Category Archives: 101 Damnations

Regulatory Damnation #34: Tariffs

While taxes alone are not damning, as taxes, like death, are one of the only two certainties in life, tariffs, on the other hand, are one of the ongoing nightmares of the Procurement world. Tariffs make the complete personal income tax code of the United States look like a kindergarten book.

For example, the current HTS (Harmonized Tariff Schedule) of the United States is 3,536 pages. And that’s just the US HTS code. The 2007 LIGIE for Mexico is 684 pages, and there have been hundreds of pages of amendments since then.

With 196 countries in the world today, extrapolating, that’s over 200,000 pages of HTS / HS (Harmonized System Code) classifications that an organization needs to be on top off to determine international import and export duty rates. But that’s just the tip of the iceberg. It’s not just keeping track of rates, it’s figuring out the rates that apply. For example, let’s say you want gloves, is it:

    4007.11.70 Leather - full grains   - glove and garment
    4017.12.70 Leather - split grain   - glove and garment
    4107.19.70 Leather - whole hide    - glove and garment 
    4017.91.70 Leather - other         - glove and garment
      ..
    4023.10.40 Apparel - articles      - gloves, mittens and mitts
    4203.29.XX Apparel - cowhide       - gloves
      ..
    6116.10.08 Gloves  - coated        - other
      ..
    6116.92.08 Gloves  - cotton        - other
      ..
    6116.93.08 Gloves  - synthetic     - other
      .. 
    6116.99.35 Gloves  - other textile - other
      ..
    6216.00.08 Gloves  - impregnated   - other
      ..

there are so many (dozens upon dozens of) classification of gloves, that it’s hard to find the right one – and if you pick the wrong one, and especially if you pick the wrong one with a lower tariff rate, then your organization is at risk of significant fines and penalties.

So how do you deal with this? There’s only one way — get a trade market intelligence solution which is kept up to date by people around the globe as classification updates and rate changes come up and easily searchable by the average Procurement professional who is not an expert in H(T)S code structures. There aren’t a lot of options, but SI recently covered one company, Integration Point, that has been building such a solution for almost 10 years. Why do you need a third party? Integration Point, which maintains a global content team, made over 2 Million updates to their global H(T)S code database in 2014 in an attempt to keep up with the never ending string of updates that are regularly released by countries around the globe. (Some countries release updates on a weekly basis. For example, Brazil once updated its HS code 80 times in one year.)

Environmental Damnation #19: Water

Water, water everywhere
and not a drop to drink

There are dozens upon dozens of challenges being thrown at you as a Procurement professional on a daily basis. We’ve said it before and we will say it again. These challenges will cause you nothing but grief and agony as these damnations, collectively, do nothing but divert your attention from critical strategic planning, (should-cost) modelling, and supply assurance.

Fresh Water is quickly becoming the scarcest resource. While nearly 70% of the globe is covered by water, less than 2.5% of it is fresh. Moreover, only 1% of our freshwater is easily accessible, with the rest trapped in glaciers, snowfields, and the earth itself. In essence, as pointed out in a National Geographic article, at most 0.007% of the planet’s water is available to fuel the planet’s 7 Billion people. At least 1 Billion people worldwide lack access to fresh water, and up to 3 Billion face water scarcity issues at least one month of the year. And this situation is only going to get worse — by 2025, over 5 Billion people may be dealing with water scarcity. Not food scarcity — water scarcity. The only thing more important to life than water is air. So the fact that it is expected to be so scarce should be, to be blunt, scaring you sh!tl3ss.

But it’s not just we as individuals that need fresh water to drink (and bathe and, to some extent, clean), and the farms that need it to grow our food, but our organizations need it too. When it comes to modern production, water is needed to clean and cool modern production plants. For example, not only is it impossible to make semiconductors and modern computer microchips in anything other than an ultra-clean facility, but ultra-pure water is required during production. Chips, and the electrical pathways that power them, are built up in layers and need to be washed clean of the solvents and debris from the layer just completed before the next layer can be started. This can only be done with ultra-pure water — which is so pure that it is unsafe to drink (because water is the universal solvent and perfectly pure water would actually leach minerals and vitamins out of your body, instead of adding them as vitamin and mineral water does).

The production of ultra-pure water requires 12 filtration steps beyond reverse osmosis, a process that is often used to turn ocean water into drinkable water. Each of these steps requires as input water of a certain purity. And even reverse osmosis requires water of a certain purity, or the equipment has to be shutdown and cleaned too often, making regular, cost-effective production difficult.

But it’s not just semiconductor and microchip plants that require fresh, clean, water — data centres, which use water cooling, do too. Salt water corrodes the cooling system, and a single leak could short out an entire facility (if it was over the main relay station). Even if your facilities don’t rely on freshwater, chances are that your suppliers’ facilities do. A lack of freshwater in your supply chain can result in unexpected disruptions, and if it is needed for cooling plants that can overheat, even disasters.

And it might not be so bad if this was the extent of the risk. But a lack of freshwater can cripple an entire economy. As per this recent article over on EurActiv.com, the entire German economy is vulnerable to global (fresh) water scarcity.

According to an author of a recent WWF Study (in German), released last August, many German economic sectors are both responsible for and affected by the international water crisis, from the food sector to the auto and fashion industries. (Almost 9,000 litres of water are needed to produce one kilogram of cotton in Pakistan!)

Even Southern Europe is running out of water. Currently, 80% of water is used for agriculture in the region, and in some of these countries, there is not enough groundwater and desalinated seawater is needed to make up the difference.

And the water shortage is further contributing to the climate change that may have caused it. As pointed out in Wikipedia, the resulting aquifer drawdown (and pumping of fossil groundwater from below the surface of the earth) increases the total amount of water within the hydrosphere subject to transpiration and evaporation, which upsets the climatic balance in ways yet to be understood.

And if you’re not preparing for the coming water shortage now, when it hits, it may be too late. You barely have time to get a drink, and now you have to ensure that the entire supply chain will have enough to drink in the coming years. And when you are surrounded by fire, this is not easy to do.

So what should you be doing? If your facility requires large amounts of fresh water, don’t depend on local city infrastructure to deliver it to you. Plan to build your own pumps and filtration systems to draw water from nearby lakes or underground wells. And if the facility is in a region that regularly experiences water storage, consider producing excess capacity and selling to nearby factories to reclaim your investment sooner rather than later.

Economic Damnation #05: Currency Strength

As indicated in the prologue to this series, there are dozens upon dozens of challenges being thrown at you as a Procurement professional on a daily basis. Causing you nothing but grief and agony, these damnations collectively do nothing but divert your attention from critical strategic planning, (should-cost) modelling, and supply assurance.

Today we are going to discuss damnation #05, currency strength — one of the ten economic damnations that we will cover before this series is over. This damnation is particularly relevant with the recent volatility in the Ruble, Renminbi (Yuan), and the petro-dollar — which might be used as a hedging strategy in some organizations.

Currency fluctuations can quickly destroy the best laid sourcing plans when sourcing internationally from countries that use a different currency, even if the contract is being executed in the currency used by the buyer.

In the situation where the contract is being executed in the currency used by the buyer, if that currency devalues against the currency being used by the supplier, then the supplier may not be able to afford to honour the contract without risking bankruptcy (as the supplier’s costs would exceed their sales). In this case, the supplier may simply cease to honour the contract.

In the situation where the contract is being executed in the currency used by the supplier, and if that currency increases significantly in value compared to the buyer’s currency, then the buyer may not be able to afford to buy from the supplier (as the buyer’s costs would exceed what the customers are willing to pay) and may be forced to break the contract (and risk the ramifications).

In either situation, there is a disruption in supply and the potential for significant financial and legal ramifications down the road. And this is one damnation that is never going away as currencies never remain stable. And while it will forever damn us, it is not always impossible to predict when currencies are likely to fluctuate.

How? Through the use of Purchasing Power Parity (PPP), we can determine when a currency is undervalued and when it is likely to rise in the future or when a currency is overvalued and when it is likely to fall in the future. It’s not perfect, but it’s better than flying blind. (For a good definition of PPP rate, review Dick Locke’s classic post on Undervalued Currencies, Part I).

So how do you determine PPP? One way is to simply look them up on the World Bank site. And how do you determine if a currency is over or under valued? You compare the official exchange rate to the PPP rate. If the PPP is (significantly) greater than the exchange rate, then the currency is undervalued. But if the PPP is (significantly) less than the exchange rate, then the currency is overvalued. How much? Divide the rates to get a percentage.

So how do you put this to use? Since floating currencies don’t always settle near the PPP rate, which some analysts are prone to believe, you look at historical variations and see where the trend over time is. If the currency is undervalued by 30% but the historical trend is that the currency is only undervalued by 20%, then it is likely that the currency is going to rise and that should be taken account in one’s projections. But if the currency is undervalued by 15% and is historically undervalued by 25%, then it is likely that the currency is going to fall. (For a more detailed explanation and example calculations, see Dick Locke’s classic post on Undervalued Currencies, Part II.)

Now, this won’t account for the situations where one country, like the US, is intentionally lowering the value of a major market resource or currency basket, like the petro-dollar, in the hopes of decreasing the value of another market resource or currency, like the Ruble, in the hopes of weakening an economy, like Russia, as these situations can only be detected by geopolitical (trade) monitoring (which will be discussed when we cover damnation #25, among others), but it will give you a much better understanding of relative currency strength and how the currency value is likely to change over time based on historical trends.

Procurement Damnation

To the tune of Rock ‘n’ Roll Damnation by AC/DC

They say that you are too proud
Well baby that’s tough
They say that you spend too much
Can’t save enough

And they all think you are a fool
Baby I’m a fool for you
They say that they are displeased, shaky stuff

It’s a Procurement damnation
You’re their whippin’ boy
Procurement damnation
Take control while you still got a voice

You say that you want respect
They say “For what?
For everything that you done for me,
Thanks a lot!”

Get up off your bended knees
Time to put your mind at ease
My temperature’s runnin’ hot
I been waitin’ all night
Take a bite from what they got

It’s a Procurement damnation
You’re their whippin’ boy
Procurement damnation
Take control while you still got the choice

It’s a hard life

Damnation, they’re putting you down
Damnation, all over town
Damnation, ’cause they’re way outta reach
Living on the street you gotta practice what they teach

And it’s a Procurement damnation
You’re their whippin’ boy
Procurement damnation
Take control while you still got the choice

Damnation, you left a happy home
Damnation, to strike out on your own
Damnation, you’re now living in sin

It’s a Procurement
Damnation, just a bundle of joy
Damnation, you’re a toy for a boy
Damnation, you got the dollars in your eye
Always chasin’ that pie in the sky

Procurement damnation