Category Archives: News Analysis

White House endorses quicker supplier payments

One of the maxims of this blog is, “Suppliers don’t offer their best ideas to their worst customers,” and one of the quickest routes to the category of “worst customer” is stretching out payments to 60, 90 or  120 days — as has been fashionable in the automotive and other industries. We generally applaud the idea of thinking like a CFO when you are a supply manager, but too often the finance-department led idea of pushing the cost of money onto suppliers by delaying payments results in tighter margins for the supply base that stifle reinvestment in equipment or research and development.

Apparently President Obama has come around to our thinking on the topic because he recently endorsed an organization of companies that have pledged to pay suppliers quickly, or help them find lower cost working capital.

In the White House announcement, the Administration claims its QuickPay program of paying small government contractors quickly has saved them $1 billion since 2011. The private business version of the program, called SupplierPay is an opportunity not just to save money, but to create better relationships that foster innovation.

 

Thoughts on the Chinese economy

The Chinese version of the ISM PMI® has ticked up from negative to positive territory, according to reports such as this one on Bloomberg.com.

A preliminary June Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, up from 49.4 in May. An index above 50 signifies expectations of growth, and Chinese leaders are giving themselves credit for stimulating the economy without resorting to drastic measures.

A survey of analysts by Reuters came to a similar conclusion about the growth of the Chinese economy. More reporting of a stronger Chinese economy comes from the South China Morning Post.

We do a significant amount of work in China and the business environment there is unique, but it has matured since the days when U.S. automakers, for instance, were almost demanding that suppliers source from there. Large Chinese companies are not just focused on exports, but meeting growing domestic demand. They are adapting more sophisticated sourcing strategies of their own, and even investing in manufacturing plants in the United States, as described in this article in The Detroit News.

The strength of China’s economy and the rapid change in sophisticated sourcing is evident in  increasing  demand for development programs, certification programs and alignment with key universities in China.

The maturation of Chinese companies does tend to reduce their cost-competitiveness, but it also introduces elements of stability that mitigate some risks from sourcing at a great distance. Economic indicators that show slow, steady growth are also good signs of stability.

 

Reactions to new EPA regulations run the gamut

Reactions this week to the new EPA regulations to cut carbon pollution from power plants ranged from the most dire to the most delighted, depending upon one’s industry, state or inclination for all things environmental.

On one hand, the new regulations will result in lost jobs and higher electricity rates.  On the other, they will improve our climate, our health and ultimately lead to greater innovation.

The energy space is a complex one, and the effect of these regulations will not be as cut and dried as some might think.  For example, weren’t we headed in this direction already?  Industries have been shifting to natural gas because it’s cheaper, and wind and solar are bringing up the rear.  In addition, each of the states will be able to select their own method of implementation from a menu of policy options.

This is a long way out and we’re just getting started.  There’s a public comment period, and the regulations themselves could be challenged in congress as well as the courts.  States have two years to submit their plans to achieve the targets, and it’s always possible they could get extensions to their timetables.

I’d like to hear your thoughts on the regulations.  Is the sky falling as Chicken Little squawked or is this the best birthday ever?

Energy Prices in Flux

Where are energy prices going? We’re not really sure.  A recent forecast reports conflicting information.  U.S. crude plunged toward negative daily territory as the Energy Information Administration revealed worse than expected crude and refined products supply figures, signaling a strong bearish outlook.  The only bullish sign for oil was that supplies at Cushing, Oklahoma, dropped to the lowest level since October 2009.
Oil tycoon T. Boone Pickens, speaking at the ISM 2014 Annual Conference, suggested that new drilling technologies have radically changed the capacity of the U.S. to produce oil and gas over the long haul. He also said conversion from gasoline to natural gas in transportation fleets will come quicker than anyone else is predicting. He predicted those changes could keep domestic energy prices under control for the foreseeable future.

Calling all auto suppliers: fed money ripe for plucking

“An opportunity to hit the accelerator on U.S. auto manufacturing growth” is how Energy Secretary Ernest Moniz characterized the Advanced Technology Vehicles Manufacturing Loan Program (ATVM) and the $16 billion in low-interest financing that is available to support efficient-vehicle programs.  While auto suppliers have always been eligible to participate since Congress created the ATVM in 2007, none have secured funding to date. Well, it’s about time the feds recognized that innovation comes from the supply chain as well as OEMs.

Moniz announced in a speech last week that the program is being overhauled to make it easier to fund production of technologies such as lightweight materials, efficient engines and low-friction tires.  The changes also include legal clarification to show that suppliers are eligible for the program, a promise to respond more quickly to applicants and the creation of a new on-line application portal.

Roland Hwang, director of the transportation program at the Natural Resources Defense Council, weighed in and said focusing on suppliers is appropriate because automakers are increasingly depending on them to help meet new fuel economy standards, which can strain the suppliers’ finances.

Ford Motor Company, Nissan, Tesla Motors and Fisker Automotive all have participated in the loan program.  Auto suppliers, it’s your turn.

 

Shock proofed supply chain?

Most Americans probably couldn’t locate Crimea without the help of Google Earth. (It’s the peninsula that juts south from the northern coast of the Black Sea.) Nevertheless, the actions of the Russian army in and around Crimea are sending shock waves through some key commodity markets, including oil. Here’s the Washington Post coverage of the story.

Have you felt any effects from the spikes in market prices? Even if you have not, this is another reminder that your supply chains likely have connections around the world that may not be obvious from your first tier suppliers. It’s good practice to map your supply chains and analyze scenarios for disruptions that could happen at any moment.

While the chances of any individual incident might be very small, there are so many potential disruptions that it is quite likely something will go wrong sometime. Smart supply managers build risk management strategies into their planning to accommodate them.

Food Safety – Not as Simple as it Sounds

The unfortunate truth is that safety in the food industry supply chain still has a long way to go. No one likes burdensome regulations, but it’s hard to argue against them when we hear about blunders such as these:

  • The Associated Press reported that Foster Farms, a California chicken farm was closed Jan. 8 when inspectors found cockroaches on five separate occasions in various parts of the plant over four months. The company says no chicken product was affected.
  • A release posted on Reuters stated that New Zeeland’s Fonterra announced on Jan. 13 a recall of products that had been contaminated with E.Coli. It affected 8,700 bottles of fresh cream marketed under their Anchor brand. There have been no reports of illnesses so far.
  • The Associated Press reported Northern California’s Rancho Feeding Corporation of Petaluma, Calif. recalled 40,000 pounds of meat products because it was produced without a full federal inspection. As of now, there are no reports of illnesses.

The U.S Food and Drug Administration (FDA) announced back in January of 2013 its proposed new food supply chain safety rules under the Food Safety Modernization Act (FSMA). After considerable input from food producers and consumer advocates,  the FDA’s most recent statement Dec. 19, 2013 indicates that it expects to issue revised rules next summer. Although they might show a retreat from some of the most stringent provisions of the FDA’s first proposals, the final rules are likely to require significant changes in how we bring food from the farm to the table.

I believe that unless the food industry self regulates and builds lot-control chain of custody processes like the pharmaceutical industry’s, greater regulation of the food supply chains is very likely.

Five Predictions for 2014

The ISM Manufacturing Index this month showed that the overall U.S. economy has been growing for 55 consecutive months. The manufacturing sector has trended positive for seven straight months. Employment numbers aren’t terrific, but they aren’t terrible either. These are generally favorable signs for business — but they suggest higher pressure on buyers to contain costs. Based on our experience and work with current clients, here are five predictions for the year ahead.

1) Buyers will see increasing pressure on pricing as industries with tight capacity or depressed margins attempt to improve margins.
2) Buyers will find longer lead times and reduced capacity as suppliers have left industries as a result of recession and remaining suppliers are enjoying higher margins based on high demand and low supply.
3) Talent management and development will be critical to the success of supply chain management success.
4) New government regulations in health care, energy, banking and other sectors will increase complexity, compliance and cost.
5) More procurement and supply chain leaders will reach the C suite.

How does this match what you are seeing?

GM Chooses new CEO with Supply Chain Experience

If you weren’t already convinced of supply management’s role in developing and driving overall corporate strategies in global companies — take a look at what General Motors just did.

The board of directors for General Motors took a bold step this week by naming a woman as the company’s Chief Executive Officer, replacing Dan Akerson when he retires next month. Here’s the GM News release.   Mary Barra will be making history as the first woman to ever lead GM — or any global automaker — as Chairman and CEO, and that’s certain to receive plenty of attention.

It’s also very important to look at her experience because she is a 100% GM insider. Barra rose through the ranks at GM as an engineer and engineering manager, starting as a co-op student at General Motors Institute (now Kettering University).  She was named the senior VP for product development in 2011, and a few months ago, also assumed responsibility for GM’s global purchasing and supply chain organization (with a promotion to executive VP).

That last step — tying together global product development with global supply chain sent a very strong signal that GM expects to deliver innovative products through its relationships with suppliers. Selecting the executive holding that dual position as the CEO over others who have managed brands or regional operations says a lot about GM’s strategy for the future.

Lessons from Walmart on corporate social responsibility

Walmart has taken some huge steps over the last few years to position itself as a socially responsible corporation, and recent stories suggest how difficult it can be to choose a virtuous path.

We know that Walmart was part of an effort to address the horrible tragedies in the garment factories of Bangladesh. The company hired a firm to audit the conditions at its supplier factories, and it recently posted on its website the reports on 75 different factories.  That’s a remarkable act of transparency that puts some weight behind the company’s commitment to changing conditions in the garment factories. Women’s Wear Daily described the action as the first among retailers in the Alliance for Bangladesh Worker Safety.

Countering that positive note, however were the claims from a European consortium of clothing companies that the Alliance was not doing enough because it was simply offering loans to make factory improvements while European firms were making outright grants. The Europeans called it essentially a case of the Walmart and other American companies riding on their coat-tails. Here’s The New York Times coverage.

The situation suggests why it’s so difficult for many corporate leaders to launch and maintain socially responsible initiatives. You try to do the right thing to get a controversy behind you, and it only raises expectations. The discussion doesn’t end, it merely changes focus. The lesson here is that the reasons for corporate social responsibility have to go deeper than scoring PR points. The scrutiny doesn’t stop when you announce a plan to “do right,” it only intensifies.