A moment of near consensus

In its latest Manufacturing Report on Business this morning, ISM reported the PMI at 50.7%.  That is down from last month, and just barely on the “growth”
side of 50%.  According to the release…
Economic activity in the manufacturing sector expanded in April for the fifth consecutive month, and the overall economy grew for the 47th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business^®.
It is interesting that the PMI very closely aligns with the results of a non-scientific “flash poll” of ISM members at the organization’s 2013 International Supply Management Conference wrapping up today in Dallas, Texas.  They were asked “Which way is the economy headed for the remainder of 2013?” and 64% responded “holding steady,” while 29% responded “turning up.” Only 7% responded “going down.” The conference attendees used a system called ThumbTalk that let them respond by sending a text message or making a choice at a mobile web site.
Shortly after the attendees answered the question live, they heard a semiannual economic forecast from ISM’s Bradley Holcomb and Anthony Nieves, who gave positive outlooks for both manufacturing and non-manufacturing sectors of the economy. (Read them here.) A third economist, Bernard Baumohl, Chief Global Economist, The Economic Outlook Group also forecast growth ahead for the U.S. economy.
Make of this what you will, but I would dare to call it “consensus.” For the moment.

 

Harvesting Cash from Suppliers is Reaping With a Sharp Sword

The Wall Street Journal today reports that Procter & Gamble is planning to extend its payment terms to suppliers by as much as 30 days — from an average of 45 days to a new target of 75 days.
The Journal reports that P&G was following the lead of many other large companies that were keeping their cash longer to help them fund expansions, investor dividends or other needs.
Of course, payment terms have been and always will be an important part of the total cost of ownership of anything in the supply chain. They are tools like many others. But as one of the sharpest of those tools, payment terms can cut two ways.
You may be comfortable that your tier one supplier can find funds at low interest rates to manage the situation without affecting deliveries to you or the overall health of the supplier. But the fact is, the more likely scenario is that tier ones will extend their own terms to tier two, and so on. Eventually, the shock of the change has to be absorbed.
How well do you know the financial health of every company at every level in your supply chain? Can you be sure there isn’t a service provider in your chain that has to meet a biweekly payroll, or some other upstream company that supplies a critical part on a razor-thin operating margin because it’s a startup or has put everything into an R&D effort? If so, you might be sowing the seeds of disaster at the same time you are harvesting what appears to be an easy source of cash.

ISM ROB Manufacturing. Still growing

For the record, right from the ISM release. PMI^™ at 51.3%, so expectations of growth are continuing, although not as strong as last month, when the index was 54.2.

• New Orders, Production and Employment Growing
• Inventories Contracting
• Supplier Deliveries Faster

(Tempe, Arizona) — Economic activity in the manufacturing sector expanded in March for the fourth consecutive month, and the overall economy grew for the 46th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business^®.  (More on the ISM website.)

 

Like it or not, you “own” your entire supply chain

Wal-Mart, Sears and Disney have all moved quickly to distance themselves from the fire in a garment factory in Bangladesh that killed 112 people — after reporters found items with their logos and other evidence of business relationships in the charred rubble of the building. Associated Press reports that all three companies claimed they had tried to sever ties with Tazreen Fashions Ltd. before the tragedy, and that any production there had been “unauthorized.”
Two important items to note:
1. The unspoken assumption in the coverage is that consumer companies are essentially responsible for their entire supply chain — no matter how far it is from U.S. jurisdictions. Tazreen may have been a tier-three supplier, but no matter to the media. If the smoking sweatshirt has a Wal-Mart label — reporters demand a response from Wal-Mart.
2. In their rapid responses, all three companies appeared to accept that premise as they distanced themselves from the factory and its owner. In fact, according to their statements, they recognized the risk at some level and had tried to sever the relationship before the incident. In a world where communications have such a broad and rapid reach — that’s the only prudent approach. Like it or not, it’s best to know your product’s entire supply chain – from its beginnings as raw material to the time it hangs in a customer’s closet — and be prepared to manage risks of any kind throughout it.

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

Everyone is Shopping, But Not All Are Buying

A friend of mine visited an upscale suburban mall over the weekend and found the parking lot full and the shoppers lively. The only things missing were lots of  bags crammed with merchandise coming out of the stores. In other words, people were having a lot of fun looking, but appeared to be careful about their buying. Based on the latest ISM Manufacturing Report on Business and other indicators — that observation might be a good analogy for the global business climate.
For instance, the ISM ROB for September went positive again — after three months in negative territory. The manufacturing PMI went up to 51.5 — an increase of 1.9 percentage points over the last month.  The Non-Manufacturing PMI jumped 1.4 percentage points to 55.1 (Here’s the link to find both reports
ISM ROB.)
From our perspective — that’s a sign that the “shoppers” are out again, but just because they are looking doesn’t mean they all will be buying. There’s still far too much uncertainty for many companies to make firm plans. They are waiting for election returns and Congressional action on the “fiscal cliff” — not to mention a European recession and Chinese economic slowdown.
Consumers uncertain about the economy are saving more than spending, and companies are following a similar course — hoarding cash by meeting slowly growing demand with minimum new investments.
This period of uncertainty and incremental changes up or down may last through the end of the year — or longer. If so, it would be a good time to push through the programs that sometimes get set aside during rapid growth — visiting suppliers, mapping your supply chain deeper than the first tier or two to assess risk, reviewing sustainability or establishing better documentation of the chain of custody. All these things will put you on firmer footing regardless of which way the economy turns.

The World is Moving Faster Than the SEC on Conflict Minerals

Three years after Congress passed the Dodd-Frank Act, the SEC this week finally adopted rules requiring public companies to report on the sources of so-called conflict minerals in any products they manufacture (or control the manufacturing by others).  Here’s the SEC link to the news release and full final rule.
The testimony, studies and lobbying has been intense, so adoption of the final rule was almost anti-climactic. That’s probably a good thing.  The fact is that even without the rule itself, pressure from NGOs (non-governmental organizations), news reports and consumers themselves are pushing manufacturers to take responsibility for their entire supply chain – from the extraction of raw materials to the distribution, packaging and sale of their products (and in some cases — to their post-use disposal).
The issues also go beyond mining that finances violence. Bloomberg/Business Week is reporting on the safety and environmental threats posed by small tin mines in Indonesia. It seems pretty clear that momentum is still towards more scrutiny, not less.
So the smart strategy seems to be the one that some electronics manufacturers such as Apple and Intel are taking — developing industry standards for determining chain of custody, appropriate due diligence and other matters related to socially responsible sourcing. That’s because the answer, “we don’t know” is no longer acceptable in that arena. Reporters and consumers are simply taking that reply and firing back, “Why not?”

Gibson Guitars Strums to the Tune of $700,000 Settlement

The purchasing team at Gibson Guitars learned the hard way that sourcing ebony wood from Madagascar to make fingerboards would raise eyebrows from environmental watchdogs.
The company has just settled a criminal investigation by the U.S. Dept. of Justice by agreeing to pay $300,000 into a reward pool for whistleblowers and $50,000 for the protection of wood species used in guitars. Gibson also surrendered $347,000 worth of Madagascar ebony that was seized from its offices in a raid by the U.S. Fish and Wildlife Service.
Gibson’s position on the matter is that it was pleased it wasn’t charged with criminal behavior; the leverage for the settlement was the Lacey Act, a set of laws that prohibit U.S. companies from importing wood that has been cut illegally in the source country. Gibson acknowledged that it had not acted on information that ebony and rosewood it acquired from Madagascar and India may have been illegally harvested.
In a competitive business environment it is tempting to focus on internal purchasing ethics — e.g. detailed policies about meals, gifts and entertainment from suppliers — and not quite so much on external ethics such as complying with foreign laws.
The Lacey Act may not be well known, but it is pretty clear, and that makes it fair game.
The truth is that “out-of-country” is no longer out-of-sight” or “out-of-mind.” Internet and phone technology, global social media apps easily connect passionate individuals to non-governmental watchdog organizations. No one should expect an ethical or legal lapse to “slip by.” Especially on a product that is played onstage by rock and new age guitar stars such as Tak Matsumoto.
By the way, according to Gibson’s website, the Tak Matsumoto Doublecut Custom Ebony now comes with a fingerboard made from “Richlite®, an extremely durable fabricated material composed of cellulose fiber and phenolic resin, (that) offers the look, feel and tone of ebony in a totally sustainable package.”
Lesson learned, there.

ISM Report on Business: Working on the Edge

ISM released its August Report on Business – Manufacturing, and the news is not surprising considering the continuing European debt saga, Indian snafus such as the biggest power outage in history and other uncertainties. The index is just under the 50 mark — making it the second consecutive month of manufacturing decline after a run of 34 positive months. According to ISM, the overall economy is still growing, and that mixed result is reflected in comments from survey participants that ranged from “demand is strong” to “a marked slowing in business overall.” While it generally makes sense not to take great risks in the face of such uncertainties, there are also good opportunities for leverage if your company or your industry is one of those that still has positive momentum. Suppliers who see softening demand from other customers may be willing to trade margin for the certainty of your business. These are times when you can take advantage if you have been careful to build cost models for what you buy. The more you understand what drives the prices of your suppliers, the better position you’re in lower them without driving your supply base out of business.