Factory Destruction Across Vietnam: Supply Chain Sourcing Flexibility and Resiliency Has Never Been as Important
In the quest to seek alternative global low-cost manufacturing sourcing across multi-industry supply chains, countries such as Thailand and Vietnam were high on the list. Both offered relatively attractive direct labor wage rates while offering a highly educated and motivated workforce. Up to this point, that has resulted in a steady flow of foreign investment in these countries including internal supply chain ecosystem capabilities.
All of this is now subject to current re-evaluation because of new political and social unrest that is occurring in these countries. The most visible has been Vietnam where this week, anti-China related violence has caused widespread rioting across the country, targeting factories and industrial parks that rioters believe are owned by Chinese interests. This rioting began earlier this week and according to various global media reports has resulted in arson and vandalism involving multitudes of factories and businesses owned by Japanese, Malaysian, South Korean and Taiwanese ownership since rioters have not been precise in targeting.
The protests were apparently prompted by Vietnamese citizen outrage over an oil rig that China placed in a disputed part of the South China Sea. We have read reports of some speculation that the core anger may be more broadly directed at accumulated anger against foreign-based exploitation within the country. The government of China is holding the Vietnamese government responsible for not taking more definitive actions to curb the rioting and damage. A report published by the Wall Street Journal today indicates that upwards of 3000 Taiwanese and 600 Chinese citizens were fleeing the country amid fear of further violence.
While foreign based business people flee Vietnam for fear of personal safety, a large number of factories have halted production because of either damage or lack of workers. Thus, the potential for significant industry supply chain disruption in the automotive, footwear, high tech, consumer goods and other areas is growing each day. It would appear that many brand owners and foreign interests are looking to the government of Vietnam to curb the current building wave of violence and factory destruction and avoid the current situation from quickly moving from the current bad to a far worse situation.
Meanwhile, continued political unrest across Thailand continues to provide an uneasy environment as violent protests continue sporadically across that country. Yesterday, there were reports that at least three anti-government protestors were killed and 22 were injured as government authorities fired guns and lobbed grenades at antigovernment protestors.
Supply Chain Matters has previously noted how significant incidents social unrest has led to a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear. Political tensions involving China and Japan over disputed ownership of islands continue and have both supply and product demand impacts to certain Japan based firms.
From our lens, the notions of global sourcing are beginning to take on a new risk management perspective, that being social, national and political unrest along with the longer-term implications of that unrest. The notions that industry supply chains can continually follow a singular strategy that is solely directed at sourcing in low-cost countries is being challenged, and increasingly requires a re-evaluation. Global sourcing now includes far more considerations beyond the cost of direct labor, and as we have continually noted, are now taking on social, political and employer of choice perception aspects. The ramifications apply not only to product brand owners, but to industry supply ecosystems.
We believe that these incidents are not isolated and business and supply chain teams need to focus on much broader trends and their implications in access to foreign markets and supply chain ecosystems. The need for supply chain sourcing flexibility and resiliency has never been as important as it is now becoming. Insure that your firm and its supply chain strategies are prepared to manage among these new challenges and needs.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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..
While on an airplane early this morning flying to Tampa Florida, this author had the opportunity to catch-up on business magazine readings. Two articles published in two different editions of Bloomberg BusinessWeek provided us more evidence that labor social responsibility trends concerning global-based production sourcing will occupy more agenda time for supply management and other executives. Labor activism continues to be a trend among so-termed, lower cost manufacturing regions, and the implications are significant for cost and product branding considerations over the coming months.
Supply Chain Matters has featured a number of commentaries concerning the ongoing social responsibility developments concerning Bangladesh, specifically those impacting apparel and retail supply chains. The production of garments and apparel accounts for 6 percent of that country’s GDP, and almost 80 percent is exported to other global markets. In the April 28- May 4, 2014 edition of Bloomberg BusinessWeek, the article: For Bangladeshi Women, Work is Worth the Risks, profiles a trend of a predominantly female dominated workforce in that country’s garment factories. This article profiles a mother who was injured but able to survive the fire that occurred at the Tazreen Fashions factory killing 112 of her co-workers, yet she continues in her occupation to better the livelihood for her children. It cites that in 2011, according to a Yale University study, about 12 percent of Bangladeshi women, ages 15 to 30 worked in the garment industry and that hunching over a sewing machine in a 10 hour shift is perceived as a once-in-a-generation opportunity to better the lives of their family members. According to this article, despite the deaths of at least 2000 factory workers since 2005 because of fires and accidents, women in this nation view apparel factory work as a means to claw their way out of poverty, yet they continue to fear for their personal safety and a decent work environment. The cited Yale University study indicates that 27 percent more of young girls have been able to attend school and obtain a basic education than before the garment industry began its increased sourcing in the country.
However, global retailers and factory owners remain at a crossroads as to actively supporting industry initiatives, consortium funding mechanisms and product sourcing incentives to improve basic safety and working conditions among the country’s apparel factories.
A contrast concerns China, where a once predominantly female workforce among this country’s electronics, apparel, and other industries has transformed to a more male dominated workforce. The May 5-May 11 edition of BloombergBusinessWeek features an article, China’s Young Men Act Out in Factories. It quotes a spokesperson at Foxconn, the largest global contract manufacturer, that: “…the factory workforce is now about two-thirds male and more “rowdy” than when it was half female five years ago. The younger generation doesn’t want to continue doing work that is very mundane.” The article points to the trend of a more activist workforce willing to undergo work stoppages to gain more economic benefits. Other workforce issues, such as on-the-job sexual harassment that include offensive comments and grouping of female workers are cited. The article quotes a source as indicating that the recent labor strike involving athletic shoe producer Yue Yuen Industrial was led by 100 all-male workers. Contract manufacturers Foxconn and Flextronics are reported to be responding to these demographic workforce shifts by sponsoring “date nights” and other worker counseling programs.
What struck this author were the contrasts and similarities for both reports. A female dominated workforce in Bangladesh for the most part, endures workplace perils to sacrifice for the better good of families. A now predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.
The primary motivations for the era of global outsourcing, namely significantly lower costs, is being challenged among multiple industry supply chains. A surgical approach to these trends is to address them in isolation. A general assumption that social responsibility and conscience can be outsourced or belongs solely to individual suppliers is wearing thin. There needs to be monetary qualifiers and incentives that address a brand owner’s commitment to social responsibility in the same light and milestones that are affixed to many of today’s environmental responsibility commitments.
Adding more pressures for increased automation or production robots for specific supplier factories, finding the next low-cost sourcing alternative, negotiating for even lower unit costs or adding more action phrases to corporate social responsibility policies that umbrella the supply chain are not the sole remedies. An industry social conscience needs to step forward, one that positions supply chains squarely into key performance indicators and performance objectives directly related to achievement of global social responsibility.
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 mission for the Supply Chain Matters blog is to be constantly alerting our readers to industry examples of where supply chain internal and external business process and information technology capabilities due matter in business outcomes.
In today’s published edition of the Wall Street Journal, (paid subscription or free metered view) the Marketplace section features two side-by-side articles they depict the crucial importance of supply chain capabilities.
One of these articles, Honeywell Takes Lesson From Japan, depicts how that company’s System Sensor business unit which designs and produces smoke and carbon-monoxide detectors for commercial buildings. The article’s focus is on the transformed results from its 1000 worker St. Charles Illinois factory, a facility inherited with many operational challenges. The subject plant was part of Honeywell’s 2000 acquisition of Pittway Corp. which WSJ describes as a well-regarded product line but high industry costs.
This facility was one of the first to participate in Honeywell’s Operations Systems (HOS) improvement framework, modeled from tenets incorporated in the well-known Toyota Production System. The plant previously struggled to align production output with product demand and was described as stacked with inventory. Honeywell Chairmen and CEO David Cote is quoted as indicating that in the first two years of the transformation he wondered aloud about the challenge undertaken. Honeywell maintained its investment in U.S. manufacturing because of the power of ideas generated by the workforce. Assembly lines were replaced by empowered production cells. Production workers were cross-trained on producing multiple products along with the elements embedded in the HOS.
The result is described as a plant that can produce four million units a year with a defect rate that has fallen 80 percent. Production can be flipped readily to accommodate changing product demand and common parts make-up the bulk of various products. The required to develop and produce new products has been reduced from three years to 18 months. Profit margins for the System Sensor business unit are reported to have risen from 17.7 to 19.4 percent since 2009.
A contrast to that article is Chrysler Says Initial Supplies of New Jeep Cherokee Are Limited, which describes how U.S. automotive OEM Chrysler continues to deal with market introduction setbacks for its new smaller Jeep Cherokee model. This model was originally scheduled to arrive at dealers earlier this year to coincide with the market introduction of the completely re-designed Jeep Grand Cherokee, but production start-up setbacks at its prime manufacturing facility have delayed volume shipments until August. The slower than anticipated product launch leaves Chrysler temporarily without a contender in the mid-sized U.S. SUV sector dominated by the Honda CR-V, Toyota RAV-4 and Ford Escape.
This new Cherokee was designed to share the same product platform as the Dodge Dart but utilizes other newer components including its transmission. Production was originally scheduled in May, then pushed to June, and apparently now likely to be August, because of various start-up challenges, with the implication that pipeline inventory ramp-up will not be ready for dealers until the fourth quarter. In its article, the WSJ points out that the delayed launch already has hurt Chrysler’s first quarter earnings with not much of an offset impact expected until the third quarter. A senior Chrysler sales executive is quoted as being optimistic that sales and profit targets for the fiscal year will be met despite this model setback.
How would you like to sit-in on Chrysler’s S&OP planning team process in the next few months? We speculate that the conversations are rather dynamic among sales, marketing and supply chain operations teams.
In one WSJ page there are two contrasting examples of how supply chain business process capabilities have the potential to impact business outcomes.