@ Supply Chain Management

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.

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.

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…

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’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.

That’s probably a rather safe thing to say as long as everyone is saying it. I would add that they might be whispering, “Well, what do you think would happen given the costs of in-sourcing?”. That’s probably not a safe thing to say, if you were a CEO.

Square with me a little, ought it not to be said? Perhaps, it bears frequent repetition as far as I’m concerned. The article titled Multinational CEOs say outsourcing has gone too far from Manufacturing and Technology News recounts:

Chief executive officers and senior manufacturing executives working for multinational corporations predict the United States will become an even less competitive location for manufacturing, according to a survey conducted by Deloitte on behalf of the U.S. Council on Competitiveness. Over the next five years, the United States is expected to slip further behind the world’s current leading manufacturing nations — China, India and Korea. The CEOs say Brazil will surpass the United States as a better destination for manufacturing by 2015.

The CEOs "see a fundamental shift — a new world order in manufacturing — that replaces the 20th century dominance" of the United States, Germany and Japan, says Craig Giffi, vice chairman of Deloitte. "It’s a virtual restart from the 21st century."

The CEOs are nervous about what this means for their children and grandchildren if the United States can’t get back into the global manufacturing game. They recognize that outsourcing of manufacturing has not worked in the way they had envisioned. "We overestimated the issues associated with outsourcing jobs to low-cost nations and the consequences of that," says Giffi. "The executives underestimated the erosion that would have in their overall capabilities in places like the United States and how that would fundamentally shift their supply chains."

and

But the United States government can’t dither in putting together policies that favor production over consumption. "This isn’t something that can be debated indefinitely," says Giffi. "Business leaders are forced into a world of making decisions 24 hours a day seven days a week on where they have to make investments in plants, equipment and new jobs." If the United States does not address its cost structure, talent gaps, trade polices and infrastructure "then we will see a continual gradual deterioration and downward spiral. . ."

Now, in the pages of this blog, I’ve gone over back and forth over the outsourcing, off-shoring and in-sourcing arguments countless times. Whether the decision to outsource or offshore manufacturing is based on flawed cost modeling, the growth of a global culture of some weird shape or form, easy credit or some other combination of other factors – what is obviously true is that it has been happening for more than a decade now.

One of more pathetic slogans that I have heard during this recession/depression is – “Buy American.” Well, I’ve been hearing this slogan even before that too. The implication of such a statement is staggering.

Allow me to explain. If the only recourse the American manufacturer has left in his arsenal to the onslaught of “cheap” foreign manufactured items is patriotism i.e. “Buy American”, it’s time to remove the last tatters of a once delicate fig leaf that has been long defending the promise of American manufacturing. If using that same flawed cost modeling, it costs ten times more to manufacturing something here in the USA than in some place far far away – there are two glaring questions – Why? and Where is the equilibration point?

The first question is :Why?

Well. that’s quite easily answered if one is prepared to be crude. Life doesn’t cost as much over there. Being paid 50 cents an hour to stitch shoe soles might inflame the passions of the very flammable over here but 50 cents an hour is a life changing event in some parts of the world. In other words, the difference in costs (using the same flawed cost modeling) is purely because of divergent cultural attitudes, wants and desires – after all, needs are the same for the human being. And this divergence has been effected in the course of less than a century. The corollary of this statement is that rights, benefits and freedoms come at an enormous price and you have to be willing to pay it.

The second question is : Where is the equilibration point?

Now, we all know that there is never going to be perfect equilibrium between the manufacturing options from overseas and those over here i.e. because of backgrounds, resource distribution etc, there are going to be quite a different set of initial conditions for any operation/endeavor. So, the natural question is whether the equilibration point is at three, five or seven times wage differential or does it lie on some other dimension itself? Is it going to be dictated on a dimension of response time or quality or some other critical cost impacting dimension? In the real world, it is a function that intersects all of these and as we muddle from one crisis to another, it will become quite apparent.

But the proof of equilibration is in the pudding. Consider for a moment, that all tax breaks for US corporations that move jobs overseas are eliminated, the currency exchange rate differential between the US$ and other foreign currencies are eliminated and so on and so forth – will there still be a significant wage differential remaining? Will the American manufacturer still have to utter the words, “Buy American!!”  as a rejoinder to those who weigh the output stateside and overseas and votes with their dollars to buy overseas? For American manufacturing to win, there has to be an exceptional value delivered even to American buyers be they consumers or intermediates. Only exceptional value can force equilibration at a higher wage differential – so the real message to the American manufacturer seems to be – where is the value that I ought to be getting for this high a wage differential? And I’m afraid that the answer just doesn’t cut it.

You see, I fear that it is not the multinational CEO that has been shipping jobs overseas as much as it is the lack of value that was being created that forced the issue. It  may not be that one fine day, a couple of CEOs figured out that it is better to ship everything, lock, stock and barrel to some god forsaken place far far away. Instead, a few CEOs looked at what they were getting for what they were paying and decided not to pay that differential any more.

I fear that in a very general sense, the American brand as far as manufacturing was concerned (and maybe in some other aspects as well) has lost its way and that’s why it becomes necessary to invoke the fig leaf of patriotism.

The words of General Patton concerning patriotism ring true –

Don’t be a fool and die for your country. Let the other sonofabitch die for his.

That’s the be all and end all of patriotism. For everything else, bring Value.