@ 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.

First Ms. Lagarde and now Mr. Bernanke (in the recent testimony on Capitol Hill) assure us that there is no currency war happening. Well, that’s true on the face of it.

However, why do currency wars begin? Because they work. Initially. Unless you’re willing to say the following that the populace of an advanced economy is going to sit back and watch their exports and by implication their jobs affected. But you might say – China has been manipulating their currency for at least a decade.

However, I think the issue with China is that it serves primarily as a low cost manufacturer by default for most of the advanced economies. While each developed economy didn’t particularly like the idea of currency manipulation by China, it affected each equally, more or less. This is quite different when each developed economy is trying to jumpstart their economies and boost exports by devaluing their currencies. The first few actors will benefit from this practice and the longer that these activities persist, the effects die down.

But please be under no illusions – these are desperate measures that have pricing volatility effects on every supply chain.

Ladies and Gentlemen, I give you evidence #1 that it is well nigh impossible to eat your free lunch. Now, I’m of the opinion that there is only 1 free lunch in the world : “Learning from the mistakes of others.” But just because there is such a free lunch, please don’t assume that you can even eat it.

Why did we outsource/offshore everything to China? Labor cost? Heck, the chinese think that the true cost of labor is still too expensive. By true cost, I mean not just the hourly pay. From the article: Robots lift China’s factories to new heights,

From car plants to microchip foundries, China’s industrial sector increasingly runs by machine.

According to Nomura, 28 percent of factory machines in China use numerical controls – one measure of automation. That may be far lower than Japan’s 83 percent, but China is growing far faster than Japan did at a comparable stage of development, says Ge Wenjie, a machinery analyst with Nomura.

The supposed reason is quite stunning as well,

"You don’t have to be an expert see the (quality) gap between Chinese cars and those made by companies like Audi and Volkswagen," said Li Shaohui, who oversees automatic control engineering for the company. "To beat those competitors we have no choice but to use a higher level of equipment and technology."

But you do sir, you do have to be an expert to know that the quality gap is not just the lack of high tech robots.

However, the whole game of international trade is coming full circle now – stunning in the sense that it took only about 15 odd years to rapidly industrialize (the benefit of the free lunch) to start feeling the need for advanced machinery and consultants from developed nations.

However, the lingering question is going to be whether they will just buy the robot because of its supposed supra-human like qualities or pause to chew on the mistakes of their forebears when they went the route of the robotic revolution.

Process, People, Process – Robots should go to management and join the other robots there…

As promised, here is my take on the Predictions from Supply Chain Gurus for 2012. You can read the article at SC Digest :  Predictions from Supply Chain Gurus for 2012

First up the Gartner Boyz:

Like others, Gartner is projecting a movement of manufactured goods overseas back nearer to US soil, if not within the country itself. It projects that "By 2014, 20% of Asia-sourced finished goods and assemblies consumed in the US will shift to the Americas," which of course can mean Mexico, Honduras, Costa Rico and other nearby sourcing locations.

The drivers? First,they says that many companies initially underestimated the true total costs of long supply chains offshored to Asia, miscalculating inventory costs, greater issues with product quality, lost sales or discounted prices due to long lead times, IP theft, and more.

They also note that some of those issues may soon be exacerbated in some countries (meaning China) as more and more production will be consumed in Asian markets, not Western ones.

Sorry, guys but I predicted this way back in 2006-07. Don’t believe me, you can read it for yourself here: Surviving the China Rup Tide – How to profit from the Supply Chain Bottleneck and The Intimate Supply Chain – Part 1 amongst other posts. The simple point is that none of these supply chain moves (no matter who the guru predicting it is – not even me) are holy writ but they’re very much context writ.

And what explains this shift?

"Customer demand for service excellence and increased product choice at competitive prices is
driving brand owners to reassess the value delivered by their supply networks," the analysts say. "Sacrificing lead time for reduced unit cost will be insufficient to satisfy this customer requirement."

For certain segments of the supply chain, a "nearshore" strategy will make a lot more sense, they believe.

Come on, does this hypothesis pass muster? Isn’t there a recession on still – unofficially but have you taken a look at the purchasing power of the middle class lately?

Production to scale is a great idea when demand is always pointing upwards on a growth chart but it’s a sorry idea if your demand falls off a cliff or in this case becomes as volatile as fickle fig leaf.

Further,

Gartner says that "After billions of dollars spent on ERP, many companies still lack the timely, accurate and network-based data that can guide fact-based, timely supply chain decisions." It also notes that companies are collecting in one way or another vast amounts of information, much if not most of which is not being used effectively for improved decision making. "Big data" is the term associated with the opportunity to better mine this information and extract more value out of it, to the great delight of data warehouse. analytics, and storage vendors.

Now, remember what I said just a few posts back about the inevitable entrance of Big Data into the enterprise world – this is no big secret and my advice to you is to get on the bandwagon now. That’s also the reason why I started my Big Data blog because there’s no escaping this elephant in the room.

This provides a perfect segue into a curious coincidence wherein this firm came into my crosshairs – Lokad. Now, I’m not very familiar with the technology but that will be the focus of my  next blog post as I investigate what they do. The gist of it is that they’re trying to get better forecasts by digging through Big Data.

Stay tuned for that update…

According to this news report: Apple’s new Foxconn inspections could start chain reaction, Apple has asked for inspections of Foxconn’s operation from an independent team of labor rights experts. Good for them.

According to Apple, a team of labor rights experts started inspections Monday at Foxconn City. Foxconn makes the iPad and iPhone for Apple. The Fair Labor Association (FLA) described itself this way: "Incorporated in 1999, the Fair Labor Association (FLA) is a collaborative effort of socially responsible companies, colleges and universities, and civil society organizations to improve working conditions in factories around the world. The FLA has developed a Workplace Code of Conduct, based on ILO standards, and created a practical monitoring, remediation and verification process to achieve those standards."

Tim Cook, Apple CEO, said in a statement: "We believe that workers everywhere have the right to a safe and fair work environment, which is why we’ve asked the FLA to independently assess the performance of our largest suppliers.

Cook has bristled at the argument that Apple doesn’t monitor its supply chain conditions. As noted before, Apple isn’t the only company that relies on China manufacturers for its wares.

In the relationship between Apple and Foxconn, I think it’s obvious where the leverage lies. For now. But tomorrow, who knows?

I wonder if this will not turn out into a shot from Rick’s café:  I’m shocked, shocked to find that gambling is going on in here!

Supply Chain Management Review blog has a post by Rosemary Coates called The Silk Road – the First Global Supply Chain.

I spent the holidays on vacation in Venice and Istanbul on a mission to understand more about these two important end points on the Silk Road. Starting around 200 BC and extending 4,000 miles, the Silk Road got its name from the lucrative Chinese silk trade and tea trade in exchange for spices, nuts and jewels from Europe and the Middle East.  In addition, various science and technology innovations were traded along with religious ideas and the bubonic plague.  The Silk Road was a significant factor in the development of the great modern civilizations.

and

Very few people actually traversed the entire Silk Road.  Mostly it was made up of agents and merchants who bought and sold goods along the way.  At major points, great bazaars opened to facilitate a meeting place for traders, such as the Grand Bazaar in Istanbul, which still thrives today.

Our modern supply chain story – the global supply chain story is not a new story. Rather it is an incarnation of an older story. The Silk Road (and I’ve explored its rich history along the different paths for my nascent book on the Supply Chain frontiers) is a recurrent theme because it fills a human aspiration – the social aspects of what it means to be human.

But take note, there was a heyday of the Silk Road and eventually it fell into ruin before it was reincarnated. Nothing in our Global Supply Chain story is permanent and this too shall pass when it comes under undue strain but the enormous benefits gained by individuals (rather than kingdom and the elites in the story of the Silk Road) this time round would be a profound loss.

Which brings me to my blog point – When Americans rue the loss of jobs to China, I doubt that what they’re really saying is that they’d like those jobs to come back as much as they’re wishing for the days of simplicity. Or in another sense, the days of yore and for questions for which we have ready answers. Those questions have been answered – it’s time to ask new questions which open up new frontiers.

Lastly, don’t buy the idea for a second that the ideas of tomorrow are those which only college education and college educated folks are only equipped to answer. There’s more under Heaven and Earth than can be found in the enclaves of academia.

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.