Monthly Archives: July 2012

Can the US Post Office Be Fixed?

As chronicled in SI’s winter post that decided it was Too Bad the US Post Office Did Not Follow Royal Mail’s lead (before we got wind of the Royal Mail Fiasco), it’s old news that the US Post office is in dire straits. (No, no, not this Dire Straits. The US Post office definitely are not The Sultans of Swing.)

When you have more debt than 50+ countries have capita, that’s a bad thing, and not something a single (barrel) of sourcing projects is going to fix overnight. (Any operation hemorrhaging cash that bad should have hemorrhaged management years ago!) A drastic Supply Management-led transformation is required, but what should it look like? Obviously, Saturday service can be eliminated (as we Canucks do without it just fine), and obviously the sorting centres should be more efficient, but that’s a small drop in the labour and overhead categories relative to the 20 Billion the US Post Office needs to save (if it doesn’t want a good excuse to be shuttered).

Where should it start? Damn good question. Obviously, a technological transformation is a great place to start, but even the doctor is at a loss at how you cut 15 Billion when the bigger problem is obviously that you lost it in the first place! However, a few people are taking stabs at it, and this recent piece over in Progressive Railroading, on how Intermodal rail [is] a ‘sensible’ transportation option for U.S. Postal Service, that quoted a report recently issued by the U.S. Postal Service Office of Inspector General‘s Risk Analysis REsearch Office, showed someone has a head on their shoulders.

In Strategic Advantages of Moving Mail by Rail, shifting a portion of mail volume from tuck to intermodal rail could yield $100 Million in annual cost savings without requiring changes to the postal service’s network. Wow! Imagine how much could be saved if the network was optimized. I’m guessing double that, or more. If I’m right, that could yield 1 Billion in five years. With almost no effort!

They have to do something. As CNN notes, it’s a summer of discontent at [the] Postal Service. But given that it’s on the verge of defaulting on a $5.5 billion payment covering retiree health care due August 1, what can we expect?

At this point, I have to agree with Bob Ferrari, who, in his recent Friday Rant^*, said that solving the problems of this agency involves a number of structural changes as well as an infusion of modern supply chain management practices related to efficiency and productivity. We have been clear that the U.S. needs a vibrant and efficient postal service and that may not necessarily equate to wholesale privatization. And, most important, there is an obvious need for a non-partisan, independent commission to oversee the process of re-structuring the USPS. Instead of audit agencies reacting to the obvious and pointing to required management changes, an independent commission should be tasked with a comprehensive look at how the USPS can be transformed to a highly efficient agency that instills modernized physical distribution and information management practices. Hear, hear! Let’s face it — 3.3 Billion is an awful lot for highway transportation contracts, even if you are the USPS.

^* What’s with S.M. bloggers and Friday Rants anyway? Haven’t they figured out yet that any day is a good day for a rant!

What Can be ‘Made in the USA’ – Counterpoint

Today’s guest post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement, and is a counterpoint to Derek Singleton‘s recent post on What Can be ‘Made in the USA’ over on Software Advice.

This is the kind of prediction I like to put in an envelope and promise to open in 5 years to see if it came true.

It’s great that Airbus came to the United States. There’s no doubt that many companies who tried China sourcing weren’t capable of doing it well. There was also a rush to put production in China that didn’t belong there. Those would be items that require flexible scheduling and for which air freight costs make China prohibitive for US consumption. No doubt some of that is in the $200B pie chart of products that are likely to move from China to the US. No doubt that Chinese labor costs are rising, but the 13% figure annual increase figure cited is for Chinese minimum wage, of questionable relevance to exports.

But $122B in computers and electronics? I really doubt that. That’s roughly 100% of the US imports from China of computers, phones, TVs and monitors, and parts for those items. Those aren’t being built in China for anything much to do with labor costs. It’s where the suppliers are. Foxconn has a million people assembling electronics. Why do manufacturers gravitate toward a particular location? Michael Porter, in “The Competitive Advantage of Nations” nailed it. It’s a combination of four factors.

Factor conditions (this includes labor rates and a lot more)
Related and supporting industries
Demanding customers
High degree of competition

China has three out of the four. They are especially strong in item 2. Nearly all the components are built there, except for a few high value parts.

Looking further, if companies pull out of China, where would they go? Phones, other than from Apple, largely come from Korean and Taiwanese companies.

Televisions are also largely from non-US companies. As they drop in price, shipping costs become a larger fraction of total costs, so many TVs for the North American market are being built in Mexico. (Mexican TV and monitor imports to the US passed China’s a few years ago.)

We’ll see how the prediction holds up. In the meantime, strategic sourcing professionals should make up their own minds, not just look at trends or predicted trends.

Thanks, Dick.

Markets are Unpredictable – Is It Time For Old Fashioned Futures?

Recently, the Economist published a piece about the broken record that the markets have been following for the past five years. In particular, it has been skipping between two tracks – total chaos (as we experience one crisis after another) and a rhythmic predictability (as investors flee to the safest investment vehicles around, a sharp contrast to the early noughts when risk was everything and traders made millions on the press of a button).

According to the article, an ideal portfolio in 2007 would have been stuffed with gold, white sugar, Swiss francs and German bunds, anyone holding that mixture of assets when the crisis began would have seemed either eccentric or confused. However, over the past five years, a new kind of risk aversion has seen gold hit record values on almost 10% of trading days. So has the Swiss franc, white sugar, and government bonds.

At the same time, many other currencies and commodities have hit record lows as well as highs. Hedging, the standard trick of attempting to offset potential losses/gains that may be incurred by locking in a price too high (or low) for a desired commodity by also taking a position in another commodity that has traditionally followed a mathematically defined relation with the desired commodity, has become almost impossible as one crisis after another derails any and all attempts to find predictable trends.

However, before hedges, we had good old fashioned futures. Initially designed to allow a farmer to sell his crop for a fixed price before it was even planted, a future provided a farmer with an assurance that he would be able to sell his crop without losing the farm if markets went south. This not only benefited the farmer, but also benefited the buying company as they would be assured of a product at the time of harvest. Or, if they didn’t want it, the buying company could sell the contract to someone else.

In today’s volatile market, hedging is not the best idea. If you can’t lock a contract in at a fixed price, which should be your Supply Management organization’s number one goal, you should look to a futures exchange. While it won’t offer either party as much security as a good old fashioned contract, a futures contract may prevent either party from losing their shirt.

Any differing thoughts?