@ Supply Chain Management

Adrian Gonzales ruminates on his eleven year stint at Arc Advisory in the post: The Accidental Analyst: My 11 years at ARC. It’s an interesting read about the progress of an analyst. Adrian talks about what has changed and what hasn’t changed in this arena:

[The dotcom era]. era served as a catalyst for companies to “think differently” about how they could leverage Internet technologies to transform their supply chain and logistics processes.

and,

Data quality remains a huge problem in the industry, and it’s only getting worse. Garbage still flows in, and garbage still flows out.

Companies still want their 3PLs to be more proactive, and 3PLs still want their customers to view them as partners instead of suppliers.

Everyone talks about collaboration, but when times get tough, as it did last year, it’s every company for itself.

Forecasts are always wrong.

It’s about people, processes, and technologies, but not necessarily in that order.

Data quality is never going to improve because data means different things to different people and so also the classification of what is garbage and what is not. The Internet is one big garbage dump but that’s no reason not to dive in – there’s a pony in there somewhere. Look at it this way, we’re in the stage of global search aka Google, Bing and what have you. Next, will come local search – simply because people will become attuned to the notion that they understand data better than some bot running on a google server in Sunnyvale, CA. And so on.

Forecasts are always wrong just as such statements that imply the same. Forecasts are mostly wrong because it is about the future. I’ve talked about that on my blog several times – there are two extremas to making forecasts – very detailed ones and a few milestones here and there. In my opinion, what is critical is not forecasting and its accuracy but execution and its implied capability. I’d focus more on short run forecasting with rapidly adaptable capability than the converse. When the converse is the case, people lament about the fact that “Forecasts are always wrong.” Yes, but that need not trouble anyone nor detain them.

Let me leave you with a sanguine observation about bubbles. The last bubble cannot be reflated because of the knowledge everyone has about it, especially about its bursting and the fact that a majority of the people are still vested in the last bubble and have yet to realize that it is not coming back. That implies that the mania of housing is over for a good while and that asset class has to go back to being a stodgy preserver of wealth (whatever little there is of it).

The consequence is that without an asset class so commonly found and the method of extracting value from it as the asset grew to bubble proportions, consumption cannot be financed at the previous pace. That has many implications for those who create goods for consumption and those who supply it (and transport it).

So all hail to the next bubble – contrary to the notion that the masters of our fate are pulling the strings that bind us; it is only that we’re so poor string pullers that we end up stringing ourselves up nice and dandy.

An article summarizing the keynote speech of Glen Hodgson, senior vice-president, and chief economist at The Conference Board of Canada is available here: Supply chain management ‘critical to success’ going forward, says Conference Board of Canada’s chief economist.

From the article

Technically, he said, while economic growth has returned in the US, reaching 5.7 % in the last quarter, Hodgson said there has yet been no strong recovery in private investment and consumer consumption.

The US will pay a high price for the heavy government investment that has taken place to boost the economy, he said.

and,

“At the peak of the housing bust in the US, one third of mortgages were subprime, ‘NINJA’ mortgages, i.e. no-income, no-job mortgages. The one piece of the US financial workout that’s not yet been settled is the housing market. There’s no true stability,” said Hodgson.

While there is still a significant overstock of housing inventory in the US, the supply is down to six months, and housing starts are predicted to rise but not at a great rate, he said.

About a year ago, the supply of homes was closer to nine months and so it is good news that some of that excess has been worked off. However, that in itself doesn’t mean much because homes are not yet affordable relative to income. Furthermore, unemployment still persists.

Going forward, Glen Hodgson predicts

“US consumers make up 70% of US GDP, and 15 % of the worlds, so a drop in consumer confidence is significant. China will eventually take this over as Chinese consumers move from saving 42 % of their income and gain access to credit. Americans are actually saving again-about 5 % of their actual paycheck,” said Hodgson, who predicted a ‘temperate recovery and consumption’ for the US, which is now borrowing about 1.5 billion dollars annually, a hole that represents about 10 % of GDP.

“They will have to have a serious debate about taxation,” he said.

The US will grow at about 2.8 % this year but the balance of ‘too much government’ is wrong, and represents what Hodgson called a ‘ U-shaped recovery’. He said the US won’t experience sustainable growth before 2012.

So that’s the take on the current situation as well as general forecast going forward. But why is Supply Chain Management critical to success going forward? The reasons don’t change even if the circumstances may:

In five to fifteen years, the rise of India and China, an aging demographic within the industrial world, and integrative trade and global value chains will be additional factors to deal with.

Supply chain management becomes ‘critical to success’, said Hodgson, who noted that firms having an international strategy “built around integrative trade will be in better shape.”

This is precious little to chew on for supply chain practitioners. However, I think we have known about this shift that will take place which is a fundamental driver of economic growth – a consumption hungry population (and a huge one to boot) that is getting to binge on credit.

What happens when Toyota falls flat? The price of success is hubris and there is for the hangers on a measure of schadenfraude to be had. To put it delicately, hot water is a kind description for the fabled auto manufacturer – there is even a website that I found that tracks issues with various Toyota models : Toyotoproblems.com

Logistics Management has an article on Toyota’s problems: Supply chain: Analysts weigh in on Toyota recall. The summary of that article is as follows:

.two analysts who spoke to SCMR today can confirm one thing: Toyota dropped the ball when it came to analyzing reports of problems in the past, reports that might have helped the company avoid such a dangerous and costly issue. Both analysts agreed that the chief lesson here for Toyota, and any other company looking to avoid similar problems, is to have tighter, more efficient analytics to better spot problems in advance.

and

Joe Barkai, practice director at marketing intelligence and advisory firm IDC, cited a 2008 report by the National Highway Transportation Authority, the government body that controls recalls in America. That report, he said, includes internal Toyota documents dating back to 2003, where the automaker detected an "unintended acceleration issue," which at the time had been attributed to floor mats which were not properly anchored.

This is clear proof, Barkai said, that Toyota has had problems for a long time with acceleration, but has failed to act.

"This recent Toyota incident is definitely not new," he said.

Michael Burkett, vice president of research at AMR Research, came to the same conclusion, citing the same documentation. There is clear evidence, he said, that Toyota was not processing the data from accidents and service reports properly.

"They were having difficulty correlating that information," he said. "It doesn’t appear that they detected problems were arising until it came to a head."

A key component in this fiasco seems to be the following that Joe Barkai points out:

Barkai suggested one factor in the size of the recall is the very design of Toyota vehicles, which in this case, may have been too efficient for the company’s own good.

"The cars are very, very similar," he said. "They use the same parts. They use the same suppliers."

As a result, Barkai said, even a minor parts-related issue could easily affect millions of cars at once. Of course, Barkai added, this same factor should have allowed Toyota to see the problem a lot sooner.

Taking the above observation along with the mistaken conclusion of the root cause analysis of “unintended acceleration issue” which was improperly anchored floor mats – the issue of the sticky accelerator pedal becomes a little clearer. Is that hubris, cutting corners or something else – some time in the near future, I think, the answer and solution will become clearer.

As you will observe, there is a feedback loop in place (falling back into Control theory terminology). What happens when the feedback loop input is not being correctly valued? The suggestion made in the article above is for better analytics in order to sift through the incoming data for yet another look. This is the role of the Observer in Control Theory. Then we get into the proper design of observers and their many inputs and the output – but it still comes down to resolving the feedback more than having an observer in the loop.

After a little more digging, I looked at some design related news about the same problem – sticky pedals. The article is from Design News: Toyota’s Problem Was Unforeseeable.

Toyota’s sticking gas pedal was an almost-unforeseeable problem, experts say, and the best course of action now is for engineers to ensure that drivers can handle the failure if it happens again.
"This is one of those horrifying nightmare problems that will occasionally occur, no matter how hard you try," said David Cole, chairman of the Center for Automotive Research.
Automotive experts said this week that predicting the problem would have been nearly impossible during design and test, especially given the kind of accelerated testing that is typically used to evaluate components which may have to last from 10 to 15 years. Making it even more difficult was the fact that the gas pedals didn’t appear to fail by themselves, but rather, by interaction with other components, such as heaters or floor mats.
"It’s not that they didn’t design a good accelerator pedal or linkage or floor mat or heater," said Steven D. Eppinger, professor of Management Science and Engineering Systems at Massachusetts Institute of Technology (MIT). "They designed them each quite well. But the most difficult problems always relate to interactions between components and other systems."
Although Toyota now appears to be coming close to a repair for the gas pedal problem, many questions still remain about its genesis. The giant automaker has gone through a succession of theories about the problem’s cause, including interaction with floor mats, materials in the accelerator’s friction lever, and condensation and corrosion from heaters. During the two-year course of problems, Toyota has examined its floor mats, shortened its pedals, lengthened the friction lever and changed its linkage materials. This morning, the company reportedly said it will add a "spacer" that will increase the tension in a spring that would keep the pedal from sticking.
Still, experts say that one of the best fixes is one that helps drivers deal with the problem when it happens. "The takeaway is that it’s less about durability testing and accelerated testing, and more about designing for failure," said Jake Fisher, senior automotive engineer for Consumer Reports.

The solution put forth there is to implement throttle-by-wire systems

Toyota’s throttle-by-wire systems, already in place on most or all of the affected vehicles, will soon contain additional software commands that will interrupt the flow of gasoline to the engine if a driver hits the brake pedal. Such software could go a long way toward preventing fatalities, since most drivers instinctively step on the brake pedal when the gas pedal sticks. Many competing automakers already incorporate those software commands in their electronic throttle bodies.

Whatever the root cause of the problem and the solution for it, there is little doubt in anyone’s mind that Toyota has stumbled and stumbled badly. What has been even more damning has been the sluggishness of the corporate response over and above the engineering, sourcing and manufacturing issues that may be at the heart of the problem. For that a heavy price must be paid.

SC Digest has a recent article: A decade in Supply Chain Timeline illustrating a decade in the supply chain timeline. What astonishes me about the decade is how quickly the mighty have fallen. Or rather how quickly some of the no-brainer trends seem to go quite limp.

The stars from the report in my opinion are:

1. Blue jeans icon Levi’s announces it is shuttering all its US production and moving to Asia – as do others throughout the decade.

If anything this move has probably been one of the most important signals of the decade.

2. Yellow Freight announces plans to buy Roadway express, its larger LTL rival. That plus other acquisitions soon bring financial trouble to new YRC Worldwide.

A telling example of how the golden boys gamble and fail.

3. Walmart announces plans for RFID tag mandate, later says it expects all vendor pallets and cases will be tagged within a few years

and later towards the end of 2009

Walmart’s RFID program seems to go into total limbo.

Now, that’s an example of how the go it alone mandate may not be the best way to introduce far reaching changes in the supply chain. Is that also a signal that the supply chain has exhausted ways of making things cheaper and in the next decade of inflation and rising commodity prices, these costs are going to find their way through the supply chain directly to the consumer.

4. Mattel becomes poster child for concerns about offshoring generally and product safety for goods made in China specifically as it has to recall millions of toys due to lead in paint and other issues.

An idea of the true costs of offshoring begins to emerge as unit cost is balanced by risk related costs and soaring transportation costs. No free lunch indeed.

5. Independent truckers going out of businesses by the thousands as slowing freight volumes and soaring fuel prices take their toll.

The driver shortage reported by American Trucking Association earlier in 2005 was most likely filled by independent truckers capitalizing on the shortfall. But the onset of the recession rearranges the marketplace again.

And the cake on the icing:

6. Dell pulls big surprise by announcing in April (2007) quarterly earnings call presentation that it is entering the retail market and largely abandoning its legendary build-to-order supply chain model, saying it is too costly.

If you survey the history of manufacturing management, you’d obtain a sort of cycle that comes and goes. The form of the cycle is centralization and de-centralization of the operations ostensibly for cost savings and better efficiencies and what not. Ergo, it behooves me to make the obvious prediction that Dell would go back to the make to order business before the end of this decade. But that is predicated on a recovery in the general economy.

7. Factory utilization reaches post-Depression low of 65% in the US.

After a decade of outsourcing and offshoring and, thus climbing up the value chain, we begin to appreciate that the perch up the value chain can only accommodate a few and the rest have to be paid for my debasing the medium of value i..e money. Fortunately and unfortunately, this game can only go so far.

And finally,

8. Everyone looks forward to 2010 – perhaps most difficult year to forecast in decades.

Au contraire mes amis, this is the easiest decade to forecast let alone year. This decade is going to be the lost decade – perhaps, I should wait at least until the first year is out. Maybe not.

I’m writing a book and I’ve put up one of the chapters from that book aptly titled Supply Chain Heresies (for now). The chapter that I’ve completed is called Continuous Improvement. Download it and send me critiques if you’d be so kind and so inclined.

Have a great weekend.

The Great Recession is finally over. So says Mark Zandi in his testimony before the Joint Economic Committee: The Impact of the Recovery Act on Economic Growth.

From that report,

This downturn will go into the record books as the longest, broadest and most severe since the Great Depression (see Table 1). The recession was twice the length of the average economic contraction, and it dragged down nearly every industry and region in the country. Its final toll in terms of increased unemployment and falling real GDP will be greater than that seen during any other recession on record.

What was interesting to me is this little tidbit from the report,

Retailers and manufacturers have also worked hard to reduce bloated inventories. The plunge in inventories in the second quarter was the largest on record and came after a year of steady destocking. Inventories are now so thin that manufacturing production is picking up quickly, as otherwise stores will not have enough on their shelves and in warehouses to meet demand even at currently depressed levels.

This suggests to me the effect of outsourcing/offshoring that inventories were unnaturally high post bust and then the plunge in inventories as the pipeline and finished goods inventories were depleted. Now a few months after the bust, manufacturing production has to be ramped up based on the expectations of a recovery going forward – a classic case of the bullwhip effect, perhaps?

Also pay attention to Table 2, where in Zandi breaks out the $175.8 billion already spent (from a total $359.3 billion available). The bulk of stimulus payments (~ 100 billion) go towards “obligations” of the government meaning extending unemployment benefits, food stamps, Medicaid etc. I mean these are obligations that the government took on regardless of the economic-business cycle but is paying for by bringing forward future tax receipts. As for providing actual infrastructure building, that amounts to a paltry $14.4 billion and tax cuts $59.3 billion.

Zandi notes,

Workers who lose their jobs before the end of 2009 can temporarily receive more UI, food stamps, and help with health insurance payments. Without this extra help, laid-off workers and their families would be slashing their own spending, leading to the loss of even more jobs.

“.leading to the loss of even more jobs” – whose jobs are these? The problem with such assertions ought to be obvious: How does one verify such statements? The same logic is everywhere:

Arguments that tax cuts in the stimulus program are not supporting consumer spending are incorrect.vii Although spending has not rebounded sharply, without the stimulus, it would still be declining.

and,

But although the exact number of additional jobs that would have been lost without the fiscal stimulus will never be known, it is clear that the number is significant.

The icing on the cake,

Although the recession is over, the economy is struggling. Job losses have slowed significantly since the beginning of the year, but payrolls are still shrinking, and unemployment is still rising. The nation’s jobless rate will top 10% in coming months-higher than the Obama administration forecast when it was trying to get the stimulus passed early in the year. That fact, however, says nothing about the program’s efficacy. If anything, it suggests the $787 billion stimulus was too small.

If you read the report, you would be hard-pressed to find any stimulus spending (unless you count the paltry $14 billion spent on infrastructure) going towards actual job creation. That’s an efficiency ratio of 14/787 = 1.7% as of now. When all the infrastructure spending is accounted for, that would stand at 11.5%. As you can very well imagine, the economists are now realizing that the stimulus was too small. Or in other words, the stimulus has not succeeded because it was too small to succeed. Or if you prefer the truth, spending 12% of the total outlay on actual job creation was a disastrous policy that will show up in the unemployment figures in the not so distant future.

Hence, the trial balloon for a new round of “targeted” stimulus: Locke Was ‘Imprecise’ in Comments on Second Stimulus

“If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as well.”

That quickly went nowhere as the reactions to this trial balloon quickly popped it. But that’s where we’re heading – Stimulus #3 is coming for sure.

Also, take a gander at the risks that are outlined for the economy going forward – nothing has changed there.

Are you pat down with the “V” shaped recovery or perhaps the “U” shaped recovery? Or perhaps, you’re attuned to stair stepping model of recovery that is headed to the dungeon of doom (nefarious toothless grin on my face)?

As you might gather from the dates between the last post and this one, I’ve been so long in the dungeon of doom, it is so dark there, that I’ve made only the slightest efforts to surface albeit with a severe case of decompression. I am decompressing actively now and hopefully I don’t get an acute case of the bends.

I still maintain my bearish bias but in the dark corners of the dungeon, one doesn’t really know whether one is amongst many or accompanying the few that remain. The last two months have been a veritable siege on my sensibility and not to mention stability. In retrospect, this was to be expected as I was well aware that there is no end to the machinations of an administration (any administration) hell bent on righting a sinking ship. While the previous administration might have protested that the ship was not sinking but it was that the storm was raging, this administration notes that while the storm has passed, there are so many tropical paradises nearby that you’d do well to use this straw to get from here to there. The more articulate ones have even begun to say that getting wet is the point of sailing. Meanwhile, “Full steam ahead.”

This is no critique of this administration because no administration save a brazen one could create sensibility when it has been jettisoned wholesale (or as a serving of humble pie a moi – offer sensibility where it is lacking. My sensibility, I confess, was lacking because I didn’t recognize the true extent of the power of government but I’m young and can be forgiven my insistence on comeuppance – well, that’s my “cop out” apology sort of thing). And this administration, like those before it, are brazen dispensers of promises and promissory notes – a brazenness more banal than breathtaking, partly because it is so predictable. While uncertainty is a staple, even necessary, when it comes to the machinations of countless parties, second parties and third parties in a web of agreements, only the steadfastness of that nameless bureaucrat and his ilk can save our world – for obvious reason: in that his chief means – power, is balanced by his chief virtues – ignorance and stability. The bureaucrat is ignorant because he was never a party to nameless and faceless agreements and his career is a glorious hymn beginning “Don’t rock the boat, baby.”

It must come a sigh of fresh air to a bureaucrat when a cursory sampling of the latest uproar on his table reads, “Extravagant bonuses at bailed out banks, unemployment and regulatory loopholes.” These are the bread and butter of a bureaucracy – incompetence, corruption, ad hoc rules, fly by night consultations and visitations – what bureaucrat is unfamiliar with those, thses can be dealt with, even swiftly if the overlords in the political world so desired it. What a bureaucrat cannot deal with is “Value”.

To illustrate, chain a man to a treadmill with rules and regulations – now, that is an easy thing in and of itself. The cheery bureaucrat will write himself a bonus for this task and no doubt countless pages of regulation that no one other than his cousin the lawyer would ever read. Why a man would run on a treadmill of his own accord – that is a secret that a bureaucrat cannot ever hope to fathom? So what does he do in the face of the latest tumult, order more treadmills and more importantly, more chains.

But this is not a question of sensibility (there’s that bearishness creeping right back in). When the agents of the government go on offense, even in a haphazard way as is their wont, even style, you’d better take note. My pocketbook took a lot of hits because I insisted on reason – governments, as I have been educated, insist on a different kind of reason.

So how have our fearless bureaucrats sought to return us to health? “Get on into more debt, young man,” blares every program in some form or the other. Take a look:

1. The stimulus (and all others to come) – borrow against future tax receipts but spend it today.
2. Cash for clunkers – Destroy a working (polluting?) car and go into debt for a new one with a little help from us – save the earth, save on oil but tie this chain around your neck.
3. Homebuyer’s credit – The first $8000 is on us, the next sum of an order 100 times our bait is on you – go into debt for the sake of cycling those homes through the market, er, no better time to buy a house.
4. FDIC is broke – This program which operates through the fees collected from the participating banks is floating a plan to have its members pre-pay up to three years of future dues in order to resume its mission of finding, taking control and then reopening failing and failed banks.

And the list goes on and on. Which of these spell restraint, awareness of the system or something wise? If we were reckless getting to this point, the administration responds with another form of recklessness getting out. The constant is a yearning for the halcyon days of but a few years ago (which having lived through were anything but) and the method of madness is to get into debt. Draw me a fine distinction, if you will, between 

(a) the worry free days of getting into debt during the housing bubble that has just revealed a chain of corruption, wheeling and dealing all the way from the mortgage officers right through Wall Street and into the books of government backed institutions such as Fannie Mae and Freddie Mac

(b) government enticing homebuyers with a credit and saddling them with homes the value of which they are certain would crater if they didn’t endeavor this way to get their citizenry into debt. Of course, if the home prices still declined, though at a lesser pace, we would revisit this same issue a few years later. 

In an insane world, if a bunch of guys were determinedly pouring water into a sinking ship, they would be keelhauled without delay. However, in this sane world, determined guys can pour more water into a sinking ship by pointing out that only then would the ship’s pumps be fully utilized. Furthermore, this is widely praised as distinguished public service.

So what then of the recovery, “V”, “U”, “L”, “W”. twenty two letters to go? To me, this is a “C” shaped recovery i.e. “Consumer” shaped recovery. I’m in the least concerned about the shape of the recovery. I’m more concerned about the consumer, the customer – the true end point of every supply chain. From my vantage point, talk about the shape of the recovery treats the consumer as the animal that he is (as in the repository of the animal spirit) – to be whipped onto the next treadmill of consumption and debt until he collapses.

And this is my contribution to the masters of the supply chain universe – if you can, for a minute, get away from the forecasts of recovery, and the talk of priming the supply chain pump, long lead times, weak dollar and what have you, and ask yourself – how is my customer dealing with a drawdown in credit lines, loss of equity in his home, chopped liver in his 401K.? In looking at the coverage of the consumer and businesses, we have gone from “Things are terrible” to “Things are bad”. However, now, I note an impatience to getting to “Things are great” while I’m expecting a “Things are not so bad” followed by “Things are Ok” followed by “Things are not so bad” followed by “Things are Ok”. The policy actions of this administration and the next would set the direction of that cycle in motion and there is every evidence that we’re gearing up for more spending, more debt, pressure from creditor nations and so on.

So is there any evidence of a consumer recovery? Yes, there is some but it is by no means something that presages significant improvement and the petering out of some of the extant stimulus programs should impact consumer confidence negatively going forward. As it stands now, note the rebound from the all too widespread feeling that went along the lines of “The world is ending,”:

There was a slight decline in September 2009 and as they note,

Consumer sentiment indices get way too much attention.  The simple fact is that sentiment does not correlate strongly with consumer spending and thus has little predictive value.  Consumer spending correlates more closely with income.  Sentiment tends to reflect well known factors such as unemployment rates and gas prices more than it predicts future spending patterns.

Meanwhile, Romer: Impact of stimulus will wear off (Christian Romer is a top White House economist) notes,

A top White House economist says spending from the $787 billion economic stimulus has already had its biggest impact on economic growth and will likely not contribute to significant expansion next year.

But I thought the bulk of the stimulus effect would be felt in 2010 and not in 2009 – What’s the deuce here? As this CNN story notes from January 2009: Stimulus will take a while to work.

All in all, the legitimate infrastructure spending, which in its expanded form would include Obama’s ambitious plans to invest heavily in renewable energy sources, will most likely not start coming on line until the fourth quarter of the year and its full effect is at least 12 to 18 months away. In other words, the fiscal stimulus measures that the incoming Administration will be pushing through are more a 2010 story.

And as for numbers of jobs created, A look at the effect of stimulus on States notes

Economists on both sides of the debate agree that the actual number of jobs created by the stimulus package will likely never be known. Large swaths of stimulus money went to provide tax relief, extend unemployment benefits and provide fiscal relief to beleaguered state government budgets. These programs have largely indirect effects on employment.

Only about a third of the stimulus funds – some $275 billion – are going to grants, contracts and loans that will be tracked on Recovery.gov. The 30,000 jobs reported so far cover only direct contracts, which represent $16 billion of that total.

So what can one conclude from this sorry state of affairs? What can one say about the “C” in the “C” shaped recovery? In a post a little while back, I had noted that there will be many more stimulii in the pipeline and one can already see the trial balloons being floated for them.

However, there is another “C” in the “C” shaped recovery – the Corporation. That will be next.

Note: I contributed this post to the Sourcing Innovation Blog as well.