In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.
In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.
We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.
Section 14- Electronic Commerce
This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers. TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.
This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.
Section 18- Intellectual Property Protections
Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.
This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.
Section 19- Labor
All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights. Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.
There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health. This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.
Section 20- Environment
TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment. The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.
Section 24- Small and Medium-Sized Businesses
A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.
Section 26- Transparency and Anti-Corruption
A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.
Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.
As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”
With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.
Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.
Supply Chain Matters will do our part to keep readers informed of important developments.
Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected
From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.
In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.
If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences. Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains. In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.
This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.
The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR). There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).
Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: “Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.
Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: “Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:
“Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”
We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion. While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption. However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.
In January, Supply Chain Matters called reader attention to Chipotle Mexican Grill’s bold adherence to staunch standards for high quality, ethically based food ingredients served at its various restaurants. Chipotle boldly suspended the use of pork sourced from an unnamed regionally based pork supplier evoking broad media headlines. According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors. The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards.
This week, the restaurant provider reported financial results for its third quarter that somewhat disappointed the investment community by indicating that future growth would be modest through next year, as opposed to the double-digit growth rates of quarters past. For its latest quarter, Chipotle’s same stores sales growth was a modest 2.6 percent, far below the nearly 20 percent growth rate of a year ago. The recent number further reflects across-the-board price increases on menu items.
Wall Street attributes this declining sales trend as a reflection of growing competition from competing outlets, the need for more workers, and problems securing inbound ingredients that meet the high standards of an ethically based supply chain.
In a prior April blog commentary, we observed that consumers are now, more than ever, interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonald’s, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. This week, sandwich chain Subway, the largest U.S. restaurant chain by number of outlets, joined this chorus, announcing plans to eliminate antibiotics use in all U.S. meat supplies over the next several years. In 2016, the chain will introduce turkey and chicken raised without antibiotics with plans to address antibiotic free pork and beef supplies down the road.
That commentary in April was triggered by a Wall Street Journal report indicating the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Supply Chain Matters increasingly believes that as more food producers and restaurant chains require and transition to the use of such ethically sourced and organically grown foods, the time to transition the entire food supply chain will be a perplexing problem. Chains such as Chipotle who were pioneers in the sourcing of healthy food could well have their near-term growth plans constrained by the reality of constrained supply. There is a classic excess demand and restricted supply condition occurring as the supply chains attempt to transition from conventional to more organic and sustainable food supplies.
This condition will present added challenges for food sourcing and purchasing teams and buying cooperatives. Ranchers, farmers, poultry and meat producers require adequate time to transition to a more healthy food supply, and that comes with the need for the financial flexibility to fund such a transition. Providers who have practiced organic food standards since their inception understand this need, and took the time to work collaboratively and financially with food suppliers to build-up adequate supply through long-term buying commitments. With more and larger global players now demanding organic and antibiotic-free supply in far larger volumes, the demand and supply equation likely becomes chaotic without added collaboration, training, financial and buying incentives. Buying scale could cloud needs for stronger and more responsive supplier relationships.
The takeaway is that food purveyors cannot just buy or dictate their way into organic, more-healthy supply contracts. This will take time and it is rather important that providers, consumers and investors understand such realities, and develop the patience and understanding that the global food supply chain does not transform itself overnight.
We would appreciate hearing from readers residing in various tiers of existing food supply chains.
What are reasonable expectations for transition?
What added financial incentives are required?
Whom do you consider to be a leader in these efforts?
Our readers among high-tech and consumer electronics supply chains are well aware that the supply and costs of rare earth minerals continues to be a supply chain. China has positioned itself to the primary global supplier of such strategic materials and has in the past exercised export quotas to favor its own domestic high tech industry needs. Supply Chain Matters touched upon this challenge in a 2011 commentary related to Phillips Electronics.
Bloomberg recently reported that a closely held miner from the country of Chile, Mineria Activa, has come up with a far different, green-mining and perhaps more sustainable approach for the mining of rare earths. The report indicates that elements such as neodymium and dysprosium are contained in clay soils near the city of Concepcion in concentrations similar to China. The difference, however, is rather than pumping chemicals into the ground for extracting these minerals, methods have been derived to dig out the clay, place it in a tank-leaching process with biodegradable chemicals and return the clean clay to the ground, while replanting displaced vegetation and trees.
The bet here is that certain manufacturers and OEM’s such as Apple, ThyssenKrupp or Raytheon are willing to pay a premium knowing that the supply is not destroying the planet.
Bloomberg points out that given the current recent capacity glut resulting in declines in the prices of certain rare earth materials, the timing of this development may not be ideal. The again, companies such as Apple with strong commitments to sustainability and green supply chain practices may be willing to consider a strategic supply alternative.
This Supply Chain Matters posting serves as a backdrop to our ongoing commentaries focused on the consumer packaged goods industry, specifically the dramatic business challenges being posed by consumers demanding fresher and more natural sources of ingredients. We have noted how specific CPG firms are scrambling to either re-formulate existing products or acquire smaller firms with higher growth prospects within the natural and sustainable foods segment.
Today, Campbell Soup Company, which has experienced declining sales of the company’s packaged soups decline, announced that it has entered into an agreement to acquire Garden Fresh Gourmet, the producer of the number one branded refrigerated salsa in the United States, along with hummus, dips and tortilla chips. The fresh salsa producer, headquartered in Ferndale, Michigan has approximately 500 employees with operations in Grand Rapids, Inster and Detroit Michigan. The announced cost is $231 million, roughly double Garden Fresh Gourmet’s $100 million in 2014 revenues. The transaction expected to close in the fourth quarter of fiscal 2015 subject to regulatory approvals and customary closing conditions.
Original founders Jack and Annette Aronson started making fresh salsa in the back of their small restaurant in Ferndale, Michigan. The recipe involved small batches using only the highest-quality ingredients. Before long, people began to flock to his restaurant just for the outrageously good salsa, and that morphed to providing the fresh salsa to local supermarkets. On its web site, Garden Fresh Gourmet states its commitment to sustainability, from how ingredients are sourced, to the manufacturing methods and to the packaging materials employed in its processes.
Today’s acquisition is Campbell’s fourth acquisition directed at higher growth, more natural foods segments. Prior acquisitions included fresh products producer Bolthouse Farms in 2012, organic baby-food producer Plum and biscuit maker Kelsen in 2013.
According to today’s announcement, Garden Fresh Gourmet will become part of the Campbell Fresh division which will now oversee upwards of $1 billion in revenues while leveraging the Bolthouse Farms refrigerated fresh platform business model. Plans call for the new addition to retain its corporate presence in Ferndale Michigan, led by Todd Putman, General Manager. Founder Jack Aronson will stay on as a business advisor and in a letter to customers, pledges that the same values of quality and caring will continue with the Campbell relationship.
In a matter of four years, Campbell continues its transformation into packaged fresh and organic foods segment which now includes four prominent brands. The next chapter is growing these businesses to scale broader geographic market segments while retaining the tenets of brands that stand for fresh and sustainable supply chain practices.
Today is Earth Day, the celebration of preserving our planet and its resources.
Any blog with a focus on the broad umbrella of manufacturing, supply chain and product management is compelled to acknowledge that supply chains and their actions have a lot to contribute to preserving our planet, its resources and its air. The good news, we feel, is that a lot has been accomplished in sustainability and green supply chain initiatives across multiple industry sectors. However, much more work remains, particularly in low-cost manufacturing regions such as Bangladesh, China, Cambodia, Vietnam and other countries.
Led by many multi-national manufacturers, sustainability efforts directed at reduced use of water, natural resources and packaging have both added creditability to brands as well as saved money for businesses. Likewise, food producers have invested in more organic and ethical supply chains. Producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Consumers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. Indeed consumers are the most important stakeholders in influencing the way in which corporations manage and respond to societal expectations. Our commentaries and observations of today’s consumer product goods industry reflect how consumer expectations are radically changing former processed foods business practices. Likewise, suppliers have an ever more important contribution to make in these efforts.
However, supply chains that have high consumption of water, chemicals, and resource intensive energy have far more work to do. Today they predominately reside in low-cost manufacturing regions where governments and businesses sometimes look the other way when it comes to active commitments to curb abuses to the environment. Recent reports indicate that China senior leaders are getting more serious about pollution and environmental abuses, which is long overdue. We have read reports of gross pollution and waste in countries such as Bangladesh. While multinationals such as Apple, Cisco, Hewlett Packard, H&M and others are actively establishing, monitoring and enforcing sustainability goals across their extended supply chains, too many others have turned a blind eye, perhaps far more concerned with lower costs. Supply Chain Matters recently highlighted National Resource Defense Council’s ongoing efforts in the greening of China’s textile and apparel producers, helping suppliers to cost justify more sustainable practices.
There is a lot more to do, and supply chain leaders and teams need to be actively supporting additional green and sustainability efforts. The good news is that our up and coming millennials, the leaders of tomorrow, are very tuned into sustainability of the earth’s resources as well as innovative ideas to make a difference.
These efforts are good for business as well as the environment.
We congratulate all that are demonstrating commitment and we urge others in our community to add their continued influence.