How Quickly We Forget

Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies.
This week it’s deja vu all over again, as The Detroit News reports that an explosion in a single factory in Germany likely has disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The News reports that 200 engineers, purchasers and others gathered outside of Detroit to figure out what to do next.
It turns out that the explosion at the Evonik Industries AG plant in Marl, Germany not only produces 25% of the world’s supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12.  With automotive production up in the U.S., global inventories of the resin could run out in quickly.
Now, it does show progress that the industry responded quickly after the accident to sort out alternatives, but it’s still shopping for an umbrella after you’ve already been caught in the rain. If the OEMs had thoroughly mapped their supply chains before this happened, they would have seen the big red “X” where all fuel hoses and brake lines led back to Marl. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.

2011 starts with manufacturing momentum

Yesterday’s ISM Manufacturing Survey reported economic activity in the manufacturing sector expanded in December for the 17th consecutive month. Norbert Ore, chair of the ISM manufacturing survey committee said, “the average PMI for January through December (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP).” That’s based on the historical relationship between the manufacturing index and the GDP.

The story for procurement professionals in the report is that manufacturers noted price increases in 23 different categories of commodities. Metals, chemicals, fuel, and grains were all there. Since the whole world seems to be shaking off the recession, upward price pressure is likely to continue for the foreseeable future.

Oil seems to be a particularly worrisome category. According to the Wall Street Journal, Goldman Sachs is predicting crude oil prices up to a $100 per barrel again this year. However, the Journal also says OPEC has a self-interest in keeping price hikes moderate because the giant spike in 2008 was one of the factors that killed the global economy. According to the Journal, that might have been a short-term windfall for OPEC, but the more stable prices through 2010 were really a better long-term deal for oil producing countries. And consumers as well. If oil prices cannot be contained and other commodities spike as well, the slow growth out of recession could still be in jeopardy.

 

Where did the cadmium come from?

According to the New York Times, McDonald’s is paying customers $2.00 to bring back drinking glasses they bought as a promotion for the movie “Shrek Forever After.” It turns out the painted image of the bright green but gentle ogre contained cadmium — the toxic heavy metal that led to a huge recall of Wal-Mart jewelry earlier this year.

McDonald’s reaction, although the actual risk is not that high, is not surprising, but it did expose a gap in their supply chain of custody system.The company could quickly identify the source of the glasses, but according to the Times, a McDonald’s spokesman said the company didn’t know the source of the paint or the cadmium.

Maybe someone did a risk mitigation analysis and decided a strategy of paying a premium to buy back defective product, and running an aggressive PR campaign to back it up had a better payoff than tracking all raw materials used in a promotional item.

But my guess is that the better investment would have been either a complete supply chain environmental sustainability assessment or a chain of custody system that could track all materials used in the glasses. Either one would have likely turned up a “flagged” chemical, such as cadmium.  As even a consultant for the International Cadmium Association told the Times, “Our position is that cadmium pigments should not be painted on consumer glasses.”

Here’s the link to the New York Times coverage:

http://www.nytimes.com/2010/06/09/business/09mcdonalds.html?ref=business

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.