The June 30^th edition of Business Week Magazine (BW) featured a well written article titled Can The U.S. Bring Jobs Back From China?.  My reaction to this article was a sense of anger.  This anger is not directed toward this article or its author, but that it is yet another evidence point that exposes an obvious lack of concerted action by our collective industry, government, and other influential leaders to both acknowledge that the U.S. needs to have a comprehensive global competitiveness strategy and actually put the components of a strategy into place.  While Supply Chain Matters is not a forum of political commentary, please indulge me.

The BW article literally challenges readers to ponder certain facts that are driving obvious strategic shifts for sourcing manufacturing in China:

• Since 2002, the value of the U.S. dollar has plunged 30% against China’s yuan, as well as other foreign currencies.
• Labor rates within China itself are rising 10-15% per year.
• The current high transportation costs to move containers of goods from China to fulfill consumer needs in the U.S. has soared by 150% since 2000, with an example cost of $5500 to ship a container from Shanghai to San Diego.

But, as U.S., European and other manufacturers continue to explore alternative options for moving certain high value or other innovative product production into the U.S. to compete more cost effectively in servicing U.S. customer needs, they discover that there is no effective supply chain infrastructure to support such an effort.  Examples of metal foundry, furniture, household appliances and batteries are all brought to light.  As the author points out, while U.S. manufacturers were tightening their belts through elimination of  their U.S. domestic supply chain infrastructure and capital equipment, companies in China and other regions continued to invest in process, more modern logistics  infrastructure and manufacturing productivity.  Now some would argue that the U.S. does have competitive manufacturing and supply chain capabilities, but in my view, the key question is whether that capability came from U.S. or foreign investment.

The article in the printed magazine edition includes an insert that outlines the various views on the issue of restoring U.S. manufacturing jobs from the two presumptive U.S. presidential nominees.  I submit that as a nation, we need to demand much more from our political and business leaders, including a comprehensive strategy with far reaching initiatives that will place the U.S. in the game for long-term global manufacturing and supply chain competitiveness.  Here’s my starter list:

• Identify the key strategic industries that are essential to long-term U.S. competitiveness. This can include areas such as alternative energy, green-based energy, aerospace, biotechnology and other key growth industries. China performs this exercise in each of its five year plans.
• Invest in private and public R&D that continues to place the U.S. on the leading-edge of innovation in these strategic industries.
• Find a comprehensive solution for delivering quality healthcare for all citizens that also places U.S. employers in the game for global cost competitiveness
• Provide incentives for insuring that technological capabilities are nurtured and developed by U.S. based suppliers.
• Identify a prioritized set of initiatives to insure a competitive and vibrant U.S. transportation infrastructure. This should include identifying what will be the core infrastructure for transporting both production goods as well as people, along with investing in required changes. Political leaders need to move beyond partisan politics, and determine the priority of new roads, expanded high-speed rail, ports, or air travel as the key infrastructure needs.
• Re-skill the current workforce as needed to insure that U.S. manufacturing has an ample supply of qualified workers in key strategic industries.

Sound easy?  Absolutely not!  But the most important takeaway for each reader is to join me and demand more accountability in our leaders to recognize the obvious fact that the U.S. needs a comprehensive strategy for U.S. competitiveness. 

Call or email your U.S. Congressmen, Senator, or presidential candidate and demand action beyond rhetoric, and get yourself into the game while there is still a game.

 Bob Ferrari

In my part one post, I provided comments and observations regarding the recent release of management consulting firm PRTM’s release of its Sixth Annual Global Supply Chain Trends 2008-2010 report, which highlighted responses from 300 international participants on the current perceptions of the effects of today’s globalization strategies on current and near future supply chain business strategies.

In this post, I will add comments and observations related to the release of the 19^th Annual State of Logistics Report  sponsored by Council of Supply Chain Management Professionals (CSCMP) (free to CSCMP members; cost for non-members) which was released on June 18th.

 My three most significant takeaways from this annual report card are:

• As expected, increased globalization has led to quantified evidence of increased logistics and inventory costs. While investments in business process and technology continue to help in managing overall business agility and efficiency, economic trends and uncertain global forces again threaten to unravel these gains.
• As a result of unprecedented changes in the cost of energy and other economic factors, the U.S. has begun to experience structural change in overall logistical capacity, the effects of which are yet to play out.
• That despite a ten year track record of significant progress, difficult challenges lie ahead for the collective supply chain community, as well as industry and government.

Let’s briefly review some key evidence brought out in this report.  During 2007, the overall cost of U.S. logistics increased $91 billion to $1.4 trillion, or the equivalent of 10.1 percent of GDP.  As a reference point, the U.S. economy only grew by 2.2 percent in 2007.  This was the first time since 2000 that overall logistics costs surpassed ten percent, and almost half-way into 2008, indicators point to overall logistics costs claiming a bigger portion of GDP.

While transportation costs rose to 6 percent, the data also reflects that inventory costs are now a growing problem. Inventory carrying costs accounted for 44 percent of the overall increase in 2007 global logistics costs, with an 8.7 percent overall rise in inventories. Growth in wholesale inventories has outstripped that in retail, which in my observation reflects that inventory remains further up the supply chain. Report author, Rosalyn Wilson, in her commentary to the National Press Club, indicated “that the bad news for inventory levels in 2007 is that turnover rates are falling.” She further indicated that while the traditional inventory-to-sales ratio has declined for the past ten years to the level of 1.27 at the end of 2007, these inventory turnover rates had begun to fall in the final quarter of 2007, with much of the recent increase attributed to changes in the way companies can respond to unsold inventories within an extended global network.  According to Ms. Wilson, “The significant order lead times required when sourcing off shore have led to a less nimble system that cannot make adjustments immediately”

Regarding structural changes in U.S. logistics infrastructure, two noteworthy points of commentary were included in the report.  Close to 2000 U.S. trucking firms failed in 2007, with an additional 935 reported in the first quarter of 2008.  The average fleet size of failures was 45 trucks, and the data did not reflect operators of less than 5 vehicles, which implies a bigger number of removed capacity.  While continued overall weak demand has resulted in abundant current capacity, a more concerning trend is that unlike previous cycles when idled trucks remained in inventory to await an economic turnaround, trucks are instead being sold at attractive prices to non-U.S. countries. The U.S. Commerce Department reports that nearly 24,000 used over-the-highway tractors have already been exported since last year, three times that of 2006.  As I see it, in essence Ms. Wilson raises the question of what happens when the U.S. economy is ready for a comeback but the trucks to support the required logistics infrastructure have been sold to other countries.  There is further commentary regarding the enormous cost of needed investment in the broader U.S. highway and bridge infrastructure as well.

The overall cost of warehousing also rose 9.9 percent in 2007.  This provides evidence of the move to more regionalized U.S. distribution, no doubt a response to the need to offset rising transportation costs as well as mitigate strategies in overall carbon emissions.

The bottom line evidenced by both of these reports is that change is occurring at an unprecedented rate, and that supply chain managers will need to continue to respond to extremely difficult business challenges involving international markets, the effects of globalization in serving these markets, and a highly inflationary cost environment.   Having broader skills and insights for monitoring the bigger-picture, ensuring a faster virtual response to rapidly changing conditions, and the ability to still deliver on the bottom line will all come to the forefront.

Supply chain will no doubt be a C-Suite and board room agenda item for some time to come, so be prepared!

Bob Ferrari

Two significant research reports were released this week, and both provide quantitative reinforcement of what many global supply chain managers already feel, namely that the  existence of ever extending global supply chains has begun to produce critical concerns for product quality and safety, and that operational challenges remain in controlling transportation and inventory costs.

 Management consulting firm PRTM released its Sixth Annual Global Supply Chain Trends 2008-2010 report (registration required).  This report highlights responses from 300 international participants conducted between the December 2007 and February 2008 time periods. PRTM states that the majority of the participants are senior executives in supply chain management, and thus we can again observe the consensus view from the senior supply chain executive.  The second report is the Council of Supply Chain Management Professionals (CSCMP) annual logistics report, which annually quantifies the summarized affects for overall logistics, inventory and other supply chain trends.  The report is titled the 19^th Annual State of Logistics Report (CSCMP membership required for free access, fee for non-members).  This year’s theme was noted as “Surviving the Slump”, which may not have been the most impactful choice of words.  I will divide my comments on these reports into two respective posts- this being the first will focus on the PRTM report.

Ten major trends were uncovered in the PRTM report, the majority of which stem from the effects of the accelerating of supply chain globalization.  Interestingly, the survey report validates that pressures to reduce cost and penetrate local markets are the two key drivers of accelerated globalization, yet product quality and safety, as well as delivery and security, remain the most critical challenges with global expansion.  In my view, these issues will continue to intensify, along with the challenges for overcoming increased transportation and inventory costs, which the State of Logistics report identified.  PRTM points to average cost reductions of 17% per globalization initiative, with many companies having difficulties realizing any savings in management and increased coordination costs. In many cases, globalization required more management coordination.

Interestingly, PRTM concludes from the data that the COO agenda across industries and geographies is on improving supply chain flexibility and performance, and by 2010, the need for greater supply chain flexibility will overtake product quality and customer service as the major driver for improving supply chain strategy.  I respectfully disagree. 

Events that occurred over these past months involving the unfolding effects of the devastating earthquake in China, the safety of life-saving drugs as manifested in the heparin recall, and even these recent weeks with the U.S. recall of tomatoes and the unfolding devastating floods in the U.S. Midwest region do not convince me that supply chain risk will take a second seat to flexibility. Unfortunately, both of these challenges will require a simultaneous coordinated focus.  In part two, I’ll provide my comments on the State of Logistics, and the implication for supply chain strategies in the coming months.

 Bob Ferrari

In my last post, Safety First for Global Outsourcing, I indicated my view that companies should not assume that risk is something that can be outsourced to supply chain partners.  An article on Bloomberg.com outlining the scope of counterfeit medicine seizures caught my eye this week as reinforcement.  The article provides specific data points to what many professionals in the pharmaceutical supply chain already have keen awareness, namely that the presence of counterfeit medicines continues to grow at alarming rates.

According to data from the Pharmaceutical Security Institute, the industry’s own security groups, seizures of counterfeit prescription medicines were up 24% in 2007, with illicit versions of 403 different prescription drugs confiscated in 99 countries.  “It’s a big issue, it’s a global issue, it’s an insidious issue,” said John Lechleiter, the president and chief executive officer of Eli Lilly & Company.  “Over the past six years we’ve seen double-digit increases around the world” of counterfeit drug seizures, further indicated Thomas Kubic, the executive director of the pharmaceutical institute.

 The article points out that the while the more popular drugs such as Pfizer’s Viagra, Eli Lilly’s Cialis, Bayer-AG and Schering-Plough Corp.’s Levitra, tend to be the popular targets, the number of drugs is on the increase.   It further concludes that the availability of drugs through non-regulated Internet based channels provides a convenient channel of distribution for these illicit drugs. Regulatory agencies such as the U.S. Food and Drug Administration (FDA) say that they do not have resources to stop the flow, and that the counterfeiters are “too good at what they do”.

 In my view, the obvious take-away is that the pharmaceutical industry has to step-up its efforts to stem this tide of counterfeit drugs and materials across their global supply chains.  As consumers, we place our trust and confidence in a brand, and get rather upset when the brand fails in expectations.  Supply chain risk management needs to be identified as a key initiative for any pharmaceutical company’s business agenda, as a means to insure ongoing brand integrity, as well as responsiveness to incidents that place consumers at health as well as safety risk.  As has been pointed out in Supply Chain Matters posts regarding Heparin and other incidents, the problem is obviously growing beyond just the sale, and stretches back to origins of raw material. 

Investing in people, process, and technology enablement practices that directly mitigate the issue of product integrity is of prime importance, and cannot be passed over to just government regulation or enforcement.  Joint as well as coordinated industry and government actions must continue to lead in resolving the issue of product and supply chain integrity.

 Bob Ferrari

EE Times hyped a recent story, The truth about last year’s Xbox 360 recall, that quotes Bryan Lewis, research vice president at Gartner as indicating that the recall a year ago happened because “Microsoft wanted to avoid an ASIC vendor”.  This article points out that Microsoft elected to design the principal graphic chip on its own, rather than engage an ASIC design vendor. Lewis is further quoted that an ASIC vendor could have been able to design a graphics processor that dissipates much less power, and would have avoided this problem.

My view is that we should not rush to judgment against just Microsoft.  Putting aside the obvious temptation for an industry analyst firm to be able to tell the alleged real story, and plant advice for the rest of the industry, Microsoft is not unlike any other consumer electronics manufacturer struggling with the need to uncover value-chain cost savings opportunities while balancing critical time-to-volume demand needs.  In hindsight, it’s easy to speculate what should or could have been the options for Microsoft for getting a product into volume production to meet market needs. 

 Readers may recall that there was quite a competitive race occurring two to three years ago among Sony, Nintendo, and Microsoft to get their new gaming consoles ready for the peak 2006 – 2007 holiday seasons.  Sony suffered market setbacks regarding its choice of imbedding the new Blue Ray technology into its design, which contributed to significant delays in missing the prime market entry window because of manufacturing volume issues with key components.   Nintendo was successful in meeting the market window with a competitive price, and has had the enviable challenge of needing to constantly ramp-up supply chain volume to satisfy pent-up consumer demand.

So perhaps this story should be placed in proper context.  The race to bring a product to market in a timely fashion presents many design, volume cost, testing and other value-chain challenges.  Microsoft was not alone in making what it believed was the most appropriate decision to mitigate cost as well as meet product release windows. To its credit, Microsoft fully supported Xbox 360 consumers by absorbing all the costs for the product recall.  It is yet another learning point for a highly competitive industry that balances these decisions every week.

 Bob Ferrari