Category Archives: Global Trade

Procurement Trend #28: Supply Chain Risk

Twenty-five trends are left
Together they are quite heft
Depriving us of deft
So let’s make another cleft
… and shred them one-by-one!

We won’t give up. We won’t surrender. We will plow through to the end. We shall expose the half-truths and the lies. We shall tackle the issue head-on and with growing confidence and clarity, we shall spread the truth, whatever the toll may be.

The goal is that, at the end of this thirty part series, you will not only understand why so many historians are still talking about the false trends we debunked in our Future of Procurement series, what you need to do to prevent staying in the past with your organizational “peers”, but what you need to do to not only stay in the present but start marching towards the future, which is coming faster than you think.

So why do so many historians keep pegging this as a future trend? There are a number of reasons, but among the top three today are:

  • Natural & man-made disasters are on the rise and will increase five-fold in next 50 years
    In Combating Supply Chain Disruptions: Lessons Learned from Japan by The Logistics Institute (Asia Pacific) published in THINK Executive, Nov 2011, the authors state that is predicted that both natural and man-made disasters will increase five times in the next 50 years! (page 18)
  • Specialization means lengthening supply chains
    as more and more companies focus on components or pieces of a solution and not the whole product or solution
  • Trade and security agreements mean more trade and economic risk
    as these agreements multiply faster than Fibonacci’s rabbits around the world

So what does this mean?

Natural Disasters are on the rise

Even more supply chain interruptions are on their way, and if your organization designed its supply chain around the ring of fire*, expect to get burned! Many organizations have not yet realized that they need to move manufacturing and storage away from the hot zones to the greatest extent possible, that they need to make sure that their facilities have multiple access routes (as one road is easily blocked by a huge sinkhole, earthquake, landslide, etc.), and that they need to have backup facilities in other locations and plans to quickly bring those backup locations online in an emergency. If the organization designed its supply chain around JIT (Just In Time), it needs to make sure that it has enough buffer stock of critical inventory to account for the expected time delay between production and shipment from a primary location and production and shipment from a secondary backup location if the switch needs to be made.

Specialization

The longer the supply chain, the longer it takes for material and product to flow though the chain to the end consumer. The organization needs to focus on collaboration and technology to make sure the chain flows smoothly. (The longer the chain, the greater the chance the order will NOT be perfect.) All parties will need to work together closely and disclose issues as they arrive so all parties can provide options for resolution. Data will have to flow quickly as well, and hence the need for new technology platforms and networks.

Trade and Security Agreements

Your organization needs to keep a watchful eye on trade agreements being negotiated and on the lobby groups pushing for those agreements, since many negotiations are now, despite being led by free countries, going on behind closed doors. If something is going to drastically change the terms of trade, your organization needs to know what the potential impacts will be and have a plan in place to deal with them. If your organization doesn’t, chances are it will miss opportunities to increase market share in the best case and be locked out of the market entirely in the worst. Sad, but true.

* Not Johnny Cash’s Ring of Fire, which burned brightest with Dilana.

Procurement Trend #31: Increased Competition

Today we continue our coverage of each and every “future” trend that we debunked in our Future of Procurement series that falls under old-blues and ongoing news. Before all is said and done, we’re not only going to make sure that you not only understand why the historians are still talking about these ancient trends, but why they are still relevant to many Procurement organizations stuck in the past with the historians as well as what your organization needs to do to prevent getting sucked into the historical time vortex as well. So on to trend number thirty one!

As per our original series, while an idiot, and maybe even an imbecile might not be aware that Globalization is, obviously, going to lead to increased competition (and that as the pace of Globalization increases, so does the pace of increased competition), but even your everyday dull-witted dimwit is going to realize this, as is everyone of average intelligence (and it’s pretty unlikely that you’re going to find anyone of lower IQ in a senior management or Procurement position [with the possible exceptions of Texas and Florida]). As a result, not only is this trend as old as globalization, but it has been obvious for almost as long.

So why are the historians still pegging it? What are some of the primary reasons?

  • Emerging markets are new Emergent Marketsand even emergent markets are outsourcing

    China is no longer emerging, it is now the world’s second biggest economy, regardless of whether you take the UN, IMF, or World Bank GDP calculations as gospel, Brazil is the seventh, Russia is the eighth, and India is the tenth. In other words, the BRIC are all top 10 economies. If that’s not an emerged market, I don’t know what is (especially since Canada and Mexico, the latter of which used to be buoyed by American near-sourcing, have been knocked down the list. Canada is not even top 10 anymore! [the doctor blames Harper.])

  • A New Set of Emerging Markets are Risingand even Africa is seeing investment

    A few years ago, people were talking about BRICS. Most because they saw the beginnings of the rise of South Africa, which matched the beginnings of the rise of the BRIC a decade or so ago, and a few because they were forward looking. But now that the BRIC has emerged, focus is shifting to the MIKTS (Mexico, Indonesia, South Korea, Turkey, and South Africa). As a result of the continual rise in transportation costs, labour costs in China, and automation, progressive American multi-nationals are realizing that near-sourcing to Mexico is not only the low-cost opportunity, but increases JIT capability in their supply chain. Indonesia is the new China and Vietnam for traditional manufacturing. South Korea, while very technologically advanced, is not as prominent as Japan or China as an outsourcing destination and, thus, provides additional opportunities for forward-looking multi-nationals for high-tech outsourcing. And Turkey, like Poland, has considerably lower labour costs than Western Europe but still has top-notch manufacturing standards and capabilities that not only meet Western European standards and capabilities, but in some industries, such as steel, exceed those capabilities. (For example, 1 US Dollar is approximately 2.3 Turkish Lira, and minimum wage in Turkey equates to about 4.3 Lira per hour [turkeys-minimum-wage-earners-slaves-to-poverty (todayszaman.com)], while the minimum wage in their neighbour Greece is about 2.5 times that, and the average Turk makes about 2,000 Lira or $800 US a month).

  • Developed Markets are becoming hyper-competitiveand sometimes the only option is global expansion

    Despite the irrational beliefe by some US leaders that markets can grow forever (because, theoretically, population can grow forever), from a global perspective, relatively speaking, market share at any given time is a zero-sum game. Your economy grows at the expense of another economy. At any given time, the are a fixed number of people on earth with a fixed number of hours to contribute to create a fixed amount of product — which means at any given point in time, there is a fixed global gross domestic product. So if your economy is getting more for that product than another economy is getting for an equivalent product, then your market share is growing at the expense of that market.

    So it should come as no surprise that now that reality has sunk back in and companies realize that market growth is limited to population growth, markets are becoming hyper-competitive as each company wants a bigger share of the fixed pie.

So what does this mean for you?

  • Emerging markets are now Emergent MarketsDon’t look for outsourcing cost savings from these markets, look at new customer opportunities and opportunities for nearby, or even local, production to keep global transportation costs and transportation delays down.
  • Third World Markets are Now Developing MarketsIf you must outsource, you need to look to the MIKTS, not the BRIC. If you still believe there is labour arbitrage, cost savings, etc. by outsourcing, then you have to look at Mexico, Indonesia, Turkey, or South Africa or get ahead of the curve and figure out what markets will be developing markets in 10 years.
  • Developed Markets are Becoming Hyper-CompetitiveSavings is not the answer — someone bigger can use leverage to save more. Value is the answer — value to the consumer, value to the company, and value to the supplier. So look for value generation in everything your organization does.

Procurement Trend #32: Globalization

As per yesterday’s post, we need to discuss in detail each and every “future” trend that we debunked in our Future of Procurement series on old-blues and ongoing news. Until you not only understand why the historians are still talking about these trends, but why they are still relevant to many Procurement organizations that are stuck in the past with the historians, as well as what you need to do to prevent staying in the past with your organizational “peers”, we can’t risk ignoring them simply because we’re fed up of them. We have to make sure that each and every organization that wants to claw its way out of the past and into the present has the knowledge it needs to do so. So without further ado, we move on to trend number thirty-two.

As per our original series, globalization began soon after trade between nations. As far back as 3,000 BC Egypt was trading with Mesopotamia, which was near the end of the known civilized world for most Egyptians at that time, for pottery, lazuli, and obsidian. Then, about 3,000 years later, the Silk Road connected China to India, Africa, the Middle East, and Europe — and that was the known world at that time. Globalization has been with us for thousands of years and isn’t going away either.

So why do so many historians keep pegging it as a future trend? There are a number of reason, but among the top three today are:

  • Post-Panamax Ships and the Panama Canal Widening
  • 767s
  • The New Silk Road

So what does this mean for your organization? How do you blast out of the past and into the present in preparation for planning for the future?

Post-Panamax Ships and the Panama Canal Widening

Current Panamax Ships can accomodate 5,000 TEU (twenty-foot equivalent units), and can hold the equivalent of three-plus football fields, but with the widening of the Panama Canal, expected to be completed next year, the canal will be able to handle post-Panamax ships with a cargo capacity of up to 13,000 TEUs. That’s a 260% increase which will bring the cargo capacity up to about eight football fields. That’s over 20 million pre-packaged ready to sell iPhones on a single ship. Assuming Foxconn can pump them out fast enough, one ship and all of North America’s iPhone needs are met for an entire quarter!

It means that even with increasing oil prices and transportation costs, it will still be cheaper to outsource production of certain goods because the cost per unit will be essentially zero in certain compact high-value goods categories.

787s

Can’t wait 33 days for ocean freight? You don’t have to! The new 787-10 Dreamliner has a 124.4 meters of cargo capacity, which is over 3 TEUs of cargo capacity that can be moved halfway around the world in less than a day! For compact, high-value goods, this also results in outsourcing continuing to be profitable and logical for certain categories despite rising oil costs and rising labour costs in Asia.

The New Slik Road

Despite the almost utter lack of coverage from western media, the new China, Russia, and Germany trade partnership is going to usher in a new era in Eurasian trade, strengthen both the European and Asian economies (and Russia, India, and China in particular – the “RIC” in “BRICS”), and offer a plethora of new opportunities for global expansion both in terms of sourcing and selling — and Procurement organizations need to lead the way. Russia, China, India, and the EU account for about 42% of global GDP, and even though it’s still too early to tell precisely what impacts the new trade agreements are going to have, there’s no way that they are not going to be uber-significant. Not only does it have the potential to biggest boon to supply chain finance this year, if not this decade, but it’s going to change the way you think about trade. In other words, you have to totally reevaluate your global sourcing and procurement strategies to make sure they still make sense in this new era of trade.

That’s two down and twenty-eight to go. It’s going to be a long trek, but we’ll do it!

Procurement Trend #33: Governmental Regulations

As we indicated last week in our posts that attempted to explain why the “futurists” are still stuck in the past where Procurement is concerned, and why we needed to spend thirty posts on the subject, we are going to discuss in detail each and every “future” trend that we debunked in our Future of Procurement series on old-blues and ongoing news. By the end of this series, you will not only understand why the historians are still talking about these trends, but why they are still relevant to many Procurement organizations that are stuck in the past with the historians and what you need to do to prevent staying there with your organizational “peers”.

As per our original series, government regulations have been enabling and restricting trade since trade between nations began. It’s always been an issue, it always is an issue, and always will be. It’s going to be an issue until the end of humanity, but is not a future trend as it’s been an issue since the dawn of humanity.

So why do so many historians keep pegging it as a future trend? There are a number of reason, but the top three today are:

  • Environmental Regulations
    Regulations like WEEE, REACH, and RoHS are coming fast and furious around the globe and are limiting what you can produce, export, import, and sell. And, in some cases, tying you to the product from cradle to grave (as sometimes you are required to take the product back at end of life and safely recycle or dispose of hazardous materials).
  • Free Trade Regulations / Free Trade Zones
    Preferential Trade Agreements such as NAFTA make certain types of trade more profitable or less costly than other types of trade and free trade zones can delay taxation until sale time or even eliminate the unnecessary collection and reclamation cycle (which is timely and costly) for goods passing through to another destination country, but only if you know how to use them to your advantage.
  • Trade Security Regulations
    Regulations like 10+2, part of the US CBP ISF, that require 24 hour advance notice of manifests can cause significant delays for companies that are non-compliant and even result in seizure and forfeiture of goods.

So what does this mean for your organization? How do you blast out of the past and into the present in preparation for planning for the future?

Environmental Regulations

You need to be current on the regulations that affect all of the products you are producing, importing, or exporting. This requires bill of materials (BoM) level visibility into each product produced and detailed lists of each material regulated by one or more regulations that your organization has to adhere to as well as software that can automatically match BoM raw materials to regulatory material lists and alerts you to a potential conflict before the product is produced and becomes useless to your organization because it contains a raw material that prevents it from being imported into the target market.

Free Trade Regulations / Free Trade Zones

You need to identify all of the regulations that impact your global trade, index them by product, and use them to your best advantage. In addition, you have to cross index your product categories against the HTS Codes to produce the best products for importation into the target country at the best locations to get the lowest rates. For example, “gloves” can be found under codes 3926.20.40, 4014.19.50, and 4203.21.60 and the tariff rates are 6.5%, 14%, 5.5%, or, if the good is coming from a country with a preferential trade agreement, 0%.

You also need to identify all of the free trade zones in each country you plan to import/export into/out of and make sure that your global trade routes flow through them when appropriate. Having to pay tariffs weeks, or months, before the product is sold poses a serious hit to your cash-flow, especially if the tariff is on a good destined for re-export, as it could be a year or more before you are able to reclaim the tariff the organization is exempt from! So you need to use the Free Trade Zones whenever you can.

Trade Security Regulations

You need to put systems in place that not only ensure that all documents are filed that need to be filed, but that all information required is automatically collected and all documents that need to be filed are automatically produced and filed with this information whenever possible. Furthermore, when information is missing, an appropriate person needs to be immediately alerted so that the documents get in on-time every time.

And that, dear reader, is why this issue stays on the “futurists” lists and what you need to do about it to make sure you don’t join your competition in the past they are all stuck in.

Trade, Treaties, and Embargoes — What Does It Mean to You?

You might think that the domain of trade agreements, treaties, and embargoes belongs to the government, and while that might have been true in the past when governments ran their part of the world, it is no longer the case now that we are in the era of multi-nationals. It used to be that the wealth and power of a company was largely dependent on the wealth and power of the country it belonged to, as the country regulated its trading rights and the treaties of the country determined where the company could trade and how much wealth and influence it could gain, but those days are long gone. Now we have companies with valuations in excess of dozens of countries. For example, only 25 countries have a GDP higher than Apple’s 500 Billion valuation.

We are now at a point where trade agreements are largely determined by the interests of large multi-national corporations. Consider the Trans-Pacific Partnership which is currently in negotiation between 12 countries in the Asia-Pacific region. This proposed agreement is stirring up angst in a number of the participating countries as global health professionals, internet freedom activists, environmentalists, organized labor, advocacy groups, and elected officials have criticized and protested the negotiations, in large part because of the proceedings’ secrecy, the agreement’s expansive scope, and controversial clauses in drafts leaked publicly. (Wikipedia) For example, StopTPP.org is claiming the TPP will turn the Pacific Ocean and its peoples into a giant privatized corporate lake characterized by non-union workers, Wal-Mart supply chain feeders, poisoned, landless agricultural labourers, a dying biodiversity, and rising, drowning sea levels. And Wikileaks, in a post earlier this year, says the TPP is Sacrificing the Environment for Corporate Interests because the current draft text of the Intellectual Property Rights Chapter is forcing nations to change laws and to prosecute in defense of the biggest corporate interests in the field of IP rights. Furthermore, the Environment Chapter does not include any enforcement mechanisms serving the defense of the environment, simply enforcing the lowest common denominator of environmental interests as the standard.

The way things are going, large Corporations Will Soon Rule the World, or at least the economic world, and they will be the entities that create the major trade agreements and trade embargoes. And those agreements will not only determine their fates, but yours. They will, directly or indirectly, determine who you do or do not do business with. If non-compete supplier clauses, favoured by big mega-brands that dominate the market and go head to head with each other at every opportunity, that prevent a supplier from doing business with a company’s main competitor become commonplace (again), by doing business with one customer you will be preventing business relationships with a second and simultaneously determining who you target customer base will be. Similarly, if your competitor is doing business with a customer that insists in a protected supply chain, that competitor, given the opportunity, will attempt to lock up parts of the supply base and limit your options.

In other words, if you don’t learn the language, logistics, and consequences of trade, treaties, and embargoes, you might fall victim to their (un)intended consequences while your competitors prosper.