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.
Posted in China, News Analysis, Risk Mitigation
Tagged China, cost containment, developing economies, global business, Logistics, manufacturing, procurement, purchasing, risk management, sourcing, supply management
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.
Posted in Auto Industry, Chemicals, News Analysis, Risk Mitigation
Tagged automotive, Chemicals, General Motors, manufacturing, procurement, purchasing, risk management, sourcing, supply chain, supply management
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.
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.
Record-setting earthquake, tsunami and nuclear meltdown — will Japan’s triple whammy create material and parts shortages that will trigger inflation? Or will they crack the momentum of a fragile worldwide economic recovery?
In the short term, of course, it may look like both phenomena are occurring. On one hand, plants are shutting down for lack of parts, laying off workers; on the other hand immediate scarcities of some items have driven up prices.
Here are some facts to consider:
– Honda expects its US dealers will experience shortages through May. — Automotive News, 3/21/11
– An automotive analyst at Truecar.com predicts the priceof a Toyota Prius could effectively go up $2,500 as a result of the disasters. — Automotive News
– Sony lost a blu-ray factory and an R&D center to flooding in northern Japan, and eight other facilities have been offline, suffering from electricity shortages and other issues. — NY Times, 3/21/11
– The Yen hit an all time high trading against the US dollar on March 16, prompting intervention by central banks in at least 7 countries. — WSJ, 3/19/11
– Officials found high radiation levels in some Japanese agricultural products grown near the Fukushima Daiichi nuclear power plant. — NY Times, 3/20/11
– Manufacturing activity in the US has grown for 19 straight months; The ISM Manufacturing Index is at the highest point it has been in nearly 7 years.
Bottom line assessment — Japan’s economy will shift from production to construction, keeping price pressures on scarce Japanese goods high, especially while the Yen remains unusually strong. Meanwhile, the need for commodities to rebuild industrial capacity and feed a population until radiation levels subside can only support higher prices around the globe. All these things point to inflation as the greater danger. There is simply too much momentum to stop the U.S. economy, and too much determination to maintain it. The world is taking one, long, deep breath as it absorbs the rapidly unfolding dramas in Asia and the Middle East. Soon it will exhale and move on, with even increasing urgency.
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.
For months, the ISM report on manufacturing showed a surge in growth and clear signs of a rebounding economy. It started dropping in May and did so again for the third straight month. The index number for July fell by 0.7 percentage points to 55.5% from 56.2%. Remember, any number above 50% suggests expansion, so this month’s number tells us that the growth rate has slowed, but not stopped. The stock market jumped on the news, not so much because of the positive trend, but that it didn’t fall as much as expected. It’s an example of the right move for the wrong reason.
A very telling piece of data from the report is that manufacturing employment is continuing to rise. The rate of growth has varied, but the indexes have been positive for eight consecutive months. Since manufacturing jobs tend to generate new jobs in other sectors the improving health of manufacturing is a good sign for the overall economy.
What this may mean for supply managers is that wild cycles of pricing swings based on erratic demand and speculation might be tempering. This might be an excellent time to review and revive the basics of managing categories, managing supplier relationships and managing opportunities for innovation. Smart purchasing has always had room for mitigating risks, but a slow and steady rate of growth is inherently less risky than a volatile economy. It might be time to play out your risk scenarios to find out if the latest numbers have changed the return on some of your “worst case” mitigation strategies.