraft needs to get really, really serious about streamlined inventory management. An inventory turn rate of under 2 times per year is flatly unacceptable.

Other risks lie in the potential for increased mandated cost reductions in supply chain and manufacturing headcount, along with required consolidation in logistics and transportation.  The Cadbury consolidation and the need to transition the North America pizza business to Nestle will surely add further distraction and disruption in business processes and systems, not to mention the obvious need for dedicated resources to successfully manage the transition plans without major glitches.

The supply chain risk profile will also escalate for the combined Kraft-Cadbury because of its renewed presence in the developing regions of the world.  The recent melamine-laced milk powder incidents originating from China, while not impacting Cadbury directly, did have some impact on some of Cadbury’s local confectionary products.  With cocoa and sugar prices at an all-time highs, the risks for scrupulous suppliers to come up with certain replacement ingredients can be high, not to mention the fact that distribution channels in the developing regions tend to be rather multi-tiered and complex.

The supply chain challenges are significant and will require very strong leadership, beginning at the top.  Kraft senior management will need to further understand that determination of profitable products and businesses has to be made on the assumption of an industry efficient global supply chain.  At the same time, too much cost-cutting could significantly reduce the agility required to manufacture, distribute and provide service to such a diverse global footprint. Too often, senior management in the CP industry tends to focus more on the product marketing vs. operational excellence of its business segments.

Kraft’s surviving supply chain leaders have a new reality that the business segment and customers that they must now serve are dramatically different than the former dairy and cookie based businesses. A supply chain that caters to consumers motivated by impulse buying is different than one that serves grocery and dairy.

In summary, change can be incremental or dramatic. Change can come from within or from external events.  When it all comes in one hair-ball, it can be extremely daunting.

Time will provide the real conclusion to this ongoing global supply chain case study.

What’s your view?  Can Kraft overcome these challenges in the next two years?

Bob Ferrari

Disclosure: The author of this posting is a current shareholder of Kraft Foods Inc.