According to the 2014 Semiannual Economic Forecast issued by the Institute for Supply Management (ISM), purchasing and supply management executives across the United States remain optimistic concerning the growth of revenues for their firms.
Manufacturers are planning for an average 5.3 percent growth in revenues in 2014, up from a forecasted 4.4 percent at the end of last year. Estimates for spending on new equipment and plants presents an even more optimistic perspective, with an indication of a 10.3 percent increase, compared to a forecasted 8 percent increase in December 2014. However, the outlook for employment was little changed from December’s forecast, projecting a 1.5 percent increase.
From our lens, these forecasts are a stronger indicator that new equipment spending is being directed squarely at automation and increased productivity. They further reflect the prediction that the current momentum in U.S. manufacturing continues across many industry supply chains.
Last week, Germany’s BASF SE announced what was described as the single largest plant investment in its history. The global chemicals provider indicates that it was considering investing upwards of $1.4 billion to build a gas complex somewhere in the Gulf Coast region of the United States that will convert low-cost natural shale gas into propylene. According to report published by the Wall Street Journal, BASF estimates that it could save upwards of $500 million per year in energy costs if this new chemical plant is located in the U.S..
Another incident involving hazardous crude oil rail transport has occurred in the United States.
Various media outlets are reporting that a CSX train carrying crude oil from Chicago to Virginia derailed and burst into flames in downtown Lynchburg Virginia, spilling crude into the nearby James River. Hundreds of people have been forced to evacuate within a half-mile radius of this accident.
A published Reuters report quotes CSX as indicating that 15 cars derailed at 2:30pm local time and that three railcars were still on-fire as of 4pm. This derailment occurred a short distance from nearby office buildings and according to Reuters, is sure to bring added calls for stricter regulations and oversight for shipping crude by rail. Reuters notes that CSX has been positioning itself to deliver more crude to East Coast refineries and terminals and that in January, its CEO told analysts the company planned to boost crude-by-rail shipments by 50 percent this year.
The U.S. Department of Transportation is dispatching Federal Railroad Administration inspectors to the scene of this latest accident. This would be the second train derailment involving crude oil so far this year amid continuing calls for improved tanker car safety standards. Last week, Canada’s Transport Ministry introduced stricter measures concerning railroad tank cars. The agency ordered railcar owners to phase out DOT-111 model cars in the next 30 days. At this point it is unclear what the type and age of tanker cars involved in this latest incident in Virginia actually were.
Ironically, last week the National Transportation Safety Board NTSB) conducted a two day Rail Safety Forum focused on the transportation of crude oil and ethanol standards. Outgoing NTSB chairperson Deborah Herseman attended this session and has been making rounds of various U.S. media talk shows and news programs. Her primary message to viewing audiences was her concern for rail safety and that industry and government interests need to do more in this area. We had the opportunity to view Ms. Herseman’s interview on the CBS This Morning program and her conclusions were quite powerful, leaving an impression that other accidents will occur without stepped-up action. These messages will resonate even more after today’s incident and the effects may impact the availability of rail tanker cars across the U.S. in the months to come.
Today’s Wall Street Journal reports (paid subscription or free metered view) what many commodity shippers spanning the Western portions of the United States are already experiencing first-hand, an erosion of rail service levels that are beginning to noticeably impact industry and services supply chains. The surge in bulk tank car shipments from the Bakken region of North Dakota, coupled with the severe winter conditions that have been experienced throughout this region have led to what is reported to be a major snarl in rail traffic that is now cascading itself among various supply chains. Once more, this situation may extend itself much further into 2014, which is not good news for supply chains that are often anchored in just-in-time inbound materials flows.
The WSJ indicates that many of the problems stem from pileups at the BNSF Railway, which has been one of other railroads heavily burdened by surging demand for crude oil transport. The problem is a classic capacity-constrained network, as winter conditions have taken a toll on equipment and schedules.
The ripple effect extends to other bulk agricultural and commodity shipment needs across the U.S. Midwest and Great Plains regions, where rail car deliveries are reported to be running two to three weeks late. Specific notations are made for shipments of bulk sugar to various consumer product goods companies, coal shipment to various utilities and grain and other agricultural products to ports or food processors. Impacted suppliers cited in the article are American Crystal Sugar Co., a supplier to General Mills, Kraft Foods and Kellogg, potato producer Black Gold Farms and fertilizer producer Mosiac Co. Hershey, on behalf of the Sweetener Users Association, has written a letter to regulators stressing the need for an urgent fix. These backlogs have the potential to cost shippers hundreds of millions of dollars in unplanned costs and the longer this service situation continues, the more upstream companies within supply chains will be impacted. The BNSF itself is reported to be scrambling to secure additional locomotives and train crews while shippers are turning to the more expensive option of shipping by truck.
As our U.S. reader community is already aware, there has been an ongoing capacity shortage among U.S. trucking companies, thus the problem cascades itself even more as trucking resources continue to fill-in for rail. Commodity procurement and logistics teams will obviously continue to deal with this situation, including coming up with alternative scenarios to keep material flows moving to upstream customer expectations. Those residing upstream should be exercising their own scenario planning options to manage through this ongoing operational disruption.
In mid-May, Supply Chain Matters called reader attention to a study issued by Alix Partners that cited a narrowing gap in the sourcing of production in China vs. the United States. Last month the Boston Consulting Group reiterated its prior message that the increased competitiveness in United States based manufacturing will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. In an August 20th published BCG Perspectives report (no-cost sign-up required), BCG declares that the current momentum in U.S. manufacturing is just the beginning, and that by 2020, higher U.S. exports combined with production work that will likely be “re-shored”, could create 2.5 to 5 million additional factory and service jobs. The strategy firm declares that its analysis suggests that the U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world, as much as 8 to 18 percent lower than countries such as France, Germany, Italy, Japan and the United Kingdom. The full impact of the shifting cost advantage is expected to take several years to be felt and BCG advises that manufacturers and retailers should recognize that structural cost changes underway represent a potential paradigm shift in global manufacturing sourcing. At the same time, BCG advises supply chain teams to maintain diversified manufacturing operations around the globe.
Some well-known retailers and manufacturers are now demonstrating more noticeable awareness to these trends, for obvious business reasons.
On August 22nd, global retailer Wal-Mart sponsored a U.S. Manufacturing Summit. At the event, Bill Simon, President and CEO of this retailer’s U.S. based operations delivered what seems to be a passionate address to the attendees where the transcript was captured on the Wal-Mart web site. Simon declared his belief that this is a transformative period in history, that opportunity in America and growth of the middle class was predicated on a job at the local factory. His argument is that the current U.S. “hourglass” economy has caused a rift, with groups calling for reform of either too much wealth or too little unskilled wages. He argues that filling in the middle through a revitalization of U.S. manufacturing could help boast the U.S. economy. He reiterated a takeaway from this Wal-Mart sponsored summit that: “the next generation of production will need to be built closer to the points of consumption.”
Of course, Wal-Mart has skin-in-the-game on these arguments since its core customers represent a good portion of middle class consumers, and they have been showing a tendency of late to shop at other lower-cost outlets. None-the-less, Wal-Mart continues in its effort to commit $50 billion, no small sum, toward increased sourcing of products among goods manufactured in the U.S. The retailer has appointed a senior team to lead this effort and has stated its willingness to sign long-term supplier agreements when it makes sense to provide manufacturers more certainty in sourcing. Simon implored other retailers to do more in their sourcing commitments. Some other passionate statements were: “I tell my team all the time that that our $50 billion commitment is our starting point. If we put our minds to it, there’s no question to me that we can achieve and exceed it. I want us to think bigger.”
Supply Chain Matters readers will recall that our numerous ongoing commentaries regarding Apple and its supply chain, cite CEO’s Tim Cook’s commitment to bring forward a U.S. based manufacturing presence it its assembly of end-products, albeit an initial small presence. That announcement was been communicated in the declared commitment to produce a new line of Mac computers in 2013 at a U.S. based facility. In late May, Cook declared to a U.S. Senate Subcommittee that the new Mac assembly facility would be in Texas. According to his testimony” “The product will be assembled in Texas, and include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.” While we and other sites speculated that the new U.S. presence would be overseen by contract manufacturer Foxconn, a mid-June posting on Mac Rumors.com quotes a Taiwanese equity analyst as indicating that Apple will actually be partnering with contract manufacturer Flextronics for the new upcoming Mac Pro. The 450,000 square foot Flextronics facility near Fort Worth is also reported to be the manufacturing site for Motorola’s new Moto X smartphone. Astute readers may also pick up on the fact that Texas is a no-income tax state, which provides an added incentive and economic justification to make it the home of Mac Pro production.
Yesterday, Parade Magazine featured an article, Made in the U.S.A., which cited other manufacturers upping their commitment to increased U.S. manufacturing including General Electric and a host of non-U.S. automotive brands. One interesting statistic: “according to Libby Newman, a vice-president at the American International Auto Dealers Association, about 55 percent of all light vehicles sold in the U.S. through July were foreign brands- but more than half were built in America.”
While readers might argue that some of the cited companies we note in this commentary have obvious motives behind their renewed interest in U.S. based manufacturing sourcing, the economics and the noticeable shifts in momentum towards a re-discovery of U.S. based manufacturing attractiveness is underway. Supply Chain Matters has further cited structural shifts in global transportation that reinforce a paradigm shift in supply chain related economics.
Each supply chain organization will have to analyze their own business factors but take heed to these messages since more noticeable momentum and commitment towards favoring U.S. manufacturing is underway.
Has your senior management teams been advised of these trends?
Since our founding, we have always looked forward to the annual REL Working Capital Scorecard, and specifically its reporting of inventory performance. We have provided Supply Chain Matters readers our observations and insights that were related to reported performance in individual industry sectors.
The data was collected by REL, which is now a division of The Hackett Group, and published each year in CFO Magazine. These indices, particularly the calculation of the metric Days Inventory Outstanding (DIO), are rather important because they reflect a generally accepted method for how CFO’s measured their supply chain inventory performance. While many in the supply chain community have adopted and are very comfortable with inventory turns calculation methods, DIO is, in our view and others, a broader financial indicator of inventory performance contrasted to annual sales trends. DIO reflects if inventory management is tracking to revenue performance, and that interests the C-Suite, stockholders and the Wall Street community.
Since CFO Magazine discontinued its sponsorship of the REL Scorecard, Supply Chain Digest took the initiative this year to actually perform the DIO calculations based on raw data supplied by REL. A few weeks ago, Dan Gilmore issued a two-part commentary providing his analysis of 2012 inventory performance which our readers can review. Supply Chain Matters provides a shout-out to Dan and his editorial team for undertaking this calculation task and allowing our community to once again review performance.
Gilmore discovered that the previous industry grouping categories were somewhat misaligned. We also have been observing that since we began reviewing the annual reporting. Gilmore further points out that mergers, acquisitions and private equity deals make the continuity of the industry groupings difficult to pin down. We speculate that the previous CFO Magazine industry groupings were formed to insure that readers in those industries would not rebel when reviewing specific industry results. Supply Chain Digest was able to provide a DIO inventory performance view that spanned the years 2006, 2011 and 2012. We reviewed our files and were able to review published data from 2008, 2009 and 2010. Although we noted that there are problems in the continuity of the trend reporting, the numbers do provide important trend indicators.
An observation and insight we do want to share reflects on the marginally performing industry sectors, those whose performance reflects an increase in inventory when compared to revenue trends. A snapshot of the 6 year DIO inventory performance as reported by Supply Chain Digest reflects:
Construction Equipment 58.4 percent increase
Chemicals and Gases 27.2 percent
Metals Manufacturing and Distribution 19.5 percent
Retail- Electronics and Home Improvement 12.5 and 11.6 percent respectively
Auto Parts and Components 12.7 percent
Toy Manufacturing 10.2 percent
Apparel and Shoe Manufacturing 7.2 percent
Auto-Truck Related OEM’s 4.2 percent
Computers and Peripheral Manufacturing 3.2 percent
Can you spot a common denominator?
Most of these industries plunged big-time into global sourcing and distribution of products and were subject to global economic developments, supply chain disruptions and slower transport times. In 2011, the automotive and high tech sectors were significantly impacted by supply chain disruption. Apparel and toys have been forced to deal with exploding direct labor costs in China, and have since altered some sourcing of production. On a positive note, Consumer Packaged Goods, which also plunged into global markets, demonstrated a 7.3 percent decrease over six years.
We share one other comment regarding Aerospace and Defense Components, which according to the analysis had a 30.1 percent increase in DIO over 6 years. This should really not be all that surprising, given the multi-year delays encountered in the major new aircraft programs from both Airbus and Boeing that overlapped this period. If there were a need for definitive evidence on the impact of these delays, particularly on aerospace component suppliers, it would be reflected in this DIO trending.
Despite all the technological and process advances in supply chain planning and inventory management, business factors often complicate overall supply chain inventory management. It is not so much a reflection on the technology, but rather the implications of globalization and increased supply chain complexity and disruption.
What is your view?
Reviewing this six year trending data on inventory performance, along with your experience in having to manage inventory in these specific industries, do you believe that external business forces have been the real challenge?
The following is the author’s weekly guest commentary appearing on both the Supply Chain Expert Community and Supply Chain Matters web sites.
Global supply chain strategy is highly influenced by global economics, especially as it relates to energy, the primary driver of supply chain costs. Today, business media is echoing the headline that the United States will surpass all other countries as the world’s largest energy producer by 2020.
The headline stems from the latest analysis performed by the Paris based International Energy Agency (IEA) which factors the recent boom and reserves discovery concerning shale-oil and gas finds across the U.S. A Wall Street Journal article points out that the IEA is not alone in forecasting this strategic shift since both OPEC and the U.S. Energy Information Administration (EIA) have also predicted sharp rises in U.S. petroleum and energy production in the coming years.
This development not only has significant impact on global politics and economies, but has impacts to global supply chain sourcing shifts in the years to come. Supply chain strategy and sourcing teams need to be cognizant of these shifting trends, if they have not done so. Further, this is yet another wake-up call to the U.S. legislators and the broader supply chain community to be prepared to take advantage of opportunity.
Already, European media has been focusing on the shifting economic advantage that continues to favor U.S. based manufacturing. More abundant and cheaper supplies of natural gas has caused German based manufacturers to become concerned that high energy consuming foundries or metal-working will no longer be economically competitive for both Germany and Europe as a whole. The Financial Times reported that global automaker Volkswagen, which actively practices universal global platform and component sourcing strategies, has already begun alternative sourcing from German based suppliers to foreign based suppliers. The FT reports that VW has joined a growing chorus of German based companies that have raised an alarm about Europe’s ability to economically compete given the shifting global energy trends, and Europe’s current dependence on more expensive natural gas emanating from Russia and Norway. In its reporting, the WSJ notes that OPEC will become more dependent on Asia-based energy consumption in the years to come, vs. the U.S., which further shifts global transportation and manufacturing economics.
Supply Chain Matters has previously weighted-in with two separate commentaries, noted here and here, concerning the building resurgence of U.S. manufacturing. We noted shifting strategies reflected in global automotive, discrete manufacturing and process industries. The shift is primarily driven by the changing economics of energy and global currency shifts, as well as future developments in additive or custom manufacturing that allows manufacturers to have much more flexibility in production design.
This latest IEA forecast has obvious impact toward high energy consumption manufacturing such as process industry, refining, fabricating and machining. It is also, by our view, a huge wake-up call to U.S. manufacturers to continue to invest in process automation and address current challenges in training and preparing a higher skilled workforce. For U.S. legislators, unions, and logistics providers, it is another reinforcement on needs for significantly renewing U.S. logistics infrastructure. There are challenges related to furthering efficiencies of designated import and export ports on both coasts. Surface transportation, highways, rail, and logistics transfer movements need to become much more efficient as is continually pointed out in the Annual State of U.S. Logistics reporting. Movement of newly discovered energy sources to designated refineries and/or consuming manufacturing regions is an area already identified by logisticians and policy makers. There are new opportunities to co-locate energy distribution and manufacturing, as well as leverage new sustainable energy strategy in consumption and further re-cycling of materials.
However, the most fundamental challenge remains in addressing the current shortage of a skilled U.S. workforce, one prepared to manage advanced manufacturing processes and more sophisticated production equipment, and prepared to oversee more analytically-driven supply chain management techniques. This author continues to hear senior supply chain management point to this challenge as significant and in need of joint government and industry action.
As the adage is often stated and practiced, opportunity comes seldom knocking, and when it does, those prepared to take advantage, reap the rewards.
Now that the tumultuous U.S. Presidential election is finally headed toward completion, the time is long overdue for both government and private industry to actively come together and prepare for taking advantage of opportunity for the renewal of U.S. based manufacturing and supply chain infrastructure capabilities.