Note: This posting can also be viewed and commented upon within the Kinaxis Supply Chain Expert Community web site.

Over these past months I’ve penned a number of Supply Chain Matters commentaries concerning Sony Corporation‘s massive restructuring across its electronics related global supply chains. In the last commentary in early February, we noted how this company had cut costs by $3.63 billion USD in a relatively short period of time.  Sony closed 20% of its manufacturing plants, eliminated 20,000 jobs and targeted additional supply chain cost reductions.  The most interesting part of this story thus far has been that most of these radical cuts, by Sony management’s own admission, have been primarily driven from top-down management directives.  There was a further acknowledgement that no business processes or system changes have been involved to this point.

An article in yesterday’s Wall Street Journal (paid subscription may be required) reflects yet another supply chain challenge. Sony announced that its television business, which has lost money for six straight years, will shift to an aggressive attack mode in the coming fiscal year in order to recapture lost market share to Samsung and LG Electronics. How aggressive? The article notes about a 70% ramp-up in production, to exceed 25 million units in the upcoming fiscal year. Once more, the company wants to gain the upper hand in the emerging 3-D television segment, thus one can further speculate that the planned ramp-up will include a lot of new 3-D models to make their market introduction.

The WSJ article specifically cites Yoshihisa Ishida, the architect of Sony’s prior supply chain cost cutting efforts, as the person who will lead this new ramp-up challenge in the television business.  He is described in the article as a no-nonsense cost-cutter who ran Sony’s personal computer business.

In previous commentary, I noted that the real work of supply chain transformation still remains a work-in-process for Sony.  I must now admit, that might have been a heck of an understatement, given these new ramp-up challenges.

I once worked for a very talented CIO in charge of all U.S. IT operations who was challenged by the existing senior management to reduce overall IT costs by at least 25%, and at the same time insure that existing up-time KPI’s remained in the high nineties.  He communicated that challenge to his senior management peers as the following: What you are really asking us to do is the equivalent of attempting to change one of the engines of a 747 aircraft while it is still flying.  Somehow, that same phrase came back to me when I reflected on Sony’s new challenges.

Mr. Ishida and his supply chain team indeed have a significant challenge in light of the need to complete a supply chain restructuring while insuring that the television business meets very aggressive market ramp-up goals.  One would hope that this team can quickly address business process and system changes, particularly in the area of broad supply chain visibility and responsiveness. This is a story that the supply chain community as a whole should keep eyes upon.

If you were asked, what advice would you provide to Sony’s SCM management team?

Bob Ferrari

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

In January, Supply Chain Matters commented on evidence of large industry influencers embarking on the first steps toward what could ultimately become disintermediation within certain industry supply chains. At the time, we cited examples of Wal-Mart and Google embarking on significant programs to gain more control and influence over aspects within their respective supply and value-chains.

Another noteworthy evidence point of this trend is now occurring within the soft drink and beverages industry. For about thirty years, this industry has been operating on a business model developed around high margin carbonated beverages. The major brand owners, in this case Coke and Pepsi, control the marketing and sales of high concentration syrup  These brand owners in-turn distribute to franchise or independent bottlers who control the production, sales and distribution to various beverage channel customers. The brand owners hold major equity interests in their named franchise bottling groups, and the model leveraged high margins for the individual brand owners, while the more asset-intensive and operationally focused bottlers managed the lower-margin aspects of production and distribution. In the end, the brand owners gained value and control across the entire value-chain.

A major change began last April, when PepsiCo announced the acquisition of its two largest independent bottlers, Pepsi Bottling Group Inc., and PepsiAmericas Inc. for $7.8 billion. At the time of the announcement, PepsiCo Chairwoman and CEO Indra Nooyl made a very powerful argument that the business model had changed.  Whereas carbonated beverages previously drove the bulk of North American sales, alternative beverages such as flavored waters, juices and other drinks are now demonstrating higher sales growth. These newer products have different production, distribution and operating margin needs. Large retailers and grocers have also gained more bargaining power, and in previous commentary, we noted that Wal-Mart and others are consolidating major geographical procurement policies.  This will mandate that bottlers and brand owners will be forced to also have a more timely and integrated response to selling and distribution needs of major customers.

Rival Coca-Cola Company had initially indicated that it did not intend to assume more control of bottling and distribution, but reflecting a change in strategy, Coke has now announced its intention to acquire the North America operations of Coca-Cola Enterprises Inc. for roughly $15 billion., At the close of the transaction it will have direct control of over 90 percent of the total North America volume.  Coca-Cola Enterprises will be re-structured to eventually gain control of European production and distribution.

It’s important to understand the logic made by each company’s senior management in articulating not only on the implications of the significant changes that are occurring in their various global markets, but also on the need for a re-look at supply chain capabilities and asset management in North America.  Whereas markets for carbonated beverages continue to grow at double-digit rates in China, India and Russia, new non-carbonated markets have emerged in North America.  That has driven the need for more flexibility in production, distribution and new product innovation cycles.  In my view, this is somewhat similar to when the computer industry, specifically Hewlett Packard, came to the realization that there was a need for significantly different supply chain delivery models to successfully support different margin products.

A fascinating and well-articulated discussion of these developments can be viewed in a recent CNBC television interview held with Indra Nooyl. PepsiCo Chairwoman, and the ‘Sage of Omaha’, Warren Buffett.  (Pre-warning- the video is over 20 minutes but very insightful and at times humorous in Warren’s political skills.) It seems that Warren not only has an equity stake and love of Coke products, but also loves his Cheetos and Doritos.

Over time the evolution and results achieved by these two global giants will prove to be the very interesting to observe.  As Ms. Nooyl astutely points out, PepsiCo being a diversified company with the likes of Frito-Lay fully understands the needs for both operational flexibility and efficiencies in production, distribution and logistics.  Coca-Cola on the other hand remains a global marketing giant. Both companies are about to gain a new appreciation of the need for geographical supply chain operational flexibility and smarter asset management.

Major economic downturns do indeed lead to new and different business models, and the implications for industry supply chains are starting to emerge.

It would be interesting for the Supply Chain Matters community to share their observations of these emerging trends.

Bob Ferrari