While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.