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Category Archives: Supply Chain

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Is This Another Smoot-Hawley?

There are economists who say that NAFTA has caused the loss of countless jobs to the lower-cost environments in Mexico, and that these jobs will come back in a post-NAFTA trade environment. They argue that instead of doing nothing, the US should take every opportunity to raise all import tariffs, eliminate trade agreements, and close the borders to immigrants and trade. This, some say, will make America competitive, even though there is no gain in productivity or cost reduction in American manufacturing.

What they may be forgetting is that the US has gone down this pathway before with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on about nine hundred products Historians blame Smoot-Hawley for triggering the Great Depression of the 1930s. They point out that Smoot-Hawley caused sharp increases in consumer prices, which led to consumers buying fewer products, which in turn led to low demand, lay-offs, high unemployment, and ultimately, the stock market crash.

For sure, NAFTA has its problems. The import/export paperwork required to track goods moving across the borders and the associated record-keeping can be onerous. Special rules for truckers from Mexico have taken a toll on American truckers, and the effects don’t end there. But overall, most economists think NAFTA has had a net positive effect on the US economy.

Trade Wars

Another concern is the likelihood of a trade war with Mexico and other countries. If tariffs are raised on imports to the United States, or if the proposed Border Adjustment Tax is imposed, our trading-partner countries are likely to raise tariffs on imports coming into their countries. Take fruits and vegetables for example. More than six billion pounds of fruits and vegetables were imported from Mexico in 2015-2016. Mexico provides 70% of fresh fruits and vegetables consumed in the United States. Corn and soybeans from American farms move the other direction into Mexico. If a tariff is placed on fruits and vegetables from Mexico, and Mexico retaliates with a tariff of their own, American consumers will suffer from higher prices, and American farmers will find it harder to compete for business in Mexico.

Mexico and the United States trade much more than food products. In fact, industrial products are the largest sector for imports from Mexico. Manufacturing operations vary from Electronics Manufacturing Services (EMS), Contract Manufacturing (CMs), Original Equipment Manufacturing (OEMs), and Maquiladoras.

What’s Next?

A radical change to tariffs on Mexican imports and a renegotiation of NAFTA or outright withdrawal from the treaty could cause much turbulence in the US economy. It could disrupt cross-border supply chains and transform import and export patterns with Mexico. It is unlikely to improve heartland and rustbelt manufacturing jobs that Trump has promised his voters he would bring back. In fact, the United States and Mexico have such tightly interconnected economies that increased tariffs and trade barriers would likely end up causing more job losses all along the US-Mexico border.

And the turbulence doesn’t stop there. Americans will likely end up paying more for everything coming from Mexico or manufactured in higher-cost American factories.  Buckle your seatbelts.

 

Makers

I spent the past week at the University of Birmingham in England with a group of 16 Operations and Economics Professors from across Europe. This was the EC “Makers Conference.” I was there to lecture and to represent the Reshoring Institute (www.ReshoringInstitute.org ). This group of universities is working together to provide research and assistance to companies that are reshoring manufacturing and building production capability in Europe. Some of the biggest buzz of the week was around the idea of Industry 4.0 (the Internet of Things) and Servitization.

The term “Industrie 4.0” comes from a project in the high-tech strategy group of the German government, which promotes connection via the Internet. It is the fourth industrial revolution in manufacturing.

  1. The first industrial revolution was the mechanization of production using water and steam power
  2. The second industrial revolution introduced mass production with the help of electric power
  3. The third industrial revolution was the digital revolution and the use of electronics and IT to further automate production
  4. The fourth industrial revolution is the Internet of Things

Industry 4.0, the Fourth Industrial Revolution, is all about connecting machinery to the Internet. Industry 4.0 creates the “smart factory” where machinery and processes are monitored over the Internet and then communicate and cooperate with each other. Just imagine up to 50 billion machines connected in some way over the Internet.

This of course, has significant ramifications for Reshoring. The more automation is introduced into manufacturing, the more efficient labor becomes. This shifts the economics of manufacturing to allow for the total cost of ownership/production to be competitive in the US. This supports reshoring of production or producing in local markets for the local consumers. The overall cost to produce and deliver goods declines.

Makers

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

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.

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.

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

I am proud to announce the publishing of my 3rd book, 42 Rules for Superior Field Service.

Writing a book is a daunting task.  It may look easy and hundreds of thousands of people try it, but it is tougher than you think. 

First you have to submit a book proposal to a publisher and hope your idea is good enough to be accepted. If your book proposal is accepted, you sign a contract and then your publisher or executive editor will work with you to determine a timeline and milestones for the book-writing process. Then you have to get busy and start researching and writing. If you prefer to outline your book first, this task must be accomplished early on.

 If you are writing non-fiction, there is a lot of research to do.  You must be able to write about a topic, plus back up your writing with facts and evidence, and perhaps some statistics.  You may even conduct interviews with experts and surveys for data. 

Armed with research, you begin the writing process.  If you have a full-time job, this means being disciplined enough to write on some sort of schedule whethe42RulesForSuperiorFieldService_Jacket_X1A_050313r it’s weekends or nights or early mornings.  Unfortunately, I find that after working all day, I am often too tired to write effectively at night.  This means that my writing time stretches out longer than it should.  Chapters that should take days to research and write often take weeks to finish.

Once the main body of writing is done, you must add “front matter” and “back matter” including an introduction, dedication, table of contents, appendices, contributors’ bios and an author’s bio.  You must also obtain endorsements from colleagues or well-known people who can recommend your writing.  Endorsements are printed on the back or inside flap of the book.

But don’t do a happy dance just yet…next comes the editing cycles.  First there is executive editing, where your editor reviews the manuscript and gives feedback regarding the content.  She makes suggestions about the flow and the way you have supported your information.  When she’s done, you have a few re-write cycles that may take many weeks to complete. 

After executive editing comes copy editing.  In this stage, the grammar and style sheet police pick at every period, awkward phrase, tense agreement, capitalization, etc.  The copy editor also checks facts and questions every detail that isn’t footnoted or attributed.  When she’s done you have several more re-write and correction cycles.

Finally comes the lay-out process.  Once again you edit the manuscript after it is laid out in book-form and again there are a few edit cycles.  Once you are satisfied, the book goes to print.  Only then you can do a happy dance!

Of course, once the book is published, the marketing cycles begin…

I participated in the 2013 Bloomsday 12K run/walk in Spokane, WA on May 5.  This is an important and well-known road race, mostly because of the event’s size.  About 50,000 people participate from the surrounding areas and some from across the country.  It’s a fun event with bands and fans all along the hilly course and a big party at the finish line.

At about mile 5, while I was desperately trying to take my mind off my aching feet, I started to think about the supply chain support required for special events like this.  Bloomsday is exceptionally well organized and managed, and the supply chain challenges are especially difficult.

Just getting people lined up in the proper time/age groups at the start of the race is amazingly orde

50,000 runners start Bloomsday in Spokane

50,000 runners start Bloomsday in Spokane

rly and efficient.  And consider for example, making sure that there is enough water poured into cups and ready to hand to 50,000 people at 4 stations along the route.  Water is critical to keep participants hydrated in the warm May sunshine and for their successful finish of the race.  These are major logistics challenges of a huge event like this, and the Bloomsday logisticians did a remarkable job.

There are other considerations, too.  T-shirts at Bloomsday are legendary.  The design of the annual t-shirt is kept secret until race day, but behind the scenes, ordering 50,000 shirts must be a daunting task.  The tag inside my t-shirt says it was made in Mexico.  Sourcing t-shirts must have included months of planning for production and importing into the US.  The shirts (in the size we ordered) were available at organized distribution tables at the end of the race. 

These kinds of big events are akin to other supply chain challenges such as pumpkins and costumes at Halloween and Christmas trees in December.  It takes a lot of talent and effort to get the right products to the right place at the right time.  Bloomsday Supply Chain people are some of the best.  Well done Spokane Bloomsday, well done!

I spend most of my time working on global supply chain consulting engagements.  But from time to time, I also do Expert Witness work for legal cases involving supply chain issues.  At the moment, I am working on a legal case involving agri-business across Malaysia and Indonesia.

palm oil fruit

Arriving after midnight last night, I couldn’t help feeling a little creepy as we sped from the airport to town in a rickety old taxi.  The third world flew by the windows.  The ancient driver was going 140km/hr until I begged him to slow down. What if we broke down or had an accident?  Were there headhunters lurking? The $50 “best hotel in Sabah” turned out to be rather scruffy around the edges and even the bottled water looked suspicious.  But in the morning, things looked better. Our driver arrived with cold water and a 4-wheel drive Jeep to take us the 50 miles to the plantation, over rutted dirt roads. Finally, we arrived at the estate plantation, a bit rattled from the very bumpy ride.

As remote as this plantation is, in the hot and humid jungles of Borneo, it strikes me that the supply chain issues faced by this company are not that different from any other company large or small, rural or in a metro area.  Here, in the wilds, the managers are worried about planning and forecasting, raw materials such as fertilizer and seeds, labor and transportation.  Harvested product needs to be processed within 48 hours; shipped to the processing plant via rag top trucks.  Then, processed product must get to market to meet customer demand.   The managers worry about IT systems to capture production data and pay the workers.  They do analysis for continuous process improvement.

The plantation workers live in plantation housing and their bare-foot children attend plantation schools.  The people are poor, but very friendly.  Hopefully, the year-round harvest is good, and too much of it won’t be eaten by tree rats or monkeys.  Even rain can ruin the workday.

This is indeed the third world, but they must deal with first world global supply chains and technology. It is gratifying to know that the topics we master as supply chain professionals are truly universal.  The skills we learn apply across industries and continents and cultures.  The differences are fewer than we might expect.

It was an interesting adventure and about as far away from my Silicon Valley home as one could possibly get. At least at home, I don’t have to deal with monkeys…at least not that often.

I visited a State Owned Enterprise (SOE) machine shop near 5th Ring Road in Beijing one very hot and humid August afternoon.  The machine shop was located among a cluster of buildings that didn’t seem very remarkable from the outside.  But inside was a different story.

We were greeted by the Plant Manager and the Operations Manager, who were expecting us for a visit that afternoon.  After the greetings were exchanged, the two managers disappeared to take a phone call and we were left to wander the plant by ourselves, unescorted. 

We walked down the center aisle of the machine shop, surrounded by giant drilling and cutting machinery making thunderous noise and throwing off metal shavings.  We were offered no eyewear protection, no foot/toe protection and no earplugs.  The Chinese machine tool operators were wearing black cloth shoes with rubber soles; not the steel-toed boots you would expect in a US factory.  About half way down the center aisle, a chemical smell was so overwhelming, that I looked for an open window or door to gasp some “fresh Beijing air”.  I was allowed to take as many photos as I liked.

The lack of safety standards and allowing us to walk through the factory unescorted was a dose of reality regarding Chinese manufacturing.  China’s steady climb in the industrial world has not been paralleled with world standards for safety.  The climb to achieve these standards in China is extremely steep.