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The Implications of Brexit Grow Near but So Far for Industry Supply Chains


In a published Supply Chain Matters commentary in late June of last year, we explored our initial perspectives of the new term in geopolitical events, that of Brexit. By voting to exit the European Union, the British electorate set off a series of events that many continue to describe as unprecedented.  The most cited analogy remains- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the United Kingdom, but on the EU alliance itself if other select countries take a similar course.

On Monday, Britain’s ambassador to the European Union informed European Council President Donald Tusk that his country would trigger Article 50 of the Lisbon Treaty, the formal mechanism seeking withdrawal, on March 29, a week from today. That starts the clock in a rather complex, two-year window of negotiations between Britain and the 27 other EU member nations and the European Parliament leading to the actual exit. Tusk has asked EU leaders, minus the UK, to meet on April 29 to begin discussions relative to the guidelines for Britain’s exit. In a statement, Mr. Tusk indicated that the main priority for the upcoming negotiations is to create as much certainty and clarity as possible for all citizens, countries, and member states. Supply Chain Matters could certainly suggest adding clarity to industry supply chains to Mr. Tusk’s statement.

Business and broad media all point to the start of some of the most complex negotiations either side has undertaken, with many issues to resolve over the next two years. They include trade and tariff, border security and the movement of goods.

Since the announcement of the results of the referendum, the pound sterling has had a somewhat steady decline in relation to its value with the Euro and the U.S. Dollar. As a rather positive consequence has been increased attraction of British goods among domestic and global markets.  Broad supply chain activity, as reflected by the CIPS UK Manufacturing Index, reached a significantly high value of 56.1 at the end of December, with the report noting that rates of growth in production and new orders were among the best observed over the past two-and-one-half years. Since December, this index has moderated slightly to 55.9 in January, and 54.6 in February, both reflecting healthy activity. Thus, in the short-term, the UK has garnered supply chain economic benefit related to Brexit.

The open question is course, the longer-term picture.

Entering the triggering of Article 50, British Prime Minister Theresa May has advocated for a “clean” break from the EU. She has threatened to walk away from negotiations if Britain did not get the trade deals it was seeking or if the EU tried to impose punitive measures.  She has further indicated that the UK could cut corporate taxes, loosen regulations, and could have a free trade deal with the EU that would include tariff-free access. British media including the Financial Times have interpreted such a stance as to indicate that Britain could transform itself into the low-tax Singapore of the west.  Such declarations appear to not set well with established EU countries.

Thus, a lot will transpire over the coming months and industry supply chain strategies will have find ways to navigate such a geopolitical environment. Most observers tend to believe that new trade agreements between both parties cannot be realistically negotiated and ratified by over 30 various parliaments in two years’ time. In fact, Mrs. May has indicated that the entire body of EU laws will be copied onto British statutes, and then over time modified by negotiation events and outcomes. The Economist noted in its editorials that it has recently taken nearly seven years to secure Canada’s free-trade deal with the EU.

As noted in our original commentary, two major industries dominating UK based manufacturing are automotive and the aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing. Two of the most dominant stakeholder brands of autos are Volkswagen and Tata Motors, followed by Nissan and Toyota. According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. As indicated in our 2017 predictions, the aerospace industry itself is believed to be reaching a 15-20 year inflection point, one that will be quite different from the past boom years of upwards of 10 year customer order backlogs.

No doubt, the invoking of Article 50 begins a period of discernable uncertainty among specific industry supply chains, related to access to key markets, financial goal performance, engineering, manufacturing, and overall talent capability.

A lot can and undoubtedly will occur, since in today’s clock speed of global business, two years can be a rather long-time, perhaps reflecting a new wave of geopolitical and technology change.

So goes this global environment of uncertainty, implications that seem near but yet so far.

Bob Ferrari

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


A Persistent Theme- Be Prepared for a Year of Continual Supply Chain Analysis

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If our readers have had the opportunity to review all of our 2017 Predictions for Industry and Global Supply Chains, you probably picked-up on a dominant theme, that being the election of Donald Trump as President of the United States, and what that could imply for U.S. global trade policies and consequent industry supply chain impacts.

We presume that some readers might ask why raise such concerns so early, after all, legislative actions take time, especially when a change involves a lot of special interests. Industry supply chains have established global value chain links and in theory, should be able to respond to many forms of external-driven changes. However, we continue to submit that the changes being contemplated for U.S. trade and tax policies are far more potentially impactful to industry supply chains, from both an inbound supply and outbound product demand lens. We reiterate that sales and operations planning teams need to be prepared for the various implications that may come along sooner than one would expect.

We pen this posting at roughly two months into the Trump presidency, and already, the dizzying pace of news, speculation and editorial regarding the potential effects of a U.S. anti-trade policy are enough to motivate many a supply chain practitioner to have a drink or two at a local pub. Mr. Trump’s personal attacks on traditional and social media based news outlets adds more fuel to polarization of viewpoints and constituencies, and his actions to utilize Twitter as a personal attack medium against the media, legislators, or specific corporations has everyone on-edge, ready to pounce on the offense.

In the United States, the atmosphere smacks of confrontational politics. The opposition political party is of the belief that the Trump Administration agenda leans far to the right on trade, tax policy, immigration, and climate change, ignoring the realities of a globally based economy, the forces of globally dependent markets and the stark signs of climate abnormalities. Political discourse now focuses on floated proposals regarding double-digit import tariffs or a border adjustment tax.  Recently, Warren Buffett termed such an approach as a “sales tax” on U.S. imports with consequent impacts for increased retail prices of imported goods.

Meanwhile, with major elections pending across Europe this year, right leaning candidates are now emboldened for change and attacking the status-quo of global trade, immigration, and economic growth.

If there is a benefit to the existing U.S. environment, it is that of broadened education on global supply chain flows and potential impacts.  In a prior blog posting, we shared highlights from a briefing with the American Apparel and Footwear Association who provided us data on that industry’s supply chain flows. A published New York Times report indicates how ‘America First” policies could harm the U.S. aerospace sector citing data indicating that “more than 13,000 U.S. companies’ make-up the Boeing supply chain nerve center”, and are dependent on Boeing’s revenue growth. Boeing represents the single largest U.S. exporter in dollar value. China and Mexico combined account for $21.5 billion in U.S. aircraft related exports, while aerospace related imports from Mexico alone account for $2.4 billion. Our news desk has featured other published reports citing supply chain U.S. import data related to retail and automotive supply chains as well.  The most pertinent data, however, is that related to various geographic sourced component costs contrasted to landed and customer cost to serve costs. In the end, supply chains need to best serve individual customers while meeting specific business or product margin goals.

The halls of the U.S. Congress are now congested with industry lobbyists. More than 25 major corporations have formed the Made in America Coalition which include pharmaceutical, chemical, and major equipment manufacturers. On the other hand, firms highly dependent on product imports such as major retailers and certain specific manufacturing companies are rallying to oppose forms of an import tax. Thus, there are industries currently pitted against other industries in a lobbying effort to educate lawmakers as to the real consequences of an American First trade and tax policy.

Once again, we reiterate that Supply Chain Matters is not a political focused blog.

Our role as a supply chain education blog compels us to alert industry supply chain teams to be prepared for continual analysis of potential supply chain impacts or revised product sourcing to better educate senior management on the cost and/or revenue impacts of different scenarios.

We are reiterating these messages because there may be some do nothing tendencies to let the political debates run their course, then, one can respond and act.

We would argue that such a strategy is ill-timed, essentially for two reasons. First, how up to date is your supply chain data related to component and landed costs? Do you have the capability to run multiple planning scenarios related to supply chain sourcing with the ability to update important data when needed? Hint- we are not referencing multiple spreadsheets passed along at various intervals. Do you have the trained people with the skills to perform such analysis on a continual basis, while multi-tasking on other job responsibilities as-well?

The other essential motivator is that an industry competitor or disruptor, who has amassed accurate data, and has completed and educated management as to all the analysis of different scenarios, already will have the head start on evaluating existing of new sources of qualified suppliers and supply chain services that can meet cost objectives, perhaps eliminating supply options from your organization’s consideration.

In today’s hyper competitive markets, one must be always prepared with the most accurate and insightful information relative to important decision-making. Preparedness and speed are the new table stakes.

If you have not already, be prepared for a year of constant supply chain network analysis and scenario-based planning.

The stakes are very high.

Bob Ferrari

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


A Supply Chain Matters Conversation with the American Apparel and Footwear Association


Earlier this month, Supply Chain Matters unveiled our 2017 Predictions for Industry and Global Supply Chains (Available for complimentary download in our Research Center). Our last grouping of predictions focused on unique, industry-specific supply chain challenges, and included apparel and footwear supply chains. Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel, and the new trade agenda being pursued by President Donald Trump has the potential to provide significant impact to this industry’s supply chains.

The geopolitical forces of increased trade protectionism are expected to hit U.S. apparel producers and retailers rather significantly in 2017. High volume, lower-margin apparel and footwear producers must continue to rely on global lower-direct cost manufacturing sources such as China, Bangladesh, Indonesia and other lower-cost regions for production of goods. Similarly, U.S. based apparel brand owners can source fabrics and yarns in the United States while Mexican or Central America based apparel firms perform cutting and sewing operations. Under the existing North American Free Trade Agreement (NAFTA), the goods flow freely and duty-free across borders in North America.

Since publishing our specific apparel and footwear industry specific prediction, this Editor had the opportunity to reach out to the American Apparel & Footwear Association (AAFA) to garner additional insights on the industry and its challenges in the coming year.

We spoke with Nate Herman, senior vice president of supply chain at AAFA regarding current industry challenges and impacts. Our discussion referenced a report from global business network CNBC regarding the potential impact of a trade war among the United States and Mexico. We provided AAFA a copy of our 2017 predictions related to the industry and the impact of revisiting the existing North America Free Trade Agreement (NAFTA) governing trade among the United States, Canada, and Mexico.

The CNBC report included some definitive data on apparel and footwear retail categories exported from China to the United States. We asked on specifics related to Vietnam and Bangladesh. The AAFA referred us to the U.S. Department of Commerce, International Trade Administration, Textiles and Apparel Import Report. The latest reported dated February 7th, for the category: United States Imports of Cotton, Wool, Man-Made Fiber, Vegetable Fibers Except Cotton ad Silk Blend Textiles provides the following data related to Top-Ten import countries for 2016. (Data expressed in million square meter equivalents-SME)

Textile Imports 2016



The data indicates that total U.S. imports of textiles and apparel was down 1.0 percent in 2016 over that of 2015. That is an important indicator of product demand. Of the top ten countries importing to the U.S. China remains as top exporter of apparel to the U.S., but overall volumes were down 2.4 percent from the year earlier period. India ranks #2 with a significant 5.8 percent increase while Vietnam ranks #3 with a 2.5 percent increase. Mexico ranks #5 with a 2.4 percent increase while Honduras ranks 9th with a 2.5 percent decrease.

Besides NAFTA, there is also the Central America Free Trade Agreement (CAFTA) that includes trade with the countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. We wanted to explore whether a cross-border or import tax involving the existing CAFTA would have an impact to existing industry supply chains. Many supply chains of U.S. based apparel and footwear providers extend to Central America, as well, now estimated to be as much as 15 percent of total U.S. imports. The region is particularly to manufacturers and retailers that are anchored in quick turn-around “Fast Fashion” supply chain response.

We asked Herman if the Trump Administration has made any indications toward revisiting the CAFTA agreement in addition to NAFTA. His response was that there has been little reference thus far. Today, advanced yarns and fabrics produced in the U.S. transit to Central American countries under duty-free conditions where they are cut and sewn into finished apparel and distributed back to U.S. entities. Herman further pointed to the appointment of Wilbur Ross as the new Secretary of Commerce and chief strategist for trade policy.

Ross’s previous business investment interests included in 2005, combining the then bankrupt Burlington Industries and Cone Mills, a leading supplier of Levi Strauss denim, to create International Textile Group. Ross then lobbied for what became CAFTA. Thus, the industry currently views Ross as knowledgeable of U.S. centric apparel supply chains flows and needs for access to lower-cost, duty-free manufacturing sourcing.

We then asked if higher volume apparel products can be economically produced solely in the United States. Herman indicated that since 2009, there has been a small but sustained 50 percent resurgence in domestic apparel manufacturing. The trend is likely to continue but there are also certain realities relative to any higher-volume manufacturing presence. They include the need for advanced factory automation and access to a trained and skilled workforce, not to mention a inherent domestic based supply chain. The Administration’s current anti-immigration environment could prove to be a detriment to growth in domestic manufacturing. The fact remains that much of apparel’s supply chain value-added remains sourced in lower cost manufacturing regions.

We honed-in on the fast fashion sector where brands tend to rely on Central America and Mexico for sewing and production. We asked if U.S. trade policy changes could impact this specific sector. Herman believes that fast fashion provides great opportunities for the Western Hemisphere to regain market share from Asian producers, and that the industry should be moving in this direction. That stated, the industry was stated as being “in-pause” pending the outcome of any Trump Administration trade policies.

Specifically regarding Vietnam, which would have been a significant benefactor of the now in-doubt, Trans-Pacific Partnership Agreement (TPP), AAFA cites this country as a #2 supplier for clothes and shoes imported into the U.S. The industry views this country as a growing supplier currently growing at double-digits. One of the important tenets of TPP was protections for intellectual property as well as counterfeit goods protections among trading partners. Such provisions remain a concern for U.S. importers.

As the industry moves forward in 2017, Herman indicates that AAFA’s mission is to make sure association members have all the information related to any changing trade policies, but the current perspective is that it’s anyone’s guess as to what’s in the cards for trade policy changes. It will require constant diligence and analysis by AAFA and its industry members.

To that end, Supply Chain Matters will check back at mid-year to ascertain any additional industry developments.

We would like to thank Nate Herman and the American Apparel & Footwear Association for their time and perspectives on what supply chains should anticipate in 2017.

Bob Ferrari

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


Published Interview of Trump Trade Advisor Has Important Supply Chain Revelations

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We trust that our Supply Chain Matters readers are garnering insights from our ongoing 2017 Predictions series. We have one prediction remaining which will be our industry-specific supply chain predictions which will publish later this week.

While we are working on the final touches, we did want to share an important development, one that is the common theme that threads many of this year’s predictions for industry and global supply chains.

Some of our readers may well be of the belief that all of the news surrounding the actions or potential actions of the new U.S. Administration are speculation, with more moderate voices to prevail. Our response is perhaps, but then again, who knows what may develop in this current highly charged geopolitical environment.

Industry and global supply chains need to be prepared, at-least in the ability to educate senior management of the implications of such initiatives or changed policies. Thus we will continue to provide added evidence and insights as they become available.

This week, Peter Navarro, the newly appointed head for the U.S. National Trade Council, conducted an interview with the London based Financial Times. In the interview, Trump’s top trade advisor accuses Germany of currency exploitation (Paid subscription or complimentary metered view upon registration), Mr. Navarro commented on a number of European topics, including accusing Germany of currency exploitation, and unlike his predecessor, the new U.S. President prefers bilateral vs. multilateral trade accords. He further declared the death of the European sponsored Transatlantic Trade and Investment Partnership (TTIP) involving Europe and the United States.

Such statements alone are garnering global headlines but we wanted to hone in on some further specific statements directly related to global supply chains.

Specifically, this is what caught our eye:

Mr. Navarro said one of the administration’s trade priorities was unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.”

“”It does the American economy no long-term good to only keep big box factories where we are now assembling “American’ products that are composed primarily of foreign components,” he said. “we need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Further noted is that Mr. Navarro all but endorsed the import tax plan now being advocated by Republican leaders in the U.S. House of Representatives.

Readers can certainly have their individual impressions of the above statements.

From our lens, they represent the clearest indication yet of a U.S. policy targeted at building multi-tiered product value chain and supply chain capabilities across industry settings. That is a far different model than exists today. Think for a moment of the current supply chain network models of Apple, HP, Nike, Fiat-Chrysler and others to cite but a few.

Such tenets of bi-lateral and domestic goods movement imply far different supply chain profiles than exist today, and our collective community is going to be very busy dealing with any of the consequences.

Just as the nineteen nineties began the movement toward globally linked corporations and associated supply chain profiles and capabilities, what is on the table in 2017 can represent a far different dimension with a number of consequences.

Supply Chain Matters has in prior years advocated for re-building certain U.S. based industry supply chain multi-tiered capabilities, specifically that of high tech and consumer electronics. This proposed new direction is far more inclusive and broad based.

Our shared takeaway is to not dismiss the current geopolitical environment as a tempest in a teapot. There is significant change being pitched and industry supply chain leaders need to be aware and need to be ready to educate on the consequence and action plans as well as forming potential scenario plans.

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


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.

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