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Category Archives: Global Supply Chain

Hoverboards are very popular holiday gifts this year, but the stories about the boards that explode are all over the news.  Many retailers including Amazon.com and Target stopped selling them, and several commercial airlines banned them aboard their aircraft.

So what happened in the manufacture of these items to make them so dangerous? In the reported incidents, the lithium ion batteries in the hoverboards caught fire while charging or just riding them. The reasons for the combustion process is well-known when a battery is defective. The problems with these batteries were identified in laptops and cell phones a few years ago.  What isn’t so transparent are the sourcing and manufacturing processes for the boards being produced in China.

Hoverboards are new, exciting and popular products and this combination creates a frenzy of manufacturing opportunity for Chinese manufacturers. Because of the popularity and the potential for high volumes and high profits, knock-off brands proliferate very fast in the extremely competitive changed to avoid patent infringement laws. The raw  materials sourcing for knock-offs may come from completely different suppliers. Cheaper knock-off products means cutting corners in the factory to keep production costs low.

US safety standards are not all in place yet for these new products. US Customs may be allowing imports to enter the US based on safety standards for similar products, following the current requirements for imports. Some manufacturers may have obtained UL certificates on certain component parts, but not for the hoverboard as a whole. Raw materials such as the actual batteries may be knock-offs, too. You cannot trust the  well-known top brands either. The high demand is likely to cause sourcing from multiple Chinese factories with limited experience and untested component suppliers. No Chinese agency is overseeing the quality of exports from China.

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Montgomery County Fire and Rescue

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It’s common to evaluate potential supplier and supply chain partner’s financial position before placing an order or signing a contract. In fact, most purchasing departments these days, require obtaining supplier key financial data as a standard part of the procurement process. This financial data is then evaluated by the company finance or accounting department and the risk associated with the supplier or supply chain partner is determined. If the supplier is a publically traded US company, that’s easy to do as these companies must comply with SEC rules on financial reporting. But you should be leery of accepting information provided by Chinese suppliers at face value.

China’s largest banks typically only lend to the largest corporations, leaving small and medium sized suppliers to obtain loans from friends and relatives or from a “shadow bank.” Shadow banks are private lending companies that are not regulated by the Chinese government. These shadow banks lend money at a much higher rate of interest, squeezing the small suppliers’ already-thin profit margins. So if you are buying from a Chinese supplier, you should ask and verify where their working capital comes from. You just might find that some suppliers cannot make their loan payments and will simply shut their doors and disappear, leaving you scrambling to find another manufacturer. Finding working capital in China is risky business.

Enter: The Bank of Foxconn. Foxconn, the world’s largest contract manufacturer and maker of iPhones, iPads and many brands of laptops, has ventured into the lending world. To protect its suppliers from the pitfalls of shadow banking in China, Foxconn is now making business loans. That makes Foxconn the banker for the world’s electronics supply chain. And Foxconn isn’t the only company to provide banking services in China. Baidu (the “Google” of China), Alibaba (the “Amazon” of China) and Tencent ( WeChat and mobile games) all have lending banks, too. Lending to small and medium businesses provides higher returns to Foxconn than they can make on their contract manufacturing business. It also provides an opportunity for suppliers to borrow at a lower rate than from shadow banks. Foxconn reportedly has obtained licenses from Chinese local governments to provide loans, factoring, financial guarantees and equipment leasing.Foxconn

When evaluating suppliers, be sure to ask where their funding comes from, and don’t be surprised if the answer is the Bank of Foxconn.

Walmart 2015

Last week we participated in the Walmart US Manufacturing Summit in Bentonville, Arkansas. Walmart has taken the lead and has ignited the Reshoring movement in America by committing to spend $250 Billion for products Made in the USA over the next few years. The annual Summit was an amazing event again this year, with an important “Open Call” day for suppliers pitching their American-made products to Walmart buyers.
Walmart estimates that 1 million new US jobs will be created through this initiative, including direct manufacturing job growth of approximately 250,000 jobs and indirect job growth of 750,000 in the support and service sectors. This alone is important for rebuilding the US economy, but because of Walmart’s size and influence, other retailers are likely to follow Walmart’s lead and establish initiatives of their own that will also result in more job creation in the US. And as we know, Retailers are the “Mothers of all Supply Chains.” These initiatives will affect manufacturers and their global supply chains.
Walmart is quickly becoming a catalyst for the Reshoring movement for another important reason. By igniting the US manufacturing movement, suppliers and their supply chains will cause the reshoring and redevelopment of key industries needed to support manufacturing in general. Take small motor manufacturers, for example. These small motors are in many consumer products such as lawn mowers, vacuums, hair dryers, and small appliances. Yet most of the small motor production was offshored to China in the early 2000s. Bringing back the production of these motors will help boost US content for many US manufactured industrial products.
Plastic injection molding, cut-and-sew equipment and other component parts will be reshored as a result of this movement. The skills to support all kinds of manufacturing were offshored too, and now skilled labor is in very high demand in America. So the Reshoring movement will drive the redevelopment of these industries and skills in America.
The federal government is supporting innovation through the bi-partisan Revitalize American Manufacturing Act of 2014 and the establishment of 45 Innovation Institutes, bringing together companies and universities to co-invest in advanced manufacturing technologies.
Walmart is the company that will make the difference because it is basing the need for innovation on the demand of its customers, and that is powerful.

tppThe TPP (Trans-Pacific Partnership and Trade Agreement) is at best, difficult to understand. There are a lot of arguments to be made on both sides of the agreement and it can be tough to wade through all of them and read the long associated text in articles for and against. So let me simplify why I am for it.

  1. Increased trade helps create more jobs, including manufacturing jobs that pay more. In our quest to reshore manufacturing, we are trying hard to rebuild manufacturing in the US and the TPP will help. One out of every five jobs in the US can be tied to international trade (about 38 million jobs).
  2. Manufacturing jobs pay better (about 18% better than other jobs). In the US, manufacturing jobs pay between $65K and $85K – squarely in the middle class. And middle class people buy houses, cars, big-screen TVs; they shop at Walmart and send their kids to college. They are the heart and soul of the United States and keep our middle-class economy going strong.
  3. 95% of consumers live outside of the US and with the middle classes growing worldwide, particularly in Asia, our US export markets can be expected to grow. Manufacturing products in America for export put US residents to work, and that is good for all of us.
  4. Trade agreements level the playing field. It’s no secret that foreign governments offer incentives and subsidies to their own manufacturers and exporters. And because the US has such an open-economy, allowing for all kinds of imports, we are seen as a big, red target market for foreign products. Trade agreements put equal rules in place so that all signatories have to play by the same rules and regulations. This will help our exporters and slow or stop unfair imports into the US. We will have legal recourse when the rules aren’t followed.
  5. Small and medium-sized exporters benefit the most because the regulatory hurdles and challenges of foreign countries are standardized or removed. In addition, we see the most reshoring activity happening in small and medium sized companies, so growth in manufacturing is in the US, plus an improved ability to export. The projections say that 98 percent of these companies will benefit from TPP.
  6. Those countries participating in TPP will be required to abide by environmental and labor conditions oversight. While this may not fix the pollution and human rights issues in all participating nations, it is a very strong step in the right direction.

If we sit back and do nothing, surely China will step in with an overriding agreement of their own and it may not be so favorable toward US manufacturers. With TPP passage, we will continue to play a leadership role in Pacific trade.

The bottom line for me is the test of rebuilding the middle class in America through manufacturing. TPP will do that by giving access to export markets for small and medium-sized manufacturers. And that is good for America.

reshoringinstituteWe have been working hard over the past couple of years to help companies evaluate and plan for bringing manufacturing back to America. We believe it’s important to rebuild the American economy and in particular, the middle class. Rebuilding our strength in the manufacturing sector is one important way.

For every new manufacturing job created, there are about 1.5 additional jobs created. This is because manufacturing workers spend their money on houses, cars, consumer electronics, food and clothing which drives employment and economic growth in other sectors. All this spending has a remarkably positive economic effect. Communities thrive, employment rates improve and the American dream is once again revived.

Although we have been assisting clients in their Reshoring efforts, we decided to broaden our efforts by establishing a research and support institute. This gave rise to the Reshoring Institute, a collaboration with the University of San Diego.  The Institute is a 501c3 Non-profit organization and survives on tax-deductible donations.

Our Mission

Reshoring Institute provides research and support for companies bringing manufacturing and services back to the America.

Our Vision

In collaboration with the University of San Diego Supply Chain Management Institute, we provide information, research and support for companies trying to “Reshore” or bring manufacturing and services back to America. This may include things like site selection, tax incentives, science and math education, marketing and PR and cost comparison development. We direct this Reshoring work and include student interns in support of research projects and consulting projects.

You can read more about the Institute here: www.ReshoringInstitute.org or contact Rosemary Coates, Executive Director at rcoates@ReshoringInstitute.orgreshoringinstitute

I spoke at the Global Supply Chain Council’s Sourcing Shift Conference in Shanghai last week. The audience was a mix of c-level executives and very senior sourcing people. These folks have been running international sourcing and manufacturing operations throughout China and across Asia for many years. They are savvy business people with amazing international experience.
So I was astonished that almost no one in the crowd had heard about America’s Reshoring movement. A 2014 Boston Consulting Group report says that 52% of American corporations over $1B in revenue are considering Reshoring. And with Walmart’s new pledge to spend $250B on US-made goods over the next 10 years, Reshoring is all over the news.
We listened to various speakers talking about the shift of manufacturing from China to even lower cost countries including Indonesia, Vietnam, Myanmar and Bangladesh. The cost per hour comparisons were remarkable. They quoted “cut and sew” and assembly operations in Myanmar at $.35/hour and Bangladesh at $.33/hour. Yes, you read that right…thirty-three cents per hour. These sourcing folks and the multinationals they represent are still chasing the lowest labor cost to produce their products.
Then it was my turn to talk about how Reshoring will affect China and specifically, how it will change these people’s jobs. I asked for a show of hands to see how many people were familiar with the American Reshoring movement. Only three or four raised their hands.
So as I described the Reshoring movement in America, they were fascinated. “How can it be that Americans will pay so much more for American-made goods?” they asked. I explained about the new “economic patriotism” that has enveloped the country. Americans want to rebuild the economy and believe that bringing back manufacturing is one way. But products must also be cost competitive. To achieve this, reshored manufacturing must be very automated including the use of robotics, 3D printing and 5-axis milling. “This is not a return to 1960’s manufacturing,” I said. “It is an evolution. And, in fact, the costs can be very competitive with China, when production is fully automated and when the total cost of ownership is considered.”
That got their attention. They are used to dealing with total cost comparisons. They have seen amazing changes in China over the past 25 years and understand the potential for evolution. And suddenly they understood. Their sourcing jobs are going to change, too.
Sourcing Shift Conf

Cof O UkraineIf you are an importer, you know the importance of US Customs regulations regarding Country of Origin markings. The regulations are in place so that US consumers can be informed about the origin of the products they buy. You can find C of O markings on adhesive stickers attached to products, on imported food labels, on soft labels in apparel and on the outside of a shipping carton or crate. But what happens when one country takes over another? How should the rules of origin apply?

Customs and Border Protection support the US government’s political position in this matter with the enforcement of C of O regulations. Take for example, the current and very serious dispute over the Crimean Peninsula between Russia and the Ukraine. The US government has taken a clear stand against Russia and one of the ways is through C of O marking requirements. CBP requires products of Crimea to be marked with Country of Origin: Ukraine. This is a very significant point being made by the US government. Goods coming from the Crimea cannot be labeled “Made in Russia” because the US government does not recognize the Russian government there.

On April 28, 2014, the White House issued a press release announcing the implementation of further sanctions against Russia including export restrictions for high-technology goods, subject to the Export Administration Regulations (EAR), which could contribute to Russia’s military.

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) also announced that, effective immediately, they will “deny pending applications for licenses to export or re-export any high technology item subject to the EAR to Russia or occupied Crimea that contribute to Russia’s military capabilities.” Existing export licenses meeting these conditions will be subject to revocation.

Supply chain professionals often discover that the real reason for a trade law or country regulations is political, not economic. The laws are enforced to further the agenda of the importing country, in this case the US. For the US and Ukraine, this means supporting the Ukrainian government in their fight to keep Ukraine independent.

2013-07-05 01.58.31I took the bullet train from Shanghai to Nanjing today, a journey in a pleasant 1st class, sparkling clean rail car at 200 km/hour, for about $30.  Rail is such a great way to travel in China.  It’s efficient, convenient and inexpensive, plus you see things you would never see from an airplane.

Along the way, in every direction, are miles and miles of factories.  They come in all shapes and sizes – small and squat to enormous smokestacks –apparently producing simple assembled products, electronics, plastics, castings and everything you can think of in between.  

Chinese Finance Minister Lou Jiwei told the G-20 meeting in 2014 that manufacturing accounts for nearly 60% of Chinese GDP, an unsustainable share which has created the problems of pollution and overcapacity, he said.  This is very evident as I traveled through the manufacturing areas between Shanghai, Wuxi and Nanjing.  The pollution was overwhelming; the skies were thick with a smoky fog and the sun was a muted disk low in the sky.  The pollution gets so bad from time to time that people wear surgical masks whenever they are outside during the most dangerous periods.

The Chinese government is no longer shying away from or denying allegations of the horrendous air quality.  In fact, in the latest government Five-Year- Plan, China is finally putting real muscle and money into environmental clean-up.  I expect to see substantial improvement over the next few years.  In addition, China plans to use the excess manufacturing capacity to address the needs of their own burgeoning middle class by producing products demanded at home.

Americans need to work on balancing the difference between the Chinese economy supported by 60% manufacturing and the US economy where only 11-12% is based on manufacturing.  Manufacturing is the fundamental backbone of a healthy economy.  We need to bring some of it back to the US- but very carefully.  We want skilled jobs that pay a living wage and don’t pollute the environment.

RESHORINGFor the past 15 years or so, I have been helping companies offshore their manufacturing.  There have been, and continue to be, pretty significant cost savings in low-cost labor markets.  But with the waning US economy, it’s time we wake up and put some Yankee ingenuity into bringing some manufacturing back. We think it is possible to bring 15-20% of offshore manufacturing back to the US.

I am not saying we can or should bring it all back.  There are still global cost advantages to low-cost labor markets.  And China represents the largest single target market in the world to sell goods to.  Companies should continue to  manufacture in China to serve the Chinese market.

The U.S. manufacturing sector has added 430,000 jobs since 2010; a small trickle of what we need to recover, but still a move in the right direction. Companies that are reshoring include some of the nation’s largest manufacturers: Apple, General Electric, Ford, Caterpillar and NCR.  A 2012 study concluded that reshoring could add 2 million to 3 million jobs and an estimated $100 billion in annual output to a range of industries by the year 2015.

But bringing manufacturing back isn’t as easy as you may think.  There are a host of considerations and analyses that companies must do to determine the costs and feasibility of reshoring. Several of the important factors in the original offshoring decisions have dramatically changed. Consider these 5 factors as the initial steps in determining your need to rebalance global manufacturing and reshore some activities back to the US.

1)      Cost Increases, Taxes

2)      Innovation and Automation

3)      Market Access and Localization

4)      Skills

5)      Political Environment and Public Sentiment

We are helping clients evaluate the possibilities now.  For more information go to www.BlueSilkConsulting.com/Reshoring

flag (2)There are some fundamental differences in business practices that you should know when working with Chinese suppliers.

Culture impacts everything

China’s 5000 year history and traditions affect everything.  The dichotomy of modern industrial China, superimposed with traditional values and approaches to doing business, is often a surprise to Westerners.

Guanxi is not networking

Guanxi is someone’s personal network and long-term trusted relationships between parties. It is not simple networking.  It involves a commitment over time. You cannot do business effectively in China until you build this type of trusting relationship.

Validate everything in writing

Even though there are more English speakers in China than any other country in the world, it is often a mixture of Chinese and English that is not understood by either party.  Just because a Chinese business person speaks English, does not mean he understands the nuance of the language.  Every detail of the contract, specifications for production, expectations, etc., should be put in writing, discussed and confirmed several times.

Contracts are viewed differently

In the Western world, contracts represent the culmination of negotiation on price, delivery, specs and other terms.  In China, a contract is viewed as just the beginning.  Just as an American high school student may view graduation as the end, parents view it as commencement or beginning.  A contract in China is a commencement and the start of real negotiations.

Quality fade

Quality fade, the process of quality degradation over time, is the single biggest issue in low cost manufacturing countries. It happens frequently in China where manufacturing processes are immature and competitive pricing drives the profits to extremely low levels.  You have probably noticed quality fade, but didn’t know what to call it, or understand how it happened.  Maybe you noticed a plastic shampoo bottle that seemed too thin.  Maybe that hand-held electronic game you put in your son’s Christmas stocking stopped working after a few days.  Maybe the zipper in your pants broke after a few zips. The initial production may have met all expectations, but over time, there was degradation in production quality.

Outsourcing and subcontractors

China business is typically a combination of primary manufacturers and many sub-contractors that provide parts and services.  Without regular monitoring of the production processes in China, this common practice of sub-contracting and outsourcing gets out of control.  US importers find it harder and harder to control quality over time and sustain delivery schedules from Chinese vendors.

Importers must remember that doing business in China is not at all like doing business in America.  The processes, culture and legal environments are a world apart.