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Report of Pending Product Sourcing Risks for European Based Manufacturers

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This week, The Wall Street Journal CFO Journal warns (Paid subscription required) that an approaching World Trade Organization (WTO) deadline could well make European goods made with components or materials imported from China more expensive. We highlight this news item because it may well be a forerunner to efforts undertaken in 2017 by the new Trump Administration in its Make America First set of initiatives related to global trade.

Such pending actions are a result of a building frustration that Chinese manufacturers are dumping products in other global regions to compensate for declining domestic market demands and consequent excess capacity among various industry sectors. The discerning shift towards a nationalist environment driving political actions and/or political candidates in developed economies now makes such actions more likely.

These tariff actions, however, often feature other broader consequences. As an example, raw steel that originates from China because of lower cost factors, becomes subject to higher punitive import tariffs when dumping is claimed, and thus adds to the previous planned construction costs of projects and products in the destination country. While the EU in some cases, imposes lower punitive tariffs than does the U.S., all can change in the coming months.

The CFO Journal report indicates that on December 11, the European Union could opt to grant China “market economy status” or the EU could opt to draft new trade rules that do away with the distinction between market and nonmarket economies. Regarding the former, sources are quoted as indicating that the odds are not leaning towards China achieving such as status because of the existing pressures from southern EU states and industrial sectors with a protectionist agenda. The December 11th date is key because a clause in China’s WTO admission protocol indicates that countries seeking to impose anti-dumping duties against the nation can only use non-Chinese data until Dec. 11, which marks 15 years since China’s admission to the trade organization.

The WSJ report surmises that the European Commission is more likely to “tighten rules against foreign-government subsidies and dumping- or exporting products at below domestic prices”, punishing those firms that benefit from Chinese subsidies. While the December 11 deadline would likely be missed, the revised proposal could be in place by the spring of 2017.

The report cites other sources as indicating that such an effort: “poses risks for companies that have outsourced parts of their supply chain to China.” European industries such as automotive could suffer the effects through higher import duties on China based parts and intermediary products.  Other industries could well be impacted according to this report.

The consequent obvious question is how will the government of China respond to such initiatives and whether more punitive Chinese import tariffs are imposed across various industry product value-chains that spill over to other global trading blocks such as the United States.

For strategic product sourcing and supply chain network planning teams, these potential trade enforcement scenarios that are global in perspective require teams to be prepared for educating senior management on product and business margin impacts. Once more, contingency product sourcing planning will likely be a more important core competency in the months to come.

 

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


Fast Fashion Retail Requires Supply Chain Strategy Shifts

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Supply Chain Matters has provided a number of retail industry focused commentaries regarding the trend toward Fast Fashion that has been pioneered by Zara and now other retailers. We now call attention to our blog readers to an industry focused commentary that has Supply Chain Matters focused insights.

The December 2016 issue of STORES magazine, whose articles are featured on the National Retail Federation (NRF) web site, has just published an article: Staying Ahead of Fast Fashion-Quick-response inventory requires supply chain shifts.  This independent industry analyst was pleased to provide business process and technology background to fast fashion trends addressed in this article.

The significant takeaway from the article is that Fast Fashion capability: “requires more than a different calendar, it necessitates a major supply chain shift.” Correspondent Fiona Soltes observes that the latest Fast Fashion wave equates to supply chain capability:

Fast fashion has influenced retail in numerous ways, but it’s in the supply chain that the differences are most profound. Conversations about data, nearsourcing and onshoring, robotics, constant monitoring and adjustment, tracking of goods and transportation have never been more complex — or more important.”

The article profiles successful efforts underway at Xcel Brands and other retailers. Robert D’Loren, CEO of Xcel Brands captures the fundamental industry change:

Today, it’s not about the product. It’s about delivering the product when people want it. Good has to be a given. Fast has to be obtained.

I added my own observation that online commerce and social media have changed the Fast Fashion as well since retailers can literally tap into the immediate response of consumers to specific designs and accessories.  It all about the ability to sense and keep-up with demand all along the supply chain as well as to reduce the amount of inventory that ends up on the sale rack later. This report is very timely in that we are at the height of the holiday fulfillment quarter, where in-demand fashion items generally have tended to sell-out at this point.  With new advances in fast fashion supply chains, more retailers and consumers will eventually be able to benefit from a faster response to in-demand fashion.

Enjoy the article.

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.


Boeing Appoints New Senior Executive for Commercial Aircraft Group

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Boeing made a senior management change this week, recruiting a General Electric Aviation Services executive to be the new head of the Commercial Aircraft division. This executive move, which is effective immediately,  likely has manufacturing, supply chain and services management implications from two perspectives.

Kevin McAllister previously served as the head of GE’s Aviation Services business unit which is the customer support arm of the aircraft engine unit. Thus, McAllister brings an aftermarket services perspective. His background is one of design engineering, having served in roles of engine component development and services sales.

According to statements from Boeing CEO Dennis Muilenberg, the aerospace manufacturer sought an executive with “fresh ideas” to lead in efforts to triple services related revenue over the next decade. In conjunction with this executive change, Boeing further indicated that it plans to centralize management of the service businesses related to defense and space operations as well as commercial aircraft.

Supply Chain Matters believes that the above moves signify intent by Boeing to expand revenue and profitability growth across managed services and such efforts will likely include leveraging of Internet of Things (IoT) and connected devices as technology underpinnings of such efforts.  Boeing had previously announced its intent to leverage more revenues from service parts which decreases revenue opportunities from certain suppliers.

As the new head of Commercial Aircraft, McAllister will oversee all of Boeing’s manufacturing and internal supply chain resources. He represents the first outsider hired for a senior management position since 2005 when former GE executive Jim McNerney was recruited to be CEO. We believe that his prior background in product engineering, services and manufacturing will surely help in the continuing challenge to ramp-up Boeing’s existing aircraft production cadence to meet backlogged product demand. Boeing previously

According to a report published by the Seattle Times, during his tenure, former Commercial Aircraft CEO Ray Connor had precipitated a sharply negative turn in Boeing’s relationships with its various labor unions. Much of this animosity came during plans to source manufacturing and supply chain related strategies for Boeing’s next generation 777X aircraft. In a January 2014 blog commentary, we had highlighted the effects of Boeing’s strong-willed collaboration efforts with the State of Washington, with prospective suppliers, and with Boeing’s labor unions. Other sour relations remain in the shared manufacturing responsibilities for the 787 Dreamliner aircraft among Seattle based, unionized manufacturing workers and predominate non-unionized workforce at its Charleston South Carolina production facility. Mr. McAllister must now direct some of his leadership efforts at addressing these sore areas.

The announcement of this new external executive hire comes after a corporate supply chain management announcement in March. Pat Shanahan, the former head of Commercial Airplane Programs was appointed as Senior Vice President for Supply Chain Management and Operations companywide.  According to that announcement, Shanahan was provided direct responsibility for oversight of manufacturing operations and supplier management functions, including implementation of advanced manufacturing technologies and global supply chain strategies.  At the time of his appointment, Shanahan reported directly to Boeing CEO Dennis Muilenburg. There will obviously be some shared collaboration and leadership with both McAllister and Shanahan moving forward.

Bob Ferrari

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

 

 


Asia Pacific Leaders Wrap-up Their Weekend Meeting in Peru and Vow to Continue Trade Alliances

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This past weekend, political leaders of the Asia-Pacific Economic Cooperation forum met in Lima Peru to discuss free-trade, and specifically pending ratification of the Trans Pacific Partnership (TPP). According to various media reports, the delegates sent a direct message to President-Elect Donald Trump, namely that they will move forward with Asia-Pacific trade pacts with or without the support of the United States.  The implication could well be more trade influence for China.

The election of Trump reportedly loomed large over this summit of 21 nations, and President Barack Obama had his hands full in trying to assuage fears of the U.S. withdrawing from TPP and other pending global trade pacts. The U.S. Congress has failed to take up TPP ratification in the now lame-duck session, with little likelihood of doing so in 2017 now that there is full Republican Party control across all branches of government.  During the presidential campaign, Donald Trump blamed bad trade deals as one of the primary causes of manufacturing and other job losses in the U.S. and threatened to specifically scrap TPP and re-negotiate the North America Free Trade Agreement (NAFTA). In the light of this current perceived trade retrenchment climate, China indicated at the summit that the country was prepared to take the lead in promoting trade. The TPP alliance was a critical component of the Obama policy to counter China’s influence in influencing trade deals and more attractive trade arrangements among Asia-Pacific regions.

This weekend, the countries of Chile and Peru, two existing members of TPP, indicated they were interested in joining the Regional Comprehensive Economic Partnership (RCEP), a China led pact that could involve 16 nations.

Leaders of Both Canada and Mexico also indicated this weekend that they remained committed to North America based trade, which leaves open the question of how much they are willing to re-negotiate the existing NAFTA agreement.

As industry supply chains complete 2016 activities, there is a clear uncertainty looking out to 2017 and beyond if the United States, one of the globe’s largest trading partners takes on a harder trade stance. Many are looking to President-Elect Trump’s policy statements and pending Cabinet appointments to assess how hard a line the U.S. will take.

There are obviously many implications related to protections to intellectual property protection rights (IPP), more open access to Asia Pacific markets and the potential for tariff implications for certain products.  All could involve impacts to existing global supply chain product sourcing strategies.

Stay tuned as we continue to assess these changing geo-political developments and their impacts to global supply chain management strategies.


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