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

A recent article featured on the ASQ (American Society for Quality) web site and originating from the Arkansas Democrat-Gazette notes that Wal-Mart has tightened its delivery windows for suppliers. Wal-Mart will impose a 3% penalty, based on cost of goods,  if a supplier shipment arrives at a regional distribution center outside of a prescribed four day delivery window, either early or late.

The notion of delivery penalties is not new in retail but the fact that Wal-Mart has now tightened the window has a lot of connotation for many suppliers to retail.  As Wal-Mart goes, so does the rest of the industry. This strategy is driven by Wal-Mart’s desire to continue to decrease its own inventory levels, transferring that burden to suppliers.

The article rightfully points out that Wal-Mart usually does not tighten-up policies without the input of suppliers.  However, as we all know, big business and large volume suppliers tend to have much more influence than smaller suppliers.  Large global CP firms  such as Colgate Palmolive, Kimberly Clark, Procter and Gamble and others have dedicated supply chain planners who can tap into Wal-Mart’s Retail Link information system, as well as various sophisticated supply chain planning, replenishment and logistics systems to coordinate and track shipments.  Small and medium business oriented suppliers often do not have such resources. That thought caused me to ponder that the supply chain stakes for these SMB suppliers continues to escalate, while these same smaller firms stand to lose the most financially with any late delivery penalty as high as 3%.

The Gazette article notes that truckers try to avoid loads that come with built-in penalty fees related to early or late delivery. And why not, since shippers can often tender a shipment at the last moment expecting or even demanding that a carrier expedite a shipment, irregardless of weather or other unplanned conditions along the route.  The notion of the “last mile” is often interpreted with that game of musical chairs, when the music stops, the entity holding possession is the one out of the game.

As carrier Transplace has done, more and more transportation and logistics providers will need to continue to reach out to shippers and suppliers in providing more “predictive” reporting relative to exception events.  But all of this information needs to be captured in a supply chain information repository.  With these higher stakes, SMB’s themselves will need to focus more on “predictive’ rather backward looking planning processes.  Today it could be Wal-Mart’s delivery window, tomorrow it could be a major customer in a foreign market.

The use of MRP or MPS planning logic which attempts to satisfy a customer delivery date without factoring all sorts of dynamic and often changing constraints across the entire supply chain can often fail to adopt to strict delivery window needs.  Small suppliers can no longer use “rules of thumb” planning, such as it usually takes n days of ship time, or production has always required two weeks or order lead time. A more predictive planning tool is often a better alternative, one that allows rapid re-planning based on near real-time events, or that can allow for what-if analysis, when the planning system is alerted to a delay in production or shipment activity.  If a supplier stands to lose 3% by being early or late, the planning system needs to be able to factor that logic against all other alternatives.

Before, SMB’s had little choice but to try and swallow a very expensive ERP focused supply chain planning system that was originally designed with classic MPS/MRPlogic, and additionally offered lots of overhead IT infrastructure to maintain. Today, the situation is far different and the good news is that there are more software-as-a-service (Saas) or hosted planning applications available that not only are tailored for SMB needs, but also offer more forward-looking predictive analysis capabilities.

The key takeaway for SMB firms is to get serious about predictive vs. reactive supply chain management and fulfillment capabilities.

Bob Ferrari

Disclosure: Kinaxis is one of other paid sponsors for the Supply Chain Matters web site.

This commentary on Kraft Foods is divided into two separate Supply Chain Matters postings.

Background

If you have been staying current on business headlines these past weeks, you no doubt have heard a lot about Kraft Foods, specifically its acquisition of global confectionary company Cadbury.  Much has been written and opined regarding the acquisition, and this author does not portend to be a commentator on the financial advantages or shortcomings of this particular acquisition.  Supply Chain Matters does, however, provide commentary related to global supply chain business process and IT matters, and I believe it is timely to add a present perspective on the future supply chain challenges facing Kraft, which I believe to be rather challenging.

Before I begin, I should add a disclosure.  I own Kraft stock, and have so since Kraft split away as an independent company.  Thus, I tend to follow the company closely.

To provide some perspective, the last Supply Chain Matters direct commentary on Kraft was back in April of 2008. At the time the CP industry was facing considerable challenges in exploding inbound commodity costs.  I shared some observations on how important supply chain strategy in sourcing, inventory management, business process and IT systems would be in navigating not only that current set of challenges, but ongoing as well.

Situation

Today, Kraft formally reported both its Q4 and total 2009 annual results.  While the current headline reads that Q4 revenue results beat Wall Street expectations, I would not categorize the supply chain of Kraft in terms of stellar performance.  Once more, with the potential for disruption relative to the consolidation and integration of Cadbury operations in the coming months, added to the recent sale of Kraft’s North America pizza business to Nestle, the agenda looks rather complex.

While Q4 net revenues increased 3.2%, 2009 net revenues declined by 3.7%.  Operating income margin has increased to 13.7%, but is far below the mid-teens income margin goals that Kraft senior management established for the next two years.  Overall total inventory levels reflect 1.8 annual turns, with slightly less than 200 days inventory outstanding (DIO) by my calculation.   That is not anywhere near top performance in inventory management.  While total inventories were decreased $108 million from 2008 levels, DIO has actually increased.  I find that a bit perplexing since Kraft had previously invested in advanced inventory management technology.

On the sourcing and procurement side, Kraft has been hard at work in further consolidation of its supply base, along with practicing active commodity price hedging.  Positives have been noted in transportation cost savings as well as leveraging green supply chain initiatives in packaging and transportation.  But the sobering fact is that the challenge stakes have now been dramatically increased.

Current Structure

It is rather important to take a step back and reflect on Kraft’s operating model.  The company itself has grown through a series of companies that have been bought and sold involving high profile consumer brands.  They include General Foods, who then acquired Kraft, and Kraft’s subsequent acquisitions of businesses such as Oscar Meyer, Nabisco and others.  Kraft today includes a stellar listing of consumer brands in food, dairy, meats and convenience foods, and has grown its brand presence across the globe.

The company previously found itself in a rather top-heavy centralized corporate structure, and has been transitioning to a more de-centralized operating business unit structure.  This transition includes a corporate-wide shared services structure where functions such as IT and human resources reside.  Supply chain functions however, such as supply chain planning, manufacturing, procurement, distribution and logistics seem to reside in either business or shared services, and it is not clear to me whether Kraft has really solidified its supply chain organizational structure during this transition.  Kraft’s goal was to move decision-making regarding product development and manufacturing to lower levels of corporate hierarchy. The backbone ERP system for Kraft is SAP, but select supply chain best-of-breed applications reside among various functions. Some of Kraft’s IT functions are outsourced to third-party providers.

In our Part Two posting, I will comment on the future challenges facing Kraft under the combined Kraft-Cadbury operating model.

In the meantime, feel free to share your own comments and observations regarding Kraft’s current and future global supply chain challenges.

Bob Ferrari

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

The January/February 2010 edition of CFO Magazine features an article The New Normal: A Spot Check. The article itself highlights results of a December survey of senior financial executives regarding their views on “the new normal” of post-recession recovery. My sense is that supply chain and supporting IT professionals should take some note of the prevailing finance opinion, since it may bite you in the proverbial butt.

On the one hand the majority of the survey respondents do not see a sustained recovery in product demand occurring until at least Q4 2010 or beyond.  That should be of no surprise, since that sentiment appears to be a cross-functional one, but it was the other two responses that really captured my interest.

When asked if the recent severe economic downturn had led to a worsened relationship with stakeholders, damaged supplier relationships only managed to come in third with a 13% response rate.  A damaged employee relationship seems to be the overwhelming consensus.  I would have thought that frayed suppliers and/or partner relationships would have scored a higher response as well.   Perhaps many CFO’s are shielded from the day to day supplier relationship view?

Regarding the question that the decisions they made during the downturn had any negative consequences, a whopping 66% responded that these cuts had few negative consequences, and 63% indicated that they were well coordinated.  The survey seems to indicate that only 42% feel that cost-cutting decisions will have a negative effect to meet future strategic objectives.

In many industry settings, a lot of cost savings came under the umbrella of supply chain, and it goes without stating by me, that these decisions were painful in terms of lost people and process capability.  It amazes me that the financial side of the house doesn’t seem to see any long-term implications. Continuous cost-cutting within supply chain is an obvious requirement to sustain business in severe economic times, but to believe that prevailing opinion points to minimal consequences is rather startling.

Here’s a suggestion.  If you have not done so already, make sure that you meet and communicate regularly with the CFO and his team.  Take them to lunch, even if it is on your dime.   Educate on where operational and supplier capabilities really stand.

While you think you may be protecting your butt by not making waves, you may be in for a rude awakening when the recovery actually makes its presence.  By then, the prevailing opinion may well be that the supply chain did not respond adequately.

It seems that the notion of the functional stovepipe lives and breathes.

What’s your view?  Do you have the same reaction to these survey results from the CFO side of the house.

Bob Ferrari

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

About a year ago, Sony Corporation initiated a massive corporate restructuring after announcing its first annual loss in more than 14 years. Sony had a significant profitability crisis which specifically involved its consumer electronics and games businesses and Chairmen and CEO Howard Stringer was forced to take direct operational control of all operating businesses.

In May of 2009, Supply Chain Matters provided a commentary, Sony’s Supply Chain Challenges, in which we noted that the restructuring would involve aggressive cost reduction goals for Sony’s supply chain. Taking on a challenge to reduce overall material costs by 20% in two years has proven to be challenging for companies in profitable times, let alone in crisis situations. I noted that Sony would have no choice but to move quickly, given the economic and industry conditions that were occurring in the consumer electronics sector.

The corporate restructuring included a combined manufacturing, logistics, and procurement organization led by a longtime Sony executive, Yutaka Nakagawa. At the time, various reports indicated that the company would close three plants in Japan by the end of December 2009, and the number of plants around the world would be reduced to 49 from 57. Other efforts noted were that the company would also slash material costs by 20% ($5.3 billion USD), and cut total suppliers to 1200 from the current 2500 by March of 2011.

In a rather sudden and dramatic turnaround of events, last week Sony announced that it has actually turned a profit in its latest fiscal quarter and will narrow its previous full-year loss projections. A Wall Street Journal article notes (paid subscription may be required) that in the area of supply chain, Sony has already cut costs by $3.63 billion USD. That is indeed rather aggressive in such a short period of time. The article further notes that Sony has closed 20% of its manufacturing plants and now eliminated 20,000 jobs, 4000 in excess of last year’s target. In the area of material costs, the WSJ article makes note that Sony has targeted a 15% cost reduction for the PlayStation 3 by March 2011. Currently the company loses six cents for every dollar of PS3 hardware sales.

Upon reading the executive briefing transcript published on Seeking Alpha, there is management acknowledgement that the bulk of the supply chain cost reductions thus far were achieved mainly from top-down senior management directives specifically targeting headcount and excessive inventory levels. Payment terms to suppliers have apparently been extended although it’s difficult to decipher from the transcript. There is also an acknowledgement that no business processes or systems changes have occurred thus far.

The picture for Sony in its first year of crisis has the appearance of top-down, slash and burn cost cutting. While these efforts did result in the required significant take out of cost, the real work related to supply chain process transformation still remains a work-in-process for Sony. This next phase will be more significant in terms of making the right moves to insure that Sony’s supply chain capabilities can sustain both continued efficiency and adaptability to changing business conditions. I trust that Sony’s supply chain teams will utilize more advanced analytical methods in navigating this next phase since we all know that cost cutting alone does not bring the ability to innovate for customer fulfillment needs.

Supply Chain Matters will continue to monitor and provide ongoing commentary.

Bob Ferrari

Disclosure: Kinaxis is one of other sponsors of the Supply Chain Matters blog, and as such provides financial consideration for having its product logo and product information linked to this blog.

There was a rather timely article in the Financial Times this week titled EU inventories low amid recovery doubt.  (free preview subscription sign-up may be required)  The article notes that European supply chains are still holding very low stocks of inventories because of lingering doubts by senior executives of the durability of economic recovery in 2010.  The cumulative effect is that any new orders are being placed at very short notice, seven days or two weeks maximum, forcing multiple dependent value-chains to have to be more responsive to unplanned demand. We all know that this phenomena is not just limited to Europe, but extends across global supply chains.

This article also reinforces Supply Chain Matters continuous commentary in noting that spot shortages are going to be a continuing challenge in 2010 since there is literally very little inventory in industry pipelines.  I coined the term Great Inventory Backflush in December of 2008 as we observed how rapid inventory was taken out to the lowest levels of industry value-chains. For most of 2009, that situation has remained with the exception of periodic required inventory replenishment cycles. U.S. and global retailers for the most part, have done a masterful job of holding lean inventories leading up to the 2009 holiday buying season, which is now paying dividends in increased profitability margins.

The takeaway remains that planning supply chain fulfillment needs for the bulk of 2010 will necessitate the ability to be more agile and responsive to demand events as they occur.  If your organization is still struggling to overcome this capability, you had better get this elevated in the project agenda.

Bob Ferrari