Global consumer goods producer Nestlé S.A. plans to start cracking down on slavery and human rights labor abuses identified during a recent year-long investigation of the firm’s seafood supply chain.
According to a published report by Food Safety News, the abuses concern impoverished migrant workers from Asian countries who are reportedly sold or induced into virtual slavery to catch and process fish, which then ends up in seafood supply chains via fish farms and other manufactured products. The stated abuses are rife among Asian suppliers which provide Nestlé with raw materials for the company’s shrimp, prawns and Purina brand pet foods.
Verite, an independent investigation firm that focuses on supply chain labor conditions looked into six production sites in Thailand. Three were noted as shrimp farms, two were ports of origin, and one was a docked fishing boat. According to the investigative report, these sites were identified as being linked with the fishmeal (or fish feed) used on farms producing whole prawns for Nestlé. There were reportedly indications of forced labor, trafficking and child labor, as well as deceptive recruitment and pay practices and exploitative and hazardous working conditions. Many of the fishermen were from Myanmar, Laos and Cambodia.
Verite has conducted ongoing investigative efforts directed at fishing and aquaculture supply chains and a general overview of supply chain labor conditions can be reviewed in a published research report.
For its part, the global consumer goods giant indicated on Monday that mitigating the situation would not be quick or easy, but that the company was hoping to make significant progress in the months ahead. The plan will focus on ten key activities designed to prevent suppliers from engaging in practices leading to labor and human rights abuses. Nestle pledged to immediately implement the plan, continue activities through next year and publicly report on the progress in its annual report.
The FSN report further cites The Associated Press as recently reporting that more than 2,000 “fishing slaves” from several Asian countries had been rescued from a remote island in Indonesia, some after being held for years, beaten and kept in cages. The AP tracked the fish to supply chains used by Walmart, Kroger, Sysco and others and involving pet food brands such as Iams, Meow Mix and Fancy Feast. In addition, nine people were arrested in connection with that incident, and two cargo vessels were seized.
No doubt, with one of the world’s largest and most prominent consumer packaged goods producers implicated in an independent investigation for alleged slavery and labor abuse practices deep within its fisheries and seafood supply chain, there will be attention brought to resolving such practices over time. Nestle has been lauded for taking active proactive stances in addressing a number of supply chain sustainability and social responsibility challenges, and Supply Chain Matters believes that seafood will be another example of such proactive efforts.
The key, however is recognition that the problem came about because certain producers sought out lower-cost sources of seafood supply, particularly for pet food purposes. It resides in deeper tiers of seafood supply chains in certain parts of Asia. The rest of the global CPG industry and fisheries stakeholders themselves need to come together in a concerted industry-wide effort to add more light to intolerance for such labor abuse practices, with focused efforts and incentives directed at resolving such practices as quickly as possible.
Consumers themselves need to be aware that such labor abuses exist in certain fishery-focused supply chains within Asia and to favor human and pet food producers producers who are taking positive actions to label food origin and who are actively committed to eliminating any supply sources that harvest food with abusive labor practices.
While industry supply chain teams work on achieving various 2015 year-end strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
But now is the time to look back and reflect on what we previously predicted and what actually occurred in 2015.
2015 Prediction One: A More Optimistic Global Economic Growth With Usual Caveats and Uncertainties
Self-Rating: 3.0 (Max Score 4.0)
Our prediction echoed an optimistic economic outlook entering 2015 with continued cautions and unknowns for industry supply chains. Bright spots were expected to be the United States and Mexico, with some slight moderation for China. As the year progressed, the caveats and uncertainties became evident with 2015 now expected to close at a far more moderate growth rate, primarily as a result of declining growth among emerging economies.
Entering 2015, the International Monetary Fund (IMF) had predicted 3.8 percent in overall 2015 global growth vs. an actual 3.3 percent growth in 2014. However, at mid-year, the IMF revised that forecast downward. In its October 2015 forecast, the IMF had adjusted global growth expectations to 3.1 percent, slightly below that of 2014.
Growth within Advanced Economies, originally projected to be 2.3 percent entering the year, have now been scaled back to 2.0 percent. In the first-half of 2015, growth of advanced economies was reported as modest, with growth in the United States weaker than expected despite a strong second quarter. The Eurozone sector has bounced back with growth accelerated by foreign currency advantage and added confidence. The IMF’s October forecast now indicates a six-tenths growth rate for the Eurozone over 2014.
Growth among Emerging Markets and Developing Economies, originally projected to be 5.0 percent entering the year, was scaled back to 4.0 percent by October 2015. As many are now aware, the most significant concern focuses on China, which entering the year was forecasted to grow 7.1 percent. By October, the China forecast had been reduced to 6.8 percent. While Latin America growth was expected to be fueled by Brazil and Mexico, Brazil is now forecasted as a 3 percent decline in growth was Mexico is forecasted to end the year at 2.3 percent growth, two-tenths higher than 2014.
The J.P. Morgan Global Manufacturing PMI Index, a composite index of global supply chain and production activity entered 2015 at a value of 51.5. As of the close of Q3, the value had declined to 50.3, just slightly above the 50 level of overall contraction. The average for the nine months ending in September was 51.2. Rather than a growth scenario, global supply chain activity has generally been on a downward trend. Once more, forward indicators such as New Orders, Export Orders and Employment Growth are all reflecting continued moderation.
Global currency shifts have turned out to be a significant challenge for both individual countries and for multiple industry supply chains. The most significant for industry supply chains was China’s sudden devaluation of its currency in August. Growth and profitability plans predicated on an emphasis toward emerging markets, particularly China, had to modified. Sales and Operations (S&OP) teams remain constantly challenged with adjusting individual region and often individual country resource plans.
2015 Prediction Two: General Moderation and Reduction of Commodity Costs with Certain Exceptions
Self-Rating: 3.8 (Max Score 4.0)
Our prediction for this year focused on an overall moderation trend for the cost of inbound commodities and consequent supply chain raw materials and components. We noted that lower oil prices would be the biggest headline driving commodity pricing trends in 2015 and that turned out to be exactly what occurred.
In its November forecast, The International Energy Agency (IEA) indicated that oil prices are likely to remain low over the next five years because of excess supply and falling demand in developed countries. Further reported was that oil prices have now plummeted more than 50 percent since the middle of 2014, closing at $43.95 per barrel as of November 9th. Further, in its semiannual forecast, The Organization for Economic Cooperation and Development (OECD) indicated in November that lower oil prices and falling unemployment will bolster economic growth in the 34 nation group of developed economies, helping to offset the impact of a slowdown in emerging economies.
As of early November, the Standard and Poor’s GSCI Index of broad based commodities was down 22.5 percent year-to-date. Highlights included industrial metals, agricultural, livestock and grains all down in double-digit ranges. The precipitous decline in China’s import and export manufacturing sector has had a dramatic impact in fostering oversupply in industrial commodities and associated prices. Commodities such as copper, gold, silver and steel remain at low price points with global excess inventories.
Global weather events remained an important driver of agricultural prices in 2015 with severe drought conditions in the United States and certain Latin American countries adding to the exception to lower commodity price trends in 2015.
In our next posting in our look back on 2015, we will review Predictions Three and Four.
In the meantime, please share your own observations and insights regarding our initial two predictions related to global supply chain activity and commodity pricing trends.
In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.
In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.
We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.
Section 14- Electronic Commerce
This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers. TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.
This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.
Section 18- Intellectual Property Protections
Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.
This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.
Section 19- Labor
All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights. Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.
There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health. This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.
Section 20- Environment
TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment. The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.
Section 24- Small and Medium-Sized Businesses
A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.
Section 26- Transparency and Anti-Corruption
A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.
Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.
As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”
With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.
Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.
Supply Chain Matters will do our part to keep readers informed of important developments.
In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. The government of New Zealand took the liberty to post the summary of this agreement on its web site, and it provides a high level view of the various components that will make-up this significant trade agreement.
In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context. The countries to be included in TPP are: Australia, Brunei, Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.
The Summary points to five defining features that make-up this agreement, which include:
- Comprehensive market access which is expected to result in the elimination or reduction of tariff barriers across substantially all trade of goods and services.
- A regional perspective among value-chains, where goods sourced and flowing among TPP nations can be considered a part of the same value-chain, for tariff purposes.
- Commitments to aide small and medium businesses to take advantage of broader market access opportunities among TPP nations.
- A platform for regional economic integration which was designed to potentially include additional economies across the Asia-Pacific region.
- Aspects for promoting innovation, productivity and competitiveness including further development of the digital economy along with the role of state-owned enterprises in the global economy.
The TPP includes 30 chapters covering trade-related issues. We and others certainly have not had the opportunity to review all chapters in-detail, but upon our review of the summary, we cite what we believe are important chapters for our readership audience:
Chapter 2- Trade in Goods
Eliminates and reduces tariffs and non-tariff barriers on industrial goods and means to reduce or eliminate tariffs and other restrictive policies on agricultural goods. According to the summary, most tariff elimination in industrial goods will be implemented immediately upon ratification, although some specific tariffs will be eliminated over longer time periods as agreed to by TPP parties. More than likely, the latter are the controversial tariff areas among specific individual trade nations that remain contentious.
Regarding agricultural products, the agreement calls for promotion of policy reforms that include eliminating agricultural export subsidies among nations along with fostering greater food security across the TPP region.
Chapter 3- Textiles and Apparel
This area calls for elimination of tariffs on textiles and apparel immediately, although those tariffs involving some sensitive products will be eliminated over longer timeframes. The former are obviously very significant for textile and apparel related industry supply chains and their associated sourcing strategies. The chapter further includes specific rules of origin requiring the use of yarns and fabrics from the TPP region, which promotes a regional supply chain. Since China, a significant multi-tiered player in the industry is not a current member of TPP that implies the development of a more independent apparel supply chain.
Chapter 4- Rules of Origin
The summary indicates that the 12 nations have agreed to a single set of rules of origin that define whether a particular good is “originating” and therefore eligible to receive TPP preferential tariff benefits. Obviously, this is a rather important, if not the most important section related to the entire agreement, one that defines the TPP value-chain economic benefit. To specifically quote a sentence in this chapter:
“The TPP provides for “accumulation,” so that in general, inputs from one TPP party are treated the same as the materials from any other TPP party, if used to produce a product in any TPP Party. The TPP parties also have set rules that ensure businesses can easily operate across the TPP region, by creating a common TPP-wide system of showing and verifying that goods made in the TPP meet the rules of origin.”
To dwell a bit more on this particular section, keep in mind that Canada, Mexico and the United States already trade under tenets of the NAFTA agreement, which defines rules of origin and tariff arrangements. Once more, as noted in a prior Supply Chain Matters commentary, country of origin and labeling legislative actions among Canada, Mexico and the U.S. were headed toward WTO arbitration.
To gain more perspective, we reached out again to trade compliance services provider Livingston International for a perspective on all of the current global trade developments in motion. We spoke again with Candace Sider, Vice President of Regulatory Affairs, Canada. While Livingston is still completing its detailed analysis of the various sections of TPP, Sider did point out that trade agreements are often contentious, especially in areas related to rules of origin. The impacts on the COOL disagreements are yet to be determined but TPP certainly adds more perspective. Concerning NAFTA, and specifically automotive supply chains, that agreement specifically calls for 60 percent origin in NAFTA countries. With Japan a member of TPP, there were reports of tense negotiations related to the effects on Japan based automaker’s global sourcing and tariff strategies which remain to be sorted out in the final details and respective ratification.
In our part two commentary, we will touch upon other important sections of TPP, along with their implications.
To continue with this week’s theme of decisive supplier management, Supply Chain Matters must also comment on Honda’s decision to no longer source air bag inflators from troubled Japan based supplier Takata Corp. after a U.S. regulator accused the supplier of misleading regulators and withholding information that eventually led to one of the largest product recalls in U.S. history.
The move comes after continuous multi-year product recall actions involving this supplier’s inflators which have on occasion, demonstrated the tendency to suddenly inflate under certain high humidity conditions and spread shrapnel on drivers or passengers. Even more concerning are actions and fines from U.S. safety regulators ordering the supplier to stop using an aluminum nitrate propellant in the Takata designed airbag inflators.
Takata had been a long-standing supplier for Honda, its largest customer and investing stockholder. This vote of no-confidence sends a significant signal in the notions of Japanese supplier management practices where automotive OEM’s constantly collaborate with suppliers on all forms of product design or supply challenges. According to reports, Honda reviewed millions of pages of this supplier’s internal documents and actually alerted U.S. regulators to evidence suggesting “misrepresented and manipulated test data for certain air bag inflators.”
Honda indicated in a statement: “Honda expects its suppliers to act with integrity at all times and we are deeply troubled by this apparent behavior by one of our suppliers.”
Regulators have now assigned an independent monitor to audit the supplier’s safety practices for the next five years and to stop the use of a certain form of ammonium nitrate air bag inflator by the end of 2018. At the end of last year,
Meanwhile, automotive service parts focused supply chains remain stressed by multiple air bag inflator recall campaigns, in some cases calling for multiple re-installations of a similar repair component. As noted in our previous commentaries related to the air-bag inflators, five auto manufacturers, BMW, Fiat Chrysler, Ford Motor, Honda and Mazda Motor account for 18 million of the since recalled inflators.
Honda itself incurred a $70 million fine from regulators for reporting lapses that included Takata air bag inflators. Our readers might wonder why the OEM did not sever its relationship with its air bag inflator at that time. Japanese corporate culture resists admission of a flawed or troubled supplier relationship and in the midst of a product recall crisis of such a magnitude, Honda probably needed to insure adequate supply of inflators to meet both product recall as well as new production needs.
This is a follow-up to an August Supply Chain Matters commentary highlighting a published report indicating that a key component part production scalability problem had been identified on the Boeing 737 MAX development program. At the time, The Wall Street Journal had reported that that a key supplier within Boeing’s 737 MAX program, United Kingdom based GKN PLC, was challenged with production ramp-up supply issues related to an engine thrust reverser on this new aircraft. Difficulties in use of an advanced titanium based material and consistency in manufacturing output volume were reportedly flagged by Boeing as a significant development challenge for its commercial aircraft business. However, at the time, Boeing indicated every confidence that GKN would be up to the task of volume production.
This week, the WSJ reported that nearly three months later, Boeing has now canceled its engine thrust reverser supply contract with GKN. Further reported was that a change in the component part design that would more readily support high ramp-up volumes of production was underway. A Boeing spokesperson indicated: “We made this decision to ensure we have a product that is not only maintainable and reliable but is producible at the high production rates of the 737 program.”
With a current order backlog approaching 3000 aircraft, Boeing must meet its time-to-market output objectives. It further appears that Boeing has translated learning from the 787 Dreamliner program where advanced technology, such as the lithium ion batteries led to aircraft groundings and production delays, and volume production of composite carbon fiber airframe components led to overall program delays. Instead, it would appear that Boeing is taking precise actions to readily identify design for supply chain challenges as quickly as possible.
As we noted in August, the fact that the design of the new thrust reverser was flagged for production volume capability assessment, two years before planned first customer ship, is indeed a good sign of proactive and decisive program management.