Can U.S. Supply Chains Afford To Be Ethical?

News reports of rebel advances in the Democratic Republic of the Congo (DRC) are stark reminders that the provisions of the Dodd-Frank Act regarding conflict minerals, as awkward as they might be, do address real life and death situations.  As much as we all might want the violence to end, if the conflict is actually escalating it begs two questions:
1. If the pressure of the Dodd-Frank provisions isn’t enough to reduce violence, is it worth the cost of implementing them? The rules haven’t been in place long enough to measure possible impacts, but perhaps it’s already too late.
2. If companies in China or other countries are sourcing from DRC without limitations and therefore at lower costs, have we made U.S. companies less competitive? Can we afford to do that in a competitive world economy?

I don’t have easy answers to these questions, but I think they are important enough to consider. Beyond the specific situation in Africa, can U.S. supply chains afford to be ethical when they have to compete against foreign companies with much lower standards? Especially when critical raw materials are in short supply or are difficult to source.
Although the voices of non-governmental organizations (NGOs) are often annoying, is this a possible useful role for them — to act as country-neutral watchdogs for generally accepted ethical or sustainable standards? Or are the pressures for growth and limits on media so great in countries such as China that they will negate the effectiveness of any whistle-blowing by NGOs?

Sourcing from China without saying, “We’re Sorry.”

According to the official statistics, the U.S. had a $295 billion trade deficit with China last year. That sounds pretty horrible, but here are a few related thoughts to chew on. Economist magazine estimated the total cost to Apple of creating an iPad was about $275. Since it’s assembled in China and sold by the millions here, it may account for as much as $4 billion of that trade deficit.  But Economist said, “wait a minute” because the design, engineering, and marketing costs are all based in the U.S., and major components such as chips, displays and memory are made in Japan and Korea. The actual value added by the final Chinese manufacturing is closer to $10, not $275. That’s a huge difference.
Because Apple has U.S. suppliers and a U.S. distribution system, Economist estimates about half of the value of each iPad stays here, generating about $4.1 B in U.S. economic activity from an estimated 15 million units sold.
A similar analysis comes from three authors of an article in the Journal of International Commerce and Economics. They looked at the supply chain for iPods (remember those?) and estimated the product was generating just under 14,000 U.S.-based jobs in design, engineering, management, distribution and retail. The product was also generating about 27,000 overseas jobs, so no big surprise there. However, when the researchers looked at the value of the work, they estimated that about $750 million in earnings were going to U.S.-based workers, and less than half — about $320 million were going abroad.
In short, sourcing from China is sometimes a good business decision — and when it is, you don’t need to apologize for it.

The China “Equation” Isn’t One

Here’s an interesting analysis of sourcing from China from an interesting point of view — the real estate investors who own manufacturing facilities across the United States.
National Real Estate Investor – Made in America Again

The authors refer to a study by AlixPartners that projected the gap in manufacturing costs between the two countries will essentially close in another three years — based on wage inflation, exchange rates and freight costs. That same study also pointed out that between 2005 and 2008 the cost gap had shrunk from 22% to 5.5% between the two countries.
The speed at which China is “catching up” is also catching many analysts by surprise, but it also points out that the China “equation” is not really an equation. An equation represents a balance, whereas the situation in China is very dynamic. Sourcing from China has never been simple; it has always required careful analysis of costs and risks, and one of those risks has always been the fluidity of the situation. Right now, for instance, the Communist Party has been shaken by the purge of a senior official and potential criminal charges against his wife even as it is poised to make a huge transition of power to new leaders. It’s impossible to predict what impact that will have as it plays out.
At the same time, as we consult with companies operating in China we are finding many of their employees are excellent students of supply management. They are enthusiastically embracing best practices, and it’s clear they are not just focusing on exports to other countries, but creating supply chains to serve China’s own huge and growing appetite for consumer and business products. Will this drive new efficiencies and innovations that U.S. companies will want to purchase? Or will it fuel demand that will put upwards pressure on prices?
China is so big, and changing so fast that the answer is most likely, “yes.” To both.

Halftime in China

We have all heard that it’s halftime in America — and that we are going to come roaring out of the locker room for the rest of the game. That may be true, but here’s a heads up — business leaders in other parts of the world are giving themselves the same pep talk and expecting similar results.
I’m saying that because I’ve seen it first hand in training sessions for Chinese supply management professionals. We are working with employees of several billion-dollar global companies — some based in China and others that have Chinese operations. They are generally Chinese nationals, have good English skills, and are excellent students. They are attentive, ask questions, and apply what they have learned after our seminars.
I don’t want to sound like I’m stereotyping, but anyone who has ever visited the Beijing Pearl Market has seen how haggling over prices and quality is deeply embedded in Chinese culture. However, no one should look at the lively interactions between buyers and sellers there and think that Chinese procurement in general is focused just on transactions.
The organizations we are working with want to know best practices in supply management. They want to use the best tools and the latest strategies for bringing value from their supplier base. Because Chinese companies have operated in a protected domestic environment, their knowledge of global markets may have gaps, but the participants in our seminars are eager to fill them as quickly as possible.
This post is not supposed to be a warning. In a global economy Chinese companies may be your partners as well as your competitors. But it is an observation that they are not not expecting to do well only because they have access to cheap labor and a protective government. They are sharpening their skills in every area of business — and supply management is a high priority.

The New “China Syndrome”

The original meaning of the term “China Syndrome” described how the fuel in a nuclear reactor might overheat and melt down, creating a disaster by burning through the reactor’s layers of protection. A new meaning for China Syndrome might describe how an overheating, or possible meltdown of the Chinese economy could create disastrous volatility in commodity demand and prices.
The Wall Street Journal has a good capsule summary of three scenarios over the next decade. Here’s the link, if you have access:

As China Goes, So Go Commodities – The Wall Street Journal

Under any scenario except a complete collapse of China’s hard charging economic growth, there is almost certain price pressures on energy sources as well as certain grains over the next ten years, and continuing pressure on construction materials as long as China keeps building infrastructure at an astonishing pace.

Over the long-term, successful supply chain strategies will not only need strategies for containing costs, but a continuing focus on innovations that provide alternatives to traditional materials, reduce waste or use recycled products.

Asian Supply Managers Eager for New Skills

In the two years since we launched the ISM-ADR School for Supply Management, we have seen remarkable demand for professional development from global companies doing business in Asia.
I’m very pleased to announce that we will be significantly expanding our presence there with a new partnership we have created with Procurement and Sourcing Institute of Asia and TransProcure Corporation (PASIA/TransProcure), both based in Manila, Philippines. Like ISM and ADR, these two organizations recognized the value of collaboration and have been working together for some time. Creating a new consortium of four organizations will ensure that any company operating in Asia will have access to consistent, high quality professional development resources. We are excited to be helping improve the skills of supply managers in this fast-growing region of the world.

Read the full release on Business Wire.

 

The buck stops … where?

We might all take a lesson from Apple Computer’s dilemma at a factory in China that assembles its slick touch screens for iPads and iPhones. The factory might be far away, and governed by far different worker safety rules, but that didn’t keep Apple off the front page of a recent New York Times with this headline:

Workers Sickened at Apple Supplier in China

If it’s not obvious already, if you work at a company that sells goods to consumers — you can expect to be held accountable for the activities of your entire supply chain — as well as the disposal of your products after use.
Of course, this example also points out one of the risks of deep strategic relationships. If the Chinese company, Wintek had been selling to many U.S. technology companies, Apple might have escaped the headline. But Apple has created a supplier network that it treats as extensions of itself — and as a result, must accept some responsibility when things go wrong.

 

Inflation Starts Here — or There

A very slow economic recovery in the U.S., and the associated headache of continuing high unemployment have generally kept inflation at bay over the last year. However, the recent spike in fuel prices and in some commodity categories have been warning us that the buyer’s market may be coming to an end.

Where will inflation start? It already has, of course, in most forms of transportation. The New York Times says in this article that you can add China to that list.

According to the Times‘ data, minimum wages in Beijing have gone up about 20% in the last year when calculated in terms of U.S. dollars — partly due to local  pressure and partly due to the rise in value of the renminbi. Overall the official inflation rate is listed as just 5%, although that is likely to be a low estimate.

This news brings more caution about sourcing in China — although the real key to success there has never been to race in, hoping for a quick fix to cut costs. And it’s a reminder to check every category you are buying for advance signs of price pressure.

Quick Responses to Cadmium…

It didn’t take long, did it?  Wal-Mart and Claire’s at least, have pulled jewelry loaded with the toxic heavy metal, cadmium from their stores.

Here’s an AP story.

Add Cadmium to the “China Watch List”

Toxic toys. Toxic drywall. Today it’s toxic jewelry from China. The Associated Press is reporting it conducted its own tests on a number of jewelry items purchased at Wal-Mart, Claire’s and other retailers and found significant amounts of cadmium in them. The heavy metal is a known carcinogen and is linked — like lead — to brain damage in young children.

According to the AP, the items could be categorized as hazardous waste if a factory tried to put them in a dumpster, but there are no standards for jewelry, so children can wear them around their necks, toy with them, maybe put them in their mouths and suck on them without any cautions from the government.

It’s easy to slam China for these situations, but the real issue is “buyer beware.” This is a great example of the hidden cost behind a low “per piece” price. More and more, companies are being held accountable for the full length of their supply chains — and often for the life and disposal of their products as well. It’s harder than ever to shift the blame to a supplier, and almost impossible to shift the cost to a reputation when your product is considered a threat to children.

There are excellent products coming from China and other low-cost country sources. There are even product innovations and improvements in quality where once we could only expect low prices on copycat designs. The cadmium alert simply reminds us to evaluate risks and other factors on every individual purchase we make.