We at Supply Chain Matters have been catching up on the latest round of corporate quarterly earnings reports as well as business headlines for significant supply chain management implications. Our focus is particularly on industry supply chains that we believe will continue to undergo extraordinary challenges in 2014. In this and follow-on, part two commentaries, we will focus on specific industry related supply chains.
In the consumer goods sector, industry bell-weather Procter & Gamble reported a slight profit increase in the first quarter but the headline was a continued struggle to expand revenues in established markets. P&G’s organic sales rose 3 percent excluding charges but its CEO indicated to Wall Street that the biggest headwind remains in market growth both in developing and developed markets. In our view, that is a significant indicator for branded CPG providers and unfortunately adds more impetus for cost cutting in the supply chain. P&G is currently three years into a five-year cost cutting plan which has allowed profits to grow faster than sales. Market headwinds have placed a renewed emphasis on product innovation and development to motivate customers to purchase a premium brand. Meanwhile, Unilever reported that its organic growth rate has slowed to 2.5 percent, indicating that traditional retail chains continue to respond to pricing challenges from discount retailers. Unilever management further indicated that growth rates in South and Southeast Asia have slowed to 5 percent. Unilever also has a renewed focus on product innovation and cost containment. In the beverages sector, both Coca Cola and Pepsi managed to deliver some profitability amid headwinds in carbonated beverage sales while some growth continues in health conscious beverage lines. Pepsi remains under pressure to split out its snacks business for potential acquisition. We have previously observed how the CPG industry has been the main focus of a number of activist investors, and that continues to provide additional emphasis on costs and brand equity. The takeaway for CPG supply chains is therefore continued scrutiny with attempts to respond to any and all market opportunities.
In the aerospace sector, industry bell-weather Boeing posted higher first quarter profits as a result of cost cutting. Revenues at Boeing’s commercial division rose by 19 percent while profits grew 23 percent, helping to offset continued declining growth in the company’s military and other sectors. A published Wall Street Journal report on Boeing indicated: “Boeing’s efforts to drive down costs internally and its suppliers helped its core operating profit margin widen in the latest quarter to 10.2%, up from 9.9 percent a year earlier.” Supply Chain Matters has previously commented on ongoing supplier tremors within Boeing’s supply chain. Boeing’s CEO indicated to analysts that the 777 factory in Everett Washington is targeted for the “most aggressive” cost cutting initiatives to offset deeper deal discounts being offered to sustain output of the current 777 model. Readers may recall that after an aggressive RFP process earlier this year, Boeing elected to source the new generation 777x in the Everett Washington area after associated labor unions narrowly agreed to an 8 year labor pact extension while the state of Washington agreed to provide the largest set of tax extensions ever offered in the U.S. which was estimated to be near $9 billion. For the high visibility Dreamliner program, the company reported that it delivered 18 completed 787’s in the quarter. Reported cracks and subsequent repairs to certain wings of 40 undelivered Dreamliners resulted in falling short of the planned delivery schedule of 10 aircraft per month for 2014. Boeing’s CEO further indicated that contingency plans are in place should supplies of titanium, sourced from Russia, become disrupted due to further economic sanctions being imposed on Russia. Amid the emphasis on cost cutting and added profitability the company indicated it would continue to distribute cash to stock buybacks and dividends.
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