Category Archives: Global Trade

Economic Density and Flexibility are Critical to Your Supply Chain, Part I

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

I’ve just read the umpteenth recent article saying that buying from China is on its way out. All the articles I’ve read have a grain of truth in them but suffer badly by being far too general. As I see it, China was never the right place for some purchases and will be the right place for others for a long time to come.

The articles need a framework to differentiate between types of purchases. Here’s mine.

I divide purchased goods two ways. The first way is by forecastability. Here I use the terminology originated by Marshall Fisher in his classic analysis “What is the right supply chain for your product?” (HBR) He divides the products your company sells into two categories. One category he calls “functional” products. Those are easily forecastable and change relatively little from year to year. He uses bleach as an example. The second category he calls “innovative” products. Those are new products being brought to market. There is no competition (a good thing for sellers) but they are essentially unforecastable … a bad thing for buyers trying to support that product. Examples are fashion goods, some innovative cars and newer computers.

His point is that buyers need different supplier selection criteria for the different categories. For innovative products, he believes flexibility is more important than cost. If you can’t ramp up quickly you lose highly profitable sales. If you can’t ramp down quickly you write off a lot of inventory. And, you can’t afford a long transit time.

The second way I divide purchased goods is by what I call “economic density.” Simply put, what is the value of the purchased goods per kilogram? You can afford to fly high economic density goods but low density goods have to move by surface transport, usually ocean. One thing to keep in mind here is that there is a concept called “dimensional weight” where the freight costs of some goods is based on their physical volume, not weight. That’s the reason why laptop computers move by air from China to the US but desktops are usually assembled in North America.

Putting those two methods of division together gets the consultant’s favorite graphic: a two by two matrix. The best country and logistics selection strategy depends on which quadrant you are in.

Functional Products Innovative Products
High Economic Density 1 2
Low Economic Density 3 4

Each quadrant requires a different strategy if an organization is to extract maximum value from its supply chain. Tomorrow’s post will discuss each quadrant in detail.

Thanks, Dick.

How Is The “New India” Shaping Up?

The New York Times recently ran an article on The Ideas Shaping a New India that got my attention. Given that so much of our supply chain, especially in services, is now dependent on India, and that India is poised to become the 3rd largest producer of GDP by mid-century, it’s important that we have a good handle on where it’ s going — especially since it’s now been twenty years since India began to open its doors to the world and loosen the economic controls on its own citizens. As a global trading partner, India is grown up — and now it has to make some adult decisions (and stop simultaneously exhibiting the bravado of needing nobody and the hunger for recognition from those it claims not to need).

So what has, and will continue to, turn the new India new? According to the author of the article, who has spent years traveling in, and reporting on, the country, these are the five prevalent ideas that are going to influence the shaping of India this decade.

  • Class is a Situation
    In early India, class was not circumstance, but identity. It was who you are from the moment you are born until the end of time. But today’s generation sees class as a transient situation that can change. Take Infosys for example. This global Indian juggernaut that has adopted the mantra of “no caste, no creed, only merit” and is changing the game for a new generation.
  • A Bed is For Two
    In traditional India, the focus was on the family unit and not the individual — every Indian was part of a clan (and the clan came first in the economy of guilt and sacrifice that has traditionally held Indian families together). In comparison, today’s generation often looks upon family as a support network but identify themselves as individuals first, family members second. Some even see family as a hindrance to achieving their dreams. Today’s generation, for better or worse, believes that the best approach is for you to take care of you and me of me.
  • English is Passé
    While Indians are still passionate about learning English, as they want to be part of the global marketplace, they no longer want to be English. They have their own traditions and manners that date back to thousands of years before the earliest English customs, and they are quite happy with them. (The oldest recorded town in Britian, Colchester, is a mere 1934 years old. In comparison, India has the oldest city in the world, Varanasi, which is over 5,000 years old.)
  • Plastic is Better Than Gold
    Traditionally, the Indian economy revolved around gold, which represented solidity and security in a culture that feared the future and sought insurance against it. Today’s generation, which associates more with credit and debit cards, is building a culture where to swipe a plastic card, rather than stash gold, is a psychological bet on the future instead of a hedge against it.
  • Modernity is Best Served Traditional
    India is a model of forward movement in which the past retains the upper hand and the future stands on the defensive that assumes,against all odds, that the traditional and the modern are ultimately compatible.

In other words, as India matures, it is going to try and blend the individualistic forward-looking Western culture with its family-focussed backward-deference Eastern culture to create a new, modern, culture that will, hopefully, embrace the best of both worlds and allow it to easily do business with the West and the East. If they succeed, we may again see a time where the bulk of global trade passes through India. (Though, hopefully, this time it won’t be through a single trading company. As much as Sanjiv Mehta might like to see the East India Company rise to glory again, I don’t think any single company should ever have the trade monopoly that the East India Company had in the 1700’s.)

Are Canadians Cuckoo for Copper?

Like just about every other commodity these days, Copper, used in everything from construction and cars to telecommunications and power, is surging with a price increase of a good 50% or so in the past year. The outlook for 2011 (AGMetalMiner.com) is that demand will continue to exceed supply and that global stock levels, which have been declining rapidly over the last six months, will continue to do so. Copper is making a comeback, and we are going to feel it in our pocket books.

Since MetalMiner does such a great job of tracking copper prices, along with prices for other metals, and regularly provides us with copper outlooks while doing so, I’m not going to beat the horse up any further but instead focus on a recent story in The Globe and Mail about how “the commodity cycle speeds up” and the impact this is having in The Great White North.

According to the article, the trucks and shovels are rumbling again near the peak of Copper Mountain which is home to the Copper Mountain project, located 270 kilometres east of the Port Metro Vancouver. Copper Mountain was shuttered in the mid-1990s due to low commodity prices and the area has been quiet since then, but now sparks from welders’ torches crackle and fly inside the massive hangar-like processing mill that stands 10 storeys tall. Outside, several 240-tonne, seven-metre-tall trucks — price tag $3.5-million each — bump along at 15 kilometres an hour, hauling away waste rock from the once-prolific pit 3.

In other words, millions of dollars (about $438 Million on reconstruction to be exact) are being spent to revive a mine to mine a commodity that is cyclical in nature and that will, inevitably, fall below the threshold price per pound required to make the mine profitable (and see the mine closed for the fifth time in its history). Which leads one to ask, in the global commodities surge, are we Canadians going cuckoo for copper?

What Effect Will The Proposed UK VAT Increase Have On Your Supply Chain?

A recent article over on BBC news discusses yesterday’s VAT increase from 17.5% to 20% and how it is going to cost the average UK family £7.50 a week, or about £389 and how it’s going to hit living standards, hinder economic growth, cost thousands of jobs, and make it even harder for families to make ends meet when they are already feeling squeezed. I have to agree with these points, especially when PayScale UK reports the average office administrator as making only £16,150 a year, the average retail store manager as making only £21,477 a year, and the average designer a mere £20,006 a year (which is not much more than the median income of £16,400 a year). For these people, that’s another 1.8% to 2.4% of their annual salary lost to taxes. These people already lose at least 36% of their income to taxes (as per howitends.co.uk) through Tax and Personal Insurance Contributions. When you also consider that the average property tax equals almost 7% of their income, and add this new tax, the average UK citizen is now losing about 45% of their income to taxes — quite a burden in these tough economic times.

But the story doesn’t stop here. In many sectors, such as logistics and (grocery) retail, profit margins in a good year now sit at 3% to 5%. What is a 2.5% tax increase going to do to these business? Especially if, after having one or two bad years of barely breaking even, the profit margin is currently sitting between 0% and 1%? At the very least, you’re going to see jobs disappear. In the worst case, this is going to force more closures, which is going to be very disruptive at home and across the globe for certain multi-nationals. I have to agree with Labour leader Ed Miliband on this one — it’s the wrong tax at the wrong time. In most countries, the private sector is the only chance they have of getting out of the recession. If the private sector is taxed out of business, then there’s no way the country is going to recover (especially in the UK which has a long history of the public sector moving at a snail’s pace).

Should Private Equity Firms Get Into Supply Chain Finance?

I was recently asked what role the banks have in Supply Chain Finance (SCF), which I found to be a bit of an odd question as the role the banks should play in SCF has been well known for a long time. Quite simply, they should be lending more money to the supply chain, doing more financing on receivables, and be supporting the business that make and ship the products we all use everyday. However, instead of playing the long term game (and investing into these business which are pretty much guaranteed to make a return as long as we need to eat, clothe ourselves, and be entertained), they chose to dump money into high-risk mortgages, facilitate the hedge fund madness, and encourage high-risk start-ups during the boom in pursuit of high rewards that are not sustainable in the long term [even if they materialize in the first place].

As a result, they banks are almost broke (and Basel III is probably going to initiate another wave of bank failures, to add to the 139 that had been shut down in the US in 2010 as of October 21 [source: Reuters], because it’s coming into effect too late — the banks have already dug the graves Basel III is trying to prevent) and have turned the taps off completely even if you’re profitable, sustainable, and have been in business for fifty years. Even though the “trade banks [could] strengthen customer relationships” (as per a white-paper published by CGI back in 2007), they have pretty much chosen to turn their backs on their customers when their customers need them most.

As a result, we’ve seen the emergence of trade finance companies, including The Receivables Exchange, which offers a business quick receivables financing from public and private lenders willing to offer receivables financing at the requested rates and/or willing to participate in a reverse auction for the business, and Orbian, which purchases receivables from suppliers in exchange for non-recourse cash for the full invoice value at rates based on the buyer’s credit, which have emerged in an attempt to fill the void. However, these solutions are few and far between and have limited cash reserves as they have not gained wide-spread adoption with either banks or investors. As a result, they cannot come close to serving the true global market demand for trade finance [even though they are being under-utilized by companies hoping to be saved by the banks that abandoned them].

However, private equity companies generally have lots of cash on hand, which they typically use to buy troubled companies with solid products or services that can meet a substantiated market demand and turn a profit. Then, when the companies turn a profit, they take dividends to add to their cash pool or take them public for a profit. What if instead of buying a company, they bought trade finance institutions and/or created new ones? Considering that private equity firms currently sit atop an estimated 500 Billion (as per an article from July 2010 in economy watch titled “economy business and finance news/what depression private equity firms have too much money 01 07”), they could make a significant impact on global trade as this could (if converted to liquid assets) theoretically finance 20% of global trade if net terms, and payback, was 60 days or less (assuming annual merchandise exports are still hovering around the 15 Trillion globally).

What do you think? Should Private Equity get into the SCF arena? While they may only control assets less than 1/10th of the assets collectively controlled by the US banks, most of their assets are not at risk and leveragable. And they are generally much better managed.

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