@ Supply Chain Management

At the rate at which I’m going – I’m posting one a month. And between my last post and this – It does seem that the world has gone mad. Or rather, very many maddening things are afoot that threaten to undo our current global project. It does seem to me that the “International” has begun to parlay into the “national” in a rather conspicuous way.

Be it the Earthquale-Tsunami-Nuclear Disaster than befell the Japanese or the popular uprisings and its very many diverse consequences in the Middle East or the non-existent economic recoveries in the developed world, I see a vortex into which everyone and everything will be dragged down for awhile. When everything is connected (and don’t we as those Supply Chain aficionados and evangelists bear some responsibility?), the perturbations and volatilities in the system threaten to drag everyone into it.

It is at this juncture that I happened to read two different same articles that morphed into the headline of this post – “Let them eat cake..”

So here they are:

Article 1: Wal-Mart CEO Bill Simon expects inflation

From the article, a few salient points:

U.S. consumers face "serious" inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.

and

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

"Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along," Long says. "Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Article 2: Why Sustainability Is Winning Over CEOs

From the article,

Potatoes are 80 percent water, most of which is lost as steam when 350,000 tons of spuds are sliced and fried annually at the factory. Seal hopes to condense the steam, possibly with a system of cooling tubes, and reuse the captured H2O to clean equipment, help wash potatoes along manufacturing lines, and even irrigate the shrubs outside. The method could save the plant $1 million a year.

and

Executives are trying to realize meaningful cost savings by coming up with innovative ways to go easier on the environment.

Recent volatile price swings in plastic packaging, fuel, cotton, food ingredients such as corn, and a host of other raw materials have added urgency to businesses’ efforts to shave costs to keep prices competitive and protect margins.

To make matters worse, the water that would have run-off in the potato processing would have returned to the “environment” – How this goes easier on the environment is beyond me? Further in the article, there is talk about savings from reduced packaging and conversion of transportation options to electric vehicles.

Why do I say that this is the “Let them eat cake…” moment? In the offing, is an unprecedented wave of cost increases across the board because of the Federal Reserve (working in concert with other Central Banks) engineered inflation. And in the face of it, are we to sit back happy that the captain’s of industry are enamored of cost-savings through sustainability.

The Fed has won in the sense that it is on the verge of getting what it engineered – inflation.

What my reader has to do is to connect the dots. Because you see, the people in the Middle-East are not up in arms because they’ve been living under dictatorships but because living under a dictator has become intolerable of late. But why has life under dictatorships become intolerable for them? Too often, when you see the alphabet soup news media (ABC, CBS, CNN, NBC, FOX et al), you don’t get the whole picture. Life is intolerable because the ordinary man can’t afford the price of food (let alone anything else) there.

The following chart can be found : Egypt Inflation data

The real challenge of the coming years is not Sustainability or saving the planet – It will be saving the globalization project itself. And our own projects of the supply chain are quite inextricably linked with that globalization project.

USA Inc. is a fascinating report that looks at the financials of the US federal government. This report created by Kleiner Perkins Caufield & Byers, a venture capital firm, treats the federal government as if it were a business. I’ve just started digging into it – a change from an unbelievably difficult two months both on the personal as well as work front.

USA Inc report from Kleiner Perkins Caufield & Byers.

I’ll have some thoughts on it after I’m done with the 266 pages.

Enjoy!!

My introduction to the stateside supply chain of the US government was through the Dept. of Defense of which the DLA (Defense Logistics Agency) is a principal player. So the news that Accenture won a four-year $73 million contract is news that rings close to me.

Accenture has won a four-year, $73 million contract from the U.S. Defense Logistics Agency to integrate its energy supply chain with its enterprise business system program, the consulting company said Tuesday.

And the scale of the DLA’s activities,

When the project is finished, the Defense Logistics Agency will have added more than $18 billion in traceable items to its supply chain, Accenture said. The agency averages 54,000 orders and 8,000 contracts per day and manages 520,000 shipments annually.

No sooner than I had posted yesterday: ‘Scuse me but who sprung the volatility back?, than I saw this little tidbit:

Geithner plans trip to Britain and Germany

Treasury Secretary Timothy Geithner will confer with finance officials in Britain and Germany next week about ways to restore global confidence in the financial system on a trip.

The Treasury Department announced the trip Thursday after a rough day on global financial markets. The Dow Jones industrial average fell 376 points, its biggest point drop since February 2009.

Investors are concerned that the debt problems in Greece and Portugal will spill over to other countries in Europe and threaten to derail the economic recovery in the United States and elsewhere.

Investors are not concerned that the debt problems in Greece and Portugal will spill over to other countries in Europe as much as they’re aware that the debt problems in their own countries will be shoved into the spotlight sooner or later. Right now, sooner is pulling ahead of later and that is cause for panic. None of these administrations have the spine to deal with these debts. Why? Because these debts cannot be paid without causing a global disruption of some sort or worse a collective default.

So what now? The Euro zone is going to engage in quantitative easing aka debasing the euro – the time honored way of keeping up appearances.

Only pathos grows as small men squeeze farce out of tragedy. Remember, that the powers that be have managed to keep the sun shining for nearly a year and a half, they can and will keep the moon shining for at least half as much.

It’s time to save the moon.

I’m about as far as anyone can get from the professed purpose of this blog i.e. Supply Chain Management. However, there is a method to this peripatetic diversion that is biased to anything but Supply Chain Management. The truth, according to me, is that it really doesn’t matter whether you’re sourcing in China or India, or whether faulty gas pedals are being found in the Lunar Rover now or how Cadmium and Miley Cyrus’s jewelry came together and made their way hand in hand onto Walmart’s shelves.

What does matter though is the fire that is being stoked in the world’s markets? And the world of the supply chain is very tightly linked to this world market but one link removed.

Think for a minute in the sense that the world financial markets didn’t exist and we only had the physical market at hand. It would be an easy tell about the interconnectedness of the supply chain and the physical exchange and transfer of goods over the counter. But back to the real world, the financial markets act as an intermediary in the financing of production and transportation of goods (and of late services) all over the world and their direction to markets all around the world, valuing everything from the debt of governments as well as the stability of firms engaged in the very production of goods and so on. And right now, there is an epic battle being waged as to the control of these markets. And not for one minute are the powerful parties in this struggle disinterested parties to the outcome. The three parties to this struggle are the financial firms and banks that control (at the behest of their clients of course) huge amounts of capital, governments that supposedly represent their citizenry and control enormous tax receipts and perpetual debts or the general public that have their retirements and houses on the line here. The truth is that only the last party to this struggle has but a squeaky voice in all of this and is also the weakest link.

Yet, in all our theoretical supply chain hokum, it is the consumer that is the main driver of everything – and here in lies the troubling dislocation. The consumer is in dire straits and without a rebounding job market or ever rising asset class that can spring some liquidity, there’s just not enough juice to keep all of the supply chain links functioning.

I’m laughing right now (false bravado, really) but I posted the below graph to the day (See my blog post on April 27th: Two conflicting reports: Who decides?) of what must have been the sunniest day this side of the great recession. Compare the two charts of volatility, one from the last post and one from today.

April 27th, 2010	May 20th, 2010

And a close up of what has transpired in the last thirty days set against the recent past, below is the VIX from the beginning of the year:

That is nothing short of an explosion of fear in the financial markets. Do you feel the fear yet in the supply chains? It is coming.

And a quote from the previous post:

“I’m certainly interested in spending now that the stock market seems so relaxed,” said Dan Schrenk, an information technology consultant, as he stood outside a Best Buy store in the Portland suburb of Beaverton.

I wonder how Dan Schrenk is feeling today?

And how does my consequent statement look like:

As the left side of the above chart shows, complacency can last quite a long time and so cannot be read to indicate that something altogether violent and volatile is impending.

Well, I was wrong because something violent and volatile was brewing and it just made a first visitation. Now, we get to see how those Animal spirits will hold up. We also get to see, what this administration has in store for us and also what their allies in power all over the globe as well. I can hazard a guess, they will double down, even triple down their reckless attempts to save us (and their ill-gotten and ill-deserved gains). But given how far they’ve held up the sun, you can almost be sure that they can hold up the moon for at least half as long.

Now as for supply chains, you can be sure that if you’re not tabling business continuity plans that take into account financing, transportation and manufacturing disruptions, political games, street riots, tariffs, protectionism and the like, you’re about to get a rude awakening. I thought I’d never say this but Inventory is about to be king and the customer, well, he’s a serf now.

Supply chains, especially those that have become enormously complex over long distances don’t have to exist – it is not an iron clad feature of human experience. In fact, it might even be a bug – it hasn’t existed in human history but for the brief blip that has been this three decade or so experiment as well as the Silk Road but that had quite a different structure altogether.

Say it aloud, these supply chains don’t have to exist. And that’s the truth. Maybe, a different sort of supply chain will spring up – local and short instead of global and long. Or something else entirely.

So in the big picture, this sophistication in supply chain structure, technology and management is relevant because the scale and scope has been expanding these last thirty years and at a tremendous pace. As the need to understand, manage and control has grown, so has the need been met in this particular fashion. The promise of future continuing growth in both scale and scope is premised on reaching the unwashed masses – or those who are yet to attain to our supposed state of development. Yet, there is not any universal law of progress that dictates that it should be so – we could head in the other direction i.e. devolve to the state of underdevelopment of those we planned to grown to envelop.

So this is very much like a locomotive that is running at break neck speed on a track that is only being laid as the engine rolls forward with a lever attached to the locomotive itself. What’s more, we find that the need for speed has been met only by burning up the coaches that were once attached to the locomotive. Very soon, there will only be an engine running on inertia towards a track that is at an end.

This is a story coming out of India – out of US Sec of State Hillary Clinton’s visit to India : India to Resist U.S. Pressure on Carbon Emission Caps.

India will resist pressure from the Obama administration to accept legally binding caps on its carbon emissions, the South Asian nation’s environment minister told visiting Secretary of State Hillary Clinton.

“There is simply no case for the pressure that we, who have been among the lowest emissions per capita, face to actually reduce emissions,” Jairam Ramesh said at a meeting today with Clinton in Gurgaon near New Delhi, according to a statement he issued to reporters. “And as if this pressure was not enough, we also face the threat of carbon tariffs on our exports to countries such as yours.”

Clinton is on a state visit to India meant to showcase trade and security ties and seek common ground on climate change and arms control. India has said it will reject any new treaty to limit global warming that makes it reduce emissions because that will undermine the country’s energy consumption, transportation and food security.

The climate-change bill that passed the U.S. House on June 26 calls for carbon-based tariffs if countries like China and India don’t adopt their own greenhouse gas controls by 2020. The U.S. said its push for higher environmental standards is not aimed at limiting the economic progress of nations, including India.

And,

“Legally binding” emissions targets won’t be acceptable for India, Ramesh said. “It’s going to be impossible to sell in our democratic system.”

Clinton said she is confident that the U.S. and India can devise a plan that changes the way energy is produced, consumed and conserved, helping to create additional investments and jobs. The two countries must also expand the use of renewable energy in India, especially for rural electrification.

Well, that’s one down. And the remaining player for large scale emissions out of a developing country is China – one country that has significant leverage over the US by way of financing its debt. I’d think that the only thing that one would hear out of the US Sec of State along this line in China is a short peep.

Now, harken back to the expectation set by the retail consultant in the earlier post:

"Suppliers are going to have to absorb the cost increases," retail industry consultant Burt P Flickinger III said Wednesday.

Just what is this expectation based on?

Mentioned in the above news item is a provision in the climate-change bill that calls for carbon-based tariffs on countries like China and India that don’t adopt greenhouse gas controls by 2020. Well, we’ve got till about 2020 to return to growth over here or junk the over-the-top sanctimoniousness of the climate-change bill because the last time that tariffs were raised during a sustained contraction, the resultant was not a pretty sight.

Besides, destroying the planet is an equal opportunity thing – destroying one’s economy is a national choice.

More quickly that it began, the Banking crisis is over screams the headline from this Time article. You might as well believe it now that the experts journalists have declared it over:

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

Yes, those are pretty much all the actors in this saga. However, what the article fails to deliver is why despite identifying these actors, it doesn’t explain how the crisis has indeed passed i.e. it is high on events and actors but low on rationale – it reminds me of cherry picking the evidence. For example,

Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.

So where is this surging demand for mortgages coming from? Mortgage applications surge 30% and that’s just for the week of March 20. But,

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 32.2% to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5% of all applications.

Now, putting just these two data points together, one would hazard a guess that a stabilization of home prices is not what this points to. What about housing inventory and also the prices of homes given the current conditions? You can get the data from the National Association of Realtors Statistics: Existing Home Sales and Sales prices of Existing Homes.

The inventory (in terms of months of supply of existing homes) is unchanged from 1 year ago and as we enter the season for home sales, we shall have to see how it goes.

However, what should be noted from the two tables above is that for virtually unchanged supply of homes, the average home prices have decreased 15.5% nationally. So what belies this sort of optimism? But Ian MacIntyre is talking about the crisis and not whether the residential real estate is about to improve. But what if this is but a temporary floor which soon gives way – wouldn’t the banks be back in the doghouse then? On a side note, perhaps, the best indicator of the fact (some time in the future) that the housing market has stabilized will be an onslaught of “How to get rich through foreclosures” schemes. I’m not trying to be funny here but honey to be had does bring bees.

So what does this have to do with the supply chain for crying out loud? Take a look at the consumer confidence which is at the lowest level since it was instituted as a measure.

The road to recovery looks like a long and winding one.