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Red alert! Red alert! – Supply Chain Prediction 2013 is beginning to materialize…

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.

“Let them eat cake…”

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

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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.

About me

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.

@ SCM Clustrmap

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