We continue with our series of postings reflecting on our 2014 Predictions for Global and Industry Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
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.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014. In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
We now revisit Prediction Five.
For the past few years, our annual predictions have specifically addressed particular industries that we felt would undergo extraordinary challenges during the calender year. For 2014, we identified B2C Retail, Consumer Product Goods (CPG) and Aerospace industry supply chains as undergoing special challenges.
Retail and B2C Supply Chains
We predicted challenges for both the consumer demand and supply fronts. On the demand side, many lessons were learned during the final stages of the 2013 holiday surge, not the least of which was consumers waiting until the very last minute to initiate their holiday purchases. At the conclusion of 2013, many studies concluded that retail consumers were permanently altering their shopping habits in favor of online options with less visits to physical stores.
Throughout 2014, parcel firms FedEx and UPS concentrated on efforts to avoid being “thrown under the bus” which occurred during the final days of the 2013 holiday period. FedEx, and especially UPS, re-examined their delivery network infrastructure practices for maximum peak surge periods. UPS itself invested $500 million in augmented network infrastructure. For the first time in the parcel shipping’s firm’s 107 year history, UPS operated full U.S. based air and ground operations on the day after the Thanksgiving holiday, the traditional Black Friday shopping period, in order to stay ahead of expected surge in delivery activity. UPS is also implementing plans to augment its package-car capabilities by an additional 10 percent over last year’s levels as well as dramatically flexing its capacity and intermodal capabilities at its Worldport central hub. Brown will also deploy what it terms as pop-up “mobile distribution center villages” that will function across various U.S, network points beginning with the expected holiday delivery surge.
Retailers themselves entered the 2014 holiday period with higher expectations regarding consumer spending. Both FedEx and UPS re-doubled efforts to influence major B2C volume retailers to stagger promotional programs during the 2014 holiday surge and increase two-way visibility into that status of last-mile delivery networks. The U.S. Postal service stepped-up its efforts in offering retailers a new alternative for Sunday delivery along with more price competitive shipping rates. As we pen our prediction rating, preliminary reporting data surrounding the four day Thanksgiving and Black Friday holiday shopping period for 2014 indicates that consumers have indeed shifted even more buying preferences towards online channels with some online sites suffering periodic outages.
On the supply side, the “perfect storm” scenario unfolded among U.S. west coast ports starting in August. A combination of factors: stalled labor contract renewal talks among the Pacific Maritime Association and the longshoremen labor union, a shortage of inter-modal truck chassis, the appearance of much larger container vessels, along with efforts by independent truckers in seeking added wages and benefits all converged to bring port unloading and loading operations to a near standstill. The backlog poses a major threat for retailers and exporters in fulfilling revenue and profitability targets for the December ending quarter.
By our lens there is no doubt that B2C retail industry supply chains have indeed encountered extraordinary challenges in 2014.
Consumer Product Goods Supply Chains
In 2013, permanent changes in shopping habits among the majority of consumers were already evident and our prediction called for CPG industry supply chains to be especially challenged with the effects of these actions in 2014. Our prediction further noted the heightened influence and actions of short-term focused activist investors, applying dimensions of financial engineering to one or more CPG companies as continuing to have special impacts. CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply networks.
Most all of these forces were in-effect during the year.
In February, we highlighted supply chain implications presented at Consumer Analyst Group of New York (CAGNY) Annual Conference by CPG firms Campbell Soup, General Mills, Hershey Company, Mondelez International and PepsiCo. Campbell Soup CEO Denise Morrison described market conditions as “tumultuous” “persistently challenging” adding that “a new normal is coming to food.” … “The winners will be the companies that adapt successfully to a changing world.” Kraft CEO Tony Vernon described the industry challenge: “Our customers (are) coming to terms with changing shopping patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices. In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. In the short-term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base.”
By mid-year, multiple CEO’s from well-noted CPG branded companies were each describing the blunt realities of a rapidly changing industry scenario where revenue growth was at a premium and profitability pressures dominated. In August, Procter & Gamble announced a re-structuring of its businesses to once again shed under-performing brands. Similarly, Coca-Cola, Mondelez, General Mills embarked on a business re-structuring efforts to boost sales and shed costs with a multi-year cost savings initiatives. Some CPG firms such as Kellogg, elected to acquired other smaller firms in growth segments.
Entering the closing month of calendar year 2014, many CPG supply chain organizations find themselves navigating the need to once again reduce long-term cost structures to free-up funds for strategic business initiatives while being called upon to be more nimble to rapidly changing consumer preferences and tastes. For some, these goals continue to add extraordinary challenge.
Aerospace Supply Chains
The unique challenges within aerospace supply chains have stemmed from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limitations have stretched into multi-year customer delivery windows to airlines and aircraft lessors. The literal duopoly of Airbus and Boeing did indeed dominate industry news in 2014 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. After publishing our prediction concerning continued unique challenges for aerospace in December, we were pleased to note a published Bloomberg report in late January, With Epic Backlogs at Airbus and Boeing, Can Business Be Too Good?. Bloomberg pretty much mirrored our prediction.
By mid-year, Airbus and Boeing reported first-half delivery performance that would slightly exceed 2013 levels, but not at the pace required to step-up production momentum for the coming years. Once more, the latter part of 2014 featured considerable reductions in the cost of aviation fuel, and the open question is whether this will help or hinder the pressures for increased capacity and production of aerospace component supply chains. Airbus completed international certification test trials for its new carbon fibre A350 XWB aircraft program as well as the maiden flight of the new A320 Neo in September and both programs are reported to be on-track for initial delivery of first operational aircraft to launch customers. The A350 launch will represent a competitive offering to the Boeing 787 Dreamliner for wide aisle, long-distance travel, while the Neo version of the A320 will continue to compete with Boeing’s next generation 737.
Throughout 2014, Boeing announced a series of strategic, multi-year supply agreements to ensure supply of critical materials and components. The most notable involved strategic supply of material required for producing titanium, in a long-term supply agreement announced at the height of hostilities among Russia and Ukraine. The most recent announcement involved a 10 year agreement to supply carbon fibre composite material from a key supplier in Japan.
Other smaller industry OEM’s such as Bombardier, COMAC and Mitsubishi Industries continue to compete for smaller niche aircraft segment needs, and each of these players faced setbacks during 2014 as they dealt with the realities of more complex, globally dispersed suppliers sharing in product innovation. Bombardier encountered a significant program setback concerning its C-Series program as pre-maiden flight tests encountered an engine malfunction. Reports indicate that China based COMAC is also dealing with some unspecified setbacks.
Thus, the commercial aerospace industry did indeed manifest its own unique set of industry supply chain challenges this year, challenges that other industry teams would perhaps envy. Order backlogs extending beyond 10 years, technology innovation as a driving force, and supply chain scale-ups remain critical challenges in the months to come and commercial aerospace may indeed appear as an extraordinary challenge for 2015.
This concludes Part Three of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess the remainder of our 2014 predictions in follow-on postings.
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