Category Archives: Global Trade

Risk Mitigation 2012: Society

In our last post, we covered some potential mitigations for each of the top three technology risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three societal risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Economic Disparity

Economic disparity can negatively impact a Supply Management organization in a number of ways. An obvious impact is if the majority of the target population in the geographic regions in which the parent organization operates, and wishes to sell the product, cannot afford the goods or services being offered. In this case, Supply Management will be stressed to lower the price point or risk serious resource cutbacks as the organization faces reduced revenues and operating resources.

This is a hard risk to counter in that an average global multi-national cannot make a significant impact on a national economy. While BNP Paribas has assets that are greater than the GDP all of France (2.68 Trillion compared to France’s 2.56 Trillion GDP), even Walmart only has assets of 181 Billion (which is barely greater than the GDP of Pakistan). Once you get out of the Global 1500, where only 27 companies control more than 1 Trillion of Assets, only 217 companies control more than 100 Billion of assets, only 400 companies control more than 50 Billion of assets, only 904 companies control more than 20 Billion of assets, and only 1437 companies control more than 10 Billion of assets, you see that the ability of an average corporation to make a significant dent on an economy is miniscule.

However, an organization can prepare for it. By following economic trends and consulting leading economists and strategic intelligence agencies, it can create potential scenarios (using scenario planning) of what its target economies are likely to look like next quarter, next year, and in three years time. From this, it can determine what consumer price points it will likely need to meet to hit sales target, and determine what “cost” targets it will need to stay under or, if the cost of production cannot be brought down to the target cost, what value it will need to bring to justify a higher cost point, and, eventually, a higher sales price. And if an organization knows a year in advance of a potential economic decline, it has time to identify new designs, new materials, and new sources of supply in an effort to meet the cost targets that the organization feels are necessary to survive.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada last year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants.

This is another risk that you can’t do much about. You can be a good citizen and not corner the market and artificially drive up prices in the name of greed, but you can’t prevent a greedy, money-grubbing, wall-street-type from being evil and doing the last thing that should be done in a time of need. All you can do is try to predict where riots are most likely to occur if food becomes insecure, which of your assets are most at risk, and take steps to physically protect them. And while SI believes they are a blight on the landscape, electric chain-link fences and, in extreme cases, “armed” guards (tasers and/or other non-lethal choices, please) may be necessary to keep not only your goods, but your people, secure.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water. For example, in the USA, about 2 US gallons of water must evaporate to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute.

While it’s hard to maintain food security, as unpredictable and unpreventable natural disasters can wipe out entire crops in a province or state overnight, with a little planning and foresight, water security can be maintained. While most of it is not drinkable, almost 71% of our planet is covered by water. And it’s relatively easy to clean water with modern technology. You can build your own desalination and filtration plants and your own pumping stations and not rely on public utilities, which might already be facing undue strain. You can even make the extra investment to make the water drinkable. Or, if the cost is too high, you can form a cooperative with your manufacturing neighbours that also need water for the purposes of forming your own local water utility. We should never be in need for water.

Risk 2011: Geopolitical

In our last post, we discussed the top three environmental risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a geopolitical perspective.

03: Corruption

Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight. This is one risk that’s never going away.

02: Terrorism

Terrorism is on the rise, and terrorists are getting their hands on more powerful and destructive weapons by the day. And it’s not just religious extremists that you have to be afraid of. There’s also anti-establishment extremists, new-age radical groups, and anarchists. Each of these groups could decide that your goods or services are against god, pro-establishment, anti-progress, or too orderly and decide that your corporation needs to be taken down here and now. One well planned strike and your factory, or headquarters, is a smouldering crater.

01: Geopolitical Conflict

Civil unrest can often quickly escalate into civil war and civil war can quickly result in cities, counties, and even provinces becoming inaccessible and if the conflict escalates, entire borders will close. Once a border closes, nothing gets in our out. Your factories become cut off from the rest of the world, and all of your inventory, tying up all of your capital, becomes inaccessible for an indeterminate amount of time. And your supply management organization, like the goods in your cut-off factory, is at risk of total destruction.

Risk 2011: Society

In our last post, we discussed the top three technology risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a societal perspective.

03: Economic Disparity

Economic disparity, also known as economic inequality, refers to the disparity in the distribution of economic assets and income. Economic disparity can negatively impact a Supply Management organization in a number of ways. An obvious impact is if the majority of the target population in the geographic regions in which the parent organization operates, and wishes to sell the product, cannot afford the goods or services being offered, than Supply Management will be stressed to lower the price point or risk serious resource cutbacks as the organization faces reduced revenues and operating resources. A less obvious impact is that economically disadvantaged groups may also have restricted access to food and water. This in turn increases the severity of the top two societal risks to your supply chain.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.

Risk, Risk, Risk: 2011 Did Not Improve Matters Any

The World Economic Forum recently released it’s 6th Global Risks report, 2011 edition, and it’s filled with economic, environmental, societal, geopolitical, and technological risks that are plaguing global supply chains across the globe. Some of these have not changed since SI first reviewed the 2nd edition back in 2007, and some are new. However, they all have the potential to bring your supply chain to a grinding halt. In this series, we will review each category of risk, focus on a few risks of immediate relevance and discuss how they could impact an average supply chain.

At a high level, the risks identified were:

Environmental

  • Air Pollution
  • Biodiversity Loss
  • Climate Change
  • Earthquakes & Volcanic Eruptions
  • Flooding
  • Ocean Governance
  • Storms & Cyclones
Technological

  • Critical Information Infrastructure Breakdown
  • Online Data and Information Security
  • Threats from New Technology
Societal

  • Chronic Disease
  • Demographic Challenges
  • Economic Disparity
  • Food Security
  • Infectious Diseases
  • Migration
  • Water Security
Economic

  • Asset Price Collapse
  • Extreme Commodity Price Volatility
  • Extreme Consumer Price Volatility
  • Extreme Energy Price Volatility
  • Fiscal Crisis
  • Global Imbalances & Currency Volatility
  • Infrastructure Fragility
  • Liquidity / Credit Crunch
  • Regulatory Failures
  • Retrenchment from Globalization
  • Slowing Chinese Economy (<6%)
Geopolitical

  • Corruption
  • Fragile States
  • Geopolitical Conflict
  • Global Governance Failures
  • Illicit Trade
  • Organized Crime
  • Space Security
  • Terrorism
  • Weapons of Mass Destruction

That’s a lot of risk to consider, spread across five categories and thirty-seven risk types, each of which could manifest in dozens, or hundreds, of ways across your global supply chain. In the next five posts we’ll discuss what SI thinks are the top risks in each category and why.

Will 2012 Be The Year Manufacturing Returns to Mexico?

Alix Partners recently released their “2011 U.S. Manufacutring-Outsourcing Index” and it had a few surprises. First of all, not only is Mexico now the country with the lowest-landed costs for U.S. customers (which SI has been predicting would be the case for some time now), but the four other major outsourcing destinations analyzed — Romania, Russia, India, and Vietnam — all had lower landed costs than China as well.

Alix Partner’s projected landed costs from China for the next four years based on the three assumptions of:

  • 30% annual increase in wage rates, consistent with Chinese wage inflation over the last several years,
  • 5% annual increase in the strength of the yuan, consistent with the widely accepted estimate of the undervaluation of the yuan by 20% to 25% relative to the US dollar, and
  • 5% annual increase in freight rates, consistent with increasing fuel prices.

If these assumptions hold true, then the landed cost of manufacturing in China will equal the cost of manufacturing in the U.S. by 2015! (And if only one of the predictions come true, the savings from outsourcing for an average organization will only be 10% in the best case!) In other words, at this point very little is needed to erode not only some, but all of China’s cost saving potential in manufacturing outsourcing.

It would seem that for companies looking to outsource manufacturing, the writing is already on the wall: unless you already have a Best-In-Class operation in China, the chances of realizing any value (given the initial start-up costs associated with outsourcing and streamlining such an operation) are quickly approaching zero as time goes on.