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 Non-Manufacturing ROB still positive

Respondents to the ISM Report on Business in non-manufacturing industries had some alignment to their counterparts in manufacturing last month — as the index dipped 1.6 percentage points, but still remained positive. Here’s the headline. Find the full report on the ISM website.

March Non-Manufacturing ISM Report On Business^â

NMI^™ at 54.4%
Business Activity Index at 56.5%
New Orders Index at 54.6%
Employment Index at 53.3%

(Tempe, Arizona) – Economic activity in the non-manufacturing sector grew in March for the 39th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business^®.

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?

Global Inter-connections Continue for ADR

Please excuse this bit of promotion, but smart sourcing has become valued throughout the global economy and as a response to demand in the Middle East for procurement expertise, ADR International, Ltd. has established an office in the United Arab Emirates (UAE) to serve that region. The new company called ADR Middle East will provide the same full range of Consulting, Learning and Sourcing services that ADR offers to its clients in other regions of the world.

ADR’s local Arabic & English speaking team in the Middle East region will use the same skills, methodologies and processes developed globally by ADR over the past 25 years.  This know-how that has transformed the way ADR International’s clients buy across the globe is now available to Middle East organizations. The Managing Director of ADR Middle East is AbdelGhani Sinan.

And speaking of connections — hurricane Sandy of course, created huge disruptions in global supply chains, primarily from the damage and delays at the Port of New York and other logistics hubs in the northeast.
On the other hand, the supply chain profession is supporting humanitarian relief through the American Logistics Aid Network (ALAN) http://www.alanaid.org/
Their mission is “Engaging the Supply Chain Community to Support Humanitarian Relief Efforts.”

 

 

 

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?”

Sourcing from China without saying, “We’re Sorry.”

According to the official statistics, the U.S. had a $295 billion trade deficit with China last year. That sounds pretty horrible, but here are a few related thoughts to chew on. Economist magazine estimated the total cost to Apple of creating an iPad was about $275. Since it’s assembled in China and sold by the millions here, it may account for as much as $4 billion of that trade deficit.  But Economist said, “wait a minute” because the design, engineering, and marketing costs are all based in the U.S., and major components such as chips, displays and memory are made in Japan and Korea. The actual value added by the final Chinese manufacturing is closer to $10, not $275. That’s a huge difference.
Because Apple has U.S. suppliers and a U.S. distribution system, Economist estimates about half of the value of each iPad stays here, generating about $4.1 B in U.S. economic activity from an estimated 15 million units sold.
A similar analysis comes from three authors of an article in the Journal of International Commerce and Economics. They looked at the supply chain for iPods (remember those?) and estimated the product was generating just under 14,000 U.S.-based jobs in design, engineering, management, distribution and retail. The product was also generating about 27,000 overseas jobs, so no big surprise there. However, when the researchers looked at the value of the work, they estimated that about $750 million in earnings were going to U.S.-based workers, and less than half — about $320 million were going abroad.
In short, sourcing from China is sometimes a good business decision — and when it is, you don’t need to apologize for it.

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.

P&G CEO: We want sustainability without tradeoffs

Interviewed by the Wall Street Journal, Proctor & Gamble CEO Robert McDonald said only 15% of consumers will accept tradeoffs (i.e. higher prices) for products that are more environmentally sustainable. The other 85% may appreciate sustainability, put won’t pay more for it. That’s why he says P&G is focusing on innovations that add sustainability without higher prices or compromising other features of its products.
As a way, perhaps, of encouraging others to walk the walk as well as talk the talk, P&G is also making its supplier sustainability scorecards generally available. It might also be a strategy of fishing for new suppliers with sustainability innovations — because that’s clearly the way the CEO is thinking.

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.

ADR North America’s New Home

SourcingGuy has found a new home. ADR North America has had a successful partnership with the Institute for Supply Management for three years offering high quality professional development courses through the ISM-ADR School for Supply Management. We were interested in building on that partnership, so we have merged our organizations through an acquisition of ADR North America by ISM.
We think it is a very good fit for ADR NA and ISM. We will be continuing to better integrate our professional development offerings with our consulting practice, and ISM expands the services it can offer its members and the supply management profession generally. ADR NA continues to be a licensee of ADR International, so we will still be providing our innovative products such as Development Needs Analysis (DNA) and PRISM. And, of course, I’ll still be writing blogs and articles for a number of publications and presenting at the ISM Annual International Supply Management Conference and Educational Exhibit. See you in Baltimore.
Here’s a link to the news release on the acquisition.
The Twitter hashtag is #ISMADR.