The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

Supply Chain Matters has previously penned ongoing commentary regarding the supply chain related challenges of Japanese consumer electronics provider Sony.  Supply chain community members can’t help but observe the multitudes of business challenges that have been a part of Sony these past months. The devastating earthquake and tsunami that occurred in northern Japan in March impacted a number of Sony production facilities. A series of multiple large-scale computer hacking attacks directed squarely at the company’s online communities created considerable financial harm and eroded consumer trust  Sony’s television business has not achieved profitability for the past seven years. A tops-down directive to slash supply chain costs remains to make a significant impact on bottom-line results.

In our commentary in March of last year, we noted how the company’s television business was planning for an aggressive market share attack for the coming fiscal year, planning a 70 percent ramp-up in production, to 25 million units, for the fiscal year that ended in March 2011. Sony’s senior management continued to take an aggressive stance on returning the business to profitability, thus creating a conflict for television.  Sony has closed 20 percent of its manufacturing plants, including the closing of four of Sony’s eight television production plants, and eliminated 20,000 jobs. In our commentary in November, we noted that Sony’s CFO, Masaru Kato indicated that the company had no intention of being “adventurous” in its supply chain management and that “pushing products into the market without consumers is not the business we are in.” The company slashed inventory and began an aggressive plan to outsource additional television manufacturing outside of Japan.  Production outsourcing agreements surrounding the company’s Slovakia and North American facilities have been struck with global contract manufacturer Foxconn Technology Group. Senior management also entered into joint manufacturing ventures with industry rivals.

Sony recently released its fiscal Q1 quarterly earnings (June ending) and the results were not optimistic. While operating income was reported at $340 million, the company reported a net loss.  Sales for the quarter declined 10 percent, with the consumer business unit recording a 17.9 percent decrease in sales.  The company acknowledged that operations were negatively affected by the earthquake, with $66 million recorded as incremental expenses directly related to damage, repair and inventory write-off. Lower LCD television sales were noted compared to the previous forecast in May.  The financial press echoed headlines that Sony has cut its profit forecast for the remainder of the fiscal year by 25 percent, while management has called for more supply chain cost reductions, including further outsourcing of production. Meanwhile, Sony executives continue to re-iterate the importance of the television business to Sony’s strategic direction.

An article published in Bloomberg BusinessWeek notes that as of two months ago, Sony was optimistically forecasting an annual production output of 27 million units for the current fiscal year.  Sony’s annual production forecast has now been lowered to 22 million units, a 19 percent reduction in a matter of two months. The magnitude of the change raises speculation on the effectiveness of Sony’s executive level S&OP planning.

Another business and management re-organization is in the works and we all have to wonder that the company’s television related supply chain and S&OP planners have been suffering from whiplash. Eroding market conditions, severe competition, overly optimistic forecasts and an unprecedented earthquake event have all taken a toll. Of more concern, Sony has been surrounded by competitors who have closed the gap in innovation and quality perception. A strategy of market share gain has been subsumed by that of lower cost, market share defense, while the overall market remains challenging at best.  The precipitous events of financial markets this week have not helped to improve consumer confidence and sensing the market is ever more critical.

Some difficult decisions lie ahead for Sony’s senior executive and supply chain teams, and Supply Chain Matters anticipates further dramatic announcements. One thing is clear however, over optimism needs to be replaced with more pragmatic, forward oriented and fact-based decision-making. The forecasting logic of the past needs to be replaced with more responsive planning that is tuned to the realities of Sony’s markets. A lot is at-stake.

Industry and community members are welcomed to share their observations.

Bob Ferrari