The ability to bounce back from unexpected supply chain disruptions is the essence of “resilience”. Resilience can be achieved by building in redundancy (e.g., in inventories, capacity, and suppliers), but such redundancies are expensive. A more viable way of ensuring resilience is by building in flexibility into the supply chain. The presentation will highlight the most effective ways of developing resilient supply chains and will explore how they can be used for day-to-day competitive advantage.
The talk will cover many of the topic and the examples described in Professor Sheffi’s award winning and bestselling book “The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage.” (MIT Press, 2005).
Topics discussed during this webinar will include:
Supply chain management processes
Building resilience
Overcoming vulnerability
Maintaining competitive advantage
This informative webinar will take place on Wednesday 21st April at 14:00 GMT. Yossi will present and discuss the themes of his recent publication
What is most interesting for me would be how Prof. Sheffi is going to link up resilience and competitive advantage – should be interesting. And it’s FREE.
The Treasury has at long last unveiled its plan to steady the battered financial sector. Who can really tell whether it will be successful but the plan itself has been battered in short order – it’s only been a few days but no one could pay me enough to be Tim Geithner’s seat right now. After reading and re-reading a number of pro and con articles, I can only wish the man well not because his plan is a good one but because he is a human being in a Treasury department that is empty at the highest levels – like someone thrown in the lead car of a roller coaster that has left base station while everyone acknowledges that the tracks are not yet complete.
What is a plan? I mean, Why engage in planning at all? Let’s just roll with the punches and end up wherever we end up. Actually, that’s what happens in the real world but planning gives you an advantage i.e you have a chance to press towards a goal knowing what footholds are available, some idea of the strengths you bring to the fight and where some of the weaknesses are. But for that you have to have planned beforehand i.e. mapped out a baseline, run through some scenarios and know some fallback options.
So what is a plan?
Among other incarnations, it is a map of how you intend to get to a goal.
So what is the goal here- “the most important bar none short of selling your soul after a heart transplant” goal? To me, the goal is economic recovery. It is not saving the financial system or some or all players within it – they can save themselves. In so far as some of these financial players contribute to that economic recovery, we should be use them as crutches. It is not saving homeowners who took on crazy amounts of debt or those whose credit cards were means to an imaginary life or even survival. Or whatever else has already cracked or given way under this period of duress. The reason I say this is because even though we may not be able to comprehend it, this may only be the first wave with several more waves to follow the intensity of which we don’t know. Of course this depends on two things – an understanding of what else may give way and what we’ve already committed as actions through this first wave which may give us a foothold or may be a false floor. But in order for an economic recovery to be sustained, an intermediary financial market has to exist i.e. a functioning market that evaluates credit worthiness and supplies funding for requests from various participants.
In my opinion, there are two activities that a plan should support in its archetype – dampen the implosion and prime a recovery. If you were to survey the entire gamut of activities that you’ve heard about so far, what would you conclude – is the implosion being dampened, is a recovery being primed or is it just a fall back on an economic ideology or something else that could be classified as confusion? Now, confusion is a part and parcel of a fluid environment but one ought to take a step back and be able to find a bearing despite the confusion. Are you able to locate one over and above the vapidity of change?
Most of the efforts so far (before this plan) is heavily tilted towards dampening the implosion with next to nothing about priming for a recovery (well, I don’t think that economic recovery stimulus bill does anything here – all the future collectible taxes that have been allocated as stimulus will course through the patient like a jolt when it hits. I guess one can expect a few quarters of sunshine if that (to take a metaphor to the macabre ) but I don’t think that one would conclude that because the patient momentarily rose into the air, that he was trying to sit up). Momentarily, it seems as if the implosion has slowed as large sums of money are pumped into the system but as you will discover reading further, we are dampening the implosion from one cause i.e. residential mortgages. There are other causes which are namely credit card debt, commercial mortgage default and last of all the leveraged buyouts of various entities.
So onto the plan. As you might have very well read before : Treasury proposes plan to purge “Toxic Assets”, the provided sample calculation should be sufficient to throw some light on the matter.
A Sample Investment In Toxic Assets
Comments
Step 1: A bank has a pool of residential mortgages with $100 million face value that it’s seeking to divest. The bank would approach the Federal Deposit Insurance Corp.
No comment
Step 2: After conducting an analysis, the FDIC would determine that it would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
This is part of the problem that the Treasury claims it was trying to avoid. The raison d’etre of the plan is that by bringing in private investors and managers, the treasury would be able to avail itself of expertise in properly valuing these assets. However, by determining the leverage ratio ahead of time, the government through the FDIC has already set up an envelop for the price of the securities. This is no different than saying that it is the FDIC that is actually pricing these securities.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest private bid – in this example, $84 million – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
For a pool of residential mortgages at $100 million face value, is there going to be a private sector bid at $84 million when home prices on average have decreased 25-30%. Even with home prices decreasing 25-30%, one would hazard a guess that the areas where these residential mortgages are really distressed have seen greater price reductions. So in my opinion, if one changed the highest private bid in this example to $40 million (or less), one begins to approach reality. This would most likely result in banks not willing to sell the mortgages. The plan cannot go forward then.
Step 4: Of this $84 million purchase price, the FDIC would provide guarantees for $72 million of financing, leaving $12 million of equity.
If Step 2 and Step 3 are sound, then this follows. However, there is no reason to think that the previous steps are sound.
Step 5: The Treasury would then provide half of the equity funding, or $6 million, and the private investor would contribute $6 million.
Step 4 and Step 5 are actually a single step
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition using asset managers approved by and subject to FDIC oversight.
Getting the private investor or independent asset managers to handle this is a good idea but this is an irrelevant positive.
So as you might be able to see, the plan is problematic because it relies on the government ball parking the price of the securities (and through them the residential mortgages) The government does this in two steps: first through the leverage ratio and second by being very optimistic about the value of these mortgages such that the banks will be willing to sell them and private investors willing to partner with the government to buy them.
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system – that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
He’s pointing to the same problem i.e. the government thinks that these residential mortgages are mispriced and therefore must believe that they’re passing on a great bargain to private investors. Here is a graph that helped me put things in perspective, it is also something that guided me in the past:
The above graph is simply a plot of Home prices divided by median family income for the United states over a little more than 4 decade period. Now, I am simple revert to the mean kind of guy unless there is some compelling reason to overshoot or undershoot. So do you see any compelling reason why we will not revert back to about 2.7 or even lower than that?
This is a graph dated from January 2007 that gives a timeline of the various mortgage types that will undergo a reset at some point in the future. As you can see, we have passed the period of Subprime ARMs being reset (as of January 2007) but look at what’s coming up ahead? This is the reason why I believe that we’re through the first wave and you also begin to see why it is one of the important reasons why I think that the Fed wants to keep mortgage rates low (failing which, we start to drive more and more people off the cliff with the resets to come).
The outstanding issues that are yet to be considered are credit card debts, commercial real estate defaults and finally Leveraged Buyouts (LBOs) that were all the rage at the very end of this expansionary cycle. We’re beginning to see some of these issues surface here and there but I don’t think that we’ve seen the end of them.
Supply Based Management is a new book by Stephen Rogers that I’m reading right now – a review to follow shortly. In the meantime, I have the pleasure of posting an excerpt by the author himself about supply based management in these difficult times.
SUPPLY-BASED MANAGEMENT IN TOUGH TIMES
In today’s deep recession, customer vulnerability and top line revenue declines need to set the tone for the actions that create advantage not merely survival.Cutting costs is vital to your competitiveness but the knee jerk reaction to squeeze suppliers, as much as you fear your customers will squeeze you, will not create a business model that rises above survival.
About the Author Stephen C. Rogers is the author of the new book, The Supply-Based Advantage: How to Link Suppliers to Your Organization’s Corporate Strategy (AMACOM 2009). He is a Senior Consultant with the Cincinnati Consulting Consortium, concentrating on Purchasing and Supplier Management, and an adjunct professor at Xavier University. During his 30 years at Procter & Gamble, he had sourcing roles in every major business unit, and as the
If we can get through these pressing times, we might have some time left over to read The smarter supply chain of the future (courtesy of IBM supply chain management). Or is that pouring new wine into old wineskins? Or is it the same old wine with a dash of vinegar mixed in?
The executive summary reads from the first line:
Volatile. That’s perhaps the best word to describe today’s global marketplace.Like economies and financial markets, as supply chains have grown more global and interconnected, they’ve also increased their exposure to shocks and disruptions. Supply chain speed only exacerbates the problem.Even minor missteps and miscalculations can have major consequences as their impacts spread like viruses throughout complex supply chain networks.
Silly me – supply chains were forced to grow global because of various actions taken by firms, first as a trickle and then enmasse which had the entirely unanticipated (I’ve been anticipating this for some time now) consequence of exposing the firms to the risk of very long supply chains. To give a different analogy, this is what Napoleon did too in his disastrous Russian campaign – he overextended his supply lines and continued his campaign into the brutal Russian winter. As we stand now, we risk a brutal global economic winter of proportions we have never witnessed (when I say "we", I mean most of us didn’t grow up in the great depression or something like it) all the while our supply chains are long and fraught with risks that are just becoming apparent. So tell me, what new problems await us? Plenty aplenty.
Nevertheless the discussion of the report focuses on:
Cost containment – Rapid, constant change is rocking this traditional area of strength and outstripping supply chain executives’ ability to adapt.
Rapid and constant change have always existed, no? One would think that while one would have been patting oneself on the back about engaging in globalization as rapid change but you can’t stop there. You’ve entered the whirlpool now – this is no time for smooth sailing.
Visibility – Flooded with more information than ever, supply chain executives still struggle to
Many banks have made it harder for borrowers to obtain all kinds of loans over the last three months despite a $700 billion federal bailout program and a flurry of other bold moves to stem the worst financial crisis to hit the country since the 1930s.
yet brimming within you had to have detected the hardly restrained despair over the perceived double cross – It reads, “They (banks) take our money and refuse to lend it out…”. Expect the nonsense to get a whole lot more shrill just as sense was beginning to take hold.
This vindicates the following: Sense is as delicate as nonsense is compelling.
As bankers return to the norm (after that last mania has died), the question that remains really is what is the norm for a politician? Draw that norm and you have made some distance in setting the expectation of how bad this mess is going to get. There is a plethora of danged and damned danged stuff out there that form the repertoire of a seasoned interventionist (You might appreciate that the US government, and every other government in the world as well, is in full interventionist mode) – Price controls, wage controls, nationalization, funky money, funkier money, generic stimulus, targeted stimulus, “Dang, I hope this works” stimulus, quotas, protectionism, tariffs, Buy American – (What is American anymore?), unemployment, adjusted unemployment, severely one time adjusted unemployment, “we just stopped counting” – unemployment, war, senseless wars, senseless wars made sensible… In short, there is nothing sensible when it comes to politicians or the government.
So what does that mean to the supply chain at large. I can think of two possible impacts immediately.
1. Increased pace (perhaps tending to the frenetic) of lobbying efforts – When the government enters the playing field (and as of now, it is hovering and peddling influence at the periphery) as I expect that it will, firms up and down the supply chain will have to expend considerable lobbying influence to either keep the playing field as is or towards favorable terms. Naturally, the firms with deep pockets will benefits immensely from this whereas the smaller players in the supply chain (be it services such as 3PLs or carriers or actual suppliers of raw materials or intermediary products) will lose out unless they get their collective pockets together. Of course, frantic money encircling government begets not efficiency of investment (perish the thought) but beggars scandal – expectation of many money scandals is now firmly on my screen.
2. Stimuli – Can anyone put forth the reasoning behind the stimulus? Why stimulate anything in the first place and why does the government have to do the stimulating? The second part first – only the government has the “magical ability” to create something out of nothing – in other words, when the government says, “Let there be money.” Poof!! “And there was money.” Let
There is little doubt in my mind that this company ought to go bankrupt (or be forced into bankruptcy – the management needs to be replaced. And the unions – well, forcing this company into bankruptcy might very well mean the loss of a great deal of jobs and the brinkmanship that they have played in this farce wouldn’t be more well recompensed) because it doesn’t seem that its management has a clue about what brought them to the brink in the first place or maybe even left them dangling over a precipice. What brought them to the brink in the first place is the dearth of, nay, absence of profit that the firm chalked up these past years – prudent firms grow profit and trim costs. GM on the other hand does the reverse. What pushed them over the edge is the fact that the a great number of that elusive group called the US consumer is strapped for cash, not credit worthy by reason of being neck deep in debt.
Therefore, GM has decided that its flagging fortunes will be rescued thus:
GMAC will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers. The company said it won’t finance
It is that time of the year where we chart through the snow… No, we never do that. But these are extraordinary times. So I share a couple of charts with you minus the commentary. The lack of commentary is part amazement and part “What the heck does this mean going forward?” – I
I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.
