Category Archives: Risk Mitigation

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.

Conflict Minerals

One year ago today, the SEC released its draft rules requiring public companies to report whether or not their products were manufactured using “conflict minerals” — materials mined in the Democratic Republic of Congo (DRC) or surrounding countries that were being sold to finance lawless militias and violence in the region. The minerals covered are — tin, tungsten, tantalum (the “3Ts”), and gold.
This is a case of establishing a chain of custody all the way from a specific mine to a smartphone I might be using to update a blog. That’s a huge undertaking, and perhaps in deference to that, the SEC has not rushed the rulemaking. Final rules are expected sometime next year, but no deadline has been set.
While the final rules may not yet be clear — what is certain is that they are coming. There is considerable discussion of their final cost to companies and consumers, but the benefits seem to lining up already.  A letter from a UN agency monitoring the violence in Africa told the SEC that “private sector purchasing power and due diligence implementation is reducing conflict financing, promoting good governance in the DRC mining sector, and preserving access to international markets for impoverished artisanal miners.” In other words, even before they are implemented, the rules appear to be working.
And if chain of custody disclosures are working for 3T+G, there is no reason to think they will stop there. Are you ready?

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:

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.

Japan’s Triple Whammy – Where Will It Lead?

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 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.

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.

ISM Manufacturing Report – Back to basics?

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.

Where did the cadmium come from?

According to the New York Times, McDonald’s is paying customers $2.00 to bring back drinking glasses they bought as a promotion for the movie “Shrek Forever After.” It turns out the painted image of the bright green but gentle ogre contained cadmium — the toxic heavy metal that led to a huge recall of Wal-Mart jewelry earlier this year.

McDonald’s reaction, although the actual risk is not that high, is not surprising, but it did expose a gap in their supply chain of custody system.The company could quickly identify the source of the glasses, but according to the Times, a McDonald’s spokesman said the company didn’t know the source of the paint or the cadmium.

Maybe someone did a risk mitigation analysis and decided a strategy of paying a premium to buy back defective product, and running an aggressive PR campaign to back it up had a better payoff than tracking all raw materials used in a promotional item.

But my guess is that the better investment would have been either a complete supply chain environmental sustainability assessment or a chain of custody system that could track all materials used in the glasses. Either one would have likely turned up a “flagged” chemical, such as cadmium.  As even a consultant for the International Cadmium Association told the Times, “Our position is that cadmium pigments should not be painted on consumer glasses.”

Here’s the link to the New York Times coverage: