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Contract Labor Practices Under the U.S. Regulatory Looking Glass

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Business media has been reporting on recent rulings from the U.S. National Labor Relations Board (NLRB) that has implications for hiring and labor negotiations practices related to contract workers.  Supply Chain Matters advises operations and customer fulfillment teams to stay abreast of these developments since certain rulings can have noteworthy implications for existing supply chain work practices and cost structures.

Essentially, the NLRB is re-visiting long-standing practices as to when contractual business arrangements, such as the use of supplemental contract workers render the contracting business a joint-employer of workers that are employed by the contract worker firm. An initial ruling involved global restaurant firm McDonalds and its franchisee restaurant operators, when the NLRB reviewed complaints alleging that the restaurant chain and its franchisees had violated the rights of employees who were involved in protest activities. After finding what it believed to be merit in the complaint of unfair labor practices, the NLRB ruled that McDonalds should be considered a joint employer.

A second potential ruling involves Browning-Ferris Industries of California and Leadpoint Business Services, a supplier of contract workers, which concerns a factory located in Milpitas California.  A local Teamsters labor union is arguing that as a labor union, it cannot adequately bargain over labor practices unless Browning Ferris is at the bargaining table as a joint employer. The argument is that since Browning dictates labor practices, scheduling and work duties of both permanent and temporary workers as a single unit, it is a de-factor joint employer. How the NLRB rules in this case has far broader implications for various industry supply chains and partner service firms.

With the dynamic ebb and flow of business operations today, supply chains often have to manage spikes in operational and customer fulfillment, especially in seasonal or holiday-related time periods.  A keen focus on costs has caused many production, fulfillment and logistics firms to utilize significant numbers of on-call temporary contract workers to supplement a leaner full-time, permanent workforce in such periods of work surges. Such practices have drawn protests directed at well-known brands, with protests involving two-tiered labor rates, avoidance in hiring full-time staff, or too much dependence on temporary contract labor in supporting supply chain operational needs. Supply Chain Matters has previously called attention to protest actions involving Amazon, Wal-Mart and certain third party logistics providers, to name but a few, to be placed in the public spotlight.

If the NLRB begins to consistently rule that brand owners who dictate work schedules and practices are to be considered joint-employers, the implications for supply chain flexibilities and costs can well be significant. Readers need to stay abreast of these developments and we at Supply Chain Matters will continue to provide updates as to implications.


In Automotive Industry, Mexico is Indeed Becoming A North America and Export Production Center

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In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s.  Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.

This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles. 

Obviously, such a trend implies that a global production strategy is at-play within these moves.  Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.

As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations.  Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.

The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.

The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models.  Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence.  Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.

Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.

There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.

Bob Ferrari


Supply Chain Matters News Capsule: August 15; Google, Airbus, Boeing, HP

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following updates:

Google and Barnes and Noble Partner to Take on Amazon

Airbus Completes Test Trials of the A350

Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain

Hewlett Packard Announces Smaller, Less Costly Cloud Platform

U.S. Job Openings at a Thirteen Year High

 

Google and Barnes and Noble Partner to Take on Amazon

Earlier in the week, the New York Times reported (tiered subscription) that Google and Barnes and Noble are joining forces on for fast, cheap delivery of books. According to the report, buyers in Manhattan, West Los Angeles and San Francisco Bay locales will be able to get same-day delivery of books from local Barnes and Noble retail stores via Google Shopping Express, beginning this week. The effort is billed as a competitive response to Amazon’s same-day delivery services.

Google Shopping Express already allows online shoppers to order products from 19 retailers including Costco, Walgreens, Staples and Target and secure same-day delivery. As noted in a previous Supply Chain Matters News Capsule, the Google Shopping Express strategy is to become an ally and complement a retailer’s local brick and mortar presence, relying on inventory from local retail outlets rather than the deployment of a larger network of fulfillment centers.

Airbus Completes Test Trials of the A350

Airbus completed the route-proving certification phase for operational testing of its new A350-900 model commercial; aircraft, approximately two months after completing the maiden flight of this aircraft. During this completed phase, engineers had to demonstrate to safety and regulatory agencies that the aircraft is ready for commercial service. A Vice president in charge of flight testing for Airbus declared; “The airplane is perfectly fit to go into service tomorrow.” The A350 was designed to compete against the current operational  787 Dreamliner and the 777 aircraft. Bookings for the A350 have surpassed more than 700 aircraft.

It has been noted that 7000 engineers worked on the development of the A350, with roughly half of these engineers stemming from key suppliers.  Important learnings have included the need for a singular Product Lifecycle Management (PLM) software system, creating a single electronic rendering of an aircraft that every program engineer can reference or modify when needed.

Administrative reporting to various agencies remains a milestone before this aircraft can be officially certified for commercial use.  Meanwhile, the Airbus supply chain ecosystem continues preparations and scaling to support planned production levels of 10 A350’s per month by 2018.

Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain

Supply Chain Matters has posted numerous commentaries related to Boeing’s commercial aircraft focused supply chain ecosystem, faced with a dual challenge of having upwards of 8-10 years of customer order backlogs while continually being challenged to reduce costs.

Boeing’s defense businesses have a far different problem. Cutbacks in military and government spending programs have led to declining business, and a supply chain oriented to engineer-to-order specialized aircraft and spare parts. Early this week the head of Boeing’s defense, space and security business unit called for an additional $2 billion in cost cutting, two-thirds of which is being targeted among suppliers. Boeing has already cut $4 billion in spending related to its defense businesses. The unit chief called on suppliers to note efficiencies that have been gained in Boeing’s commercial aircraft programs.

 

Hewlett Packard Announces Smaller, Less Costly Cloud Platform

Hewlett Packard announced what it is communicating as a less costly cloud based IT platform under the Helion brand name.

Helion Managed Virtual Private Cloud Lean is being targeted for use by small and medium sized businesses looking to move applications development, software testing and workplace collaboration onto a Infrastructure as a Service platform. According to HP’s announcement, the new service offering can further provide services around SAP’s HANA in-memory systems.

With the new service offering, HP’s goal is to provide the same level of large enterprise services but at a lower-priced alternative. Pricing for this announced service is noted as $168 per month for a small virtual service configuration. A pilot trial service also is available for customers who want to certify an application to run in the cloud with the full support of the HP team.

U.S. Job Openings at a Thirteen Year High

Talent management, retention and skills development has been a constant theme among supply chain management forums and indeed many Supply Chain Matters commentaries. Executives and team leaders constantly lament on how difficult it is to find people with the right level of skills. Current forces of supply and demand in the U.S. labor market are not going to help in overcoming this challenge.

The number of job openings across the U.S. reached a 13-year high in June with U.S. employers announcing 4.7 million job openings. Reports indicate that employers additionally hired 4.8 million workers in June; an indication that the U.S. labor market is showing new momentum. With this increased level of hiring activity, existing workers have showed increasing willingness to seek other opportunities, given the level of new opportunities. A reported 2.53 million U.S. workers quit their jobs in June, up from 2.49 million in May.

 


The Catalyst for Rebuilding Component Supplier Networks in the U.S.- China’s Manufacturers

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Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets. 

Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.

If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers.  That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.

However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S. 

The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace.  The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.

While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve.  OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.

Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.

If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.

Bob Ferrari


P&G Announces Significant Strategy Shift with Widespead Industry Supply Chain Impacts

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Last week, Supply Chain Matters featured a commentary regarding the blunt business realities that are impacting many consumer product goods focused businesses and supply chains.  Multiple corporate earnings reports bring home the compelling reality of an industry undergoing profound external and internal business challenges.  Our conclusion was that invariably, CPG supply chains will bear the brunt of changes and needs required for more market adaptability and responsiveness while having to deal with continued pressures to reduce costs.

Another compelling evidence point is the latest announcement from Procter and Gamble which indicates that this CPG icon plans to divest, discontinue or merge more than half of its global brands as it once again, initiates an effort to focus on its most profitable brands. 

This is a similar strategy that former CEO A.G. Lafley has initiated in times of profitability challenges and comes almost a year after he was compelled to return from retirement to lead P&G.  The announcement comes after P&G reported both fourth quarter and fiscal year earnings. Earnings per share growth were reported as 5 percent in fiscal 2014 while organic sales growth was 3 percent. Net sales for the fiscal year grew by a mere one percent. In the earnings press release, Lafley states: “We met our objectives in a very difficult operating environment, delivered strong constant currency earnings growth, and built on our strong track record of cash returns to shareholders. Still, we have more work to do to deliver the profitable sales growth and strong cash productivity we are capable of delivering.”

From our lens, this is yet another acknowledgement of the short-term focused, external Wall Street and hedge fund pressures being exerted on industry players. It’s a two-fold vice.  Consumers have permanently altered their shopping practices and buying choices and larger industry players are struggling to provide business responses. The Wall Street and activist community continues to have a very short-term financial results focus for industry players, viewing CPG companies as cash, dividend or acquisition plays.

According to published reports from both the Wall Street Journal and AdvertisingAge, the latest divestiture announcement implies major consolidation of 90 to 100 current P&G brands in the coming months or years. The company previously divested of its pet care business. P&G will retain 70 to 80 of its most profitable core brands, those reported to be fueling 90 percent of total revenues and the majority of current profits.

According to the WSJ, the brands being shed account for $8 billion in revenues and could prove attractive to private equity firms that specialize in orphaned brands or CPG focused companies in China or Brazil looking for more global presence. The scope of this P&G strategic initiative implies both opportunity and/or added challenges for existing industry chains, especially the commodity supplier community.

The WSJ once again acknowledges that the P&G announcement reflects the reality of a new environment of weak sales growth for consumer products, increased currency fluctuations and inbound commodity costs that are eroding profitability. Meanwhile, activist investor pressures to cut costs, consolidate and merge brands continue to influence industry behavior.

The adage that as P&G goes, such does the industry, is yet another poignant indicator of the current business challenges that are surrounding CPG focused supply chains.

Bob Ferrari

 


Where is Apple’s Commitment to U.S. Manufacturing?

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Our previous Supply Chain Matters commentary noted that Apple is in the process of marshalling its vast supply chain scale in ramping-up for the pending introduction of new iPhone and other products while stoking consumer demand for the upcoming holiday buying surge. Upwards of 110,000 or considerably more additional workers are being marshalled to support production ramp-up while suppliers themselves reap the benefits of orders exceeding 100 million units.

In December 2012, Apple CEO Tim Cook conducted a series of orchestrated media interviews that included an announcement that Apple planned to invest upwards of $100 million to build Mac computers in the U.S. Our Supply Chain matters commentary at that time reflected on one interview conducted by NBC News anchor Brain Williams. Below is an excerpt of that commentary:

There were statements by Cook that, in our view, were somewhat on the mark and deserve amplification.  Brian Williams asked in the Rock Center interview- What would be the financial impact to the product if, for example, the production of iPhones were shifted to the U.S.?  Cook’s response was that rather than a price impact, the real issues reflect a skills challenge.  Skills were identified as the existence of talented manufacturing process engineers, as well as experienced manufacturing workers.  Cook pointed to deficiencies in the U.S. educational system, as well as the ongoing challenge of recruiting skilled manufacturing workers in the U.S.  Great answer!  But perhaps, there is much more unstated.  High tech and consumer electronics firms long ago shifted the core of consumer electronics supply chains to Asia. Foxconn alone represents a production workforce of over a million people, not to mention many more of that number spread across Apple’s Asian based suppliers. Add many other consumer electronics companies and the arguments of existing capabilities in people, process, component product innovation and supply chain across Asia remain compelling.

We recall that commentary in light of yet another major ramp-up of Asia based consumer electronics supply chain providers.  Yet, the open question remains, where or what is the status of Apple’s planned $100 million investment in the U.S. let alone a more far reaching commitment toward renewing a U.S. based consumer electronics component supply chain ?

A posting in All Things Digital in May of 2013 indicated that according to testimony from CEO Tim Cook before a Congressional Subcommittee the Mac facility would be located in Austin Texas and rely on components made in Florida and Illinois and equipment produced in Kentucky and Michigan. Soon after, Apple contract manufacturing partner Foxconn announced that it was looking to source more manufacturing in the U.S.

In June of this year, PC World made note that Cook tweeted a photo of his visit to the Austin Texas facility where Macs are being produced. The snafu was the iMac in the background was running Microsoft Windows.

The problem however is that a Google search to find updated information related to Apple’s investment in U.S. supply chain capability yields scant information.  We certainly urge our readers with knowledge of Apple’s U.S. production and supply chain investment efforts to chime in, if they are allowed.

Compare that with the efforts being generated by Wal-Mart in its Made in the U.S.A. initiative, committing upwards of $250 over the next ten years on U.S. produced goods. During the Winter Olympics, Wal-Mart produced a super slick video, I am A Factory, that garnered over a million You Tube views. That has been followed by summit meetings held with would-be suppliers in multiple product categories to encourage U.S. investment and provide assistance in sourcing or skills development training. Wal-Mart is even willing to make multiple year buying commitments to prospective manufacturers to help them invest in U.S. based supply chain resources. Last week, the Wall Street Journal profiled Element Electronics which is currently assembling televisions in a production facility in South Carolina under the Wal-Mart program. Noted is that the Element production line is an exact duplicate of one that exists in China, installed by Chinese engineers. While Element management admits that there are challenges in the sourcing of a U.S. component supply chain, and in required worker skills, it is making efforts to correct that situation over time under the support of Wal-Mart’s longer term buying commitment.

The point is this.  There is no question that Apple has the financial resources and the public relations savvy to make a U.S. production and supply chain sourcing effort far more meaningful, impactful and visible.  Yet one has to dig real deep to find information let alone acquire any sense of active commitment. Instead, business headlines note massive scale-up and flexibility of Asia based resources as being far more important to Apple’s business goals. Yet Apple has no problem in demanding a premium price for its products from U.S. consumers. We will avoid diving into the debate regarding Apple’s offshore cash strategy.

Supply Chain Matters therefore challenges the top rated supply chain to join Wal-Mart and others in a far more active and impactful multi-year commitment to U.S. manufacturing which includes higher volume products and education of required worker skills.

Bob Ferrari

 


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