When I chose the name of this blog, I had in my mind a strong belief that for many manufacturing, retail, and other service firms, the capabilities of supply chain do matter, especially on the impacts to the business bottom line.  Glancing at a series of June ending earnings results from various corporations, as well as current media stories, we find continual positive and not so positive reinforcement.  Let’s explore a couple of season highlights.

Of a positive note:

Siliconvalley.com reported highlights of a fiscal first quarter 34 percent profit increase from Nintendo, the maker of the Wii gaming console. (user account required)  As an analyst, I often cited the contrasts of consumer electronics and gaming players in terms of supply chain decisions and capability.  Cases in point: Sony continuously delayed its initial launch of the Playstation 3 console because of engineering and production ramp-up delays and Microsoft, while having a fairly competitive product, experienced quality problems with its Xbox 360 consoles.  Nintendo on the other hand introduced Wii on target in market launch and price point. The result has been over 5.2 million Wii consoles shipped in the quarter and a cumulative 29.6 million consoles shipped to date. Playstation 3 on the other hand had cumulative shipments to date of just 14.4 million, half theWii amount, with no so stellar results from Sony.  Nintendo clearly understood the recurring revenue stakes of being first to market and volume leader.

Kraft Foods Inc. reported blowout second quarter 2008 results exceeding financial analyst projections.  While across the board price increases were implemented to offset significantly higher input costs, the results noted an operating income increase of .8 percentage points in Q2 as a result of overhead cost leverage, as well as strong revenue growth. The earnings press release also notes approximately $150 million in gains from certain commodity hedging activities. We featured a previous post outlining Kraft’s supply chain challenges along with its investment in supply chain analytical capabilities.

Southwest Airlines reported second quarter 2008 earnings of $121 million, fairly positive financial results in light of all of the overall negative earnings among the U.S. based airline players.  Fuel and labor are the two biggest expense items for the airline industry, and in spite of unprecedented high fuel prices, Southwest continues to successfully hedge its average fuel costs as a competitive advantage.  While Southwest experienced fuel cost increases of 35.2 percent, it still managed to hedge an average of $2.19 per gallon.   Wouldn’t we all like to have the ability to fill our cars today at that price!  Southwest further states that it has derivative contracts for approximately 80% of upcoming third and fourth quarter estimated fuel consumption needs. Third quarter hedging is at an average crude-equivalent price of $61 per barrel, or the range of $2.50 per gallon, while fourth quarter hedging is at $58 per barrel.  There is also a mention of hedging contracts extending out to 2012.  We should all be that good at hedging.

 On the not so positive note:

Michael Krigsman’s CNET blog, IT Project Failures, had a post which indicated that clothing manufacturer Levi Strauss experienced significant order fulfillment problems during one week of the second quarter, attributed to a  North America implementation of SAP ERP.  The interruption is speculated to have caused shipping problems, and combined with other economic issues, caused the company’s net income to drop a whopping 98% relative to the same quarter in 2007.  Kingman cites the company’s SEC filing which, in a nutshell, indicates that the ERP implementation uncovered the need for the company to correct its internal control systems  A former auditor interpreted the SEC filing to indicate a potential problem area of inventory reporting.

American Airlines is now dealing with a current negative customer public relations backlash, as a result of a failure of its baggage handling system at New York’s JFK airport.  A news item on Bloomberg this morning indicates that American has repaired the system, but is still working to deliver hundreds of stranded bags to customers.  The carrier’s 67 JFK departures were delayed anywhere from 30 minutes to 2 hours during this snafu.  Oh, and American was gracious enough to waive its $15 baggage handling fee. Perhaps some passengers will get their bags before their trip ends!  Readers may recall an incident in April where British Airways had to literally shut its new London Heathrow facility due to a major glitch in the baggage handling system.  Two senior managers were ousted as a result of the incident.

And finally, I highlight another Bloomberg News item that indicated that apparel retailer J Crew Group Inc. apologized to its customers because the J Crew web site wasn’t accessible, hindering the ability to receive Internet and phone orders from its customers.  A statement from the company’s CEO states in part: “We’ve made some mistakes (too many in our mind). Please bear with us as we work through these issues.”  This author applauds J Crew management for its open communications to its customers, but this type of incident does tend to point to forthcoming upstream problems as the supply network attempts to respond to a potential imbalance of orders.

The summation of just a few news items taken from various media and Web 2.0 sources clearly reinforces the theme of supply chain matters.

If you have other stories to share for reader education, please send them in comments below, or email me directly at bob.ferrari@theferrarigroup.com.

Bob Ferrari