Monthly Archives: December 2010

If Basel II Crippled Trade Finance, Will Basel III Stifle It?

Last year we discussed how Basel II is crippling trade finance, but it looks like the worst might be yet to come. According to some reviewers, Basel III, the forthcoming update to the Basel Accords, might stifle it.

As per this recent article in the Financial Times, the top 35 banks will face a $100 Billion Basel III shortfall in equity capital after the new regulations are imposed, with 90% of the shortfall concentrated in the biggest six banks. Barclays Capital estimates that the banks will need to hold top-quality capital equal to 8% of their total assets.

Not only will the Basel III reforms force banks to increase the risk adjustment for big swathes of their business, but it will gradually tighten the definition of what counts as tier one capital, putting many of the US banks who are already on shaky ground on top of a fault line. This could force banks to curb lending to the real economy or raise borrowing costs.

Plus, as described in this post over on the Reuters blogs, when credit in an economy is growing faster than the economy itself, a countercyclical capital buffer kicks in, which essentially says that banks need to have more capital in good times. So, instead of the 7% common equity, 8.5% Tier 1 capital, and 10.5% Tier 2 capital, the banks will need 9.5% common equity, 11% Tier 1 capital, and 13% Tier 2 capital.

And that’s just the beginning. In 2015, the liquidity coverage ratio gets introduced and then the net stable funding ratio arrives in 2018. And the committee is reviewing the need for additional capital, liquidity, or other supervisory measures to reduce the externalities created by systemically important institutions.

While stronger measures are obviously needed, as the economy cannot afford another Bear Stearns, if it’s too much, too fast, will the banks be able to handle it?

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Car Companies Do It Again!

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

For a blog post, I don’t often get off on international issues but this one has been making me crazy for years.

From an op-ed in last Wednesday’s New York Times:

     


In addition, even when it comes to the trucks and S.U.V.’s that Americans actually do want to buy, the bailed-out automakers are building vehicles faster than they can be bought. Inventory levels at both companies have ballooned this year, to the point where G.M. now has nearly three months’ worth of sales sitting on its lots and Chrysler’s excess inventory (in terms of days of supply) is exceeded only by such marginal players as Saab, Mitsubishi, Suzuki and Mazda.


Allowing new cars to pile up on lots may well be the most deadly of Detroit’s new-old bad habits, as the practice not only artificially inflates sales numbers (which, ridiculously, are booked upon production, not when a vehicle is driven off the lot), but also lead to yet more incentives, fleet sales, subsidized leases and subprime lending.

     from A Green Detroit? No, a Guzzling One by Edward Niedermeyer

The auto companies’ manufacturing people love to brag about low in-plant inventory. But can you think of a more expensive way to hold inventory than in the form of finished goods?

Between inflexible supply contracts and labor contracts that required paying laid-off employees, the car companies had really no short-term variable costs, so it paid to continue to run factories when there were no sales. However, the labor contracts should have gone away, and I hope they negotiated more flexible supply contracts. Maybe this is just habit?

Thanks, Dick!

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Another Reason to Be Wary of Outsourcing

As per this recent article in Industry Week on how the New CPSC Complaint Database Is Trap for the Unwary, as of March 2011, the US is going to have a searchable electronic database of consumer complaints, implemented by the Consumer Product Safety Commission (CPSC). In a mere four months, instead of having to file a request to the CPSC for the release of documents and wait for the results of a manual search, a consumer will be able to go online and do their own search at any time — and retrieve all complaints that are over 10 days old unless the manufacturer has proven (and the CPSC agrees) that the reports are inaccurate.

However, instead of having 15 days to review a complaint, a company will now have as little as 5 days (as the CPSC will have 5 days to forward a complaint to the manufacturer) to review a complaint and, whereas before the CPSC would not release the documents until the manufacturer’s response was reviewed (provided the response was provided by the deadline), the CPSC is now required to release all complaints after 10 days, whether the manufacturer’s response has been reviewed or not.

As per the article:


[I]ncorrect reports are likely to be included in the database and available to consumers, reporters or advocacy groups. … [T]he CPSC could perform compilations that may lead it to believe that a substantial hazard is presented by your product. Finally, plaintiff’s attorneys will use these complaints to prepare class action petitions, which will require significant resources to derail or defeat.

In other words, if a product that you manufacture fails, you could be in serious trouble … even if you outsourced the manufacturing to a contract manufacturer. It’s yet another reason to be wary of outsourcing, because if your contract manufacturer doesn’t enforce strict quality control, and the product fails, not only will everyone be able to find out each and every complaint 10 days after it is filed, but every class action lawyer in the country looking to make a quick buck will be automatically compiling evidence against you!

Maybe it’s time to bring (some of) your core supply chain back in house?

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HBR’s Advice on Getting Your Idea Approved

As per the eSourcingWiki article on The Quest for Purchasing Fire, it can be tough to get your idea approved. That’s why you need to take the advice of the experts from time to time, and this recent post over on the HBR Blogs on How to Get Your Idea Approved is a great start. Especially the second step of:

Prepare, Prepare, Prepare

As Michael Norton says, “when you watch someone stumble through an answer, you make an inference that they don’t know what they’re talking about“, so if you stumble through an answer, you can expect that your audience will think that your idea is half-baked, which will greatly reduce your chances of getting it approved. A major key to success is to identify the potential concerns of your audience up front and then prepare concise, honest answers to their challenges that you can deliver with confidence. Even if they don’t buy in, they’ll be a lot less likely to fight your idea. And then, you need to:

Keep it Simple

As Norton says, the curse of a presentation is that you know much more than your audience about the topic, but you have to avoid overwhelming your audience when you present the idea. You need to focus on the main points, which should be presented in the language of your audience, so that your audience will grasp the benefits quickly, and avoid tangential wanderings into secondary points unless they come up in the course of Q&A. And even then, you have to keep your answers concise. (Only go into the full details in the full written proposal, and only give it to those who ask. Provide everyone else with short executive summaries.) Finally, it’s important to:

Maintain Alliances

While its important to form alliances early, it’s also equally important to maintain those alliances. You’d be surprised how fast those alliances could go up in a puff of smoke if you don’t maintain your connections, keep them apprised of what is going on, continually address their concerns, and, of course, socialize.

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The State of Sustainable Procurement Reporting

ORSE (Observatoire sur la Responsabilite Societale des Entreprises) just released a detailed 36-page study on Sustainable Procurement Reporting, sponsored by Ecovadis, that aimed to identify the major trends in terms of Sustainable Procurement Policies. Many of the observations were not unexpected given the recent uptake in sustainability in the corporate world, but a few of the findings were disturbing.

First of all, the finding that European companies are twice as effective at communicating their sustainability goals and structuring their policies (75% of European companies are at an ‘advanced’ level compared to only 40% of American companies) is bothersome. Why is Europe so far ahead of us?

Secondly, despite the fact that 95% of companies mention Sustainable Procurement in their Sustainable Development reports, only 51% of companies have quantitative Sustainable Procurement targets. Without goals, it’s all just a bunch of hot air.

Thirdly, even though two thirds of North American companies (and almost nine tenths of European companies) analyze supplier performance, in some sectors, less than half of the companies assess the CSR performance of their suppliers. Why is performance so inconsistent across industries?

Fourth, only 13% of companies have a sustainable procurement team. While dedicated full time staff are not required, there should be a dedicated team of employees who have sustainable policy development, implementation, and (supplier) training as part of their job.

Fifth, on average, only 6% of companies train their suppliers to be sustainable. In order for sustainable practices to take root, they need to spread. In order for them to spread, they need to be taught.

In other words, the state of sustainable procurement reporting is improving, but there is still a long way to go. For more details, check out the detailed 36-page study on Sustainable Procurement Reporting.