Last week, some key manufacturing indices reflected some optimism in continuing momentum of U.S. related manufacturing and supply chain activity, while China remains on a downward trend.

The ISM PMI Index of Manufacturing Activity was reported at 55.3 in June, up 1.8 percentage points from May, a positive and a very pleasant surprise.  Economists were expecting the index to contract because of headwinds in the economy. Once more, the new orders index indicated a slight increase, reflecting some optimism for continued momentum.  Manufacturing employment was up 1.7 percentage points which were a very positive sign of optimism. Prices of inbound materials also dropped 8.5 percentage points.   Of the 18 manufacturing industries reported, 12 indicated growth in June.

A cause for concern is the Inventories index which was reported to be 5.4 percentage points higher than May. Six industries accounted for the increase including Computer and Electronic Products, Electrical Equipment and Machinery, perhaps reflecting increased concern and hedging over the recent shortages caused by the earthquake and tsunami that occurred in Japan in March.  Customer-related inventories were also up.

Separately, the ISM-Chicago Area PMI Index rose to 61.1 reflecting a 4.5 percentage point increase from May.  The Wall Street Journal noted in its report that the increase in the Chicago index supported the argument that the spring slowdown in manufacturing was mostly reflected by the impacts from the Japan earthquake rather than underlying deterioration in the U.S. economy.  That stands to reason given the Chicago region reflects a heavy presence of automotive and industrial manufacturing. Indices reflecting the New York, Philadelphia and Dallas regions however reflected a decline for manufacturing activity in June.

China’s PMI Index, reported by the China Federation of Logistics and Purchasing and China’s National Bureau of Statistics fell to 50.9 in June from 52.0 in May, its lowest point in 28 months. Weaker global demand and tighter monetary policy has the index now approaching a signal of defined contraction, reflected by a value of 50 or below.  Among 10 indices, all but one fell, indicating continued signs of a broader-based slowdown. A report featured on The Economic Times web site indicates that U.S. retailers are planning conservatively for the upcoming holiday season, attempting to avoid being stuck with unsold goods or untimely inventories.

A separate news story published in today’s printed Wall Street Journal (paid subscription required) notes that a stronger yaun and continued rising wage rates are motivating some larger manufacturers to consider a variety of measures to offset higher labor and export costs.  Wage rates in China have doubled for companies such as Brooks Sports and United Technologies, who are now looking toward other areas such as Vietnam Indonesia or Malaysia for factories, or investing in higher levels of labor automation for existing Chinese factories.

What about your organization’s current manufacturing strategies?  Is your organization cutting back in China in favor of other countries, including the U.S.?

Bob Ferrari

There is an article appearing In the March 7^th edition of Time magazine titled, How Germany Became the China of Europe,  which I highly recommend to our Supply Chain Matters readership.

This article, authored by Michael Schuman in Stuttgart provides insightful conclusions as to why Germany has been able to bounce back so quickly from the global recession.  Germany’s export surge allowed the country to respond far more quickly than major industrialized countries to global-based  market opportunities, and the country’s unemployment rate has actually improved in 2010.

Three of the important takeaways that I came away with from this article are:

• A firm belief that maintaining and enhancing manufacturing capabilities are the key to global competitiveness. German exports to China actually surged 45 percent in the first ten months of 2010, while other countries continued to struggle with their export volumes. German companies concentrate on equating market opportunities with competitive value-chain capabilities.
• While companies in the U.S. were quick to shed experienced workers, Germany’s industrial and government leaders came-up with innovate ways to retain workers, allowing for much more responsive plans for responding to global market opportunities. As an example, in late 2008, when demand for ethylene declined to a mere 14 percent of existing capacity, BASF tasked engineers to come-up with ways to keep the facility operating through complicated recycling schemes.  The article notes that while Germany’s middle-class may not be benefitting in parity with the current export boom, German workers are pragmatic in accepting smaller pay raises in return for forms of job security as opposed to “employment at will” arrangements.
• German companies understand the critical importance for being at the center of a network of regional suppliers and for nurturing value-chain capabilities not only in Germany, but in other countries as well.  The article notes that Germany’s imports from the rest of the Eurozone are expanding more quickly than exports.

While German corporate and political leaders do understand that problems still remain, including more growth in domestic product demand, they are willing at least to work together toward developing common and collaborative corporate and legislative policies.

That seems completely different than the constant litany of U.S. and Wall Street related executives who continue to bash political leaders for being “anti-business”, or for translating increased competiveness and job growth into needs for less regulation or lower corporate taxes.

The appointment of a U.S. presidential commission for manufacturing competiveness and jobs was long overdue and this advisory body needs to quickly redouble its efforts.  Applying some learning from Germany’s current track record of corporate and legislative collaboration would also be some required reading.

Bob Ferrari

In the past two weeks we have penned two Supply Chain Matters commentaries that reflect on the challenge for re-invigorating manufacturing and supply chain jobs growth in the U.S.  These included a commentary on GE’s CEO Jeffrey Immelt being appointed to the new Presidential Commission on Jobs and Competitiveness, and a commentary reflecting on the recent state visit by China’s President Hu Jintao to Washington. In both commentaries, we pointed to the depth of the challenge, either in business or political terms, in fostering a concerted strategy for U.S. innovation and job growth in the midst of a growing global economy. We also noted that the political leaders, and multi-national corporations need to quickly move beyond the rhetoric and posturing to address some serious realities of why so many jobs have been lost and from where future job growth will come.  That would include some sacrifices for each stakeholder, a candid reality check relative to existing trade and IP protection policies.

There was a rather provocative article in the Wall Street Journal, U.S. Firms, China Are Locked In Major War Over Technology, penned by John Bussey. (paid subscription may be required)    The article’s conclusion is that a titanic battle is under way between U.S. business and China, one which is destined to dominate relations between both countries for years to come.  It notes that China’s legislative leaders have been rolling out an array of interlocking regulations targeted to make China a technology powerhouse by 2020.   The article makes reference to a U.S. Chamber of Commerce report: China’s Drive for ‘Indigenous Innovation, A Web of Industrial Policies, which has become rather important reading for many multi-national companies with hopes of continuing to tap China’s lucrative markets. The WSJ concludes its article with following statements: “ In the innovation race, China is thinking long term—and big. Its goal isn’t just to tinker with foreign technology.  It plans to supplant it.  As any competitor might.”

We would recommend that our readers, before internalizing the WSJ statements at face value, actually read the U.S. Chamber report, as we have.  The executive summary of the report makes a very important observation. It notes that many multi-national corporations are becoming ever increasingly dependent on their China revenues as contributions to profitability. They actually expect their own technology coming back in the hands of a Chinese competitor, and believe they have the strategic and management savvy to out maneuver these threats.  However, the Chamber report also points out that many single industry or single product companies could be destroyed in the process, and the end result could be a chilling effect on innovation from a global perspective.

The term context is a very powerful term, and has special meaning when it comes to the challenge of creating more U.S. manufacturing and associated supply chain jobs.  The context of jobs is a direct correlation to innovation and customer demand.  Create or foster a market, and innovative companies will come.

The objective of business is to make profits, pure and simple.  Robert Reich’s astute commentaries point this out.  The objective of policy makers and of governments is to foster and promote policies, incentives and frameworks that fuel national economic growth. That is what China is doing, and doing very well at that.  Businesses are currently creating and continuing to grow supply chains and job growth in emerging markets because of the compelling economics.

Some pundits argue that job growth stems from a positive sense of business confidence. The reality, at least from the lens of supply chain, is that job growth stems from economic incentives that reflect a market for products, the cost of materials and labor, and the overall cost of getting products shipped to markets and customers.

Creating U.S. manufacturing jobs and broadening the domestic supply base equates to legislative and business leaders putting their own economic interests aside and reflecting on the lack of an articulated strategic framework that will address America’s plan to win.

Reflect on those final lines of the Journal article. Thinking needs to be long term and what it takes to win in innovation and jobs.

Bob Ferrari

Last week, some stunning news reverberated across the state of Massachusetts.  Evergreen Solar Inc. announced that it would shutdown its two year old existing $430 million manufacturing facility located on a former military base in Devens Massachusetts.  This news was very disappointing, not only because it represents the potential loss of 800 or more jobs, but also because it involves such a strategic industry for future growth in U.S. manufacturing capability.  Evergreen management noted that it was a victim of weak U.S. demand and competition from cheaper manufacturing capabilities in China, where the government provides solar companies with generous incentives.  Evergreen, however, also sources some production in Michigan, as well as higher volume production with a partner in China. The company had been increasingly hinting that China would be a more strategic manufacturing focus for the company.

Local media sources were quick to point out that Evergreen had the benefit of governmental grants and loans valued at $76 million, and the company ended up taking about $58 million in aide. The Boston Globe article notes that the Governor of Massachusetts had been previously criticized by his rivals for providing such generous aide to a private company during challenging fiscal times, but felt strongly about establishing a strategic manufacturing capability and presence within the state to insure an economic future for alternative energy technology manufacturing.

No doubt, Evergreen management and its investors may have what it believed to be compelling reasons for this decision.  The company has reported a cumulative loss of $54 million through the first nine months of 2010 and has also burned through $685 million since its founding.  The company may have further placed more emphasis on research and development vs. production capabilities. It is no secret that U.S. demand for solar panels to date has been tepid and disappointing, considerably lagging other countries such as China. The changed political climate in Washington also indicates a period of conservatism in any future incentives for alternative energy development.

Interestingly enough, while lamenting the news, I also came across a Bloomberg BusinessWeek article with the headline, Chinese Plants Grow on U.S. Turf. This article profiles China’s Suntech Power Holdings which, as of October, has been producing solar panels in a 117,000 square foot production facility in Goodyear Arizona.  The facility provides savings in transportation costs for U.S. based customers and received a $2.1 million manufacturing tax credit through the U.S. economic stimulus package.  According to the BusinessWeek article, Suntech invested in the U.S. to bring itself closer to U.S. customers and to accommodate “Buy American” requirements in some government contracts.  It further notes that this strategy seems to be working since Suntech plans to double its payroll by the end of next year.

Also noted are extracts of a recently disclosed by WikiLeaks cable sent by the U.S. ambassador to China in January of 2010.  The ambassador wrote: “Chinese companies, thanks to government-backed loans, monopolies, and preferential treatment, are awash in cash and should be a source for investment in the U.S. economy.” The article goes on to note that Suntech has chosen to deploy more advanced manufacturing equipment in its Arizona facility, allowing 30 U.S. workers to produce the same number of solar modules as 100 in the home factory in China to overcome obvious higher U.S. labor and benefit costs  It quotes a Suntech executive as noting that if successful, these same advanced manufacturing methods could be brought back to China to effect labor and productivity savings in China as well.

The contrasts in events and strategy are startling and should be a cause for concern for U.S. legislative leaders and U.S. based companies.  While Massachusetts made significant concessions to help a local private company develop and deploy world class competitive production capability in solar panel production, an existing Chinese company elects to deploy its own capabilities in the U.S. and is garnering U.S. based customers.  While Chinese companies have the benefit of multiple years of subsidies and grants to develop and deploy competitive capabilities, a U.S. based company pulls the plug on U.S. developed production capabilities in just two years.

In our view, the contrast of a U.S. based company who has decided that it cannot profitably produce solar panels in the U.S. with a noted Chinese company who claims it can is rather startling. There is no doubt many inter-related issues are at play.  Perhaps Evergreen provided a unique set of challenges and/or setbacks, as noted in the Boston Globe article.  Perhaps Suntech is not being totally forthcoming in its U.S. profitability.  In either case, the contrast in events is troubling and should be a cause for concern for U.S. based companies and legislative leaders.

Perhaps the answer to this dilemma is for Massachusetts leaders to offer the Devens facility to a Chinese or other foreign-owned firm. Then again, is that what ‘Buy American’ is suppose to mean.

What’s your view?

Bob Ferrari

This is the third posting outlining each of the Supply Chain Matters ten predictions for global chains in 2011.  Part One commented on predictions one through three, and Part Two provided commentary on predictions four through seven.

In this posting, we complete our predictions commentary with a look at predictions eight though through ten..

Prediction Eight: Two industry sectors, B2C and healthcare, will be especially effected by significant supply chain process impacts in 2011.

In the retail, wholesale and E-Commerce sectors, the advent of the more economically stressed, sophisticated and demanding consumer, now equipped with computer savvy, smartphones and mobile applications, will alter the retail buying landscape for years to come.  Consumers have found and demonstrated powerful new weapons in smartphones and leveraged use of the Internet.  They also know that the influence pendulum has shifted in favor of the buyer.

The ability to significantly influence product selection choices, shop and easily place orders via the Internet, and the increased ability to actually perform real-time price comparisons while in a retail store are capabilities that consumers will embrace even more.  The implications for retailers are significant, and throughout 2011, retailers and B2C commerce providers will need to be ‘fast-a-foot’ in staying ahead of this trend.  The most important indicator of the implications came when electronics retailer Best Buy announced a quarterly sales shortfall in December. When post 2010 holiday shopping volumes are all tabulated, we may well see which retailers and e-commerce providers were the overall winners and losers, and how consumer buying patterns played out.

Retailers will be faced with critical decisions on areas to invest in accommodating multi-channel commerce or multi-channel operational process integration needs.   Consumers who want to be engaged in the buying experience will expect the same supply chain wide visibility as manufacturers and suppliers expect from their internal processes. As an example, think of the Dominos Pizza buying experience.  Inform me, the consumer, when my purchased product is going to be made, when it ships from the factory, and the exact time it will arrive.  Similarly, if I am shopping in a store, inform me if an out-of-stock item can be found in another nearby store, and reserve that item for me.  Think item level visibility.

The second significantly impacted industry in 2011 will be pharmaceutical and healthcare related value-chains. Significant changes in strategic business models, healthcare reform initiatives emanating from multiple countries and desires to grow sales in emerging markets have brought home a renewed sensitivity to supply chain agility and consistency in operational excellence.  The healthcare supply chain was already highly segmented and non-aligned to joint stakeholder value-chain performance, but as the Bob Dylan tune laments, “Times, They Are A- Changing”.  Aggregate inventory levels are excessive, over five months of days inventory outstanding on average.

We along with others have commented on a more demanding healthcare consumer, a more acute competitive landscape, and the need to introduce modern supply chain practices within life science, vaccine and healthcare related supply chains.  Healthcare supply chains face similar challenges as high tech or consumer products and many best practices can be transferred.

For pharmaceutical and healthcare value-chains, the year 2011 should hopefully bring new opportunities for stakeholder alignment, along with advanced practices in planning, inventory optimization, supplier and customer collaboration.

Prediction Nine: The landscape for the global outsourcing of components and finished goods production will shift again in 2011.

Recent trends in supply chain global outsourcing were motivated by two fundamental business forces. The first relates to competitiveness in product cost, where outsourcing activities were driven by needs for securing the lowest cost producer of components and finished goods while conforming to specific specification of design and quality. The second was driven by market access, the need to have a supply chain or value-transformation presence in a promising emerging market such as China or India.  It is the former that has driven the bulk of outsourcing activity.  Access to emerging markets has become more of a challenge as some countries continue to initiate barriers to market entry among perceived foreign manufacturers or as issues of  copying of product design continue to occur.

In 2011, industry observers point to more shifting sands as labor costs continue to explode in China and other regions and as issues of IP protection become more of a concern.  There are also building storm clouds in global currency risks which manufacturers must also factor in their strategies for 2011. Some industry observers are already pointing toward countries such as Vietnam or Indonesia as the new opportunities for low-cost sourcing, while others note that having a  combination of balanced in and out sourcing options can be the best hedge for intellectual property protection and shifting currency trends.

We predict that in 2011 there will be much more attention paid to outsourcing strategies and to analyzing all the pertinent factors motivating these strategies.  We also expect further shifts, particularly in low margin or highly sensitive IP product areas.

While on this subject, do not be surprised to see one or another of the aircraft, high tech or telecommunications manufacturers having to modify or alter their component sourcing strategies in 2011.

Prediction Ten: Supply chain related green and sustainability programs will continue in 2011 and beyond, but at a slower pace.

In our report card of 2010, we noted that while sustainability and carbon tracking were not as robust as we had earlier predicted, supply chain carbon tracking and sustainability efforts will remain on corporate agendas for some years to come. While a positive sustainability profile often makes good business sense, there has been a noticeable slowdown in momentum. The perceived failures in motivating global wide sustainability milestones and the effects of global recession in changed consumer buying decisions have made business cases for accelerating green and sustainability programs somewhat problematic.

To date, the unspoken aspects to supply chain wide sustainability efforts have been directed at achieving cost reduction as well as sustainability goals. Saving energy, water consumption or packaging costs can all relate to the bottom line,.  As long as supply chain related green and sustainability efforts can be directly associated with either cost reduction or positive impressions on the brand, than these initiatives will continue to be supported in 2011.  Progress, however, will come in multi-year scope and dimensions.

This concludes our listing of what you can expect to see within global supply chains in 2011.  The year 2010 brought many challenges and 2011 will bring similar challenges. Periods of uncertainty tend to separate the industry leaders from the followers, and 2011 will provide another backdrop for industry competition among supply chains.

Please feel free to comment on any of these predictions, as well as offering any that we may have neglected to mention. Readers are also welcomed to participate in our polling question (placed in the lower right-hand panel) regarding the key business priorities for your organization in 2011.

We will also be producing a complimentary research report which outlines each of these predictions in detail.  If you would like a copy, please provide your name, company or affiliation, and return email address. Requests should be sent to: info <at> supply-chain-matters <dot> com.

We extend to all of our readers our best wishes for the holidays, along with a period of rest and renewal with family and friends.

The Supply Chain Matters Team.