Monthly Archives: March 2015

Infrastructure Damnation 11: Postal Services

While most Supply Chains don’t run on public postal services, and instead rely on private transportation companies for both their freight and package delivery needs, public postal services are still needed. Why?

Without public postal services, there would be an effective private monopoly in mail and package distribution. While there are multiple private options, without a public body to set baseline prices, there is no incentive for the private companies to be competitive. As long as the private companies thought they could charge more, it is very likely that rates would increase across the board, consistently, until the average company switched to independent bike couriers.

More importantly, without public postal services, the average consumer would not be able to afford to shop online as much as she does now, which would likely lead to an across the board decline in sales for many companies, which would, of course lead to a decline in order volumes and Procurement’s negotiating leverage with its suppliers.

And this is looking like a reality in multiple countries right now. As discussed here on Sourcing Innovation over the last few years, The First World Postal Services Are in Trouble and the, US, UK, and Canadian public postal services are all deep in debt and may need to drastically reduce services in the coming years in order to balance the books and keep in business. Consider SI’s recent posts on the US, UK, and Canadian postal services (including, but not limited to, our posts that asked if the U.S. Post Office Can Be Fixed and Too Bad the US Post Office Did Not Follow Royal Mail’s Lead). They are billions in debt (Canada Post is over 1 Billion in debt exclusive of pension liabilities, the recently privatized Royal Mail has a debt to equity ratio of 91% (which puts its debts at over 1 Billion US Dollars, and US is over 100 Billion in debt when underfunded pension liabilities are taken into account, and it’s not getting any better.

While one may think that this will never happen, as Canada has had its own public mail service since 1867, the US has had a reliable public service since the Pony Express started back in 1860, and the UK has had public mail since 1516 — but we could be just a few years away from the day it’s private bike courier for mail and small packages (and we need a Dark Angel for reliable deliveries). It is likely that Royal Mail is only still in existence because it was privatized (and that postal services in North America, if they do not drastically restructure operations, will have to follow suit).
And while you might not see a large impact to your supply chain, since the 3PLs and trucking companies are here to stay, when your order volumes decline and you have to pay double just to send a contract across town, you will.

Risk Management in Migration to Low-Cost Countries, Part II

Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

In Part I, we noted that efficient migration to low-cost countries has become a necessary, competitive trait because ignoring low-cost country sourcing within the corporate agenda is now a risk in itself. However, low-cost country sourcing has become so intricate that it carries significant risks if improperly managed. We already discussed that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process and discussed the quality concern and noted that where there is expertise in a well established industry, quality will generally not be an issue. But this is just one risk area.

As far as other risk areas, geography is a critical component that is ignored more frequently than it is acknowledged when selecting a low-cost location. Geography plays a dual role when managing risk. First, geographical risk can be assessed based on the proneness of one location to experience a natural disaster and its ability to recover. Secondly, geography should be assessed on the location’s accessibility to reach end markets quickly. Logistics and infrastructure play a key role here, but a strategic location is a competitive advantage that will nurture mobility.

Low-cost countries will also have different laws, rules, and regulations that permeate their business culture. Some countries will have strong intellectual property (IP) protection schemes but they may not enforce or penalize infringement. Others won’t have any at all, which in many cases has motivated corporations to exit low-cost locations. IP transgression may have huge repercussions to a company, especially if prosecution in a foreign country is favorable. Corporations must ensure that robust confidentiality agreements, contractual terms and conditions, and enforceable jurisdictions are in place with all entities that are engaged from the beginning.

Financial regulations, taxing structures and commercial activity compile an extensive bundle that may pose both risks and advantages. The best way to capitalize on tax breaks, financial incentives and even logistics benefits is by understanding the trading regulations and agreements low-cost countries have in place and how can they be leveraged advantageously. From subsidies, to temporary-tax-free importations, most low-cost countries today have mechanisms to incentivize investment. It will also be critical to understand which regulations can negatively impact the operation or may affect the Total Cost of doing business. Some good examples of this are anti-dumping laws and penalties that are applied to specific commodities and products, which will vary in time and form constantly.

Political and social instability are stigmas that often become associated with low-cost countries. In many cases this image is misunderstood or exaggerated by the media. The reality is that focused social issues may transcend the commercial barrier when unwarranted fear is passed onto potential investors. Social unrest is unpredictable and can easily scare away opportunities, but in many cases, specific industry sectors may be protected from it and may even be thriving in spite of it. The best way to manage something like this is to understand how the macroeconomic landscape behaves as a whole from the very beginning.

Some companies have shown interest in approaching migration on a “testing the waters” type of approach to mitigate risk, which may entail transitioning only a small portion of their volume to a low-cost country, or running pilots to ensure a safe migration. While this conservative strategy is common and could be effective, is not necessarily the most beneficial. “Testing the waters” may actually be very expensive in the short-term and may not provide the full benefits of a well-run migration strategy; in some cases it may even be considered somewhat “risky” since companies may incur in dead costs, expose competitive strategies and not leverage the full potential of the local network.

Strategic sourcing best practices are a key element on risk mitigation, as many of them include the evaluation of multiple dimensions of the offshoring and migration process. They also help understand suppliers and establish collaborative links with them and other local entities that can help define a clear picture of the local market, the networks and uncover the opportunities that may have not even been considered in the first place.

With all this in mind, low(est) cost should not be considered as the only metric on which to base a migration decision. Finding an ideal low-cost country with low risk will depend on its sustainability potential. In some cases the lowest cost may also come with higher risk, and so a well-balanced strategy that demonstrates long-term value is the best formula to keep both costs and risks down. A balanced combination can only be drawn through leveraging accurate data and expert advice on each of the risks areas of cost migration.

Thanks, Diego.

Risk Management in Migration to Low-Cost Countries, Part I

Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

A few decades back, corporations started to talk about migrating costs to low-cost countries. These discussions were driven by the inherent advantages that locations in East Asia, Eastern Europe, and Latin America presented. Today, this is no longer merely a strategic notion but a well-established commercial trend. Efficient migration to low-cost countries has become a necessary, competitive trait.

One of the primary reasons companies decided to migrate to low-cost countries in the first place was precisely to mitigate risk, whether by reducing cost or by decreasing the probability of supply chain or operational disruption. Eventually, this strategy became so popular that companies understood that without implementing structural changes to reduce their cost base, they could perish. Consequently, as the trend evolved into a global practice, it became clear that ignoring low-cost country sourcing within the corporate agenda was a risk itself. Today, the global sourcing paradigm is complex, and in many cases, world class organizations are now even moving out from well-known countries in Asia to “nearshore” locations in Latin America.

However, as ironic as it may be, low-cost country sourcing is so intricate that it carries significant risks if improperly managed. This preamble sets the tone to our main discussion, as risks factors, whether known or strange, will present themselves regardless of the low-cost country strategy.

Common sense dictates that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process. Surprisingly enough, many corporations overlook this first step because foreign market research can be both expensive and time consuming. Regardless of how arduous the efforts are, some risk factors will not be identified easily or early enough. Thorough research and preparedness will always prevail as the first risk mitigation strategy. That said, many risks of low-cost country sourcing today are well-known, and best practices will facilitate managing risk from the initial stages of the migration process.

Typically, low-cost countries are surrounded by some level of both reputation and myth. Getting to know the real landscape is paramount when migrating costs. The first premise that comes to mind is that low-cost is associated with low quality. Generally speaking, this is not true, especially when we understand the strong industries in the markets we pursue. The likelihood is that where there’s expertise and a well-established industry, quality will not be an issue. What we need to determine instead is whether the location in scope has the adequate environment to sustain and develop the industry in the long-term. Beyond generating an understanding on local suppliers, labor rates, and raw materials, corporations must consider multiple areas of risk and audit the local market itself.

This is particularly important because any company migrating a manufacturing process or even a service should determine if the local market itself would be receptive to it and support regional demand. This step would mitigate risk by reducing costs and opening new markets, making the location an efficient link within the supply chain and a source of revenue.

However, quality is just one concern that needs to be considered when outsourcing to a local market. In Part II, we will explore some of the other risks that need to be addressed.

Thanks, Diego.

Economic Damnation 07: The 1%

“The 1%” was coined in 2011 to refer to the US income and wealth inequality where the concentration of wealth among the top 1% is significantly above the national average. On average, the 1% earn well over a million dollars each year (and the bottom 99% all make less than 350K) and control over one third of the country’s wealth, meaning that, on average, their financial influence is 33 times that of an average person. In addition, the roughly 536 Billionaires in the US have a net worth that is over 10,000 times that of the average household net worth in the US (and in a couple of cases, almost 100,000 times).

And the US is not the only country with such a disparate income and net worth inequality. China has 213 Billionaires in US dollars, and the top one percent in China also controls over one third of the country’s wealth. The wealth inequality has widened significantly over the last 20 years.

And similar situations appear to be arising in other developed countries around the world. A recent article in the Guardian called the growing wealth inequality in the UK a ticking time bomb, the Broadbent institute recently published a report that found Canadians vastly underestimate the wealth gap in Canada, and even the Australian Institute is finding that the inequality between those with the most and the least is rising in what was once universally thought of as an egalitarian country.

This is bad, because it’s at the point where a select view individuals can not only single-handedly make life a living hell for a large number of Procurement professionals in a number of disparate companies across the globe (as Extreme Activist Investors, Damnation 64), but can individually cause a number of economic, infrastructural, environmental, regulatory, societal, organizational, and technological headaches all on their own. If a small group of these individuals buys a Fortune 3000 and decides it’s manpower heavy, they can cause 10,000 people to be laid off in a day in a small town and cause a major shift in the local, and even regional, unemployment rate (and the market who can afford the product being built). They can start new airlines to increase competition (and logistics headaches), or buy a competitor just to decrease competition. They can create new sustainability initiatives overnight, or turn the fracking dial up to 11! They can fund entire lobby groups to get their standards and requirements in place. They can single-handedly make your supply chains safer or lobby against worker’s rights to keep costs down. They can replace your entire Sales and Marketing teams overnight. And they can dictate your ERP for years to come.

The reality is that, in today’s world, Money Talks, and when you can buy and sell 99% of the world’s companies with your pocket change, their money talks the loudest. It’s another damnation we’d rather not know exists, but it does, so we need to be as prepared as we can (and always expect that even the best laid plans can be set awry by the whims of one wealthy individual).