The following posting can also be viewed in the Kinaxis Supply Chain Expert Community.

While the intent is noble, the ranking of corporate supply chains can be a risky proposition and a slippery slope.  A lot has to do with ranking methodology, screening criteria and qualitative weighting factors.  An industry analyst can sometimes dread the final rankings since certain firms can take exception as to why they were not included or even considered in such rankings.

The AMR Research/Gartner Top 25 supply chains ranking seems to be that which captures the most interest among our supply chain community.  AMR’s noted criteria for ranking its Top 25 includes 50% weighting for financial performance (ROA, inventory turns, revenue and profit growth) and 50% qualitative, meaning individual analyst and peer industry nominations. Much dialogue and discussion can be made regarding who made or was not included in the ranking, and this commentary is not about such. In the end, I suppose we should be able to agree that the most important criteria in evaluating any firm’s supply chain is whether these capabilities helped that firm to be the best performing company in its industry.

I was  reading Bloomberg BusinessWeek magazine and noted its June 21 cover article, the Annual Ranking of the 50 Best-Performing Companies. BW’s overall ranking has a context of delivering maximum stockholder value, which happens to be a rather important measure attributed to supply chain capabilities.  The ranking is further noted to be firms that have the top performance in the Standard and Poors 500 stock index over the previous five years. BW notes: “In a period of tremendous economic turbulence, these stocks returned an aggregate 222.3 percent to shareholders, including reinvested dividends.” We often communicate to senior management that the true benefits of supply chain capability do not necessarily come in any one year, but are a result of many months of building process competency and customer intimacy. Thus a five year horizon can be a meaningful benchmark measure.

In the interest of getting some constructive dialogue started, let’s contrast the top five firms listed on the BW ranking with the AMR ranking.  If one screens out non-manufacturing or supply chain centric firms, only two companies stand out: Intuitive Surgical (#2), and Apple (#4).  Apple ranks #1 within the AMR/Gartner ranking, while Intuitive Surgical revenues failed to make the threshold for the AMR/Gartner revenue screening criteria. Apple is no surprise to appearing on both rankings.

Now look at the 6 through 25 ranked firms, and the following manufacturing, retail, or supply chain related firms are noted in BW’s ranking:

Flowserve- (#7)

FMC Technologies- (#8)

Cliffs Natural Resources- (#9)

Amazon.com- (#10)

Titanium Metals- (#11)

Cummins- (#12)

Celgene-  (#13)

Precision Castparts-  (#15)

Western Digital-  (#18)

Big Lots- (#19)

Cameron International- (#20)

Airgas- (#21)

CSX- (#23)

Occidental Petroleum- (#25)

Within this BW grouping, the AMR/Gartner ranking only noted Amazon.com, concurring as #10.  Select names on the AMR/Gartner ranking such as Hewlett-Packard (AMR #15, BW #28) or McDonalds (AMR #11, BW #31) did not make the top twenty- five BW cut.

Are there some observations contrasting these two rankings?    I can note some.

Company size certainly stands out as a difference.  Is supply chain capability contributing to bottom-line performance just as pertinent to smaller vs. multi-billion dollar firms? Are smaller firms characteristically more agile in their ability to take advantage of market opportunities?  Should differentiating based on company size be considered in ranking of supply chains?

Specific industry needs and profile is another obvious consideration.  In times of global recession, certain industries fare better than others.  Companies that grew during the recession could invest in supply chain, while those that declined or were flat, most likely had to reduce costs or capabilities in supply chain.

What other observations or pointers do you observe from contrasting these two rankings?

Bob Ferrari

We can sometimes refer to the time-worn adage that success can bring more challenge, and as we have been noting in ongoing commentary on this blog that certainly applies to Apple Inc..

The company announced this week that it cumulatively sold more than 1.7 million iPhone4’s in the first three days of initial product launch, an all-time record in the history of Apple.  This comes in addition to Apple’s previous announcement that it has sold 3 million iPads in the first 80 days of product launch.  Such success however is compounding other supply chain developments and new challenges.

In a front page article, today’s Financial Times (free sign-up preview account may be required) notes that Foxconn, Apple’s prime contract manufacturer is preparing to shift part of its production related to Apple products to north and central China, where labor rates will be lower. The move is reported to be a response to the dramatic wage concessions granted to Foxconn’s workforce in southern China, after an unprecedented wave of worker suicides. The article notes: “Executives close to the annual negotiations between the two companies over next year’s orders said Foxconn’s demands to pass on some higher labour costs had not been met favourably by Apple  “But Apple is more ready now to use some of the new locations”, one executive said.”” Headcount at Foxconn’s main Shenzhen factory is up to 300,000 to accommodate ever increasing consumer demands for Apple’s products, and is expected to increase even more before any location shift can occur.

In fairness, both Foxconn and Apple have declined to comment on the FT article, and there may be other forces at play here, but this development is worthy of comment, especially since this author has in the past tried to keep an objective perspective toward Apple.

Consumers and Supply Chain Matters readers know that Apple makes attractive products, and its no secret that Apple charges a premium price for these products.  In the nine months ending in the recent March 2010 quarter, Apple has more than doubled net income, and gross margin has increased over 2 percentage points to 41.2%.  In March, Apple’s very able COO and chief supply chain officer Tim Cook was awarded $22 million in cash and stock compensation for his outstanding leadership.

In light of these stellar financial results and rewards, and in the context of Apple’s very public Supplier Responsibility and Code of Conduct commitments, it seems rather perplexing that Apple is reported as playing hardball in negotiations for added labor increases, especially when direct labor is a minor consideration to overall product cost.

As a community, we have all admired how successful Apple’s supply chain team became in concentrating its negotiation power with just a few contract manufacturers, trading off large volumes for huge amounts of influence and flexibility.  That model may well be reaching a crossroads, as Apple’s success in products takes a toll on these manufacturers, and their workers.  It also raises the question- is it time for Apple to finally step-up and play its role in supplier responsibility and proactive engagement? Playing hardball in supplier negotiations is one thing, playing hardball in the midst of overwhelming profits in quite another. Being rated as the number one supply chain comes with immense global responsibility.

Is it time for Apple to step-up to its own code of conduct?  I vote yes!

How do you vote?

Bob Ferrari

In previous commentaries penned on Supply Chain Matters, I have noted the implications of increased labor activism and subsequent raising wage rates within mainland China. Even last week, the financial news media continued noting incidents of new work stoppages occurring within China’s automotive plants, now involving Japanese brand Toyota as well as Honda.  Much financial media and blogosphere commentary revolves around the recent decision from the government of China allowing the Chinese yuan to “tolerate a gradual appreciation” within currency markets.  The combination of these two significant developments has caused some to declare that the era of cheap manufacturing in China is coming to an end.

My view is that it is too early to be making such broad reaching statements, or more importantly, significantly altering supply chain strategy.  Both developments, in my view, are driven by pragmatic business and political considerations.  The raised labor activism and consequent wage hikes are driven by the reality that workers within China’s major Pearl and Yangtze River coastal manufacturing regions are becoming more frustrated with their economic plight, and the government of China, thus far, is de-facto not interfering with this new wave of labor activism. Foxconn, China’s largest manufacturing employer’s recent announcement of doubling base pay for employees was the benchmark event that has led to more demands for wage increases in other industries.  The real question, however, is when or if these increases will be passed on to major manufacturing-driven customers.

The long awaited government decision to allow the Chinese currency to appreciate against major currencies such as the U.S. dollar was a political decision, timed to come out just prior to this weekend’s G-20 Economic summit meeting.  Many long-time political observers have noted that the word “gradual” is the operative word, and note China’s senior economic leaders have managed to allow the yuan to appreciate no more than a certain percentage in any given year, and that will most likely continue.

More important to the currency decision is the potential that foreign imports, such as consumer electronics, could become more attractive within China’s huge market. Additionally, as noted, the very goods that U.S. and Europe based firms manufacture in China might now become more affordable for China’s evolving middle class consumers.

Thus, in supply chain strategy context, both developments should be evaluated in the primary context of future product demand within China’s internal market, and secondarily, any impact that may come in the overall cost of manufacturing.  A recent Financial Times article (free preview account may be required) makes the observation that the increased pay raises will only accelerate a move of manufacturing from the coastal region to other interior regions.  For instance, Chongqing is becoming the new base for the electronics industry.  Foxconn is reported to be in talks with the local government in Zhengzhou, the capital of Henan province, to build its next mega-plant in that region.  If other component suppliers continue to shift their manufacturing to the interior regions, than a new manufacturing hub will be created.

My advice to manufacturers is to continue to monitor developments, but also differentiate supply chain strategy within China on the basis of first supporting China’s internal market potential, and second, as a hub of competitive manufacturing cost.  It’s apparent that China’s desire to be a world leader in more high technology areas such as autos, electronics, information technology and alternative energy manufacturing will continue, and a more pronounced shift within manufacturing toward the interior regions will occur.

As always, the notions of manufacturing cost are a tradeoff of direct labor vs. material cost.  The combined occurrence of increased labor activism and a floating Chinese currency should be viewed on long-term impact to material cost.

What’s your view?

Bob Ferrari

I had the opportunity to participate in a recent briefing with executives of RollStream, Inc. This SaaS based, supplier information and community management technology provider has a keen focus on supporting B2B related supply chain relationships. I must admit that I was impressed with both business approach and breath of information management functionality, particularly in the area of managing supply risk.

RollStream’s customer base has some marquee names and includes anchor participants in healthcare distribution, grocery and manufacturing related supply chains.  Its technology addresses business process support needs typically found among procurement, product management and other supply chain constituencies. The RollStream Community Platform functionality addresses supplier discovery, on-boarding, compliance management, collaboration and performance scorecarding.  Support includes the ability to track supplier information, communications and certifications from a single system repository, with access controls and regulatory compliance considerations. This can be an even more important need in the critical area of supply chain risk management.

What impressed me the most was this vendor’s design approach, which stems from social media design.  RollStream is quick to point out that its applications are more focused to the way people tend to collaborate and interact within a process or community.  That could include profile data, photos, project activities or information exchanges.  That should prove attractive to those firms with work teams that are quite comfortable with a social community approach or want to move in this direction. While we did not have the time, I hope to witness a demo of the platform at a later time.

The one drawback I should note for our readers is that RollStream’s platform per se does not support transactional or planning processes but can complement such processes via partnerships or other integration  Then again, there are many supply chain planning or transactional focused collaboration platforms that do not include the informational management capabilities within RollStream.

Bob Ferrari

David Dayton is the owner and manager of Silk Road International, an international procurement and project management company that helps clients find the right factories in Asia along with coordinating production, logistics and quality control needs for clients.

David pens a blog of the same name, which provides a perspective representing his 20 years of experience working with manufacturing companies in Asia.  The Silk Road International blog is listed on our Blogroll, and is a site I visit for insights on supply chain issues within China.

David recently penned a series, Chinese Culture for the Frustrated Foreign Buyer, which I highly recommend for reading by sourcing and procurement professionals with activities within China. I’ll warn you up-front that series is rather long on content, but the observations and insights are truly candid and insightful, and may help you to overcome frustrations as an outsider doing business within China.

I learned a lot from reading the entire piece, but I will tease my readers by calling attention to a few worthy insights from David:

Insight 5. The rules in China work for only one party, and that party ain’t you.

“First, it is not unique to China that laws favor the locals.  Don’t complain about the fact that the field is tilted against you—it is.  Deal with it.  Second, unless you’re a big deal (e.g. you are spending 6 figures per order) you’re not going to get any special attention, so take your ego down a couple notches before you start working here—…”

Insight 7. “We just don’t really work like that.”

“The reality of contracts (even the good Chinese ones) is that no one but you has ever read them.  When contracts are broken in China (and court is not an option) your going to just hear “well, we don’t really work like that in China” or something similar. “

Insight 9.  If you’re not here, it doesn’t matter what you want or what you say.

… “Learn this now: there is no such thing as potential when you’re manufacturing in China.  There is no future, only now.  No one feeds their family on potential.  Just think about how may hundreds of clients tell your supplier the exact same thing every week?”

You will find David’s posting very educational and perhaps helpful.

Bob Ferrari