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?

Seeing is (Barely) Believing

The ISM Report on Manufacturing showed signs the economy as a whole and manufacturing in particular are continuing to grow at a more-or-less steady pace. The Manufacturing PMI was 51.7, up slightly from last month, an indicator of slightly faster growth. Based on past experience, the PMI data also suggest that the overall U.S. economy has been growing for 37 consecutive months. The same for growth in manufacturing employment.
One would expect that survey respondents would be providing cheery comments to go with those numbers, but consistent with all the uncertainties of these times, the quotes went more like this:

• “The slowing of capital expenditure in Europe and China has lowered our backlog for Q4.” (Computer & Electronic Products)
• “We see a general softening in the steel and automotive markets in the fourth quarter.” (Fabricated Metal Products)
• “Cuts in healthcare reimbursement rates continue to negatively affect top-line revenue.” (Miscellaneous Manufacturing)
• “Sales and order intake have slowed.” (Primary Metals)
• “Europe is still very much a concern. Global recovery is still fragile.” (Chemical Products)

Here’s the summary chart for some of the sections of the report.

PMI™	51.7	51.5	+0.2	Growing	Faster	2
New Orders	54.2	52.3	+1.9	Growing	Faster	2
Production	52.4	49.5	+2.9	Growing	From Contracting	1
Employment	52.1	54.7	-2.6	Growing	Slower	37

Drought shock — are you prepared?

No big surprise to anyone who has been baking in record temperatures and drought conditions anywhere in the central part of the country, but today’s US Dept. of Agriculture food price forecast projects increases in the range of 2.5 to 3.5 percent for the remainder of 2012, and uncertainty about the full effect of the drought.
If grain or livestock is a category you source, are you prepared for “drought shock?”
How about the short term dip in beef prices as farmers sell off stock rather than pay higher costs for feed?

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.

Japan’s Triple Whammy – Where Will It Lead?

Record-setting earthquake, tsunami and nuclear meltdown — will Japan’s triple whammy create material and parts shortages that will trigger inflation? Or will they crack the momentum of a fragile worldwide economic recovery?
In the short term, of course, it may look like both phenomena are occurring. On one hand, plants are shutting down for lack of parts, laying off workers; on the other hand immediate scarcities of some items have driven up prices.
Here are some facts to consider:
- Honda expects its US dealers will experience shortages through May. — Automotive News, 3/21/11
-  An automotive analyst at Truecar.com predicts the priceof a Toyota Prius could effectively go up $2,500 as a result of the disasters.  — Automotive News
- Sony lost a blu-ray factory and an R&D center to flooding in northern Japan, and eight other facilities have been offline, suffering from electricity shortages and other issues. — NY Times, 3/21/11
- The Yen hit an all time high trading against the US dollar on March 16, prompting intervention by central banks in at least 7 countries. — WSJ, 3/19/11
- Officials found high radiation levels in some Japanese agricultural products grown near the Fukushima Daiichi nuclear power plant. — NY Times, 3/20/11
- Manufacturing activity in the US has grown for 19 straight months; The ISM Manufacturing Index is at the highest point it has been in nearly 7 years.

Bottom line assessment — Japan’s economy will shift from production to construction, keeping price pressures on scarce Japanese goods high, especially while the Yen remains unusually strong. Meanwhile, the need for commodities to rebuild industrial capacity and feed a population until radiation levels subside can only support higher prices around the globe. All these things point to inflation as the greater danger. There is simply too much momentum to stop the U.S. economy, and too much determination to maintain it. The world is taking one, long, deep breath as it absorbs the rapidly unfolding dramas in Asia and the Middle East. Soon it will exhale and move on, with even increasing urgency.

It was bound to happen, eventually …

As we have been saying, companies everywhere held off price hikes as long as they could, in spite of rising commodity costs, trying to maintain sales in the face of a sputtering economy. But a stop for a gas fill-up ought to tell us all that those restraints are coming off.  The New York Times published a good summary of where prices are likely to go across a broad category of consumer goods.

 

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.

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.

 

ISM Manufacturing Report – Back to basics?

For months, the ISM report on manufacturing showed a surge in growth and clear signs of a rebounding economy. It started dropping in May and did so again for the third straight month. The index number for July fell by 0.7 percentage points to 55.5% from 56.2%. Remember, any number above 50% suggests expansion, so this month’s number tells us that the growth rate has slowed, but not stopped. The stock market jumped on the news, not so much because of the positive trend, but that it didn’t fall as much as expected. It’s an example of the right move for the wrong reason.

A very telling piece of data from the report is that manufacturing employment is continuing to rise. The rate of growth has varied, but the indexes have been positive for eight consecutive months. Since manufacturing jobs tend to generate new jobs in other sectors the improving health of manufacturing is a good sign for the overall economy.

What this may mean for supply managers is that wild cycles of pricing swings based on erratic demand and speculation might be tempering. This might be an excellent time to review and revive the basics of managing categories, managing supplier relationships and managing opportunities for innovation. Smart purchasing has always had room for mitigating risks, but a slow and steady rate of growth is inherently less risky than a volatile economy. It might be time to play out your risk scenarios to find out if the latest numbers have changed the return on some of your “worst case” mitigation strategies.

Hope that the economy’s accelerator is “sticking”

The latest ISM Report on Business finds the manufacturing sector on a quickening upturn — it’s fastest  since 2004. The results confirm what we are hearing in our discussions with clients. Stable energy prices and continuing high unemployment may be staving off significant inflation threats for the time being — although manufacturers did report more cases of rising prices in the March survey. We are continuing to watch that closely.

Here is the summation of the results from Norbert Ore, CPSM, C.P.M., and chair of the Institute for Supply Management™ Manufacturing Business Survey Committee.

“The manufacturing sector grew for the eighth consecutive month during March. The rate of growth as indicated by the PMI is the fastest since July 2004. Both new orders and production rose above 60 percent this month, closing the first quarter with significant momentum going forward. Although the Employment Index decreased 1 percentage point to 55.1 percent from February’s reading of 56.1 percent, signs for employment in the sector continue to improve as the index registered a 10 percent month-over-month improvement, indicating that manufacturers are continuing to fill vacancies. The Inventories Index provided a surprise as it indicated growth for the first time following 46 months of liquidation — perhaps signaling manufacturers’ willingness to increase inventories based on expected levels of activity.”

Link to a comprehensive summary:  http://www.ism.ws/ISMReport/MfgROB.cfm