Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets.
Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.
If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers. That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.
However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S.
The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace. The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.
While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve. OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.
Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.
If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.
Supply chains directly associated with up and coming or mid-sized businesses need to be constantly diligent to the effects of a major supply chain disruption, both overt and not so. Procurement teams of mid-sized brand owners need to be especially cognizant that labor unrest has become much more prevalent within low-cost manufacturing regions and the implications to less influential customers have greater significance. Of late, such unrest moves beyond disputes regarding wages, but also worker social responsibility policies. Once more, active use of customer segmentation strategies implies that the bigger global players can often be buffered to such disruptions, both operationally and financially.
Just this week, we have come across news reports of ongoing disruptions involving influential industry supply chain players. In the footwear and apparel sector, workers at certain facilities of shoe manufacturer Yue Yuen Industrial, located in southern China have walked off the job in a dispute over social insurance payments tied to overall wage rates, which are governed by labor law. Yue Yuen employs upwards of 40,000 employees at its facilities located in Dongguan. The Wall Street Journal reported (paid subscription) yesterday that this shoe manufacturer is a supplier for both Adidas and Nike. It quotes an Adidas spokesperson as indicating that the Chinese supplier is currently working at 50 percent of capacity but Adidas has experienced no slowdown in production volumes. A spokesperson for Nike is noted as indicating that that company is monitoring the current situation including ongoing talks between workers and factory management. The WSJ report further indicates that demands raised by the Yue Yuan workers may become an important precedent for labor policies among most workers in China’s manufacturing industry. Thus, the stakes in finding a resolution are somewhat higher.
Judging from the reported statements from both Adidas and Nike, we would venture an opinion that what production capability that is still operating is probably being allocated to the production schedule needs of the most influential customers. That is an obvious supply chain reality, namely, the most influential customers in terms of revenue and profit will in more times than not, be somewhat buffered from such disruption. Consider further that ongoing labor unrest continues for within apparel producers in Bangladesh, Cambodia and other regions as workers continue to be more active in demanding that social responsibility policies are adhered to by employers in these regions. While industry consortiums have been established to address such issues, workers have become untrusting.
Continued work stoppages and production disruption imply that the most influential customers will be somehow buffered while less influential customers may bare the bulk of the disruption or added cost burden.
Members of the supply chain management and B2B community are literally bombarded every day by user survey results. The reasons are many and unfortunate, since by our view, surveys have become too excessive. They are driving survey fatigue and more importantly, drowning out the surveys that provide the most insightful information.
Industry analysts and technology providers leverage quantitative and qualitative surveys to gain perspectives on the current challenges and viewpoints across multiple supply chain environments. Industry trade publications and conference producing firms utilize surveys to attract attendance at various conferences or utilize conference attendees as sounding boards. Academics utilize surveys to identify areas for advanced research or academic based thought leadership.
The reasons are many and in this commentary, we will not dwell deeper into motivations.
For you, our readers, it is important to not just dwell on the executive summaries or conclusions of such surveys, but to pay particular attention to the demographics, statistical survey base, and lineage of such surveys. Look for statistical valid sampling, clear statements of the surveyed demographics, and more importantly, look for surveys that are consistently performed in a pre-prescribed basis, since they provide the most insights into shifting patterns of challenges and needs.
We view our role at Supply Chain Matters as not pitching endless summaries of our own research (we do conduct and produce such research), but more importantly to point out to readers various surveys that are grounded in discipline and believe warrant your attention.
We were recently alerted to a 2013 ISM Survey of Procurement Executives (complimentary report requiring reader registration) sponsored jointly by the Institute of Supply Management (ISM) and supply management technology provider, BravoSolutions. This report captured our interest because of both its demographics and its implied conclusions regarding the current priorities from procurement executives from mostly mid-market firms. The survey itself yielded over 500 responses, which is fairly good by today’s standards. The demographics included the majority of respondents, 64 percent, from non-manufacturing industries such as agriculture, energy, mining, professional services, transportation, retail and other services segments. Firm size was weighted toward 45 percent with revenues under $500 million and 56 percent with annual direct spend in the range of under $50 million to $249 million. Thus, this survey can serve as a representation of current challenges and viewpoints among mid-market service providers, an area we normally do not come across.
In terms of our key takeaways from this survey, we noted that improving cost reduction and savings was by far (60 percent of respondents) the top business priority in 2013 for these mid-market procurement executives. Yet, these same respondents indicate they have only been able to deliver 10 percent or less in savings during 2013. The remaining top five priorities were rated as:
2. Revenue growth and profit improvements
3. Risk management
4. Procurement transformation
5. Supplier performance and sustainability management
By our view, while we were pleased to see that risk management has finally reached a top-three weighting of priority. Half of the respondents’ firms were prepared to mitigate what were described as reasonable levels of supply, supplier or operational risk.
Far lower in 2013 priorities, according to this survey were areas such as employee retention and training, improving regulatory compliance, improving the strategic nature of customer priorities and technology implementation. Merely 19 percent indicated that supplier collaboration and innovation was a stated priority. The latter noted lowered rated priorities can clearly be considered important enablers to the top three priorities. These lower-ranked priorities are another symptom of the need for broader influence skills for procurement.
This author had the opportunity to speak with Mickey North Rizza, Vice President of Strategic Services at BravoSolutions about the implications and messages embedded within this survey. Readers may recall that Mickey was a very able and insightful supply management industry analyst at AMR Research and Gartner, before joining Bravo. We hope to feature Mickey in a future guest posting on Supply Chain Matters.
Mickey pointed to the continuing challenges of business process alignment among procurement teams, including more direct links to a firm’s sales and operations planning (S&OP) process, actively working towards broader cross-functional business alignments in joint initiatives along with a renewed emphasis on change management. Deeper partnerships and dialogue with IT regarding goal prioritization and technology’s enablement of these business goals, including options in today’s cloud-based computing applications certainly plays an important part.
There is a considerable amount of detail included in this ISM survey and we encourage our strategic sourcing and procurement readers to take the time to scan each of the highlighted areas. We especially call attention to a Table noted on page 16 of the report that describes the following: “To have world class suppliers we need our suppliers to ….”
In the important challenge of overall procurement transformation, respondents of the latest ISM survey report that while good progress has been made, many challenges remains. While mid-market firms often operate in lean environments and often do not have deep investment budgets, they can benefit from the learnings and insights from other transformation successes across industries including manufacturing-centric. Today, more than ever, the barriers to driving successful organizational change management and more affordable options in the ability to leverage advanced technology towards deeper procurement intelligence and insights have come down. Reach out and learn.
Our European readers are acutely aware that the ongoing severe recession affecting the Eurozone has taken a severe toll on manufacturers and retailers. At the same time, time tested principles of market specialization, global outreach, and a highly skilled workforce can often provide a basis for a firm to outlast a recession in one’s home market.
In late 2010, in the midst of the previous global recession, Supply Chain Matters featured a commentary highlighting specialty small and mid-sized manufacturers in Germany, termed the Mittelstand companies. These German companies featured conservative, non-flashy management and came to understand that growth comes from a focus on market niches, sometimes in traditional industrial areas where bigger companies choose not to compete. They viewed the world as one global marketplace for specialty products or materials. Our 2010 commentary highlighted three lessons for growth and surviving a geographic recession:
- Building recognized product innovation, even when that innovation is within traditional industries.
- Understanding that niche markets can be huge when projected on a global scale.
- That small and medium sized manufacturing focused businesses can be an engine of sales and employment growth, providing they have an unwavering focus on operations excellence and continuous improvement in every process.
In 2013, Europe is enduring close to two years of severe economic contraction, yet the above lessons remain as guideposts for surviving the recession. Further evidence has come forth in a series of articles on European industry published by The Financial Times. One particular article, Skilled workers give Italy an edge, (paid subscription or sign-up for free metered view) should capture interest because it reinforces similar principles.
The article highlights Italian manufacturers Guala Closures, a global leader in the manufacture of premium bottle tops, IMA, a global producer of automatic machines for the packaging of pharmaceuticals, cosmetics and other products, Luxxotica, global eyewear manufacturer, and Sogefi, a producer of specialized automotive components. While Italy endures nearly a decade of economic stagnation, these manufacturers are holding their own. As an example, Guala has grown fourfold in the past ten years, selling to more than 100 countries, with a presence of 24 worldwide manufacturing facilities. IMA which garners revenues in excess of €743 million, boasts that 93 percent of those revenues are derived outside of Italy. It sales network includes 70 countries with 23 global manufacturing centers. Sogenfi supplies Audi with a super lightweight spring made of composite materials.
FT points out that each of these companies stress innovative products in niche markets coupled with premium manufacturing skills and lean operations. Sound familiar?
While there are obviously other factors necessary for enduring a severe economic downturn in the host geographic region, including access to affordable credit, time proven principles of product innovation, an unwavering focus on manufacturing excellence coupled with a highly skilled workforce have endured to provide our community continuous evidence of their importance.
Any small and mid-sized business can be challenged with online commerce, especially when a product goes viral in popularity among social media circles. When the online commerce system encounters snafus, the results can be potentially disastrous.
Supply Chain Matters read an article hosted on Yahoo regarding this summer’s wildly popular swimsuit that actually sold-out before the official start of the summer swimsuit season. This swimsuit, a galaxy print bikini was termed the “fatkini” by various media sources and was designed in a joint collaboration between popular plus-sized blogger Gabi Gregg and retailer Swimsuits for All. The online campaign was a rousing success until unanticipated demand exhausted all available inventory. Unfortunately, due to a described “computer glitch”, the underlying online fulfillment system did not react in-time to the zero inventory condition and continued to book customer orders.
Gregg was forced to communicate to her blog followers the occurrence of this glitch along with the actual status of orders, noting that one style had sold-out while another was still in stock. She also had to communicate the disappointing news that backlog orders could not be fulfilled this summer season because of the lead time and production practices of producers who tend to only produce swimsuits in seasonal cycles of capacity. As noted in the article, consumers would have nothing of the explanation and voiced their disappointments in further online circles. Online provider Swimsuits for All was also dragged into the fray having to issue statements apologizing for the fulfillment glitch. The article further intimates that Gregg does not have immediate plans to design more bathing suits with the online provider.
Once again, the takeaway for teams supporting online commerce is the critical importance of integrating real-time information flows among the online and back-end supply chain inventory and procurement systems. Teams representing online marketing and back-end fulfillment need to closely collaborate and test for system stress points. This is always important but doubly so when dealing with seasonal products that can only be offered in specific time periods. Customers expect timely status of their orders, particularly when inventory has been exhausted.
A sell-out of any product is evidence of customer delight, but that perception can turn rather quickly when the online system has a very public glitch.
A report published on the front page in the Companies section of yesterday’s edition of The Financial Times (paid subscription required or free metered view) indicates that there is a link between the current alarming rise in cybercrime and the adoption of outsourcing. The article concludes that according to corporate security officials, outsourcing companies that provide low-cost IT focused services are becoming the “weakest link” in the battle against rising cybercrime.
The article cites sloppy security practices and lax controls for handling of sensitive data. Noted is that the consumer protection bureau of the U.S. Federal Trade Commission “has brought around 40 data security cases against businesses and at least six involved a failure to properly oversee a service provider.” The article cites a recent survey conducted by the Ponemon Insititute that found that there was a continued lack of agreement as to who’s responsibility it was to maintain good security. A partner of consulting firm PwC indicates that that while outsourcing contracts generally contain clauses requiring service providers to notify clients if data is compromised, monitoring of security standards has not taken hold.
Prediction Ten of our Annual 2013 Supply Chain Matters Predictions for Global Supply Chains pointed out that cloud computing and managed services options would continue to gain traction, provided that vendors and service providers resolve current lingering customer concerns. Those concerns are often noted as data and information security. Up to now, cloud computing options directed at point applications may have caused procurement, supply chain and IT teams to overlook such provisions but with the current alarming rise in cyber security and data breach threats, these issues are becoming much more troublesome.
In its article, FT points out that the weakest link in the security chain may be an outsourced business process or cloud based application. This threat is becoming very real and teams are well advised to insure that data and information security provisions related to outsourced processes meet rigorous standards. Vendors and service providers of outsourced and cloud service offerings are further advised to insure that security of data and information meets the most rigorous standards, especially with reliance on a third party IT infrastructure provider.
As a reminder, readers can download the full version of our Predictions research report with our compliments by accessing our Research Center and providing some basic registration information.