We want to again alert our readers that The Supply Chain Council (SCC) will be hosting its annual Executive Summit on October 13-15 in Houston.

The event offers senior supply chain executives a well recognized forum for discussing key emerging challenges in business and supply chain strategy.  It also offers an opportunity for executives to network with other industry peers through panel discussions, roundtables and other networking events. The theme of this upcoming summit is “Boom & Bust: The New Realities for Supply Chain Excellence”.  Summit attendance will be limited to 100 executives.

You can view further information and registration details at the SCC Executive Summit web site.

It is also my pleasure to announce that I will be in attendance during the summit and Supply Chain Matters will be providing live blog and social media updates during the three days of meetings.

Bob Ferrari

Disclosure: Bob Ferrari is an elected member of the North America Leadership Team (NALT) of the Supply Chain Council, but has no monetary interests in regards to promoting this upcoming conference.

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

There was some rather significant news this week concerning the automobile parts and distribution industry which promises to be of continued interest within the U.S..

General Motors announced that it will sell its steering-parts operation to a Chinese based venture.  The Wall Street Journal and other sources noted this development “as the largest move by a Chinese company into the U.S. auto parts industry.” Nexteer Automotive, which was once known as GM’s Saginaw Steering group, is to be sold to Pacific Century Motors, a joint-venture of Beijing-based Tempo International Group and a Chinese government-owned company known as Beijing E-Town International Investment & Development Co. Ltd. (E-Town).  Financial terms were not disclosed. The transaction is expected to close sometime in the fourth quarter.

GM assumed ownership of this parts unit a year ago from major Tier One supplier Delphi as part of an arrangement to insure a reliable flow of parts supply and help Delphi exit out of a complex bankruptcy. The press release announcing the sale notes the following statement: “E-Town and Tempo have followed the developments of Nexteer closely during the last two years and worked diligently over the past six months with General Motors, the UAW, global customers, critical suppliers, and Nexteer management, to ensure a successful transaction and seamless transition of Nexteer to an independent automotive supplier with a market-leading position and unrivaled steering technologies.”

The obvious question for the automotive supply chain management community is what, if any, may be the longer-term implications of this sale?

Nexteer currently operates 22 global manufacturing plants, and according to the WSJ article, does business with more than 60 automotive manufacturers. This does not include relationships with parts distributors serving the global auto parts aftermarket.  While there have been other deals involving Chinese owned companies, this is certainly the biggest to date, and Tempo International is also a part owner in the former Delphi brake and suspension parts business.

While the U.S. provides a huge market in autos, the largest and most promising worldwide growth segments reside in the markets of China and India.  The major Chinese automotive companies are expanding operations to serve their high growth domestic market, and to some day export world-class autos to other markets, including the U.S.  As we all know, any world class company supporting robust markets requires the support of innovative and cost competitive supply chains.

E-Town, which was inaugurated in March of 2009, is noted as providing financial development support for companies residing in the Beijing Economic Technological Development Area (BDA) to help promote industrial upgrades and clusterization.  That implies that this announced investment has a lot to do with insuring Chinese competiveness or control in key automotive parts supply. My fellow bloggers in China may want to offer  more commentary.

GM, which is 61% owned by the U.S. government, states that it is working to get its finances and operations in order ahead of a planned public offering of new stock to pay back the U.S. government.  While it may not be in the strategic interest of GM to continue to be in lower-tier supply businesses, this development certainly raises questions as to the longer-term implications to U.S. based auto and aftermarket parts supply chains.

In March of 2009,  I penned a commentary, Prescriptions for Detroit’s Supply Chain Crisis, which related to the raging U.S. debate concerning the bailout of GM and Chyrsler that essentially agreed with the conclusions of a Forbes published article, which stated: “The growing fear is that without help the auto industry may collapse from the bottom, rather than top down.”  At the time, I and others argued that the real issue to a bailout was not just saving the OEM’s but rather saving the essence of the parts supply chain, which was in far more serious financial trouble. I called attention to a profound quote from Laura Macero of the Corporate Advisory and Restructuring Services team at Grant Thornton: “Without a structured approach of consolidation to the benefit of the entire supply chain, the industry may lose critical partners with the technology, scale and geographic footprint that are linchpins in the viability equation”

Now, fifteen months later, it appears that the U.S. government, as an owner in GM may be strategically conflicted.  Is the milestone really the renewal of GM or Chrysler, or the renewal of the entire industry supply chain, or both?

While the interests and employees of Nexteer gain renewed financial banking, and perhaps new strategic perspectives, one has to wonder whether the U.S. government is giving-up on the broader and more important strategic objective.

What’s your view?  Is this a watershed event or just a reality to the current state of automotive supply chains?

Bob Ferrari

The name of Palm has been frequent in business news of late.  Our last Supply Chain Matters commentary regarding Palm was at the time of the long-awaited big-bet announcement of the Pre smartphone in June of 2009, complete with a new webOS operating system.  It was deemed the best potential competitive offering to the Apple iPhone.  We noted the importance of Palm’s supply chain capabilities to be able to ramp-up to support a goal to have one million units shipped by the second half of 2009. Palm had brought in an entirely new leadership team with both Apple and mobile device manufacturing experience and the hope was that this experience would translate to brighter fortunes.

A short ten months later presents a far different picture. In March, Palm indicated that it had shipped 960,000 phones for the fiscal third quarter that ended February 26^th, an almost 300 percent increase from the year earlier.  Unfortunately, only 408,000 of these phones were actually sold, leaving the company with a sizeable inventory overhang.  Palm’s CEO noted in the Q3-2010 earning press release: “Our recent underperformance has been very disappointing, but the potential for Palm remains strong.” Now, several weeks later, the company is fielding acquisition offers.  On the GigaOM network featured by Bloomberg Businessweek, Kevin Tofel notes how Palm slipped in marketing and advertising strategies related to the Palm Pre. “instead of marketing Pre smartphones as high-value handsets, the (Palm’s) carriers are holding fire sales to rid themselves of excess inventory.”

Optimism apparently has its limits when your products lack traction in the market.

On April 12^th, news spread among the Silicon Valley crowd that Palm was quietly putting out feelers for a buyer.  Initial speculation as to potential buyers looked to the Pacific Rim, as well as RIM, the company.  Speculation ran high that Taiwan’s HTC, a high volume mobile phone producer, and best known lately for its Android phones, might be the best buyer for Palm. HTC’s production and supply chain scale, coupled with the Palm brand, could add a stronger competitive dimension.  Another speculated buyer was China’s Lenovo, which of late has been moving toward broader diversification in its product offerings beyond laptops and PC’s. As I pen this posting, a Reuters news story indicates that HTC has dropped out of the bidding and Lenovo is now emerging as the leading candidate to buy Palm.  Other potential acquirers are noted to be Chinese telecom companies Huawei Technologies or ZTE, but they may face intensified governmental scrutiny.

Palm faced many insurmountable obstacles in its quest to be the potential iPhone alternative.  We can all speculate as to which of these obstacles turned out to be the Achilles heel.  It could be the initial choice of carrier distribution and channel partners, difficulties in initially scaling-up production capabilities, or the fact that Apple’s momentum in the market is insurmountable at this point. 

In my view, two conclusions are obvious regarding the current state of Palm. First, in spite of its current independent focused bravado, Palm can no longer remain an independent company.  There is also a strong likelihood that a current U.S. multinational brand will be assumed by some Asian acquirer, and timing could not be more ideal. Second, as we often point out, end-to-end supply chain capability must always be aligned to the needs of the overall business.  In the case of Palm, supply chain ramp-up was not aligned to sales and marketing execution.

What is your view?  Where did Palm’s supply chain strategy falter?  Which company will benefit most from acquiring Palm and which is the most likely to actually pull-off an acquisition of Palm?

 Bob Ferrari

There is yet another interesting follow-up to the 2008 milk powder contamination incidents that occurred in China.  Supply Chain Matters readers may recall our commentaries related to this tragic incident involving the deaths of at least six individuals and sickening of over 300,000 people, many of which were infants and children.  Our Supply Chain Matters commentary, The Tainted Milk Scandal in China-One Year Later, noted that Sanlu Group, China’s largest producer of infant formula neglected to make full and timely disclosure of the melamine-laced contamination.  One year later, two Chinese citizens were convicted and executed as a result of their involvements in this incident, over 20 percent of the country’s milk collection stations were shutdown and despite massive subsidies from the government of China, dairy farmers on the mainland suffered from lack of demand and consequent low dairy prices.

One of the indirect participants involved in this incident was New Zealand based Fonterra, which is one of the world’s largest dairy producers.  The company had 43 percent joint ownership of Sanlu, and Fonterra officials were the first to inform Chinese governmental officials, via the government of New Zealand, on the potential existence of contamination.  Fonterra paid a dire price monetarily and in reputation. It had to liquidate its entire ownership of Sanlu, which incurred a NZ $200 million loss, and rebuild some of its credibility as a supplier to major confectionary and food producers such as Nestle and Kraft who relied on Fonterra for safe dairy related product.

In a new twist to this risk related story, an article published in the Financial Times (free preview sign-up or paid subscription may be required) notes that Fonterra is resolute to now return to China, but in a different role. Chinese consumers continue to lack trust in the Chinese dairy industry and have been electing to purchase from imported non-Chinese brands. This includes sales of New Zealand based dairy products. The article notes that Fonterra being a dairy cooperative, itself has 10,500 New Zealand farmer owners, and a near 40 percent share of global dairy sales.  Now Fonterra sees a vast opportunity to expand in China’s dairy market, and is actually looking to build more dairy farms within the country.  While the company continues to have a small brand presence within China, it now wants to elevate that image.

When I read of this development, I though about the Asian adage that crisis often brings opportunity.  The 2008 occurrence of the Chinese milk scandal will continue to be on the minds of Chinese consumers and dairy producers.  Safety is apparently being viewed as dairy products produced under non-Chinese control.   Fonterra is taking a bold but perhaps savvy move to turn a financial and potential brand crisis into a new market opportunity.

I wonder how may other firms would take such a risk?

 Bob Ferrari