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.

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.

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 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.

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.

Lesson from McDonald’s – Stay Ahead of the NGOs

This animated Chipotle commercial telling the story of a farmer freeing his pigs from pens wasn’t exactly the most attention-grabbing spot of the Super Bowl broadcast. However, it turned out to be a good setup for the recent announcement by McDonald’s that it is requiring its suppliers to end the practice of keeping pigs in gestation pens. Here’s Bloomberg’s coverage of the story.
According to Bloomberg, Chipotle stopped buying pork from producers who used gestation pens (which highly restrict the movements of a reproducing sow) a decade ago, while McDonald’s still owned the restaurant chain.
McDonald’s reportedly came to agreements with major producers such as Cargill before it made its own announcement.
Three lessons emerge from this. One — Do not underestimate the power of activist organizations. I worked with a restaurant chain that was under pressure because PETA was complaining that it unfairly treated fish.
Two — Stay ahead of the curve. McDonald’s made its move ahead of any serious public criticism. Animal rights activists have complained about the practice for years, but no credible threats were made to McRibs in the form of boycotts, occupying booths or blocking drive-thrus. McDonald’s anticipated the trend, adapted its supply chain and then announced.
Third — Manage your communications. McD’s announced the change jointly with an organization that could have been its enemy in a public opinion battle — the Humane Society of the U.S. With that step it didn’t just turn a potential negative into a positive — it simply skipped the negative potential altogether.
In all three ways, McDonald’s showed it recognized the potential influence of activist organizations and knew how to turn that into positive media coverage. Please pardon my saying so, but that’s a clear case of making a silk purse from a sow’s ear.

You Cannot Know Too Much, Too Fast

When something goes wrong deep in your supply chain — you can never find out the precise source of the trouble too fast, or in too much detail. Time spent creating a chain of custody is well spent when a crisis breaks. Even when the problem is minor, it can have a big impact.  Case in point: according to “Baking Business,” Jeff Sobell, senior manager, global packaging, Kellogg Company, Battle Creek, MI, recently told a panel at Pack Expo that the company’s quarterly net income dropped 15% last year when it had to pull 19 million cereal boxes from stores shelves because the packaging had an odor.
He was making a point about how important packaging standards are to food products, but there’s also a lesson there for a tight chain of custody. Kellogg is a global corporation and an industry leader in supply chain practices. However, this relatively minor issue that had no impact on the quality of the product inside the boxes, nevertheless, hit Kellogg’s bottom line. I am pretty certain Sobell mentioned the case only because Kellogg had learned from it. You can, too.

Risk Quick Fix – Backup Sourcing

What a turnaround to the phrase attributed to Henry Ford that you could have a Model T in any color “as long as it was black.” Ford Motor and others have found themselves telling dealers you can have vehicles in any color except black. That, of course is a result of the earthquake and tsunami that damaged Merck’s Onahama, Japan plant. According to Automotive News, “the only plant worldwide making its Xirallic metallic pigment.”

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20110408/OEM10/110409901/1117#ixzz1Ju48Z3QU

While Merck scrambles to restore production there or elsewhere, companies are rapidly changing strategy away from single sources to dual sourcing. Primary and secondary sources are a quick fix to SC risk.

How to Hug a Tree With Your Boots

An article in the September Harvard Business Review by Timberland CEO Jeff Swartz describes a great example of how chain of custody issues can put you right in the crosshairs of powerful non-governmental watchdog organizations such as Greenpeace.
As Swartz describes it, Timberland is known for its leadership in global sustainability — especially deforestation. Nevertheless, Timberland and other shoe companies became the targets of a Greenpeace email campaign claiming some of the leather in its boots came from cattle that were grazing on recently deforested Brazilian pastures.
Timberland received 65,000 challenging emails and quickly realized it didn’t have a quick answer because it had no chain of custody for leather beyond its immediate supplier. Hides are considered waste parts by meat processors, so the documentation isn’t as reliable as it is for beef.
Swartz describes Timberland’s response in detail, but a key fact for supply managers is that it is taking the company more than 18 months to implement a system that tracks every hide back to the farm on which it was raised — and assures retail customers that the farm is not on recently deforested land.
All in all, this is a great cautionary tale of how global watchdog organizations can drop a dangerous challenge to your company — right at your boots.

Top Worries for CFOs

A survey of 168 Senior Financial Executives reveals that the top three concerns are:

• Financial exposure
• Supply chain logistics disruption
• Legal liability/harm to reputation

The survey shows that supply chain risk management is very high on Senior Management’s agenda.  Supply Chain Executives should place a high priority on assessing and managing the risks across the entire supply chain.  Companies have significantly reduced capacity during the downturn and are not adding it back any time soon.  The survey was the result of CFO Research Services and Liberty Mutual Insurance Company.