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Summary Highlights of the 2017 ISM Conference

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This author had the opportunity to attend the annual conference of the Institute for Supply Management (ISM) annual conference held in Orlando Florida this week. This conference brings together supply management professionals spanning areas of direct and indirect supply sourcing and procurement. In this blog posting, we touch upon highlights and some important takeaways and learning expressed by those attending.  ISM2017 logo 002 Summary Highlights of the 2017 ISM Conference

This year’s conference drew a rather large number of attendees, much more than last year’s event.  We estimate attendees were more than 2500, and sensing from some hallway discussions, many came to seek added knowledge and understanding to rapidly changing industry and business environments.

The ISM organization deserves praise for recruiting two keynote speakers that spoke first-hand to the current wave of geo-political and economic events that could well impact industry supply chains in the months to come.

General Colin Powell, former U.S. Secretary of State and Chairmen of the Joint Chiefs delighted the conference audience with his comments on topics related to global events, politics, and industry supply chains. Regarding the latter, General Powell noted that Operation Desert Storm was won by superior logistics, and he shared some rather humorous stories relative to the challenges of moving vast amounts of material, supplies and personnel. He described today’s global landscape as a pressure cooker in the notions of the rise of populism, accelerated by the information revolution. General Powell voiced his view that the U.S. rejection of the Trans Pacific Partnership was an “unfortunate decision”, one that can likely benefit China as a larger influencer in global trade.

Former UK Prime Minister David Cameron’s address came on the morning of the tragic terrorist attack at a concert in Manchester England. Mr. Cameron spoke of the long struggle to defeat terrorism across the globe and on the renewed resolve of his country to march on. On the topic of supply chain management. Mr. Cameron observed: “What you do is extremely important to the global economy.” The Prime Minister later noted that he is a huge supporter of global trade, yet acknowledged that the rising tide has not lifted all boats. He noted that societies must reject tendencies toward protectionism because they failed miserably in the nineteen-thirties. He also addressed the rising tide of populism in observing that the pace of change has perhaps been too-fast, the scale of immigration too great, causing many to be fed-up with mainstream political parties. Addressing specific supply chain topics, he observed that ethical and sustainable supply chains are good for the brand and for society.  During a Q&A sit-down with ISM CEO Tom Derry, Mr. Cameron spoke of the implications of Brexit and what supply management teams can expect in scenarios of a hard or soft Brexit. Finally, responding to the question of what countries will likely be economic stars in the next five years, Mr. Cameron specifically mentioned India and Vietnam as emerging global commerce leaders.

A combined news conference featuring ISM CEO Tom Derry, Hans Melotte, Executive Vice President, Global Supply Chain for Starbucks Corporation, and Kristopher Pinow, Vice President and Chief Procurement Officer for B/E Aerospace, addressed some common themes impacting the supply management area. One was clearly the area of technology, described as quickly changing the current and future practices in supply management, which have typically been more transactional in-nature. Mr. Melotte observed that many in the profession are underestimating the impact of new technologies on processes, which he feels are coming sooner rather than later. CEO Derry observed that procurement managers are becoming much more aware of the importance of the Sales and Operations Planning (S&OP) processes, and the expansion of scope that it implies. This author had a later discussion with Jim Barnes, ISM Professional Services Director who shared feedback from various ISM regional chapters has reinforced the need for added education and involvement in S&OP, and why that involvement pulls procurement into the scope of the end-to-end supply chain.

Another top-of-mind topic remains talent management with an acknowledgement that absolutely, supply management does not have the talent to be able to leverage the tide of new technologies impacting the profession. Melotte noted- “We need to learn how to ask different questions as well as to sharpen our intellectual curiosity as to technology trends impacting our businesses.” Mr. Pinow noted- “We have to recognize that we do not know everything” and he quoted Shelly Stewart, Vice President, and CPO at Dupont in his observation that procurement leaders need to be more actively curious, including what is occurring external to procurement.

While attending other conference sessions, we further noted some rather consistent themes, especially from several panel discussions addressing timely topics. Addressing the challenge of CPO’s in making B2B networks work better together, Beverly Gaskin, Executive Director, Global Purchasing at General Motors observed that procurement has to improve practices in the science of marketing, namely how well procurement leaders sell and influence value to the business and to suppliers. Thomas Linton, CPO and Supply Chain Officer at Flextronics noted that procurement needs to understand the different management cultures of both internal and external partners and can build successful alliances based on different cultures. Many panelists addressed the need for leveraging knowledge and talent in today’s business environments, and that knowledge extends across the product value-chain to include close collaboration with supplier teams.

There were other common themes and takeaways and we will be sharing some of them in subsequent Supply Chain Matters commentaries.

A final note- after attending two subsequent ISM conferences, this author has noted a rising tide of desire and zeal among supply management professionals to become more recognized providers of business value, beyond procurement cost savings. It behooves other teams that make-up today’s broad supply chain management umbrella that spans product design to after-market services to include supply management in collaboration and to recognize suppliers for the partnership value that they can provide. That obviously includes S&OP teams.

Yes, the reality of increased supply chain cost saving needs is not going away and must be accommodated. However, it remains important that supply chain wide teams jointly recognize what capabilities in process, technology and people skills need to be preserved or augmented by trading-off cost savings for key investment needs.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Chinese Branded Railway Cars Appearing in Major U.S. Cities- The Momentum Has Increased

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In October of 2014 we alerted Supply Chain Matters readers to what we thought was a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system.

The headline back then was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the ’T’. This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract.Boston CRRC subway cars sized Chinese Branded Railway Cars Appearing in Major U.S. Cities  The Momentum Has Increased The further significance of this development was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow.

Subsequently, China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. (CRRC Corp. Ltd.) then created a local U.S. subsidiary to administer contract delivery needs involving the U.S.

The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago.

The State of Massachusetts has since opted for adding more subway cars to its original contract agreement, again calling for local assembly with fabricated steel and carriage equipment sourced in China and domestic sourcing of other equipment.

On March 16, CRRC Corp. held a groundbreaking ceremony and began work on the Chicago manufacturing facility. According to a published report by the Caixen News Agency, the 45-acre facility, located in the Hegewisch neighborhood of Chicago is expected to cost $100 million with assembly lines producing 168 rail cars annually starting in November 2018. This facility will similarly assemble subway cars from major fabricated steel components imported from China, combined with domestically sourced U.S. component content, and will employ only 168 people in Chicago.

Yesterday, this same new agency, citing knowledgeable sources, reported that CRRC Corp. Ltd. has now won contracts to supply subway cars to both Philadelphia and Los Angeles transit agencies. According to this report, the Los Angeles deal will see CRRC supply 64 rail cars for the red and purple lines on the city’s subway system with delivery set for either 2020 or 2021. The Philadelphia deal reportedly calls for CRRC to deliver 45 subway cars to the U.S. east coast city for a total price of about $137.5 million. Neither of these deals have been officially announced yet by the respective transit agencies.

This Caixen report further indicates that like the deals in Boston and Chicago, the new agreements for Philadelphia and Los Angeles will require CRRC to set up local manufacturing facilities and buy more than half of components for rail cars domestically.

Further reported, and somewhat even more interesting, is that a consortium led by CRRC and Canada’s Bombardier Rail Unit is currently the lead candidate to supply subway cars to New York City in a deal that could soon be announced.

Thus, in a matter of three years, it appears that China’s state-owned railway equipment manufacturer has been gaining momentum as a provider of modern, technology-laden subway and rail passenger cars with somewhat attractive pricing.

Beyond all the political dimensions of the above, there are now the geopolitical dimensions to consider as well.

If the new Trump Administration in the United States follows through with campaign promises to significantly step-up spending on U.S. transportation infrastructure, would U.S. Congressional leaders be open to a Chinese state-owned company as a qualified supplier of competitive equipment to other U.S. rail networks?

If the Administration further influences the U.S. Congress to pass major corporate tax reform legislation that includes an import tax, or perhaps higher duties for equipment manufactured or fabricated in global manufacturing regions such as China, how would such legislation impact the economics of these recent U.S. transit equipment deals?

These are interesting forces at-play, forces that may have major U.S. cities possibly advocating for open access to global markets like China to modernize long overdue urban and inner city transit at a more affordable cost, while balancing the supply chain with imported as well as localized supply chain content.

Obviously, this is an area that will provide interesting developments in the weeks and months to come.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

In this deep-dive series posting, we drill down on Prediction Four.

 

2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains

In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP).  Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.

For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.

Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.

A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”

As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.

Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.

We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics.  They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.

Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.

Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.

As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.

Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017.  Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.

This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Japan Display Secures Another Financial Bailout Infusion

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Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.

In late August of 2011, three of Japan’s existing liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation, and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named what is today’s Japan Display.  Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. The new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences, and subsequently an IPO in 2014.

Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.

This strategic move is wise from two perspectives.

First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.

Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions.  The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake.  The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.

Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.

As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.

The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of  product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.

The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.

The open question remains which suppliers eventually dominate.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


New Developments and Potential Added Risks for Chinese Branded Subway Cars in the U.S.

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In October of 2014 we alerted Supply Chain Matters readers to a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. Since that time, much as occurred, and this week, there is yet another development, one that perhaps has implications for the upcoming administration of President- Elect Donald Trump.

The headline back in 2014 was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the “T’.

This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract. The further significance was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment, far underbidding other railcar manufacturers. According to local news reports, CNR aggressively courted the Massachusetts transit system to gain a foothold in the U.S. rail equipment market. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow. Major components however, would be produced in China and transported to the U.S. for final assembly of railcars.

Since that time, there have been other developments.

China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. then created a local U.S. subsidiary to administer contract delivery needs involving the U.S. including the MBTA contract.

The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago. This assembly facility is expected to be in operation for a total of 10 years with railcar prototypes coming out in 2019, and initial cars being delivered into operational service  in 2020. The CSR Sifang America bid came in $226 million lower than that of Bombardier Railcar Equipment, the most recent manufacturer of Chicago’s railcar fleet. Since that time, competing bidder Bombardier filed a protest with the agency, saying that the bidding process was rigged in favor of a Chinese firm that promised to bring manufacturing jobs to Chicago.

This week, the Massachusetts based MBTA control board voted to authorize as much as $277 million to acquire an additional 134 Red Line railcars as an extension of the existing contract with the China based railcar producer. This amended change to the existing contract bypassed standard bidding procedures because the agency indicated that it was seeking to standardize its entire network-wide fleet of both Orange and Red Line cars. The MBTA considered rebuilding the 184 existing Red Line cars not scheduled to be replaced in the initial contract, but a financial analysis had indicated that brand new cars would cost as much as $310,000 less than overhauling the existing ones. The added Red Line cars are expected to replace the entire existing fleet by the end of 2023.

Specifics of the amended agreement were reportedly revealed publicly for the first time on Monday of this week.  Board members were asked to approve the deal that same day, to supposedly avoid a price increase and to secure local manufacturing capacity.

Supply Chain Matters brought initial attention to China’s state-owned railway efforts to make a more sustained equipment presence within the U.S. because it included both global and domestic supply chain implications.  The plans calling for many of the major train components to be produced in China and shipped to the U.S. for final assembly within local U.S. final facilities insured some local jobs, which was an obvious big deal for local governments. That theme has more current resonance with the discourse that came out of the recently completed U.S. Presidential election. Voters opted for the candidate they perceived to have a more aggressive protectionist stance on jobs and who would take on China as a perceived currency manipulator and in the consequent outsourcing of jobs to that country.

However, from our lens, the real question will come as the new Trump administration begins to unfold its trade protectionist policies.

Current speculation is that the incoming administration will not be shy in slapping increased tariffs on Chinese parts and components imported into the United States. Some plans call for a revised tax code that would feature a form of a value-added-tax or tariff on imported goods. If that comes to fruition, then the economics related to the existing U.S. subway equipment replacement contracts could well be impacted. The question is how much and whether local final assembly turns into something quite different, or whether new subway cars can indeed be delivered at such attractive pricing.

This is an area worthy of observation over the coming months. On the one hand, U.S. taxpayers are saving money and supposedly gaining use of very modern, technology-laden passenger railcars for urban transportation needs. They also gain some local manufacturing jobs.

On the other hand, China’s existing lower direct labor costs, overcapacity situation in steel production, and needs to insure continuous employment among state-owned manufacturers make the landed cost more attractive for local transportation agencies. It is a delicate balance that may well be subject to change, especially if the expected costs of landed components increase substantially.

Stay tuned.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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