Tomorrow, a new chief executive, Kazuo Hirai, will outline the specifics of a broad and painful strategy to turn around consumer electronics producer Sony.

The company is in crisis mode.  For the fourth time in less than a year, Sony had to slash its earnings outlook. It is currently on-track to announce the deepest financial losses in the company’s history, along with the fourth straight year of non-profitability. Current forecasts are that Sony will incur upwards of over a $6 billion loss for the fiscal year.

Mr. Hirai has taken the reigns from former chief executive, Howard Stringer, and has promised decisions necessary to return the company to profitability. Those decisions are reported to include major headcount reductions in the order of 6 percent of its global workforce and other painful operating decisions that concern its various businesses.

Supply Chain Matters has provided many ongoing commentaries concerning Sony’s business and related supply chain challenges. As far back as March and November of 2010, Supply Chain Matters noted major supply chain implications of an aggressive production outsourcing strategy with overly optimistic forecasts of Sony’s planned television output levels in the midst of a cutthroat market that was ripe for consolidation. Sony wanted to aggressively attack the 2010 holiday buying season with optimistic sales forecasts but limited supply chain follow-through.  Sony also failed to recognize consumer buying sensitivities to price over brand loyalty. In August of 2011, after the June ending quarter results, we noted how Sony executives continued to iterate the importance of the television business even though it continued to have over optimistic output and revenue forecasts. We speculated on S&OP whiplash as television output levels were slashed 19 percent in a matter of two months. In November, Sony announced a major restructuring of its TV business which included high volume contract manufacturing as a dedicated focus.

While all of this has been occurring, Sony’s supply chain teams have had to overcome the significant impacts of the March 2011 earthquake and tsunami and the later tsunami floods that impacted Thailand.

This week, the Lex Column of the printed edition of the Financial Times made the observation that in light of the current crisis, Sony’s workers have to be frustrated.  Previous large investments in restructuring have yielded limited results. The column also opined that Sony has been a terrible company for decades in terms of long term return on equity, and if the company has any chance of recovery, it should cease retrenching and start investing in its future.

From our lens, we believe that Sony’s future must include an emphasis on externally focused supply chain innovation. We continue to believe that Sony’s teams need to internalize the implications of more external faced value chain activities and their implications for more advanced supply chain capabilities. As more value-added component sourcing, production and logistics are outsourced to contract manufacturers and trading partners, Sony will require enhanced supply chain visibility and decision-making capabilities. A previous culture of rigidity in product demand forecasting needs to be replaced with product demand sensing and response capabilities linked to constantly changing consumer needs and market trends. The company’s internal S&OP teams can benefit from more scenario-based planning and coordinated execution and fulfillment capabilities.

Our respectful message to Mr. Hirai and the extended management team is to continue to make the required painful decisions required to restore Sony to greatness, and include in these decisions the need for business culture changes. At the same time, recognize that Sony’s supply chain capabilities need to be augmented to the business outcomes required in its future business models.

Now is not the time for wholesale supply chain cost cutting, nor unlimited process and technology budgets. Rather, it can be the time to focus on the differentiated supply chain process capabilities required to restore Sony to product innovation and competiveness in its future markets.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.