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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.

The Oh-no moment…

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).

Japan Government Budget

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

United States Government Budget

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…

Amending the Supply Chain Prediction…

NOT!!!

However, here’s Ms. Lagarde of IMF : Lagarde sees Currency Worries, Not ‘War’.

"There’s been lots of talk of currency wars, and we have not seen any such thing as a currency war. We’ve heard currency worries, not currency wars," said Lagarde. "We’ve not seen confrontation but deliberation, dialogue, discussions and clearly this G-20 meeting has been extremely helpful and productive."

Lagarde’s comments echoed those of the G-20 nations on Saturday, who declared that there would be no currency war. This has taken the heat off Japan, which has been criticized for its expansive policies that have driven down the yen following the election of Prime Minister Shinzo Abe.

We’re all diplomats for now. Like I said in my prediction, we’ll first take the time to get this wrong to the fullest extent possible before we admit to the possibility that it was a war all along. So far we have no confrontations but deliberation, dialogue and discussions only. But confrontations arise from accusations – so until we see all sorts of accusations thrown about, it’s quite alright to be in the mode of Supply Chain worries.

Like this kind:

Bank of Korea Governor Kim Choong-soo told the Wall Street Journal on Sunday that he was concerned over the weakening yen’s impact on his country’s economy. The governor stressed the importance of strengthening financial safety nets to give smaller nations the confidence to not have to stockpile currency reserves.

However, be not alarmed when such protestations erupt from the smaller economies. When you sniff the first wave of accusations between the larger economies, you’d do well to have already taken a long hard look at every and any extended supply chain and start diversifying options – especially options that have a strong currency component to it.

Predictions for the Supply Chain in 2013

SC Digest has posted a round up of Supply Chain Predictions for 2013 :

Part 1: Predictions from Supply Chain Gurus for 2013 – 1

Part 2: Predictions from Supply Chain Gurus for 2013 – 2

The predictions from supply chain gurus span the gamut from Big Data, Analytics, Dealing with longer lead times, Talent, South America and Africa. And e-tailers?

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.

In summary, while global supply chains can tolerate some uncertainty, it isn’t quite clear to me whether it can tolerate the sort of volatility that global currency wars entail. The Gold standard of Supply chains might mean something entirely different in a couple of years time.

Robots lift China’s factories to new heights : Can you eat your free lunch?

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…

Why Apple makes iPhones in China and Why the US is screwed?

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.

Apple supply chain sees smooth sailing ahead

Apple’s succession story has been in the news lately – or rather a story made necessary by Steve Job’s health situation. In this article on CNET : Apply supply chain sees smooth sailing ahead, the new head of Apple – Tim Cook, is reputedly a supply chain pro. In one sense, that’s a great thing but then I take a step back and ask myself : Is that what Apple really is?

I don’t think of Apple as a supply chain company with great products but a company with great products that has honed its supply chain quite well.

There is one quote from a Jeffries Analyst that speaks to the supply chain management voodoo at Apple:

"Even with the unfortunate events in Japan around the time of the iPad 2 release, Tim Cook was able to double or sometimes triple source component suppliers. To date, no competitor has been able to gain meaningful share in the tablet market; and, in our view, Cook’s leadership during the introduction was critical to this."

Perhaps, we will see Tim Cook elevate the next avatar of Steve Jobs from within Apple’s ranks that puts the key competitive advantage of Apple front and center. That would be “Giving people what they didn’t even know that they needed”.

Not easy but necessary.

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.

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