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The Implications of Brexit Grow Near but So Far for Industry Supply Chains

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In a published Supply Chain Matters commentary in late June of last year, we explored our initial perspectives of the new term in geopolitical events, that of Brexit. By voting to exit the European Union, the British electorate set off a series of events that many continue to describe as unprecedented.  The most cited analogy remains- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the United Kingdom, but on the EU alliance itself if other select countries take a similar course.

On Monday, Britain’s ambassador to the European Union informed European Council President Donald Tusk that his country would trigger Article 50 of the Lisbon Treaty, the formal mechanism seeking withdrawal, on March 29, a week from today. That starts the clock in a rather complex, two-year window of negotiations between Britain and the 27 other EU member nations and the European Parliament leading to the actual exit. Tusk has asked EU leaders, minus the UK, to meet on April 29 to begin discussions relative to the guidelines for Britain’s exit. In a statement, Mr. Tusk indicated that the main priority for the upcoming negotiations is to create as much certainty and clarity as possible for all citizens, countries, and member states. Supply Chain Matters could certainly suggest adding clarity to industry supply chains to Mr. Tusk’s statement.

Business and broad media all point to the start of some of the most complex negotiations either side has undertaken, with many issues to resolve over the next two years. They include trade and tariff, border security and the movement of goods.

Since the announcement of the results of the referendum, the pound sterling has had a somewhat steady decline in relation to its value with the Euro and the U.S. Dollar. As a rather positive consequence has been increased attraction of British goods among domestic and global markets.  Broad supply chain activity, as reflected by the CIPS UK Manufacturing Index, reached a significantly high value of 56.1 at the end of December, with the report noting that rates of growth in production and new orders were among the best observed over the past two-and-one-half years. Since December, this index has moderated slightly to 55.9 in January, and 54.6 in February, both reflecting healthy activity. Thus, in the short-term, the UK has garnered supply chain economic benefit related to Brexit.

The open question is course, the longer-term picture.

Entering the triggering of Article 50, British Prime Minister Theresa May has advocated for a “clean” break from the EU. She has threatened to walk away from negotiations if Britain did not get the trade deals it was seeking or if the EU tried to impose punitive measures.  She has further indicated that the UK could cut corporate taxes, loosen regulations, and could have a free trade deal with the EU that would include tariff-free access. British media including the Financial Times have interpreted such a stance as to indicate that Britain could transform itself into the low-tax Singapore of the west.  Such declarations appear to not set well with established EU countries.

Thus, a lot will transpire over the coming months and industry supply chain strategies will have find ways to navigate such a geopolitical environment. Most observers tend to believe that new trade agreements between both parties cannot be realistically negotiated and ratified by over 30 various parliaments in two years’ time. In fact, Mrs. May has indicated that the entire body of EU laws will be copied onto British statutes, and then over time modified by negotiation events and outcomes. The Economist noted in its editorials that it has recently taken nearly seven years to secure Canada’s free-trade deal with the EU.

As noted in our original commentary, two major industries dominating UK based manufacturing are automotive and the aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing. Two of the most dominant stakeholder brands of autos are Volkswagen and Tata Motors, followed by Nissan and Toyota. According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. As indicated in our 2017 predictions, the aerospace industry itself is believed to be reaching a 15-20 year inflection point, one that will be quite different from the past boom years of upwards of 10 year customer order backlogs.

No doubt, the invoking of Article 50 begins a period of discernable uncertainty among specific industry supply chains, related to access to key markets, financial goal performance, engineering, manufacturing, and overall talent capability.

A lot can and undoubtedly will occur, since in today’s clock speed of global business, two years can be a rather long-time, perhaps reflecting a new wave of geopolitical and technology change.

So goes this global environment of uncertainty, implications that seem near but yet so far.

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.


2017 Industry Specific Predictions- Pharmaceutical and Drug Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

In prior industry-specific predictions posting, we dived into Automotive Supply Chain Residing Across North America.

We then dived into Commercial Aerospace Manufacturing Supply Chains.

Next came B2C, B2B-to-C and Traditional Retail Focused Supply Chains.

We then moved to Apparel and Footwear Producers and Respective Supply Chains.

Next-up:

Pharmaceutical and Drug Supply Chains _DSC0083

For the first time, we are including pharmaceutical and drug supply chains in our industry-specific predictions for 2017. The principal reasons are twofold and somewhat inter-related. The increasingly global reach of the industry’s various supply chains is adding continued possibilities for risk and disruption. Second, within the U.S. especially, there remains an enormous groundswell of political and social backlash directed at what is perceived as artificially high and inflated pricing stemming from conflicting buyer self-interests across the industry’s extended supply chain.

Global Sourcing

Today’s manufacturing and drug capacity profiles among proprietary or generic drug brands span countries such as Ireland, India, Israel, China, Singapore, and the United States. Some produce drugs for their immediate regions, while many export globally. Of late, there has been a shift of manufacturing away from the U.S. to take advantage of lower manufacturing cost and tax savings. The bulk of active pharmaceutical ingredients, the primary raw material compounds related to other drugs, are sourced in China and India.

According to the U.S. Department of Commerce, the United States is now the biggest importer of pharmaceuticals from other countries. Incidents of counterfeit drugs and medicines have been a constant challenge and lately, conformance to generally accepted production practices have become troublesome from production facilities across India, where many generic drug production facilities are located. The government of India recently cited 200 India based drug manufacturers for high risk in compliance standards.

Ongoing Business Challenges

In 2011, the industry reeled from an average of over 250 shortages of critical drugs as monitored by the U.S. Federal Drug Administration.  Much has been accomplished to alleviate drug shortages since that time but continued work remains. As of the end of January 2017, the FDA was reporting 57 drug shortages, the bulk of which were included in categories such as Pediatric Medicine (26), Oncology (6), Gastroenterology (9), Endocrinology (6), among others.

For years, the industry has danced around or delayed responses to mandates for implementing item-level traceability and tracking of life-saving drugs and medicines. By November 2017, pharmaceutical companies will be required to mark their products with a National Drug Code (NDC), serial number, lot number and expiration date in both machine-readable and human-readable format according to the Drug Supply Chain Security Act (DSCSA) of 2013. A diverse group of 44 companies, from manufacturers to wholesalers to solution providers, have further come together to develop updated GS1 guidelines on the use of GS1’s Electronic Product Code Information Services (EPCIS) for lot-level management and item-level traceability of pharmaceuticals. DSCSA is planned to be implemented over the next 10 years in three different phases while companies are transitioning their systems and preparing for the various requirements. Ten years is a considerable amount of time and some on the customer and patient side continue with frustrations as to the industry’s overall progress.

This is an industry that continues to demonstrate a general lack of common goal collaboration across an extended supply chain with conflicting stakeholder interests. Thus, the challenge of business transformation or faster momentum can continue to be bogged down.

A recent wave of high-profile, large global-scale mergers and acquisitions have further disrupted individual supply chains in areas of assimilating business and supply chain processes, procurement software systems technology and talent.

Geopolitical Forces

The new Trump Administration and the U.S. Congress have cited the pharmaceutical and drug industry in the context for both new healthcare care reform, excessive drug pricing and in current sourcing practices of drugs globally. In late January 2017, President Trump, at a meeting in the White House with a group of high-lever pharmaceutical drug company executives, indicated that he wanted more manufacturing to occur in the United States.

As noted in our other industry-specific predictions, if the U.S. Congress were to adopt business tax reform legislation that could impose a multi-industry import tax, pharmaceutical and drug companies importing raw compounds and medicines could be financially impacted. We therefore predict the need for a lot of product sourcing scenario planning and analysis in the coming months.

For all the above, we include pharmaceutical and drug supply chains in our 2017 Industry Unique prediction category.

 

This concludes our Supply Chain Matters series of ten 2017 Predictions for Industry and Global Supply Chains, predicting a year that promises to be:

  • Consumed by global uncertainty
  • Somewhat challenged in terms of supporting business top-line growth
  • Sure to place supply chain sourcing teams in constant scenario analysis and business advisor roles to senior management
  • Noticeably higher in the supply chain risk potential

Again, our goal is to provide clients and blog readers insights and helpful information in setting agendas and initiatives for the existing year. Throughout 2017, Supply Chain Matters will be publishing periodic updates related to each of our predictions.

Our full 44-page Research Advisor Report is now available for complimentary downloading in our Research Center. We do ask that you provide basic contact information as well as a valid email address and phone number. As a reminder, we do not sell or offer reader and contact information to any third-party.

If we can be of any assistance to your organization in the coming year, give us a call or email us at: info <at> supply-chain-matters <dot> com .

Bob Ferrari

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

 


2017 Predictions- The 3M Perspective on the Need for Bimodal Supply Chain Capabilities

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In preparing our overall 2017 Predictions for Industry and Global Supply Chains, and specifically our prior posting, Prediction One- What to Expect in Global Economic Activity, we had the opportunity to speak with both industry, supply chain and technology executives to gain current perspectives of what supply chains should anticipate in the coming months and how to be prepared.

One opportunity was a discussion with Paul Keel, Senior Vice President, Supply Chain for diversified manufacturer 3M Company. In my role as a supply chain industry analyst, my perspectives of 3M extend nearly 15 years, when I first interacted with members of the 3M supply chain leadership team. A lot has occurred since that time, and that came to be the context of the discussion with Keel.

The 3M of today is a $30 billion diversified manufacturer whose supply chains support 5 different business sectors that span both B2B and B2C focused market segments. Industry products are quite diversified spanning industries such as automotive, commercial aerospace, communications, healthcare, high tech electronics and transportation. The consumer segment is the wide variety of 3M branded products that many of us are familiar with including the iconic branded Post-It note pads. Today’s 3M has deeper roots as multi-industry supplier. The company has always been anchored in core manufacturing and today that includes upwards of 220 worldwide manufacturing plants. It all amounts to a considerable scope for 3M’s supply chain teams.

In our interview, Keel referenced Q4 of 2008 as an important milestone checkpoint for 3M, one that created acute awareness to the potential of heightened volatility of industry and global markets brought about by the global financial crisis. He described that point as “opening the aperture” of the 3M of 30 years ago, as a $3B manufacturer, and the aspirations of what 3M has become today in ten-fold revenue growth.  The described anchor has been that of a complete product innovation and continuous improvement mindset across the company. It was also a wake-up call that supply chain capabilities do matter, and that 3M had to excel in all aspects of supply chain competencies.

Regarding 2017 predictions relative to heightened industry competition, continued market uncertainties and potential volatility, Keel remains of the belief that the supply chain will play an increasingly differentiating role for high-performing organizations. He states:

In the hyper-competitive world of global business, we’re finding new ways that supply chain must lead. While historically organizations looked to their supply chains primarily for productivity and cost reduction, today high-performing companies count on us for much more – developing new products, protecting our environment, serving our customers, and driving meaningful value creation across the enterprise.  Fully leveraging the power of supply chain begins with the proper mindset.  ‘Make and deliver’ is no longer enough.  To win in 2017, we’ll need to ‘amaze and delight.’”

Keel further described the notions of a bimodal supply chain perspective:

There was a time when supply chains could settle for trade-offs…cost or speed, service or quality, flexibility or reliability.   Those days are long gone.  The equation has shifted from an imbalanced ‘or’ to an equilibrium centered on ‘and.’  Information and technology are central to achieving this synchronization.  The leaders of tomorrow will be the organizations that can effectively manage a bimodal supply chain.”

We also discussed technology as the enabler of bimodal capabilities. Keel described 3M’s perspective as: “Asset-light and Information-heavy.” In the bimodal lens, it translates to enabling greater levels of efficiency in overall productivity levers, in an end-to-end supply chain risk mitigation approach to manage volatility, and general in moving forward with overall global optimization. The other technology lens is that of the business growth enablement lever, manifested by enabling continued end-to-end supply chain segmentation capabilities along with digitization of supply chain processes and decision-making needs.

Keel further pointed to corporate sustainability and social responsibility initiatives as an essential mindset going forward and a further component of bimodal. For 3M, this equates to declared responsibilities to communities, to employees and to the environment.

Bob Ferrari

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

 


The Initial Signs of the Donald Trump Era- Continuous Change, Uncertainty and Supply Chain Risk Mitigation

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As Supply Chain Matters has noted in prior commentary, the election of Donald Trump as the incoming President of the United States will present quite a number of global and domestic supply chain management uncertainties for industry teams to manage over the coming months, and perhaps years. The question is how to be prepared.

Thus far, Trump’s initial communications and proposed Presidential Cabinet appointments would imply that campaign promises to kill unfavorable trade agreements as well as openly confronting American companies to keep jobs in the United States are holding true. Then again, news of potential Cabinet and advisor appointees would imply a pro-business administration.

The first public confrontation involving the heat and air conditioning Carrier business unit of United Technologies over proposed job reductions that were transferring to Mexico has received quite a lot of media coverage. Trump’s supporters are elated with this initial confrontation. In the end, after closed door discussions, Carrier has agreed to keep roughly 1,000 jobs in Indiana, while the state of Indiana had to agree to provide UTC upwards of $7 million in financial incentives to remain in the state. While Carrier still plans to invest $16 million to retain some operations in Indiana, the intent is to go-ahead with the movement upwards of 1300 other jobs to Mexico and close another facility in Indiana as originally planned. While visiting the Carrier Indiana facility yesterday, Trump once again vowed to reexamine existing trade agreements such NAFTA, and put U.S. businesses on-notice that there would be consequences for any decision related to the movement of jobs out of the country.

Political opinion is now raising the specter of U.S. corporations having to base business sourcing decisions on threats of punitive actions. That further raises speculation that other countries will respond to a Trump administration with threats or their own punitive actions.

On a somewhat positive note, the selection of Elaine Chao, a former Cabinet secretary serving eight full years during the Bush Administration as the nominee for Secretary of Transportation is being perceived as an intent to follow-through on the campaign promise to aggressively invest in needed infrastructure in roads, bridges and other badly needed U.S. transportation infrastructure needs. Ms. Chao provides what is widely perceived as an extensive policy background and she is also the spouse of U.S. Senate Majority Leader Mitch McConnell. If confirmed, Ms. Chao will inherit management of current unprecedented levels of safety related recalls involving the U.S. automotive sector, especially those related to air bag inflators manufactured by supplier Takata. She will have oversight of regulations pertaining to Uber-like transportation services as well as regulations pertaining to autonomous driving vehicles.

For industry supply chain teams, there is little doubt that capabilities in assessing supply chain network design decision support options based on criteria related to direct labor costs, inventory, transportation and landed costs, as well as what may be constantly changing local content requirements will be essential.  Capabilities in managing what may turn out to be very fluid and changing global trade management policies and regulations will obviously be essential along with integrating such information with existing product sourcing and planning systems.

Supply Chain Matters sponsor LLamasoft has already indicated a marked uptick in interest levels in the firm’s supply chain network design and Supply Chain Guru focused technology coming from UK based firms because of the Brexit referendum, and anticipates similar increased interest levels as the Trump leadership era unfolds.

As teams prepare for their 2017 investment and resource budgets, minimizing risks related to global sourcing and material movements, deeper analysis and more informed decision-making capabilities, along with overall agility in supply chain focused decision making should be high priority areas.

In 2017 and beyond, supply chain and product management teams will indeed be very involved in counseling senior and line-of-business management on the various whiplash effects of a far more changing global trade environment.

Bob Ferrari

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


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