Global Supply Chain Risk Exposures Report- Continued Reinforcement for More Risk-Balanced Sourcing Decisions
Within its 5th annual Natural Hazards Risk Atlas, risk analytics and advisory firm Verisk Maplecroft calls attention to high profile risk cities that happen to be today’s growing manufacturing and logistics hubs. This atlas assesses the natural hazard exposure of over 1300 global cities, selected for their economic importance in the coming decade. The analysis is somewhat unique in that it not only identifies regions most prone to natural hazards, but further quantifies the socio-economic resilience within these locations. From our Supply Chain Matters lens, it provides a yet another stark indicator that supply chain disruption and risk criteria were most likely not weighted high in past outsourcing or global based manufacturing and strategic sourcing strategies.
According to Verisk Maplecroft: “natural hazards constitute one of the most severe disruptors of business and supply chain continuity, and also threaten economic output and growth in some of the world’s key cities, especially for those located in emerging markets.” Maplecroft indicates that its annual analysis considers the combined risk posed by tropical storms and cyclones, floods, earthquakes, tsunamis, severe storms, wildfires, storm surges, volcanoes and landslides. This report’s executive summary further notes: “Of the 100 cities with the greatest exposure to natural hazards, 21 are located in the Philippines, 16 in China, 11 in Japan and 8 in Bangladesh.”
If you have been following our Supply Chain Matters commentaries related to global supply chain disruptions and risk, these same regions comes up quite often. This blog alone has amassed over 350 commentaries directly related to either supply chain disruption or risk indicators. The Philippines has emerged a hub for semiconductor assembly, high tech production and customer services while Bangladesh continues as the hub for apparel and clothing manufacturing. China and Japan are both major hubs for multi-industry manufacturing and product development. Yet, natural hazards are a more frequent occurrence within specific emerging global supply chain hubs such as Bangladesh, Thailand, Japan, the Philippines and other regions. Such occurrences not only add to major disruption but added insurance and risk mitigation costs.
The continued reinforcement of such risk indices is another important reminder for strategic sourcing teams to actively foster balanced sourcing decision criteria, weighting landed costs with risk profiles. Where higher supply chain risk and disruption indicators are prevalent within certain regions, there obviously needs to be a corresponding alternative sourcing plan in-place.
Lumber Liquidators is reported to be one of the largest and fastest growing retailers of hardwood and laminate flooring in North America. This weekend, a broadcast report from CBS News’s 60 Minutes program turned a public light on this retailer’s supply chain and the consequences are becoming quite troublesome from a brand and financial perspective.
The 60 Minutes report concluded that:
“Much of its (Lumber Liquidator’s) laminate flooring is made in China, and as we discovered during our investigation, may fail to meet health and safety standards, because it contains high levels of formaldehyde, a known cancer causing chemical.”
All laminate flooring carried by Lumber Liquidators bears a label indicating that it is CARB Phase 2–compliant, referring to the California Air Resources Board, which sets standards for formaldehyde emissions in wood flooring.
The program reported these findings after conducting its own sanctioned tests of select flooring and after interviewing workers among various China based suppliers. An executive director of a nonprofit group was teamed-up with a prominent environmental attorney, to test the Chinese-made laminate flooring. Chinese suppliers were interviewed by a 60 Minutes reporting team posing as buyers and using hidden cameras. Employees of three Chinese mills indicated they were using core boards with higher levels of formaldehyde to save the retailer up to 15 percent on price. Three mills further admitted on camera to falsely labeling products as CARB 2–compliant. The report then concluded:
“While laminate flooring from Home Depot and Lowes had acceptable levels of formaldehyde, as did Lumber Liquidators American-made laminates, every single sample of Chinese-made laminate flooring from Lumber Liquidators failed to meet California formaldehyde emissions standards. Many by a large margin.”
Lumber Liquidators’ founder and chairman, Tom Sullivan, indicated to 60 Minutes that the tests weren’t valid and said the company isn’t required by law to test finished products, as the program did. In a filing with the U.S. Securities and Exchange Commission on Monday, the company reiterated that the testing method on which the CBS program based its report was improper. It said it is fully compliant with California standards. “Our laminate floors are completely safe to use as intended” the filing said.
While this retailer vociferously insists that its flooring is safe and meets certain standards for environmental safety, the initial fallout among investors has been severe. Shares of the company’s stock closed down 25 percent today, and were halted through the morning ahead of a planned news release. A published report from MarketWatch indicates that this retailer blamed the attacks as the work of short sellers, “who are working together for the purpose of making money by lowering our stock price.” This report further indicates that short interest in Lumber Liquidators stock reached 30 percent ahead of the CBS program’s airing, according to FactSet data. The company is reportedlybeing sued by environmentalists, backed by a group of Wall Street short sellers, who accuse the company of violating California’s toxic-warning statue.
Beyond the Wall Street and legal messiness, this incident is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards are cited. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring. Supply chain focused snafus or product quality issues continue to cause reverberations for brand loyalty and investor confidence. The fact that news networks can place hidden cameras and conduct interviews of a company’s suppliers is further cause for concern.
No doubt, the situation at Lumber Liquidators will continue to reverberate among business headlines in the days to come.
To the obvious relief of many industry supply chains, an announcement that a tentative agreement has been reached among the Pacific Maritime Association and longshoremen has finally come. The announcement came late Friday night, Pacific Time after nearly nine months of ongoing contract talks and rancor.
According to reports, dockworkers are expected to conduct normal port operations beginning this evening. This tentative agreement averts what could have been an even more disruptive scenario of a total shutdown of ports.
This five year contract agreement still needs the approval of longshoremen union members as well as individual employers. There may also be some local port issues needing resolution. Thus far, no details of the new contract have been disclosed including the reported final contentious issue related to the selection or elimination of certain arbitrators for work rule disputes. According to published reports, U.S. Secretary of Labor Thomas Perez, while declining to reveal any details, indicated that employers and the union have agreed to a new arbitration system.
As Supply Chain Matters opined in yesterday’s update commentary, when contract talks were eventually resolved, it will take months before any U.S. west coast port operations return to a state of normalcy, if at all. The underlying issues of the structural impacts of unloading and loading far larger container ships, the notion of proper scheduling of now outsourced trailer carriages and the consequences of trucking lines classifying truck drivers as casual, independent contractors remain ongoing challenges to be addressed.
Gene Seroka, executive director for the Port of Los Angeles indicated to the Los Angeles Times on Friday: “more than ever, we need labor and management working together.” Those words have special meaning for all U.S. west coast ports.
Remember this date, it will serve as the baseline indicator as to how long before U.S. west coast ports return to operational service levels meeting shipper and industry supply chain expectations. Much work remains, not only from an operations perspective, but also from a shipping lines management planning perspective.
Last week, we were reading a recent report produced by the Chartered Institute for Procurement and Supply (CIPS) in the U.K. indicating that its risk index reversed in Q4-2014 and reached a nine month high. According to this report:
“The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs.”
Now, there are multiple business and general media reports of the severe toll that is cascading from the continuing backlog of ships destined to U.S. west coast ports that cannot be unloaded and reloaded on a timely basis. The latest news this weekend is that President Obama has dispatched the U.S. Secretary of Labor, Tom Perez, to California in an attempt to broker an agreement.
Today, a Reuters syndicated report featured on Business Insider provides ample evidence of the rippling effects beyond retail focused supply chains. Honda Motor now indicates that it is slowing production at certain North America auto assembly plants because component parts in the replenishment pipeline are now impacting the production of this OEM’s Civic, CR-V and Accord models. Similarly, Fuji Heavy Industries, producers of Subaru cars indicates that it is already air freighting parts to U.S. factories through at least the end of this month.
An AP syndicated report featured on business network CNBC indicates that in addition to car parts, imported furniture, medical equipment, bathroom tiles, shoes and other goods are all impacted. On the export side, meat, produce and other agricultural foods are not moving to Asia destined markets and are in danger of spoilage.
No doubt, the cumulative impact across industry supply chains will be in the billions of dollars if the current labor dispute is not resolved quickly.
Further reported is that the port crisis is impacting available capacity and shipping rates for both sea and air freight, making it even more expensive to implement contingency shipping and logistics plans. Air freight capacity originating from China and the Asia-Pacific region was reduced in 2013-14 due to declining demand and increased costs. Thus, the current surge in contingency shipping demand is chasing limited supply, and no doubt, bigger more influential shippers will be garnered preferential services.
As is often the case with these types of multi-industry supply chain crisis, small and medium businesses will bear the bulk of the economic burden.
Within the U.S. itself, a current period of severe winter weather featuring unprecedented snowstorms and extreme cold weather have paralyzed the U.S. northeastern and Midwest regions and its economies, adding more economic burden.
Tomorrow (Tuesday), west coast dockworkers are supposed to return to work. All industry eyes are affixed on a speedy and final resolution of the current crisis. Amen to that!
Industry supply chain teams do not need to concern themselves with supply chain risk indices for this quarter and beyond. They will be off the charts and indeed, the perception of global supply chain risk will be at an all-time high.
Today, sensing and real-time awareness across the end-to-end global supply chain network as to where inventory resides and the daily condition of global transportation networks and contingency plans is far more important. The current crisis will continue to worsen before it gets better.
Longer-term, once the current U.S. west coast port labor contract is resolved, shipping industry interests had better get their acts together and figure out solutions to a number of current industry choke-points and structural deficiencies. Larger mega container ships will not address the needs of shippers for reliable and efficient logistics and transportation.
The notion of the flexibility and/or cost effectiveness of global supply chains has reached a critical crossroad.
Supply Chain Matters has opined on more than one occasion that the wheels of justice seems too often crank very slow even though today’s clock speed of business moves at lightning speed. For pharmaceutical supply chains, the mitigation of such thefts remains a rather important component in supply chain risk management and mitigation.
One of the largest warehouse thefts in U.S. history occurred in March 2010 and involved the theft of an estimated $80 million worth of pharmaceuticals from an Eli Lilly warehouse in Enfield Connecticut. In May of 2012, federal authorities arrested two people in connection with the Eli Lilly incident. According to reports at that time, the arrests were described as a takedown of a major prolific cargo theft ring. Two Cuban born brothers were indicted on federal conspiracy and theft charges and ten additional persons were also charged in federal court.
Since that time, the U.S. Attorney for the District of Connecticut accused five individuals in the conspiracy and participation in the theft that occurred in the Enfield Connecticut warehouse. All five have since pleaded guilty. According to evidence and statements collected, the thieves climbed through the roof, slid down ropes and disabled the alarm system and then loaded the 40 pallets of stolen goods into an awaiting tractor trailer utilizing existing fork lifts. The stolen goods were then transported to a public storage facility in the Miami Florida area for black-market distribution.
According to a report published by The Wall Street Journal, the stolen pharmaceuticals included Lily’s antipsychotic drug Zyprexa, antidepressants Cymbalta and Prozac, the cancer treating drug Gemzar, among other drugs. The thieves were obviously seeking high-value goods. These drugs were destined for retail distributors along the U.S. east coast.
Last week, a U.S. federal judge sentenced the first of these criminals, a Cuban citizen living in Florida, to a six year and three month prison sentence in regards to his role in the pharmaceutical theft. Prosecutors were seeking a seven to nine year sentence, citing the seriousness of the crime. However, defense attorneys argued leniency by the defendant’s guilty plea and subsequent actions.
Thus, roughly six years after this high visibility theft, the wheels of justice have begun to close the loop.
Meanwhile, pharmaceutical companies have since garnered a more astute understanding of the increasing occurrences of cargo and retail thefts and the risks that these incidents pose to legitimate pharmaceutical supply chains as well as public health. While the wheels of justice indeed move slow, deterrence, supply chain risk identification and mitigation remain important ongoing initiatives.
In late December of 2011, Supply Chain Matters raised awareness to Japan based automotive OEM’s, specifically Honda, with plans to shift a major portion of export production capability from North America instead of from Japan. We have since updated readers on this strategy to include other automotive OEM’s. We did so because for our readers, it provides a valid example of a globally-balanced and flexible global manufacturing sourcing strategy along with proactive supply chain risk mitigation.
Last week, The Wall Street Journal featured a report on 2014 U.S. auto exports, one that confirms rather active evidence that North America auto production continues to be viewed for both domestic as well as global consumption.
The report indicates that U.S. auto exports in 2014 recoded a record for the third consecutive year. In 2014, approximately 2.1 million new cars and trucks were exported to other global regions, an 8 percent increase over that in 2013, according to the U.S. International Trade Association. According to the WSJ, about half of these exports are destined to Canada and Mexico with other countries of mention being China, Saudi Arabia and South Korea. Exported vehicles include brands such as BMW, Fiat-Chrysler, Daimler, Jeep, Ford, Honda, Nissan and Toyota. One cited example was the Jeep brand which shipped upwards of 316,000 of that maker’s Wrangler and Cherokee vehicles to export markets. A 50 percent increase from 2012 levels. BMW has plans to boost U.S. production of its X3 and other SUV line-up by 50 percent over the next two years.
The article further points out that while the U.S. dollar is currently strong, these exports efforts began when the dollar was weaker, and momentum has continued.
As we originally observed, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains now cater to the product-unique needs and product demand strategies of certain export markets and there lies the importance of global product platform development strategies. There is the added need to dynamically plan and respond to constantly changing and different geographic market scenarios. The U.S. automotive supply chain ecosystem therefore benefits and has the continued potential to be globally competitive in margins and consumer fulfillment. The U.S. automotive supply chain further serves as a backup strategy to any major supply chain disruption that might occur in another region.
Whether the growing export trend continues in 2015 is obviously dependent on shifting and highly changing currency trends. However, the strategy and capabilities invested upwards of five years ago appear to be paying off.