Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our series of predictions for the coming year. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions.
Part Two of this series summarized Prediction One related on what to expect in the global economy and Prediction Two, what to expect in procurement costs.
Part Three of this series summarized Predictions Three, continued momentum associated with the resurgence in U.S. and North America production, and Prediction Four, talent recruitment and retention as a continued challenge.
In this Part Four posting we address industry specific supply chain challenges in 2014. We need to alert readers that this particular posting in somewhat longer in content but we felt we needed to provide the entire spectrum of the more unique industry specific 2014 predictions.
Prediction Five: Noted Industry Specific Supply Chain Turmoil and Challenges
In 2013, we predicted that B2C and Aerospace focused supply chains will experience significant challenges and increased turmoil. That turned out to be the case in many dimensions. For 2014, we continue to predict added challenges for this sector, and are adding consumer product goods (CPG) focused supply chains to our 2014 predictions list.
B2C and Retail Focused Supply Chain Challenges
As was the case in 2013, B2C and Retail focused supply chain will face challenges for both consumer demand and supply aspects. The “Amazon effect” remains a real threat for both traditional brick and mortar and online retailing fulfillment strategies in 2014.
On the consumer demand front, the majority of consumers continue to be economically stressed and cautious given a world of many uncertainties. These consumers have shifted their research, buying and goods replenishment preferences towards channels offering the lowest price and highest value, and the effects of omni-channel retailing continued to reverberate throughout B2C segments in 2013 and will continue throughout 2014.
According to online fulfillment intelligence firm ComScore, in 2012 online E-commerce sales rose by 14 percent and there were 12 days of greater than $1 billion in online sales activity. The firm’s preliminary projects for 2013 call for a 14-17 percent increase in online sales with consumers utilizing mobile devices reaching the highest percentage of digital commerce with nearly $10 billion in spending. With a shorter 26 day buying period between the Thanksgiving and Christmas holidays, predictions call for intense promotional programs to attract consumer sales and ComScore predicts that nearly 25 percent of holiday buying will occur December 15th or later. In 2013, some notable brick and mortar retailers such as Best Buy have developed new strategies to overcome the effects of “showrooming” where consumers visit a store to inspect product features and then elect to buy online. The crux of the new offsetting strategy is price-match any online offer and to provide added services for consumers. However, as we pen this prediction, retail sales associated with the all-important 2013 Thanksgiving and Black Friday holiday weekend lagged behind 2012 levels for brick and mortar retailers, causing concerns for high inventory management visibility in the remaining days leading up to end of December.
Emerging market areas such as China and Russia are now experiencing explosive growth in online buying and although overall logistics are not as sophisticated, volume growth is being supported. Published research data indicates that consumer facing industry supply chains are continuing to invest more in direct, consumer-facing activities.
The above amount of activity will stress an already taxed set of capabilities across B2C focused supply chains and the spillover effects and consequences will extend into 2014.
On the supply end, global retailers have garnered considerable visibility to social responsibility practices and in particular, factory safety and labor conditions across garment factories in Bangladesh. The tragic Rana Plaza factory collapse that killed in excess of 1000 workers was the watershed event that has now led to the formation of three regionally based retailer consortiums addressing the state of factory conditions across that country along with financial mechanisms to assist factory owners in making required upgrades in facilities and compensating garment workers a living wage. Prediction Six will provide additional detail on these types of challenges, which are sure to garner increased visibility and developments in 2014.
More than ever, for B2C facing supply chains, advanced capabilities in more predictive planning, inventory management and responsive replenishment will separate leaders from laggards. The ability to have real-time visibility and the ability to plan and pool multi-tiered supply chain inventory needed to support the breadth of omni-channel fulfillment needs is part of that differentiation. In 2014, B2C facing supply chains will come to understand the critical linkages among supply chain network design and predictive planning capabilities.
In 2013 we learned how Amazon is expanding its breath of online product selections, its added investments in distribution and same-day delivery capabilities. We learned of distribution co-location fulfillment program among Amazon and Procter and Gamble, where certain consumer products are moved across the aisle to trigger Amazon’s online distribution network. More announcements will come in 2014.
In 2012, we advised retailers large and small to tear down the functional walls between traditional and online supply chain organizations and reduce overall complexity. In 2014, we again predict that teams will experience how important that becomes. The traditional concepts of physical distribution are now being re-aligned toward the ability to support individual order and higher flow-through volume. The ability to manage the tendency toward stock-keeping unit (SKU) proliferation brought about by multiple channel fulfillment will become another important differentiation for customer-facing supply chains.
Some noted retailers have already struggled with the effects of a digitally empowered consumer. Our prediction is that at a minimum, 2-3 and perhaps other highly recognized global or regional retailers may not survive this new world of omnichannel retailing in 2014. Amazon will continue to dominate but will remain under challenge from online efforts from Wal-Mart and other web-based fulfillment properties.
Consumer Product Goods (CPG) Sector Challenges
The CPG industry is traditionally an industry of high volume and low margins. Profitability growth stems from a continuing stream of innovative products that consumers desire to buy, high sales volumes, overall efficiency and cost management. Stockholder interests lie in consistent dividend payouts and increasing market-share dominance.
Global scale is an important strategic differentiator. Smaller or less profitable brands and firms have been acquired by larger industry players, and continued growth and profitability stems from the ability to tap new consumer markets in developing parts of the world. Economic recessions brought about a more cost-sensitive consumer, and the emergence of the attraction of private brands among consumer buying patterns has taken hold across the industry. Globally focused firms with large product portfolios and brands are able to leverage needed investments in innovation in laggard brands to differentiate their products over private brands, but the competition for the bulk of the consumer wallet continues. The current momentum of online fulfillment and the “Amazon effect” (noted above) has added additional pressures for business process and fulfillment investment. Profits generated from the most popular products or brands help to fund new investments in laggard products. Industry supply chain capabilities focus on responsive demand and supply planning, the ability to plan and anticipate consumer demand patterns and to control commodity and overall procurement costs.
What is changing is the heightened appearance of activist investors who apply dimensions of financial engineering to one or more CPG companies. Their goal is stated as extracting more hidden value for shareholders and the tactics can shake-up, disrupt or cause certain unforeseen effects to individual supply chains. Time Magazine recently cited a Citigroup report indicating that there were 138 activist actions by the end of August 2013 and further noted that activists are less likely to buy firms outright and more likely to pursue share buybacks allowing greater control of corporate strategy and tapping the vast amounts of trillions of dollars in cash on corporate balance sheets. “Their sites are on bigger, richer companies.”
The Supply Chain Matters blog has featured past examples of CPG supply chains response to activist actions. The most notably was the split of CPG icon Kraft into two separate companies, Kraft Foods and Mondelez International. That event was preceded by Kraft itself acquiring global confectioner and snack food company Cadbury. The cumulative effect was multi-year initiatives designed to extract cost savings primarily from global supply chain operations including capacity consolidation and facility closings. Savings garnered from supply chain cost reduction where channeled to fund both new sales and marketing promotions or to fund stock buyback needs. The newest announced 2013 initiative for Mondelez includes the goal of a 5 percentage point improvement in income margin by 2016, which accounts for upwards of $3 billion in savings. Sibling firm Kraft Foods is in the process of re-investing in its overall capabilities to secure added operational improvements. Some of the same industry activists now hint of pairing up Mondelez and the Frito Lay snack foods division of Pepsico as a new and more formidable global snack and convenience foods provider.
In early 2013, another significant announcement was the acquisition of HJ Heinz by 3G Capital and Berkshire Hathaway with again the motivation to extract added value from a consumer icon. That motivated the Wall Street Journal to headline that merger activity is on a comeback in CPG. Several weeks ago, Heinz announced a re-structuring of its global wide facilities that included plant closings and reductions in corporate administrative staff.
With investment money remaining cheap, activist or M&A activity will obviously continue into 2014, and that threat alone places more pressure on CPG focused supply chains to harvest more cost savings. A look across the remainder of the industry finds that Procter & Gamble has been under enormous pressure these past months to produce additional growth and revenues, after its efforts to consolidate certain supply chain related activities. Nestle has been reviewing its entire global portfolio of brands. Kellogg’s announced a multi-year billion dollar efficiency and effectiveness initiative across its global supply chain. Both Coca Cola and Pepsico have experienced a slowdown in overall revenues and profits from traditional beverage lines causing additional speculation for re-structuring.
For all of the above reasons, CPG focused supply chains will be additionally challenged in 2014 as they are called upon to deliver further cost savings. Since multiple years of prior cutbacks in capacity, spending and resources have taken a toll, additional cutbacks will have far deeper implications. The spillover of financial activist actions may impact additional supply chains. As we penned this prediction, activist Carl Icahn was in dialogue with Apple regarding more increased value and dividends for stockholders.
China’s new shift to more a consumption driven economy will drive new opportunities for a growing middle class and CPG market, and will indeed present a competition among global, local or private brands. The leaders will be those supply chain teams that can influence senior management on cuts in areas that will not cripple the ability to maintain market agility and maintain capabilities for more timely response to market opportunities or major disruption.
CPG companies must invest in new business process capabilities to meet the challenges of diverse global markets, varying channels of distribution and the threats of omni-channel commerce. The year 2014 will prove critical as to which CPG supply chains rise to balancing activist industry pressures for cost savings or consolidation with the needs for the supply chain to be more responsive to individual market needs. Resiliency is the key strategy for CPG focused supply chain in 2014.
Aerospace Industry Supply Chain Challenges
Aerospace supply chain challenges stem from a rather enviable position, namely unprecedented demand for newer technology-laden aircraft and aircraft components while volume capacity limits are stretched into multi-year windows.
The literal duopoly of Airbus and Boeing continued to dominate industry news in 2013 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. Other smaller industry OEM’s such as Bombardier, Embraer and COMAC compete for niche aircraft segment needs, and each of these players faced critical milestones in 2013.
Both Airbus and Boeing focused supply chains continue with efforts to increase overall aircraft delivery volumes by an unprecedented 40 percent by 2015. At the recent Dubai Air Show held in November, new aircraft orders amounting to excess of $150 billion were booked with delivery slots beginning in 2020. That is the indication that aerospace supply chains will be extraordinarily challenged for at least the next 10 years if not longer. The dual challenges of ramping-up volume production of released and certified aircraft, coupled with additional product design, development programs and component sourcing efforts for newly announced aircraft will continue to tax supply chain, sourcing and product management teams.
In 2014, existing released aircraft such as Boeing’s 787 Dreamliner must meet delinquent ramp-up delivery requirements in spite of continued component glitches. Suppliers to the 787 have already incurred financial hardships related to constantly delayed or changing delivery schedules. Amid the flurry of multi-billions of orders associated with the launch of 777x aircraft, Boeing’s engineering and production labor union in Seattle has rejected the company’s offer for a long-term labor agreement. In 2014, Boeing must deal with both of these challenges as key partners demand more of their share of financial benefits to unprecedented backlog order and customer delivery needs.
Airbus has plans to begin production and delivery of its new A350 aircraft in 2014. Production ramps of 40 percent increase for the existing A320 backlog, while continuing plans for development and first maiden flight of the anticipated A320 neo version of aircraft will accelerate in 2014.
Bombardier’s new C-Series aircraft first customer ship is expected in late 2014, after completion of certification by global regulators. Barring any major unexpected issues, that milestone will be crucial to convince prospective airline and leasing customers that another alternative exists for fuel efficient single aisle aircraft with possibly quicker delivery times than Airbus or Boeing.
COMAC also faces critical challenges in 2014-2015, those that determine whether it will be a viable market competitor. That OEM’s C919, which Fortune magazine recently declared as a direct look-alike to the Airbus A320, is scheduled for maiden flight in either late 2014 or 2015 and so industry watchers question the effectiveness or viability of the design.
Aircraft engine suppliers General Electric, Safran and Rolls Royce are also beneficiaries of unprecedented new aircraft orders. GE Aviation must fulfill a delivery rate of more than 4,000 engines per year for the next two years amid increasing customer orders for its new GE90, GEnx and CFM56 engine models. The company has a backlog of orders for 15,000 new generation aircraft engines between now and 2020. In 2013, GE Aviation provided indications for movement towards a more vertically-integrated supply chain strategy to both protect intellectual property and better control production ramp-up requirements.
Rolls Royce has plans to double its production output of wide body aircraft engines in next five years. Aircraft engine manufacturers continue to foster and support recurring revenue flows from airline customer “pay by the hour” operating uptime leasing programs. “Power by the hour” airline customers expect to pay for engine up-time and long-term reliability, which in reality shifts more of the operating and uptime risk burden to the OEM manufacturer. The gold rush analogy that the makers of shovels benefitted more than the miners applies when it comes to aircraft engine providers. Each of these manufacturers and their associated supply chain partners are dealing with unprecedented order backlog volumes and production ramp-up needs, while insuring that newer, more fuel-efficient materials and components can meet the strict quality and operating time standards of aircraft power plant needs.
The year 2014 will indeed be a continuation for unique supply chain challenges across the civilian aerospace industry with little margin for setbacks or glitches. Both product development and operations focused coupled with service management focused challenges are in-store for 2014.
This concludes Part Four of our 2014 Predictions series.
Keep your browser focused on Supply Chain Matters as we highlight Prediction Six and Prediction Seven, both of which will address new dimensions of supply chain risk, in our next posting.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series
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