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Supply Chain Sourcing Taking on More Geo-Political Significance

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In this new era of geopolitical risks, the critical importance of supply chain management sourcing strategy was again brought to light in a published article by The Wall Street Journal. The report, When Currencies Fall, Export Growth Is Supposed to Follow- Until Now (Paid subscription required), questions common theory that a weaker currency is a boon to export growth. The reason stems from existing supply chain sourcing realities.  Container Term 300x200 Supply Chain Sourcing Taking on More Geo Political Significance

The report specifically examines a test case reflected by the ongoing effects of Brexit to the manufacturing sector of the United Kingdom. As Supply Chain Matters has profiled in a prior posting, the country’s decision to initiate efforts to exit the European Union, caused the British pound sterling to fall significantly. The effect was that products exported, such as chemicals, autos or aircraft parts became more price competitive in global markets. That obviously raised expectations for boosted economic growth, and indeed the PMI indices for the UK have been generally rising.  The evolving reality as depicted by the this latest WSJ published report, is that supply chain sourcing strategies that resulted in significant dependencies on importing value-chain components and/or raw materials served to have generally served to offset any lower price advantages of produced goods.

One specific example profiled was auto producer Aston Martin which exports a reported 80 percent of its vehicles to foreign markets. Post Brexit, with the decline in the value of the pound in low double-digits, Aston sales resulted in as much as 12 percent in additional sales margin. However, an industry reality that many automotive component suppliers are primarily based in offshore lower-cost locales presented the effect of increased costs for imported materials.  That has reportedly offset sales margin gains. Likewise, retail prices of many consumer items that are often imported into the UK have risen significantly since the Brexit referendum decision.

A contrast provided is that of the whiskey industry in Scotland, where the bulk of the product value is generated and produced locally and where producers have now been able to reap the rewards of increased export sales as well as profits. With the majority of the end-product locally sourced, a devalued currency has provided meaningful economic benefits for this industry.

The WSJ report makes note of two recent papers from both the World Bank and the Organization for Economic Cooperation and Development (OECD) that both found that movements in exchange rates had a declining impact on trade in advanced economies.

The sum of these developments is noted to be the same conclusion, that industries and companies have become more embedded in global supply chain sourcing.  Cited as evidence is an OECD statistic indicating that between 1995 and 2011, the import content of exports rose from 14.9 percent to 24.3 percent among OECD nations. Obviously, beneficial for developing, lower-cost manufacturing regions.

From our Supply Chain Matters lens, the evolving data again points to ongoing conflicts among individual companies, who’s product value-chain strategies are driven primarily by overall profitability, manifested by landed and total cost considerations, and on individual governments who must strive to grow domestic economies and employment. Specific case in point is the ongoing manifestations of the Trump Administration’s Make America Great policies that are reflected toward existing global trade policies.

Increasingly, economists and political leaders, have begun to question the overall benefits of globalization in the context of impacts to local economies, social responsibilities and to long-term economic growth. The spillover to existing global supply chain sourcing strategies seems inescapable.

Geo-political forces surrounding global trade are likely to occupy the attention of many industry supply chain teams, all of whom must be prepared to deal with near or longer-term implications. The takeaway for industry supply chain sourcing, procurement and overall supply chain leaders will continue to be the need to be well informed as to ongoing international geo-political events that will impact certain industries, and to ensure that respective C-Suite executives are well informed as-well.

In late September, this Editor is scheduled to deliver an Accenture Academy Trend-Talk online seminar: Supply Chain in an Anti-Trade and Anti-Globalization Era. We will be sharing further details in the weeks to come.

Stay tuned.

Bob Ferrari

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


Reinforcing Data on Ocean Container Rate Hikes and Capacity Shifts

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Last week, we alerted Supply Chain Matters readers to a warning from the European Shippers Council regarding very limited container shipping slots and corresponding spiking container shipping rates for exports from Europe to Asia. This week, Drewry Advisors released its latest update for its World Container Index, providing reinforcing quantitative evidence that container rates are spiking. The overall composite of container freight rates on 8 major trade routes is now trending up 11.6 percent this week to an average of $1523.86 per container. Drewry reports that this same index is now up 75 percent from the same period in 2016.  Maersk Con Ship 300x201 Reinforcing Data on Ocean Container Rate Hikes and Capacity Shifts

As noted in our prior blog, the primary reason provided by ocean container carriers for capacity constraints and spiking rates was the repositioning of ships among various new shipping line alliances that started various network services this month. A review of the detailed shipping routes analyzed by this index reflects a 62 percent weekly, and a whopping 151 percent annual spike in container rates for the Rotterdam to Shanghai routing. However, the same annualized 151 percent rate hike is reflected on the all-important Shanghai to Rotterdam routing. The Shanghai to Los Angeles routing, another high-volume route reflects a 63 percent annualized rate increase. On the other hand, other routing such as New York to Rotterdam reflect a 6 percent annualized decrease.

In our prior update, we questioned whether container shipping lines, or their respective alliance networks, had done adequate planning for this month’s new network models.  Based on this latest data, we now lean toward a different perspective, namely that alliance networks may well have exercised concerted planning regarding capacity and rate structures related to specific geographic routes, including those that are most heavily traveled.

The takeaway remains- industry supply chains, reliant on spot market rates, are going to feel the impact of these double-digit rate increases. Transportation procurement teams will have to do their homework regarding rate trending and shipping alliance contracts.

Shipping lines can argue that the current rates reflect historic rates in times where industry capacity aligned with overall global shipping demand. The visualization of Drewry’s World Container Index dating back to April 2015, reflects discernable zig-zag rate patterns of constant spikes and ebbs. The lowest rates were the high six-hundreds and the highest rates exceeded $1700 at the start of this year.  On the one-hand, planning or compensating for such a wide variation in spot-rates may lend itself to a preference for contract rates, which only high-volume shippers or brokers can take advantage of. On the other, such a wide disparity makes transportation contract renewal or re-negotiation a difficult exercise.  Added to this dynamic is a shipping industry track record of inconsistent schedule reliability and slow-steaming methods that optimize costs for carriers vs. shippers.

We continue to question how much industry shippers and global maritime regulators are willing to tolerate regarding consolidation of capacity under multi-carrier alliance networks, before the economic and supply chain predictability interests of shippers are considered. Global regulators are likely beginning to sense such a groundswell of shipper and stakeholder concerns on new ocean shipping alliances impacts to service reliability, predictability, and non-market-driven rate structures.

That, unfortunately, will not alleviate the current impacts to transportation budgets.

Bob Ferrari

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

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

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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

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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 e1488404460790 A Supply Chain Matters Conversation with the American Apparel and Footwear Association



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.


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