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?

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.

 

Think “Low Cost Supplier” not “Low Cost Country”

I’ve been on Internet radio talking recently talking about the change at the top of global procurement at GM — and what that means to the huge push they had been making to source from China and other low-cost countries.
This excerpt from a column by an ADR International colleague based in Prague, Czech Republic makes a good point about that. Here’s the excerpt and a link:

“Experience shows a clear erosion of the traditional split between low-cost and high-cost countries, as many suppliers in emerging countries are unable to deliver benefits because of poor performance and productivity and high logistics costs.

Buyers are therefore seeking companies which offer the most advantageous relationships, whether they are located in an emerging region or, for example, Western Europe.

Global companies such as Unilever, for example, no longer focus on regions or countries. Instead they use a database of vendors capable of supplying their global network for best total costs no matter where the vendors are located.

Of course, this requires active and capable sourcing resourcing all around the world.

It should be borne in mind that low-cost status does not last forever. Every country wants to move from being regarded as emerging to being seen as developed. Some countries, South Korea, Singapore or some central-European nations, for example, have already achieved this.

The US has benefited from a weakening dollar for a couple of years, while Europe became very expensive with its Euro. In recent months currency rates are moving even more into foreground. Economic crises have caused a substantial fall in the value of some currencies such as the UK pound and some central-European currencies.

Nevertheless this brings unexpected opportunities. Offerings that appeared lucrative a month ago may mean a loss today or next month.
The global economic downturn has brought the factors of trust and reliability into focus. The ability to deliver goods and the ability to pay have increased the need for trust and risk mitigation.

Such proven business relationships will last even when the economy recovers, and risk management with those companies which have proved they can deliver the goods will be more important in the future.”
Robert Sobcak, ADR International, Prague.

Link: Think Company, Not Country

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

$100 Per Barrel Oil

They may only be bumping up against it now, but oil prices will soon hit and exceed $100 per barrel, and prices aren’t likely to drop substantially for the forseeable future. The reason for that is summed up in two countries: China and India.

Increased competition for the scarce oil from developing nations such as India and China are likely to keep the pressure on the price of oil for some time. Smart buyers who have watched the price go up have already created category strategies and relationships with their supply chain to manage the higher costs. Those who have not may be forced to look for strategic alternatives in energy and some raw materials in order to survive.

The $100 benchmark will significantly impact the Michigan, U.S. and global economies. The triple-digit price has a huge psychological impact that will affect consumers as well as every buyer throughout the supply chains that create consumer products. If they haven’t paid enough attention to the rising cost of fuel, the $100 mark is a loud wakeup call.

Buyers in every industry will be making cost containment an even higher priority than it has been, because oil provides more than just energy and fuel for shipping products. Industrial buyers will be encountering significantly higher costs for freight, plastics, chemicals, steel and travel.