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Supply Chain Sourcing Taking on More Geo-Political Significance

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

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

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

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

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

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

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

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

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

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

Stay tuned.

Bob Ferrari

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

 


3M Supplier Survey Brings Forth Important Insights for Increased Supplier Collaboration

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Diversified products manufacturer 3M recently conducted a survey among supply chain suppliers to hone in on current challenges related to the notions of supplier collaboration. While the survey population was small, the results caught our attention because they uncover important challenges that remain for procurement and supply chain teams.

The purpose of the survey- Driving growth and innovation through supplier partnerships, was designed to uncover insights (not specific to 3M) on the most urgent trends, opportunities and challenges facing suppliers today. Upon review, Supply Chain Matters noted a number of noteworthy findings.

Technology’s Impact Becoming More Important

On a positive note, and further validation of our Ferrari Research and Consulting Group’s 2017 prediction of increased investments in supply chain focused technology, 60 percent of the suppliers surveyed by 3M indicated they are in the process of making major changes and upgrades to their systems and technology to become more digitally connected. That from our lens is encouraging news.

Nearly all suppliers surveyed, ninety-five percent, reported being at least somewhat empowered and encouraged to innovate and make suggestions for improvement for the customers they supply. Yet only 43 percent of suppliers’ report feeling fully empowered to collaborate with their key customers. The survey evaluators indicate that the challenge of collaboration and joint innovation may not lie in lack of incentive and customer openness, but because the organizations they supply lack systems and technology that make collaboration more efficient. Seventy percent of suppliers indicated at least half of the customers they supply do not have a strong system and process in place for buyer and supplier collaboration. A similar theme of discussion emanated from our attendance at this year’s annual conference of the Institute for Supply Management (ISM).

Again, from our lens, that finding may reflect differences fostered in ongoing supply chain segmentation strategies that place major emphasis on key customers and suppliers vs. all trading partners.  Regardless, the finding reinforces that procurement teams need to step-up their technology deployment strategies as well as to re-double efforts to foster various forms of process and product innovation. We suspect that hidden in the numbers are supplier needs to have incentives to want to broaden collaboration. That trend was brought out by the survey authors who indicated that nearly half of the suppliers surveyed have held back from making a strategic recommendation due to lack of incentive or customer openness.

 

Risks

The 3M survey validated that suppliers are facing an unpredictable risk landscape in 2017. The majority, 61 percent, identified volatile commodity and supply prices as their primary concern related to risk. Respondents listed their other concerns as the following:

Uncertain policies of the new U.S. administration- 8 percent

Regulatory compliance- 7 percent

The performance of tier two and tier three suppliers- 6 percent

Natural disasters and supply disruptions- 3 percent

Cybersecurity- 3 percent

Cost concerns remain by far the biggest risk

Here again, suppliers may need to broaden their perspectives of risk, especially since all the other rated categories have increased incidents across multi-industry supply chains.

 

Widespread Consensus

The area of widespread consensus was reported to be that of sustainability and social responsibility, both of which the survey authors point to as core focus areas in 2017. Nearly 76 percent of suppliers identified the biggest motivator for operating in a more sustainable fashion are positive business outcomes. The next biggest drivers for sustainability is noted as suppliers’ desire to create a more socially responsible supply chain (69 percent), compliance (64 percent) and brand reputation (62 percent).

 

Supply Chain Matters thanks 3M and its associated supply chain and public relations team for bringing this survey to the attention of our blog readers.

Our readers can review the full PDF version of the 3M supplier survey at this web link.

 

Bob Ferrari

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

 


Let’s Not Import nor Export an Ethos that Turns a Blind Eye to Social Responsibility

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Our Supply Chain Matters readers have likely discerned that the notions of globalization are being challenged across many political and media platforms these past months, including this blog platform. Many are beginning to question the benefits, and the global and domestic supply chain implications brought about by globalization. That includes the potential for exploitation of labor and of worker safety. While many of our prior blog commentaries have brought forward reported incidents among lower-cost global manufacturing regions such as Bangladesh, China, or Myanmar, we were taken back to read a report of such conditions in the United States.

As a supply chain management community, we can sometimes turn a blind eye when production facilities in external countries provide workers with unsafe conditions. Burning factories with workers inside, workers forced by economic needs to work excessive hours have not stopped U.S. companies from doing business with suppliers residing in these nations. Rather, there is a call for factory audits and oversight when unsafe working conditions become public.

We now have a report that may well serve as a call for audits and responsible actions for certain U.S. production facilities.

The Bloomberg Businessweek published article, Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs- The South’s manufacturing renaissance comes with a heavy price is a sobering account of jeopardized worker safety in its most concerning form. Take away any reference to the location, and one could assume the report describes a low-cost manufacturing region within an emerging region of our world.

The report profiles worker conditions among lower-tiered automotive component suppliers across Alabama. The sub-headline takeaway reads:

In the American South, auto parts workers are poorly paid, barely trained, and under relentless pressure. And they’re being maimed and killed.”

Ladies and gentlemen, please do not view this article as “fake news”, rather, a report that provides some compelling observations and evidence. It does not point a finger toward global and domestic OEM manufacturers, who’s plants and worker safety measures are described as good. Rather, it points to a component supplier environment that has described unrealistic OEM contract performance measures, delivery commitment and profitability as overriding needs.

The report describes that conditions among auto parts suppliers in this region:

epitomizes the global economy’s race to the bottom. Parts suppliers in the American South compete for low-margin orders against suppliers in Mexico and Asia. They promise delivery schedules they can’t possibly meet and face ruinous penalties if they fall short. Employees work ungodly hours, six or seven days a week, for months on end. Pay is low, turnover is high, training is scant, and safety is an afterthought, usually after someone is badly hurt. Many of the same woes that typify work conditions at contract manufacturers across Asia now bedevil parts plants in the South.

One could certainly conclude from this report that the ethos of low-cost manufacturing practices has de-facto spilled over to certain regions of the U.S. to compete to a global norm.

We encourage our Supply Chain Matters readers to take the time to read the many incidents and respective production conditions described. Conditions like a maintenance worker being paid $13 per hour working a continuous 12-hour shift in an environment with little worker protections (gangways, handrails, cables), and subsequently falling into a tank of sulfuric and phosphoric acid. Another, an account of a female worker impaled by a production robot because of the overriding concern of the production team that they were falling behind in daily output.

For us, the conditions described evoked a sense of outrage.

As global citizens, we need to all do better to protect basic worker safety. Providing a job comes with certain responsibilities, and that includes a belief in social responsibility practices when it comes to wages and worker safety.

And by the way, we are not a political blog platform. We are rather a platform for responsible global and domestic supply chain practices that are both financially and socially sustainable.

Bob Ferrari

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

 


Challenging Few Weeks for Certain Myanmar Apparel Producers and Branded Customers

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This past week provided stark reminders for apparel retailers and their suppliers on the realities of chasing the lowest cost producer, and of the blowback to the brand and its consideration of social responsibility.

Two different yet disturbing incidents involving suppliers located in the country of Myanmar have came to light.

Reuters reported that workers of a Chinese-owned factory making clothes for Swedish fashion retailer Hennes & Mauritz, conducted what was described as a violent demonstration that literally destroyed the production line of the factory. According to the Reuters report, production at Hangzhou-Tex Garment (Myanmar) Company, one of 40 H&M suppliers in that country, have been halted since February 9, nearly a month to-date. The worker dispute started with a strike in late January following the termination of a local labor leader advocating for an improved performance review system and healthcare coverage. Video observed by Reuters described dozens of female workers physically assaulting a factory manager. In late February, hundreds of workers were reported as storming this factory and damaging facilities including machinery, computers, and surveillance cameras. The Chinese embassy in Myanmar described the incident as an “attack” and filed a “serious request” to local government authorities to hold those involved accountable.

H&M issued a statement indicating that it was deeply concerned about this recent conflict and is monitoring the situation closely to include dialogue with concerned parties. What makes this news more troublesome is that H&M has been widely viewed as being outspoken among apparel retailers in promoting worker rights and fair wages. H&M was one of several retailers that demanded labor reforms and improved working conditions after the devastating 2012 Tazeen Fashion and 2013 Rana Plaza factory fires in Bangladesh that cumulatively killed upwards of 200 workers and injured over a thousand workers. In its reporting, Reuters cites H&M as ranking high in sustainability indexes.

A report also indicates that H&M has plans to influence apparel suppliers within the retailer’s supply chain to digitize payments for workers.  A report conducted by the Better Than Cash Alliance indicates that 80 percent of factories in Bangladesh pay employees in cash notes. A review of 21 garment factories already utilizing digital payments pointed to significant savings in administrative time handing out cash to workers as well as some security for workers themselves with a more transparent way to receive money, provide more accurate data on wages paid, and afford greater economic independence to female workers.

Separately, a published report by The Wall Street Journal indicates that Europe private equity firm Apax Partners, which controls Germany based retailer Takko Holding, is facing questions from some influential investors after Takko Holding was found to be sourcing production at a garment factory in Myanmar that employed underage workers. Such findings were reported in February by the Dutch based Centre for Research on Multinational Corporations, known as SOMO. That report indicated that several apparel factories in Myanmar had unsafe working conditions, paid low wages or enforced long worker hours. Besides Takko, the SOMO report identified 12 factories utilized by six other Western retailers.

The WSJ report notes that Influential investors of Apax Partners include the California State Teachers Retirement System as well as the Greater Manchester Pension Fund. Each of these investors are highly sensitive to corporate social responsibility and human rights practices and each was vocal to express direct concerns about the latest reports.

Both Supply Chain Matters and apparel industry observers and participants continually point to an industry sourcing model where individual garment factories produce for multiple brands, and in some cases, factories will sub-contract to other factories often without the knowledge of the branded customer. As the WSJ concludes, brands certainly have influence in demanding certain working standards but have little direct control, other than continuous audits.  Another ongoing challenge identified after the Bangladesh tragedies was factory owner access to capital to make necessary factory improvements to achieve minimal safety standards, with owners themselves seeking financial subsidies from apparel industry associations who source production in a particular country.

In the specific case of Myanmar, Reuters cites International Labor Standards data indicating that line worker wage rates average $63 monthly as compared to $90-$145 monthly wage rates in Vietnam and Cambodia. Yet in Myanmar, the government has yet to establish a standard for garment factory safety and labor practice standards.

Thus, the challenges of social responsibility continue to persist with the addition of a new lower-cost manufacturing region with a new set of workers becoming impacted by industry practices that weigh direct labor expense as a prime sourcing determinant. It would seem, though, that the risks get higher.

Most apparel retailers and brand producers have declared social responsibility statements and supporting practices. We all know that supply chains are driven by customer and consumer desires and needs, and in the case of apparel, that demand translates to continual variety and the lowest cost. Quality, or perceptions thereof, is sometimes overridden by the attraction of cost, when styles have a short market life.

We continue to submit that we, as consumers of apparel, have the ultimate voice on the weighting of social responsibility practices in the selection and consumption of our apparel choices.

Bob Ferrari

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


Deep Dive on 2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

 Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

Prediction Four- Increased Anti-Trade Geo-Political Forces Provide Added Global Sourcing Challenges

Prediction Five- Continued Global Transportation Industry-wide Turbulence

Prediction Six- A Renaissance in Supply Chain Focused Business Services and Technology Investments

Prediction Seven: Enhanced Supply Chain Intelligence Capabilities Among B2B Network Platform and Managed Services Providers Will Pay Dividends for Industry Supply Chains

Prediction Eight-Amazon and Alibaba Continue to Position for Global Online Platform Dominance

 In this deep-dive series posting, we drill down on our next prediction.    Paris COP21 Deep Dive on 2017 Prediction Nine: Business Self Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives

2017 Prediction Nine: Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Focused Initiatives

Despite the declarations by U.S. President Trump that climate change has not been proven to be an issue, we predict that individual business and supply chain self-interest needs, along with the track record of benefits to-date, will continue multi-industry green and supply chain sustainability initiatives and momentum.  There is literally too much positive momentum on a global basis to motivate senior executives to derail such efforts in 2017.  The need remains compelling.

Where Emissions Emanate

Scientists point to three sectors that are most critical toward reduction of GHG emissions:

Energy– the engine and most influential cost aspect of global business and of industry supply chains represents upwards of 30 percent of global CO2 emissions. Throughout modern history, the cost of energy and fuel has been the principal driver of a majority of industry, manufacturing, distribution, and global supply chain strategies. Reduction opportunities reside in the consumption of alternative and low carbon renewable energy sources, smarter and far more efficient energy, and logistics utilization practices.

Agricultural, Land Use and Forestry Practices account for an additional 30 percent of global-wide emissions. With world population growth expected to reach 9 billion people by 2050, our planet cannot tolerate an unsustainable food production system. Farming practices, fertilizer, water use, animal husbandry all add to considerable emissions.

City Infrastructure, Buildings and Transportation can be responsible for upwards of 40 percent of global emissions. More of the world’s population is expected to be concentrated in larger cities, (mega-cities) and thus will be the hubs for economic growth, commerce, delivery, and fulfillment logistics. The potential of smarter, more connected cities coupled with advances in more sustainable, renewable energy sources provides the opportunity for a complete re-thinking of urban logistics and transportation. Global trade must now stem from advances and efficiencies in global, regional, and local transportation networks.

To address these three imperatives, more and more organizations have discovered that the firm’s supply chain can be responsible for up to four times GHG emissions beyond that firm’s direct in-house operations.  Industry supply chains are therefore one of the most critical areas of opportunity to enable GHG reductions and climate chain resilience.

Sustainability is further not limited to emissions and natural resource protections, it further umbrellas global-wide social responsibility as a business and corporate citizen, and in the treatment and respect of labor provided by individuals. Here, the latter is especially pertinent to industry and global supply chains who elect to source production, component supply or business services in low-wage, limited protection geographies.

Current Status

As we begin 2017, scientists indicate that the Earth reached its highest temperature on record during 2016, breaking an earlier record set in 2014. This development represents the first time in the modern era of global warming data that average temperatures have exceeded prior levels for three years in a row.

The 12th Edition of The Global Risks Report 2017, sponsored by the World Economic Forum, observes that extreme weather events, climate change and water related crisis have each consistently been noted as among the top ranked global risks for the past seven editions of this report. However, according to this latest report, the pace of change is not yet fast enough to curb current warming trends.

The Artic sea ice had a record melt in 2016 and the Great Barrier Reef suffered an unprecedented coral bleaching event last year. Estimates are that GHG emissions are growing by 52 billion tons of CO2 equivalent per year even as the share from industrial and energy sources may be peaking because of investments in green and sustainability initiatives among multiple industries and countries.

Much has been accomplished these past few years, but more difficult work remains.

The Paris COP21 Agreement on climate change entered force during November 2016. This agreement has now been formally ratified by 110 countries with another 196 countries including China, now indicating strong support. The Global Risks Report 2017 cites data indicating: “The reality remains that to keep global warming to within two degrees Celsius and limit the risk of dangerous climate change, the world will need to reduce emissions by 40% to 70% by 2050 and eliminate them altogether by 2100.

Moving Forward

This new era of the Paris COP21 Agreement provides both a profound call to action as well as a significant opportunity- an opportunity for bolder collaboration and joint goal-setting to not only address greenhouse gas reduction imperatives and to saving our planet, but the imperative of sustainable business itself. It literally should change our perspectives and goal-setting for sustainability strategies surrounding industry supply chains, moving such initiatives beyond supply chain functional to line-of-business level efforts.

Across many industry supply chains, a lot has already been accomplished in identifying opportunities related to reducing industry supply chain related GHG emissions, preserving natural resources including water, and insuring sustainable supply of Earth dependent commodities. Multi-year objectives have been established that include annual tracking of performance to each objective. The benefits of these initiatives are meaningful in relation to savings on supply chain related costs, reductions in responsible emissions, insuring adequate supply of key strategic supply needs and a more positive perception to one’s corporate and product branding.

Opportunities to Further Leverage Technology

With the era of COP21, industry supply chains are presented opportunities to seize upon the tenets outlined in Jeremy Rifkin’s book, the Third Industrial Revolution as well as other Industry 4.0 thought leaders that point to the compelling convergence of technologies that are before us. One that leverages the convergence of green and renewable technologies, new more renewable energy sources, IoT enabled predictive-focused analytics and the digitization of manufacturing and supply chains. All are converging over the not too distant future, and collectively can foster insured business continuity through strategies that are directed at long-term sustainability of commodity, raw material, and natural resource supply.

Our Takeaway

In 2017, despite any U.S. political notions that climate change may or may not be a significant factor for business risk, industry supply chains and the respective businesses and customers they support and serve, will be at a disadvantage in de-railing or slowing down sustainability efforts.

Benefits have already been recognized along with added opportunities. From our lens, the ongoing convergence of digital and physical business processes manifested by IoT, more predictive analytics, autonomous decision-making and additive manufacturing will provide added opportunities towards sustainability needs and objectives.

The challenge remains insuring a sustainable business within domestic and global dimensions, and that momentum is likely to continue in the coming year.

 

This concludes our Prediction Nine drill-down. In our final posting of this series, we will explore Prediction Ten which addresses certain industry-specific supply chain focused challenges in the current year.

Stay tuned.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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