So long, Bo

Nobody should be surprised by the news from General Motors that the global purchasing czar, Bo Andersson has abruptly left the company “to pursue other career interests.”

[See Crain's Detroit Business: http://www.crainsdetroit.com/article/20090612/FREE/906129997/-1 ]

Andersson came from the school of thought where squeezing razor thin supplier margins, bankrupting suppliers and pushing undercapitalized vendors was the order of the day. Clearly that approach cannot be sustained.

Domestic automakers are realizing that the supply chain will be playing an increasing important role in the future. The new era will bring suppliers with healthy margins, viable suppliers, innovation, and value based purchasing.

With R&D dollars scarce, OEM’s need suppliers to bring them innovations and no smart supplier is going to send its best new technology to its worst customer.

It does not surprise me that both Chrysler and GM appear to be making the necessary changes in purchasing to create a better culture for supplier relationships.  We’ll have to see if they can make the changes stick.

(Find a longer version of this article on Mlive.com — with suggestions for the new czar, Bob Socia.)

Purchasing Briefs

Here are a couple of quick reads from my colleagues at ADR around the world. Robin Jackson is CEO of ADR Intl., Simon Aldred is a consultant, and Robert Sobcak is managing our new office in Prague, Czech Republic. Worth a look.

Now is the time to review everything procurement does or else face downsizing, says Robin Jackson.

http://www.adr-international.com/BusBrief-April09-Times.shtml

Managing the big, core areas is the easy part, but the 20 per cent of less obvious spend can yield big savings too, says Simon Aldred.

http://www.adr-international.com/BusBrief-April09-Manage.shtml

Changed world conditions mean we need to think of companies, not countries, when looking for low-cost sourcing opportunities, says Robert Sobcak.

http://www.adr-international.com/BusBrief-April09-LCC.shtml

Chemicals

I recently had a good conversation with Richard Weissman at Purchasing Magazine about buying chemicals. I can tell you a few things I told him — or you can read the whole article (with good comments also by Tom Brossart, the director of global logistics and trade and compliance at W.R. Grace in Columbia, Md.).

http://www.purchasing.com/article/CA6635527.html?q=bill+michels

1. Nothing really replaces an in-person supplier visit. Travel budgets are tight, but risks from low-cost country sources are significant.

2. An example of an area of risk is environmental practices. You can no longer “export” pollution to countries that have less stringent laws than the U.S. Organizations are monitoring practices around the globe, and consumers hold companies here accountable for what their suppliers do abroad. Sustainability and the environment are critical issues that reach through the whole chemical supply chain.

3. The chemical supply chain is suffering from the same effects of the credit crunch as other products. Buyers are extending terms. Suppliers are squeezed and risks of disruptions are increasing. We work with clients to run simulations that gives us clues where the stress is greatest, so we know where we ought to line up standby sources.

It is easy to think of chemicals as commodities that need to be evaluated almost exclusively on price, but when you add considerations of risk — environmental, logistical or financial — procurement strategies have to more carefully constructed to accommodate them.

Pro to Know, Five in a Row

Bill Michels, chief executive officer at ADR North America LLC, has been named by Supply & Demand Chain Executive magazine as a “Pro to Know” as a consultant advising companies about purchasing strategies and managing supplier relationships.
Every year the trade magazine for purchasing executives honors industry leaders who have made substantial contributions to the supply chain field. This is Michels’ fifth time earning the “Pro to Know” designation; Michels was recognized for his leading expertise in identifying troubled suppliers and mitigating the risks if they fail.
Michels is a nationally known expert on strategic purchasing, cost and change management.  He has pioneered new methodologies and theories, practices and tools for the transformation of the supply chain, helping businesses increase profitability and value. Michels writes regularly for trade publications and general business periodicals and is called on to present his expertise at seminars and conferences in manufacturing, wholesaling, chemical, pharmaceutical and commodity industries. His blog is www.sourcingguy.com.
“This year’s Provider Pros to Know have shown themselves to be thought-leaders in their respective supply chain segments,” said Andrew K. Reese, editor of Supply & Demand Chain Executive. “Their efforts in developing the tools and processes have enabled companies to weather risky economic conditions and place themselves in a position to surge ahead in better times.”

Lean, Green, Global Machine

You’ve heard of carbon dating — but in Japan and the UK at least, consumer product companies have begun rolling out “carbon labels” on what they sell. The labels tell purchasers the amount of carbon dioxide released during the manufacturing, marketing, distribution and likely disposal of the product.  Procurement professionals are adept at looking back through a supply chain — but this approach also has us “forward thinking” through the whole lifecycle of a product.

I think sustainability initiatives are likely to be with us over the long haul. They are themselves sustainable, if you will, so we should be prepared to manage them. One of the basic steps is to establish your enterprise’s standards for evaluating environmental impact. The rise and fall of ethanol is a great example of how an idea for moving away from fossil fuels was tarnished by questions about its overall impact and the pressure it puts on food supplies.

Japan, the UK, and Scandinavian countries are moving quickly to create independent assessments of sustainability. The carbon labeling is just one example. Here in the U.S., we have Leadership in Energy and Environmental Design (LEED) standards for buildings. A Green Restaurant trade group has set up a certification process for “sustainable dining,” and you can look to your own industry groups to find out how they are setting standards for sustainability.
In the absence of industry metrics – you might follow the example of Herman Miller, which set itself these goals by 2020:
•    zero landfill
•    zero hazardous waste generation
•    100% green energy
•    all buildings LEED Silver certified
•    100% of sales from products designed for the environment
Those targets may be aggressive for your company, but they do provide a good framework for prioritizing and measuring green progress. Back them up by planning and executing steps to reach them. Once your own house is in order, you can turn to your suppliers – wherever they are – and negotiate standards for them.
What is absolutely clear is that companies can no longer ship their environmental issues to offshore suppliers. Even in countries where regulations may be lax, watchdog groups are vigilant, and bad news travels at Internet speeds.
The imperatives are clear, but like any transformation, it may not happen overnight. Still, with continuous support, you can turn your company into a lean, green, global machine.

Riding the economic Tsunami

Darwin probably said it best – the fittest will survive. That’s also the assessment of my colleague in the UK, Robin Jackson, CEO of ADR International. If you haven’t seen ADR’s newsletter, this is what he had to say:

“The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours – if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of currency will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability – imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years.


These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.”

Thanks, Robin. We should all bookmark this. Post it on our desktops and build it into our work plan every day for 2009.

Find more articles by Robin and others at our ADI International web site. 

 

Damage Control = Cost Control

We were thinking here about how Wal-Mart wants to eliminate all returns from its suppliers over the next 2-3 years and it reminded us that even though you expect the carrier or supplier to cover the cost of damaged products — it still makes sense for buyers to take an active role.

Here’s what our consultant Fred Parkinson had to say on the matter.

When products or merchandise that arrive at your loading dock damaged – what do you do? Could the damage have been prevented? What are the actual costs, both direct and indirect, of managing product that has to be returned or discarded?

Prevention 

OK, you can’t control weather or sloppy package handlers, but you can write packaging specifications into your product orders. Purchasing should call on other departments within the company to help develop specifications and shipping requirements that will insure the integrity of the product when it arrives from the supplier. 

Your supplier should also be used as a resource to develop the packaging and shipping requirements because they likely have dealt with damage returns in the past.

Your parts supplier may guide you to its corrugated supplier, who will likely have a packaging engineer or designer whose services would be available to you free of charge. 

The transportation carrier should also be able to provide or recommend shipping solutions that will get the product to your dock without being damaged. Maintaining good supplier relations will help you in times like these when you need to draw on their expertise.

Costs

The hidden costs associated with returning damaged product may include:

·      Warehouse labor costs, both at your facility and at the suppliers plant, that result from handling the damaged goods three or four times.

·      Administrative labor costs of notifying the supplier of the problem, submitting claim forms with the carrier, arranging for pick ups and expediting a replacement shipment.

·      Inventory costs associated with carrying a larger safety stock if the problem is a reoccurring one.  If the product is being imported the pipeline will be substantially longer, which will also have a big impact on how much safety stock has to be carried.

·      Accounting labor costs to process and handle multipliable invoices and credit vouchers.

·      Cash flow issues while claims are being settled or waiting for credit.

·      Lost sales revenue from being out of stock and customer dissatisfaction which may result in loss of business long term.

All good suppliers and carriers will cover the obvious expenses, but when you calculate these hidden costs – you can see why it’s in the interest of buyers to take active steps to prevent damaged goods from arriving at their plants.

 

Follow the Money When You Rescue Detroit’s Big 3

People throughout the Midwest are stunned by the barrage of questions hurled at the captains of the automotive industry by Washington insiders, but there is a question that hasn’t been asked that probably should be: Where is the money going to go?
All three Detroit companies argue that they are the engines behind a huge supply chain of companies that forms the backbone of the U.S. manufacturing base. And while that still has some truth, the fact is that GM, Ford and Chrysler have all been backing out of U.S. manufacturing for years.
Caught between the unrelenting cost pressure of foreign manufacturers and union, pension and health obligations that could take a generation to shed, Detroit’s original equipment manufacturers, or “OEMs” have enthusiastically embraced the strategy of sourcing parts from low-cost countries. They started in Mexico, but over time, they have pushed suppliers to eastern Europe, China and other Asian sources.
Three years ago Bo Anderson, General Motors vice president of global purchasing and supply, proudly announced that GM had increased the share of parts it sources from low-cost countries, saving from 20% to 30%. He said to GM’s supply base, “if you are a world-class runner, your competition is global.”
Just last August, John Campi, Chrysler executive vice president of procurement, said Chrysler aims to cut supply chain costs by 25%.
In a way, the strategy of price-buying and low-cost-country sourcing has decimated and bankrupted the entire supply chain.  It is not difficult to understand that a bankrupt supply chain eventually worked its way up to the Big 3.
The key question that comes to mind as these executives prepare their plans to save the industry is: How much of the federal tax money will flow down the supply chain, and where precisely will it go?
Will the strategy of off-shore sourcing continue under the federal assistance? Members of Congress and others argued that funds shouldn’t be subsidizing job banks in America where people are paid for simply showing up. Should they instead be subsidizing factories in China, Russia or Vietnam?
Congress seems to be insisting that the industry restructure itself, but the way that is going now is by driving the automotive supply chain overseas. If the national interest in the automotive industry is to maintain and grow a domestic manufacturing base – how does that reconcile with the direction the industry has been heading for a decade?

NAFTA Does Not Serve a Service Economy

Why is it that as a purchasing advisor to global companies, I have to show my college diploma and a letter from a client to cross the border into Windsor for a consulting meeting? We are supposed to be in a post-NAFTA world, when trade barriers are supposed to be lower between Mexico, the U.S. and Canada. It is clear that NAFTA has encouraged the flow of products among the three countries, but that benefit has not yet been extended to those of us in service industries.

If we are moving from a manufacturing to a knowledge economy, it’s in the best interest of Michigan and the U.S. to reconsider the exchange of services across the borders of our nearest neighbors.

The first problem is primarily based on the fact that selling a service often means moving people to their clients’ places of business, and when that move crosses a border – governments treat it essentially as immigration, not trade.

NAFTA actually addresses the flow of consultants across Mexican and Canadian borders. Under Chapter Sixteen of the treaty, the three NAFTA countries agreed on common rules for business people temporarily working in each other’s country. The provisions apply to business visitors, treaty traders and investors, intra-company transferees and certain professionals.

For most of my business travels to those countries I’m a “TN” or “Trade NAFTA” professional. In that category, my clients don’t have to prove that a Canadian or Mexican national could not do my job, but they do have to produce an employment letter, even for a one-day training session.  All Trade NAFTA-approved categories require a college degree, so immigration officials may turn me away if I can’t show it at the border. I also pay $50 for this inconvenience.

When we travel to a Mexican factory for even a one-day consultation we have to stop and arrange for a work visa or risk a $100,000 maximum fine. With penalties such as that, we always fulfill the administrative requirement, regardless of the inconvenience.

The Canadian government also set up a whole second set of tax obstacles to exporting my services. It’s hardly a surprise, but Canada is inclined to tax every dollar that our firm charges our Canadian clients and every dollar our consultants earn while they are in Canada. And they don’t just send a bill later. The law requires Canadian customers to withhold 15% of fees payable to U.S. consultant companies and pay it to the government. Companies here are also expected to withhold and pay Canadian income taxes on behalf of our consultants.

The law exempts businesses our size and consultants whose time at work in Canada stays under specific thresholds, but to stay within the law requires essentially applying for contract-by-contract waivers. We also had to set up a S-Corporation subsidiary to our LLC business because Canada doesn’t exempt LLCs from these tax burdens.

Taken one at a time, these are not insurmountable hurdles to our business. However, I don’t see any reason to create obstacles at all to the free flow of service-industry trade between the U.S. and our immediate neighbors. In a fiercely competitive world economy we are seeing European countries becoming more like a single trading entity – without giving up any of their significant national characteristics. The U.S., Canada and Mexico have recognized their common interests as a trading block, and it’s time to truly extend that to all forms of commerce.

Roller coaster diesel prices may be masking a new carrier pricing cycle

They took off like a rocket and fell like a stone. The spike and subsequent plunge in diesel prices over the last six months has quieted many analysts who are normally quick to give you a prediction of fuel costs. Roll in the unknown effects of a global credit freeze, a stock market free-fall and you have a shipping environment unlike anything we have seen in the past.
David McClimon, who has spent over 28 years in the transportation industry and most recently ran Con-way Freight, is now advising some of our clients on their transportation and logistics issues. I asked him to contribute to this blog, and here’s what he had to say….
——
Before the spike, carriers had been chasing a declining level of tonnage, keeping rates low. During the price spiral, fuel surcharges swung the price pendulum emphatically the other direction. As fuel prices came down, common wisdom would expect the pressure to keep rates down would exert itself again. This seems especially true as shipments in core industries such as auto have dropped dramatically. In short, any company that is still shipping should be in the driver’s seat on prices.
Before we all celebrate too much, though, there are warning signs ahead. The surge in diesel fuel prices put many marginal carriers right out of business. According to America’s Commercial Transportation research group, more than 45,000 vehicles, or 3% of the tractor fleet, have disappeared from the industry since last year. Carriers with at least five trucks are going out of business at an accelerated pace. The American Trucking Association reports that in the first quarter of 2008, 935 operations shut down. This is up from 385 in the first quarter of 2007 and is the highest quarterly failure rate since the 2001 recession.
Don’t expect the contraction to end quickly, either. There are analysts projecting truck capacity in the U.S. to drop at a rate of 2% per quarter, or 6% by mid-2009. Add that to the number already gone and we might have a total capacity loss of more than 10% over an 18-month period.
When the economy turns, capacity is not likely to come back as quickly as demand, and prices may rise accordingly. Of course, no one is ready to predict the timing or the pace of a turnaround, so there is considerable uncertainty in the market.
Whenever uncertainty is high, risk is also preeminent. Here are some ways to mitigate risks if your business expects to survive this recession and capitalize on a recovery:
1.    Be sure your fuel surcharges are current – based on latest, falling prices. With barrel prices collapsing a week’s change could be a big change.
2.    Assess the financial health of your most important carriers. Do they have the resources to deliver right through a recession? Failure of a strategic supplier could disrupt your supply chain during a downturn. Weigh the benefits of leveraging now with the risk of losing the low-bid carrier to bankruptcy and the cost of lining up new carriers when the capacity is scarcer and carriers have the upper hand.
3.    If you see an opportunity to take advantage of current overcapacity, do so carefully. Evaluate each situation individually. You might be able to lock in long-term base rates that make you look very good in 18-months, but only if your carrier is still in operation. There is no good reason to leverage your current advantage into a supplier failure.
In summary, look through the wild swings of fuel surcharges to the fundamentals that are still at work in logistics. Don’t get caught up in driving prices down unless you have carefully assessed your supplier.
Establish relationships, because if you plan on being in business 18 months from now, you want your primary carriers to be in business as well. Those shippers that have been able to develop long lasting relationship with their carriers, vs. taking advantage of short term pricing pressure opportunities will be in the best position when the power of the pricing pendulum swings in favor of the carrier.