This commentary can also be viewed on the Supply Chain Expert Community web site, upon which the author is a featured guest blogger.

One of the cornerstones of the Supply Chain Matters blog is to track the history of specific supply chain related events involving industries and to help our readers connect the dots in term of strategy and results. In May 2009, we featured a commentary regarding Fiat Group and its unfolding strategy of opportunistic supply chain strategy, specifically its planned acquisition of Chrysler in the U.S..  At the time, this author was impressed with Fiat chairmen Sergio Marchionne and his strategy to make both companies global players in the industry.

As we approach the end of 2011, the story of Fiat and Chrysler is much more positive, with an even stronger potential.  We call readers attention to an article published in the December 19 edition of Time, Power Steering- How Chrysler’s Italian boss drives an American auto rival. (paid subscription required) Author Bill Saporito pens a very insightful look at Chrysler, where it was, and what it is becoming, and in particular, the noticeable leadership of its chairmen, Sergio Marchionne. Sergio has a knack for turning around dysfunctional automobile companies along with a keen understanding of operations and value-chain management.

The article points out that Fiat’s small-car prowess, engine technology and superior manufacturing capability was a perfect complement to Chrysler’s needs. Fiat which now owns 53.5 percent of Chrysler, has made its impact. Chrysler revenues were up 23 percent in Q3-2011 and could top $55 billion.  Operating profit could reach $5 billion vs. hemorrhaging $1 billion a month in 2009. In May, Chrysler transferred $5.9 billion to the U.S. treasury, paying off its bailout loan six years ahead of schedule.

The article goes on to expound on the unique leadership style of Mr. Marchionne, specifically his no-nonsense approach to management, his deep analytical abilities, and attention to the details of all aspects of the business, including manufacturing and value-chain.  He has thus far resized the company, flattened management layers, and overhauled the vehicle line-up in record time. Mr. Marchionne is a strong believer in elimination of management layers and practices promoting people buried in the ranks to higher levels of responsibility, giving such people all that they need to succeed and prove their potential. It is referred to as loose-tight management, a concept which many successful companies have practiced.  At the same time, he also holds people accountable for definitive results and is not shy about pulling the plug when results are not forthcoming. The author notes that: “Marchionne has the Steve Jobs gift of absolute focus.” He gets into the details. He also does not choose to have his office within Chrysler’s former executive penthouse, opting instead to locate his office in the engineering department, a visual reinforcement that it is no longer business as usual.

As was noted in 2009, Marchionne has a vision that the surviving global automotive OEM’s will need to have sufficient volumes of production to support each of the major world markets, at least one million for each major product platform in order to drive required global production cost efficiency and sustained profitability.  This translates to a combined goal for producing 6 million vehicles among the Fiat and Chrysler brands, with today’s volumes at 4.2 million vehicles. Fiat has become a global leader in efficient, high-volume, robotized production of small displacement engines and there are plans to have a similar focus for V6 engines.  Fiat also excels in small diesel powered engines, and its production facility in Poland recently exceeded a production target of 4 million 1.3 litre, 16 valve MultiJet technology engines. Technology and world class manufacturing knowledge transfer is underway among both companies with a cultural premise that production workers, not engineers, own the quality control process.  A global manufacturing boss has been appointed to oversee both Chrysler and Fiat, and the article points out that Mr. Marchionne has been known to show up from time-to-time at warranty analysis and quality performance meetings. Chrysler itself has not been known to invest in advanced supply chain software technology for planning and business intelligence but that may perhaps change.

The first totally new vehicle of the combined Fiat-Chrysler collaboration will debut in 2012 with a C-class Dodge branded vehicle. It will be based on the Fiat platform of the Alfa Romeo Giulietta, adapted for U.S. market requirements. There is a further plan to invest $23 billion to develop new vehicles for Chrysler through 2014, a rather aggressive plan by U.S. automotive industry standards, and all vehicle can be adapted by Fiat for other global sales needs.

The Time article concludes with a very characteristic Marchionne quote: “People need to trust you that you’re going to pull them out and that they will follow you when you pull them out.  If they don’t get that comfort, they’re going to drop you. This is true of organizations.  It’s true of countries.”

We would add that this quote represents a philosophy that is rather important for senior and team focused supply chain management in the coming year and beyond, namely the ability to lead, get into the details, provide people with the means and tools to accomplish their goals, and to foster consistent accountability.

In our 2009 commentary, we closed with the statement that whether the combined force of Fiat and Chrysler was totally successful, we have the opportunity to observe a visionary company with a leader that truly understands the importance of a leveraged global value-chain and integrated supply chain execution.  Two years later, this case study continues to play out with positive potentials.

Time will tell if this will become a definitive case study in vision and consistent execution in supply chain management but the scorecard thus far is rather positive.

Bob Ferrari

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

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

There is a developing story that should capture community reading interest because of its supply chain related learning.

General Motors Photo

One of the current day business news headlines concerns the General Motors developed Chevrolet Volt, the company’s premiere entry into the plug-in hybrid automobile market. The Volt has been highly touted as the future of automotive technology, and aggressive production, marketing and sales goals have been established for 2012. The vehicle currently comes with a rather pricey sticker price, namely $41,000, and GM believes that the innovative features of the futurist car will overcome price concerns.

After some months of initial sales, The National Highway Traffic Safety Administration (NHTSA) in its initial testing of the Volt has discovered instances of battery related fires.  Three NHTSA crash tests caused the car’s batteries to catch fire days or weeks after the test, a somewhat unusual occurrence.  While GM is still investigating root cause, suspicion points to a battery cooling system which may have been damaged as a result of the crashes.  GM has been quick and proactive to respond to this situation, has placed retail sales on-hold pending further investigation and has offered concerned owners options for either a free loaner car or the opportunity to return the vehicle.  GM however indicates that it remains highly confident of the safety and ultimate consumer acceptance of the Volt, and on resolving the current issues.

There is also a broader supply chain voice perspective to this story, one from which senior executives and cross-functional supply chain teams may benefit.

In late August, Bloomberg BusinessWeek featured an article; General Motors CEO Dan Akerson is Not a Car Guy.  We had cited this article in previous Supply Chain Matters commentary. The article itself reflects on GM’s newly appointed CEO, his lack of direct automotive industry experience, and more importantly his mission to change years of previous in-bred management culture at GM.  With the help of a hefty U.S. government financial subsidy and massive re-organization plan, GM is transforming itself to a leaner company.  Thousands of jobs have been shed and the survivors are being asked to be much more productive, agile and out-of-the-box thinkers. The article provides one management perspective quote from Akerson: “It’s not my role to make people comfortable. I don’t know what it was like five years ago, and really I don’t care. We are in a war.”

The article, however unintended, perhaps provides us another perspective relative to the current Volt situation. It cites a December 2010 management meeting when the Volt product development team had developed its plan to initially build 45,000 Volts, and assumed that the plan was “baked and ready to go”. Akerson instead challenged the team to come up with a plan to build 120,000 units, under the assumption that someone informed him (perhaps from sales and marketing) that a vehicle needs to sell at least 100,000 units to be successful.  Volt engineering and product development teams however were keenly aware that it took Toyota and its Prius model about seven years to hit the numbers that Akerson was requesting.  The other looming implication was that contracted suppliers would have to quickly nearly triple the volume of the vehicle’s high tech parts, especially its volume supply of lithium-ion batteries.

While readers can take in the rest of the story, we jump ahead to note that the final decision was to set a build plan for 60,000 units, one-third more than the originally recommended plan, but half the Akerson unconstrained challenge plan of 120,000.

A recent Wall Street Journal article  (paid subscription or free metered view) reflects on the current Volt situation before the fires.   The article also notes that supply was especially short through July, when only 550 of 2600 interested dealers had a Volt to show off to customers. Toward  the article’s  end, there are comments from GM legend and former Vice Chairman Bob Lutz, the originator of the Volt concept design.  Lutz notes that the car’s main problem is the high expectations it faces, and that this year’s build plan was far  too ambitious and the ramp-up was just too slow. Mr. Lutz affirmed his belief in the success of the Volt and described its ultimate success in  baseball analogy  as a “bases-loaded home run “. While we certainly do not profess to know all of the facts and details surrounding the Volt’s product plans and can only speculate what is being written, there is some learning surrounding this evolving story.

The point of view of Supply Chain Matters is that CEO’s and senior management have every right to challenge the status quo and encourage innovative thinking.  That stated, there is also the notion that operational and supply chain experience provides a basis of some understanding of what may be realistic plans, given various realities of ramp-up planning, volume production and testing.  Readers may also recall that other hybrids such as the Prius have experienced other problems along the way, such as braking, engine stalling and software issues, which were all overcome.  After all, this is new technology.

The most innovative design or coolest product can only succeed when all the links in the supply chain operate together, and, when appropriate, the voice and experience of supply chain should trump the needs for bravado.

Bob Ferrari

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

In March of 2010, Supply Chain Matters provided commentary on how the aftereffects of major economic downturns can often lead to new and different business models.  We specifically cited an evolving trend for disintermediation and structural change within certain industry supply chains, motivated by certain business performance needs.  The ongoing developments currently occurring in the beverages industry provide learning for certain other industries.

Within the beverages industry, the separate acquisition announcements by both Coca Cola and PepsiCo for buyout of each of their major North American distribution groups made significant news for that industry.  Both previously held major equity interests in their named franchise bottling groups, but major shifts in consumer buying preferences toward flavored waters, juices and other drinks caused both industry giants to embark on a strategy of acquiring the assets of major bottlers.  PepsiCo was first by acquiring both Pepsi Bottling Group Inc. and PepsiAmericas Inc. for $7.8 billion. Coca Cola followed later with its acquisition of the North American operations of Coca Cola Enterprises for $15 billion.  Both companies at the time indicated the need for more flexibility in production, distribution and new product innovation cycles.

In our prior commentary we speculated that both companies were about to gain a new appreciation for geographical supply chain operational flexibility, inventory management and smarter asset management.  We also wanted to keep an eye toward the evolution of both efforts, since there are often mixed results to major M&A efforts.  Both companies have now posted fourth quarter and 2010 earnings and the first signposts are emerging.

Coca Cola’s fourth quarter earnings soared, and the Wall Street Journal report attributed some of the results to the acquisition of North America bottling operations.  Sales volumes in North America rose 3%, excluding the impact of acquisitions, and unit shipment volumes are increasing. Quarterly profit nearly quadrupled and total worldwide revenues were up 40 percent. Current opinion in the Wall Street analyst community is that growth has come at market share expense of competitors.  Coca Cola was not immune to higher inbound commodity costs and anticipates overall costs to be up $400 million in 2011. More importantly, increases in juice, aluminum, plastic and energy will be more impactful since Coke now controls major portions of bottling and distribution, and the company has already embarked on incremental price increases among products, which may extend through the remainder of 2011.

PepsiCo reported fourth quarter revenues up 37 percent but earnings came in at 10 percent. Full year earnings increased 34 percent, with profits up a mere 6 percent. North America operations grew operating profit by 8 percent, the strongest growth in the decade.  However, volume levels were relatively flat.  Total inventories were also up 28 percent from a year ago. The company indicated in its earnings briefing that synergies from its previous acquisitions are exceeding original estimates.  Hmm…

PepsiCo further indicated that commodity costs could increase to as much as $1.6 billion, considerably more than was reported by Coke.  We should however point out that PepsiCo has a more diverse snacks and food portfolio, including its Frito Lay division, which increases its exposure to increased commodity costs.  Some on Wall Street are skeptical on Pepsi’s outlook, expressing concern on the bottling acquisition as well as investments in a major Russian distributor and other emerging markets were Coke is stronger.

Wall Street may be on the right track in terms of its observations, and I’m sure that our community readers will have more pointed observations as to these initial signposts on efforts to own more of the bottling and distribution value-chain.  From this author’s perspective, the initial evidence points to how more efficient inventory, operational and commodity management can impact the overall success of these initiatives, as well as the bottom line. In the end, supply and value-chain capabilities always matter.

Students and practitioners of supply chain management should continue keep a keen eye on the beverages industry because what is unfolding is yet another case study on how supply chain transformation, change management and process capabilities do matter for companies and industries. We previously commented on the notion of an integrative improvement framework where operational improvement efforts scale with the clock speed of business.  The beverages industry continues to undergo a living test of these concepts.

Bob Ferrari

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

We have penned a number of commentaries regarding Apple’s extraordinary supply chain operational management capabilities, the latest being last week’s posting, Apple’s Secret Sauce Should Be No Surprise to the Supply Chain Community.  This week, more public news has surfaced regarding Apple’s strategies and capabilities, specifically two different developments. Keep in my mind, Apple’s corporate culture is one of high secrecy and information in the public domain only scratches the surface to what’s actually going on. Apple continues to cast a very wide net in assuring production capacity and capability, and at the same time, is becoming a more influential force for overall consumer electronics supply chains.

Over on the International Business Times web site, Carl Bagh noted that Apple is again plugging strategic and tactical holes in its long-term supply strategy, placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics.  As noted in our previous commentary, while competitors scramble to launch alternative products in tablets and smartphones, Apple continues to aggressively negotiate long-term supply contracts with strategic suppliers, potentially locking-up key industry capacity.  In his commentary, Baugh cites DigiTimes as reporting that LG Display will benefit from a 35 million unit order for iPad displays in 2011, but also is not able to singularly meet Apple’s growing thirst for these displays. Also noted are Apple’s co-investments with key suppliers in building more manufacturing capacity, including Sharp Corp.’s $1.2 billion investment to build a new production facility for small and medium sized LCD displays.

On the supply chain social responsibility front, SiliconValley.com reported yesterday that last June, at the height of the incidents of worker suicides at Foxconn International, Apple’s largest volume contract manufacturer, COO and now acting CEO Tim Cook was quietly dispatched to China to personally meet with Foxconn management. The extraordinary but non-public visit of Apple’s highest ranking operations executive was intended to send a rather serious message, Apple was not going to tolerate these worker suicide incidents and wanted a remediation plan.  An Apple social responsibility report noted that Cook was accompanied by two experts in suicide prevention, which spawned later interviews of more than 1000 Foxconn employees. Keep in mind that some other companies might have issued a wide distribution press release noting such a visit.

The article also highlights other social responsibility actions that Apple has undertaken, including 97 first-time supplier audits in 2010.  Of particular note, 40 percent of these suppliers noted that this was the first time any large customer had audited their facilities.

Apple continues to cast a rather wide and profound influence across consumer electronics supply chains.  The question remains, are these strategies forcing Apple’s competitors to struggle for their required capacity and inventory, and will the industry be challenged with yet another year of supply and innovation challenges?

Supply Chain Matters readers, add your observations.  Has Apple’s continual influence in product innovation and supply contracting increased the stakes for competitors, or has it benefitted the industry as a whole?   Can consumer electronics players all benefit from Apple’s strategies?

Bob Ferrari

As we did in Q1, Supply Chain Matters will once again take a quarterly snapshot of the downstream, upstream and transportation component areas of global supply chains. The goal of this three-part series is to assess trends and determine how major supply chain participants are currently experiencing and viewing 2010 business levels, and how the general post recessionary recovery is manifesting itself among industry supply chains. As we also noted in our Q1 commentary, we certainly do not portend to be trained economists. It is, however, interesting to put information points into context, note what has occurred, as well as speculate what lies ahead for the remainder of 2010.

As we begin to take a look back at Q2, manufacturing and supply chain activity has begun to lose overall momentum around the world, adding concern in many industry sectors on how best to forecast activity for the remainder of 2010.  Many economists are of the belief that the initial inventory replenishment cycle experienced in Q1 has now run its course. At the same time, select supply shortages of critical or high-demand components are being reported in many sectors, notably electronic components. The recent International Monetary Fund (IMF) World Economic Outlook indicates that growth over the next 18 months is expected to fall below the pace set in the first half of 2010.  In Q2, manufacturing growth in China and much of the rest of Asia slowed for a second straight month in June, with PMI indexes for Australia, China, India, South Korea and Taiwan all reflecting slower growth.  While growth in these regions is slowing, these declines are modest thus far.

For the U.S. there are clearer signs that recovery is losing momentum, and  GDP growth has been revised downward to 2.3 percent in 2010.  Retail sales declined 0.5 percent in June for the second straight month in a row, and business inventories rose for the fifth consecutive month.

In the euro-zone, Germany’s export driven economy has experienced rather healthy growth in the first-half of 2010, and exports from the broader 16 nation euro-zone were up 1.6 percent in May, while imports rose 4.2 percent.  Industrial orders for the euro-zone were up 22.1 percent in April.

In this Part One posting, we begin to snapshot some key companies representing the initial stages of supply feeding multiple industry supply chains. In reporting of quarterly results from the June ending period, companies in chemicals, metals and semiconductor continue to forecast both positive Q2 financial results and generally optimistic outlooks for the second half of 2010.  Some caution, however, is also noted.  Many of these reported results also reflect large benefits from the intense cost and capacity cutting efforts that occurred in 2009.

We cite the following highlights:

Select Chemicals and Specialty Chemicals Industry

The European Chemical Industry Council is forecasting that output in the chemical industry will grow by 9.5percent in 2010, and anticipates a period of consolidation in the second half of 2010 and early 2011. Recovery in output levels occurred in Q1-2010, and was expected to continue in Q2.  Capacity utilization in the industry remains well below normal levels.

BASF

• Revenues up 30 percent year-over-year in Q2 vs. 26 percent in Q1
• Profits tripled from a year ago to $1.18 billion euros, slightly lower than $1.36 billion reported in Q1
• Asia-Pacific sales up 55 percent in local currency
• Chemicals segment up 64 percent on continued improved demand, higher prices, high capacity utilization and improved costs.
• Plastics segment up 64 percent
• The Oil & Gas segment saw continued lower sales and earnings during the quarter, similar to Q1
• Expects economic recovery to continue at “moderate pace” in the second-half of 2010

Dupont

• Q2 Revenues up 26 percent year-over-year vs. 23 percent growth experienced in Q1
• Second quarter profits up 92 percent year-over-year
• Volumes up 21 percent in Q2 coupled with 19 percent growth in Q1, with 5 percent higher local selling prices
• Asia Pacific sales up almost 50 percent; sales in greater China up 70 percent year-to-date; China and Latin America sales are at or above pre-recession levels
• Agriculture and nutrition sales up 16 percent
• Sales in performance electronics and communication sectors have surpassed pre-recession levels
• Increased guidance on earnings and profits for 2010
• Expect recovery to continue in second-half, but at a more moderate pace than first-half

Select Metals and Steel

The World Steel Association reported that crude steel production for the 66 countries reporting to this group was 119 million metric tons (mmt) in June, representing 18 percent higher growth than in June 2009.World crude steel production in the first six months of 2010 was 706 mmt, 27.9 percent higher in comparison with the same period of 2009. According to this association, all geographic regions showed increased crude steel production during the first half of 2010 compared to the first half of 2009. Although production in the first half of 2010 increased by 7.2 percent compared to the same period of 2007, just before the global economic crisis, most of the world has not recovered to pre-crisis levels. Only Asia and the Middle East showed increased crude steel production compared to the first six months of 2007. Crude steel production in the EU, CIS, US and Canada is still more than 15percent below 2007 levels. China’s crude steel production for June 2010 was 53.8 mmt, an increase of 9percent compared to June 2009.  The US produced 7.2 mmt of crude steel in June 2010, an increase of 65 percent compared to June 2009.  The world crude steel capacity utilization ratio of the 66 countries in June 2010 declined again to 80.6percent from 82.0 percent in May 2010. Compared to June 2009, the utilization ratio in June 2010 increased by 8.3 percentage points.

ArcelorMittal

• Q2 revenues up 42 percent, profits up 146 percent from year earlier
• Revenues up 33 percent in the first-half of 2010
• Anticipating a deceleration in pace of demand in the second-half of 2010
• Ruled out the possibility of “double-dip” recession this year, but anticipates upturn will be “slow and progressive”

Nucor

• Revenues up 69 percent in Q2 coupled with 40 percent growth in Q1
• Profits of $91 million compared with $133 million loss a year ago; Q1 reported profits of $31 million vs. loss of $189.6 million a year ago
• Average sales price per ton increased 14 percent from Q1 levels
• Total steel shipments up 53 percent from year ago, but down 2 percent from Q1
• Capacity utilization declined to 71npercent vs. 73 percent reported in Q1
• Reduced total energy costs by $10 per ton from a year ago
• Q2 reflected slowdown in all product lines

Posco (Korea)

• Q2 Revenues up 25 percent and profits nearly tripled from year ago levels
• Operating margin climbed to 23 percent vs. 20.8 percent in Q1
• Anticipates continued strong order rates from automobiles, electronic and shipbuilding industry sectors
• Increased 2010 outlook by 81 percent and increased capital spending plans

U.S. Steel

• Q2 revenues doubled to $4.68 billion coupled with Q1 revenues of $3.9 billion
• Total steel shipments of 5.4 million tons vs. 3.23 million tons a year earlier.
• December quarter shipments were 4.65 million tons
• Loss of $25 million in Q2 coupled with loss of $157 million in Q1, the 6^th consecutive reported quarterly loss; cited increased commodity costs and unfavorable exchange rates
• Added additional capacity in Q2, but already seeing signs of reduced demand
• Shipments of flat roll steel nearly doubled, year-over-year, in the quarter, a continued indicator of positive demand from automotive and appliance sectors
• Average selling price increased 3.4 percent in Q2

Select Semiconductor Industry

According to Semiconductor Industry Association, global semiconductor sales grew to $74.8 billion in Q2, an increase of 7.1 percent over the $69.9 billion reported in Q1. Interesting enough, the May to June increase in sales for North America was 4.3 percent, while Asia Pacific declined 0.5 percent in June. Revenues for the first half of 2010 were recorded as $144.6 billion, more than 50 percent higher than the same period in 2009. The association is currently forecasting 28.4 percent industry growth in 2010, with some moderation expected in the second-half. The industry continues to benefit from increased sales from emerging markets such as China and India, a rebound in the automotive industry, and a robust technology replacement cycle.

Intel

• Q2 revenues up 34 percent, year-over-year, coupled with 44 percent surge in Q1
• Management noted “best quarter ever”, Financial analysts noted as best quarter in company’s 42 year history, surpassing Q1’s similar statements.
• Q2 overall activity up 5 percent from Q1 vs. a seasonal norm of a 2 percent decline in Q2
• Profits surged to $2.9 billion compared with $2.44 billion of profits in Q1
• Generated $3.5 billion of cash flow from operations
• Gross margin was 67 percent due to increased efficiencies and capacity utilization.
• Strong demand for advanced microprocessors and server driven markets
• Little slowdown in Q1, which is traditionally a slow quarter
• Plans to hire 1000-2000 new workers in 2010, first substantial hiring increase in five years

TSMC

• Q2 revenues up 13.9 percent from Q1 and 41.4 percent from year ago revenue
• Expects current quarter revenues to hit an all-time high
• Profits increased to $33.66 billion Taiwan dollars vs. $1.56 billion a year earlier, the highest since Q4 of 2007
• Gross margin was 49.5 percent, up 1.6 percent from Q1, and 3.3 percent from year ago
• Q2 showed robust demand in all business sectors
• Consumer segment had strongest sequential growth, 26 percent vs. 9 percent in Q1; Communication grew 22 percent vs. 2 percent in Q1; Industrial grew 14 percent vs. 2 percent in Q1; Computer-related grew 1 percent vs 3 percent decline in Q1
• Expecting 2010 global foundry market to grow 40 percent in 2010
• Accelerating capacity expansion plans
• Estimate that supply chain inventories are still below seasonal levels

Overall in Q2, the downstream supply chain continued the robust revenue and profitability growth demonstrated in Q1  Semiconductor continues to stand out as the most optimistic, reflecting consumers still want their new smartphones, HD TV’s and other electronic gadgetry. Chemical industry is on the rebound as reflected by BASF and Dupont. Geographic growth from the BRIC countries continues to be the primary fuel for this downstream growth.  While some cautions are being raised by downstream firms relative to a slowdown from the previous Q1 momentum, executives seem optimistic for continued growth in the second half of 2010. Robust profitability levels continue to stem from previous large reductions in cost and overhead expenses.

In our second posting in this series, we will focus on a brief snapshot of major industrial manufacturing companies, the middle layer of global supply chains.

In the meantime, feel free to add your own observations.

How is your organization viewing current business conditions?

Bob Ferrari