@ Supply Chain Management

Earlier this year in Feb 2013, I had made my prediction for the Supply Chain of 2013 – You can read it here in : Predictions for the Supply Chain in 2013.

In that post,

Well, I have my prediction too for the supply chain of 2013 (and 14 and 15 too). If anything I’d call it the rise of the Supply Chain Currency Wars. The first shot of this new phase of global currency wars was launched by Japan a week or two ago. While it will start slowly, over the next few years, this sort of tit-for-tat devaluation will play havoc with global supply chains especially the one’s with finely tuned cost calculations justifying the location of factories and/or distribution centers.

Devaluation of currencies over a matter of couple of quarters and in-kind retaliation is going to drive up financing risk in the supply chain. Were such a scenario to come to pass, then supply chain operators need to nail down some other variables so as not to have all the variables in a supply chain in a volatile flux.

Big Data – Nyet. Bigger and Badder visualization – Not a chance.

Increased volatility, upset cost calculations – Yes, sir – that’s for breakfast, lunch and dinner around the corner. Almost all the Emerging Market countries (such as BRIC) have entered a period of flux, not unlike what the Nutty Market countries at the periphery (Egypt, Syria etc) entered into roughly 2 years ago. This flux in the Emerging Markets – both China and India have received a lot of foreign investment in the past years.

So take one scenario : As projected growth and real growth decline, these countries will be subject to capital outflows. This is why, devaluation of the currency is the only way out for countries that constitute the manufacturing base of the world – the hope would be that devaluing their currency makes their exports cheaper and thus keeping the growth engine going. However, this is a problem for all other developed countries other than the US.

Capital outflows from emerging markets need to go somewhere. Where? You have only two choices – Bonds or Equities (well, there’s a third – Dollars). As the Fed ramped up talk about tapering the Quantitative Easing, yields have spiked for US Treasuries. Remember that if the yields spike too much, governments at all levels in the US (local, state and federal) will essentially stop functioning as they have promised to i.e. the inability to finance and roll over maturing debts at spiking rates. Equities have doddering at ever higher and higher valuations – buying into the markets at these levels is asking for trouble.

If it is bonds that these capital outflows crowd into – yields come down and everything is kicked down the road for a few more years. If it equities that these capital outflows crowd into – the markets are buoyed for a little longer with the attendant desire for the wealth effect that the Fed has been hell bent on creating.

Then the cycle reverses again intolerable equity valuations or dampened yields force capital outflows from the US back outwards in search of return.’

So what do Currency Wars mean for the supply chain? Take your pick: Disruptions, Volatility, Uncertainty, Wild swings in valuations and costing, Sourcing variations that inevitably lead to quality variations.

In one word : Variability. That’s the bane of any operation.

I couldn’t resist the pun. Long time readers of the blog would know very well that the insights of Taiichi Ohno hold a special place in my corpus of intelligent and wise things to have around. So it is a rather “Deming – like” sort of conundrum to have at hand an Oh No!! moment from Japan itself : Bernanke just felt a chill down his spine.

If you are not plugged in into the vast array of paralyzing news that flows around you or perchance missed this rather telling problem that has arisen in Japan of late.

In April 2013, Japan announced a QE program of $1.4 trillion, an amount equal to roughly 25% of the Japanese GDP. To put this into perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

When people refer to QE (Quantitative Easing) by the central bank, they almost always refer to it as if it were the only driving factor in the land. You have to remember that both Japan and the US has been running budgetary deficits as well. For Japan, it looks like this : Japan Government Budget (as % of GDP).

For the US, it looks like this : US Government Budget (as a % of GDP)

But,

Japan announced a larger program relative to its economy all at once. The idea was that by throwing around a big enough amount of money, Japan’s economy would finally waken from its 20-year slumber and take off.

This effort has been an abysmal failure. Japan’s second quarter GDP grew at just 0.6% quarter over quarter, registering the single biggest growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in history, and not only did its economic growth projections have to be lowered, but it is failing to even meet these lowered growth projections.

So, the noted result is that the GDP came in lower than the lowered forecast. For now. Oh no!!!

So what is supposed to happen?

The central bank – BOJ, Bank of Japan, being one of the bigger behemoths (financially speaking) in a country, can wish into existence more money which they then use to buy bonds. Why bonds and particularly govt. issued bonds? The point is that that’s where a lot of people have parked their monies because of the current state of the economy – accepting a nominal return in exchange for safety. By buying bonds with seemingly inexhaustible (though the only currency that is truly inexhaustible is stupidity but even a simple familiarity with the human being shows that they do get tired from time to time) i.e. magically created monies, the BOJ hopes to drive down the yield on the said bonds such that if people holding bonds currently felt that they were getting a whole lot of safety, they were going to get even less return for that safety. Ergo, those monies would be then retrieved and ploughed back into comparatively riskier assets such as stocks (i.e. the preferred funding mechanism for new ventures) which then leads to hiring instead of firing and so on.

Except that the GDP measure that is supposed to show the increase in “virtuous” activity that all this QE was supposed to engender has not worked out as well as one would have expected.

And so what is one to make of this?

Perhaps this Oh-No!! moment can lead us to what I appreciate as the central Ohno (the Taiichi kind) precept i.e. Respect for People. You see, when the BOJ (and as an agent for action, one cannot deal with a more ill-suited agent. In a firm, the BOJ would be the payroll + performance manager combined) wades onto the scene, the fundamental action is to whip people around, to coerce them into an action. You see the problem?

Let’s get something straight here – while stupidity is a truly inexhaustible resource in this world, between the ears of each and every human being is an explosive and creative engine. Unleashing this engine can only be contemplated as an extension of the inherent respect that every man, woman and child are inherently owed as their endowment.

All the machinations of central planners and allied commentators take the track of either, “Messing with/exciting the animal spirits”, or “Devaluing the efforts of people in the past i.e. through inflation” or the like.

As these Oh-No’s pile up, perhaps, it would be a wise thing to see how Ohno studied the matter in a factory on a small island far away…

Sometimes (nay more often than not), you’re treated to such deep and profound stupidity that it can only be located from the collective machinations of the board of directors. Apple board worried about ‘pace of innovation’. No kidding.

Gasparino, citing unnamed sources, said there is pressure on Chief Executive Tim Cook “to innovate, do something fast.”

“What have they had lately? They had the iPad. They had a few other things,” he said on a Fox Business broadcast on Friday. “But they don’t have anything innovating from what came from Steve Jobs.”

Set aside the fact that Steve Jobs had a knack for feeling the pulse of the intangible, to make visible what was only hinted at by the people at large – there’s simply no way to reproduce or latch on to what is ineffable. However that will never dissuade a bunch of board bound fools from demanding that it be done.

All around me and you,

Are those in chains.

Trapped from the last revolution

Set them free, sets them free…

So it is with the work of man – we use chains to break chains. And this is also how one differentiates the Vertical from the Horizontal.

Supply Chain Design is an oft overlooked field of specialty because of the “math” involved. While several providers have come up with nice interfaces to hide that math – the truth of the matter is that without the math, you’re slipping constants into GIGO (Garbage In Garbage Out) mode.

Supply Chain Management Review and Logistics Management have made this free webcast available on this topic : Winning through Better Supply Chain Design.

Two recent articles, one being the retelling of another, delve into some of the reasons why Apple makes iPhones in China and by implication not in the USA. The original article was from the New York Times, How the US lost out on iPhone Work and the retelling was recounted in This Article Explains why Apple makes iPhones in China and why the US is screwed.

There is no article about China which doesn’t recount some of the following snippets:

When one reads about these working conditions — 12-16 hour shifts, pay of ~$1 per hour or less, dormitories with 15 beds in 12×12 rooms

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.”

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day.

And lastly,

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

Summarizing, Chinese firms can scale up and down rapidly i.e. they have flexibility that the Chinese government and populace are willing to allow. Something that cannot be obtained stateside in whatever shape or form. The key takeaway is that it is not only scale but the willingness and ability to go either way with it. In the US, one finds that scale is directed one way towards growth but scaling down is an arduous, acrimonious and drawn out affair if it ever happens.

So here’s the first key to Smarter Manufacturing – Flexibility and Scalability.

A couple of posts ago, I had intimated that I was broadening my blogging horizons a bit. And finally, I can throw a bit of the covers off. I just blogged about The Zachmann Framework at my other blog. So gander over, wander or hover over that post of mine.

Pachy Data {Big Data in the Enterprise} is my new blog venture.

That’s probably a rather safe thing to say as long as everyone is saying it. I would add that they might be whispering, “Well, what do you think would happen given the costs of in-sourcing?”. That’s probably not a safe thing to say, if you were a CEO.

Square with me a little, ought it not to be said? Perhaps, it bears frequent repetition as far as I’m concerned. The article titled Multinational CEOs say outsourcing has gone too far from Manufacturing and Technology News recounts:

Chief executive officers and senior manufacturing executives working for multinational corporations predict the United States will become an even less competitive location for manufacturing, according to a survey conducted by Deloitte on behalf of the U.S. Council on Competitiveness. Over the next five years, the United States is expected to slip further behind the world’s current leading manufacturing nations — China, India and Korea. The CEOs say Brazil will surpass the United States as a better destination for manufacturing by 2015.

The CEOs "see a fundamental shift — a new world order in manufacturing — that replaces the 20th century dominance" of the United States, Germany and Japan, says Craig Giffi, vice chairman of Deloitte. "It’s a virtual restart from the 21st century."

The CEOs are nervous about what this means for their children and grandchildren if the United States can’t get back into the global manufacturing game. They recognize that outsourcing of manufacturing has not worked in the way they had envisioned. "We overestimated the issues associated with outsourcing jobs to low-cost nations and the consequences of that," says Giffi. "The executives underestimated the erosion that would have in their overall capabilities in places like the United States and how that would fundamentally shift their supply chains."

and

But the United States government can’t dither in putting together policies that favor production over consumption. "This isn’t something that can be debated indefinitely," says Giffi. "Business leaders are forced into a world of making decisions 24 hours a day seven days a week on where they have to make investments in plants, equipment and new jobs." If the United States does not address its cost structure, talent gaps, trade polices and infrastructure "then we will see a continual gradual deterioration and downward spiral. . ."

Now, in the pages of this blog, I’ve gone over back and forth over the outsourcing, off-shoring and in-sourcing arguments countless times. Whether the decision to outsource or offshore manufacturing is based on flawed cost modeling, the growth of a global culture of some weird shape or form, easy credit or some other combination of other factors – what is obviously true is that it has been happening for more than a decade now.

One of more pathetic slogans that I have heard during this recession/depression is – “Buy American.” Well, I’ve been hearing this slogan even before that too. The implication of such a statement is staggering.

Allow me to explain. If the only recourse the American manufacturer has left in his arsenal to the onslaught of “cheap” foreign manufactured items is patriotism i.e. “Buy American”, it’s time to remove the last tatters of a once delicate fig leaf that has been long defending the promise of American manufacturing. If using that same flawed cost modeling, it costs ten times more to manufacturing something here in the USA than in some place far far away – there are two glaring questions – Why? and Where is the equilibration point?

The first question is :Why?

Well. that’s quite easily answered if one is prepared to be crude. Life doesn’t cost as much over there. Being paid 50 cents an hour to stitch shoe soles might inflame the passions of the very flammable over here but 50 cents an hour is a life changing event in some parts of the world. In other words, the difference in costs (using the same flawed cost modeling) is purely because of divergent cultural attitudes, wants and desires – after all, needs are the same for the human being. And this divergence has been effected in the course of less than a century. The corollary of this statement is that rights, benefits and freedoms come at an enormous price and you have to be willing to pay it.

The second question is : Where is the equilibration point?

Now, we all know that there is never going to be perfect equilibrium between the manufacturing options from overseas and those over here i.e. because of backgrounds, resource distribution etc, there are going to be quite a different set of initial conditions for any operation/endeavor. So, the natural question is whether the equilibration point is at three, five or seven times wage differential or does it lie on some other dimension itself? Is it going to be dictated on a dimension of response time or quality or some other critical cost impacting dimension? In the real world, it is a function that intersects all of these and as we muddle from one crisis to another, it will become quite apparent.

But the proof of equilibration is in the pudding. Consider for a moment, that all tax breaks for US corporations that move jobs overseas are eliminated, the currency exchange rate differential between the US$ and other foreign currencies are eliminated and so on and so forth – will there still be a significant wage differential remaining? Will the American manufacturer still have to utter the words, “Buy American!!”  as a rejoinder to those who weigh the output stateside and overseas and votes with their dollars to buy overseas? For American manufacturing to win, there has to be an exceptional value delivered even to American buyers be they consumers or intermediates. Only exceptional value can force equilibration at a higher wage differential – so the real message to the American manufacturer seems to be – where is the value that I ought to be getting for this high a wage differential? And I’m afraid that the answer just doesn’t cut it.

You see, I fear that it is not the multinational CEO that has been shipping jobs overseas as much as it is the lack of value that was being created that forced the issue. It  may not be that one fine day, a couple of CEOs figured out that it is better to ship everything, lock, stock and barrel to some god forsaken place far far away. Instead, a few CEOs looked at what they were getting for what they were paying and decided not to pay that differential any more.

I fear that in a very general sense, the American brand as far as manufacturing was concerned (and maybe in some other aspects as well) has lost its way and that’s why it becomes necessary to invoke the fig leaf of patriotism.

The words of General Patton concerning patriotism ring true –

Don’t be a fool and die for your country. Let the other sonofabitch die for his.

That’s the be all and end all of patriotism. For everything else, bring Value.