Category Archives: Market Intelligence

Why Aren’t We Dealing With Extra-Planetary Supply Management on a Daily Basis?

It’s a fair question, considering that we put a man on the moon forty-four years ago and fifty years ago General Dynamics promised us we’d be on Mars by now (see this post).

It’s not an easy question, given the challenges involved, but the doctor thinks he has the answer. But first, consider the following:

1) Putting a man on the moon cost 400 Billion in 1969 terms. (Source: “The Cost of the Moon Race” on asi.org) That was roughly 9% of the US GDP in 1969. However, the effort really started in 1959 with Project Mercury, which had the goal of a manned earth orbit. In other words, the US put a man on the moon in 10 years using only 1% of GDP. NASA’s annual budget today is about 18 Billion, which is about 0.1% of GDP, or roughly 1/10th of what they were getting when the race to the moon was on. (With respect to the Federal Budget, in 1966 they had 4.41%. This year, they have less than 0.5%.)

2) Current robotic missions to Mars take about 8 months. Improvements in technology could probably shave a few months off of that. However, given that the orbits of Earth and Mars around the sun allow for opportunity’s to embark and return roughly every 26 months, even if the trip were shortened, it would just mean more time on Mars as one would want to minimize trip distances to ensure enough fuel. So that means over two years in space. Given that a Russian cosmonaut spent 1.2 years in the International Space Station, it’s obvious that humans could train, and endure, a mission of that length.

3) Damage from asteroids is a big concern, as they have an average orbital speed of 25 kilometers per second and we know of asteroids with orbital velocities of over 30 kilometres per second, or almost three times the estimated speed of the rocket. Large ones will be detected long before they reach the ship and enable it to make course corrections. Smaller ones could pose a problem.

However, we have the technologies to produce titanium-based metal alloys up to four times as strong as steel, exceeding 2 GPa, carbon fibres that approach 6 GPa, and lonsdaleite, an allotrope of carbon with a hexagonal lattice that is commonly called a hexagonal diamond, but which is 58% harder than diamond and able to resist pressures of 152 GPa (GigaPascals), which is a pressure that is roughly equal to 1.5 Million times atmospheric pressure. Given that standard atmospheric pressure is roughly 14.7 psi (Pounds per Square Inch), lonsdaleite can withstand an impact of up to 22 Million psi! That means we can make mighty strong spacecraft.

In other words, it’s not a question of money, trip duration, or the ability to create a space ship that can safely withstand the dangers of intra-solar system travel. So why aren’t we dealing with extra-planetary supply management on a daily basis?

Come back next Sunday for Part II and the answer.

Supply Chain Finance: A European Bank Perspective

Late this spring, the Euro Banking Association (EBA) released their “Supply Chain Finance European Market Guide”. This gives us some insight into the European Bank Perspective on Supply Chain Finance.

The guide defines Supply Chain Finance (SCF) as the use of financial instruments, practices and technologies to optimize the management of the working capital and liquidity tied up in supply chain processes for collaborating business partners. It then goes on to state that SCF is largely ‘event-driven’ and that each intervention (finance, risk mitigation or payment) in the financial supply chain is driven by an event in the physical supply chain.

The EBA then goes on to state that the key categories of SCF are:

  • Buyer-Centric Accounts Payable
    Also known as “Approved Payables Finance”, “Reverse Factoring”, “Supplier Finance”, or even “Confirming”, it’s generally based on discounted payment of accounts payable in favour of suppliers by accessing a financial institution’s liquidity. “Dynamic Discounting” is a related instrument.
  • Supplier-Centric Accounts Receivable
    Also known as “Receivables Finance”, “Receivables Purchase”, and “Invoice Discounting” or “Invoice Factoring”, it’s where a supplier finances their operations by factoring their invoices or taking loans against the receivables.
  • Inventory-Centric Finance (PO/Inventory Finance)
    Which can be used by the supplier to gain financing based on a PO or a buyer to gain financing based on inventory.
  • Bank Payment Obligation (BPO)
    As described in this recent post on how it took 40 years, but BPOs are now truly SWIFT, a URBPO (under ISO20022), provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. An alternative to L/Cs (Letters of Credit), it is a new middle ground between L/Cs and Open Account finance which can be used to offer pre- and post-shipment finance.
  • Traditional Documentary Trade Finance
    Letters of Credit and related trade loans.

In other words, supply chain finance is simply

  • a bank or third party lending the buyer money based on inventory;
  • a bank or third party lending the supplier money based on POs, invoices, accounts receivable, or BPOs; or
  • the buyer paying the supplier early for a discount.

And the primary mechanisms by which a supplier gets financing is:

  • receivables, BPO, or L/C financing from a bank,
  • discounting or dynamic discounting from the buyer, or
  • factoring from a third party.

This is a traditional supply chain finance definition and these are, with the exception of the new SWIFT BPO, the traditional mechanisms, so the guide is good in this respect. And it also has a good discussion of risk. However, when it comes to a discussion of automation, it is pretty much limited to e-Invoicing and this is a problem. e-Invoicing is just the foundation — technology has to go beyond just e-Invoicing if SCF is going to not only take off but become a pillar of supply chain support. But that’s a topic for a future post.

The Road to Riches? The Rails, My Friend, the Rails.

Every day, SI is becoming more convinced that if you want your Supply Chain to be a success, you need to ride the rails. It used to be if you were shipping goods long-haul over land, you’d ship them by train. There was no long-haul trucking and air was just too expensive. But then the war ended, Dwight D. Eisenhower championed the National system of Interstate and Defense Highways, the Federal Aid Highway Act of 1956 came into effect, long-haul trucking became an option, buses became more popular than trains for many trips, the railroads started to struggle financially, and ground eventually overtook rail for most cargo in the US.

And today, people in North America associate trains with the Wild, Wild West despite the fact that rail is, by far, the most cost-efficient way to move cargo over ground for distances in excess of 500 miles. It’s also typically the best choice for intermodal ocean freight as the major rail networks will not only have their terminals in the ports, but SLAs (Service Level Agreements) to make sure cargo is quickly transferred from ship to rail-car. For example, agreements between the Port of Halifax and CN Rail gives you a double-stack rail-service direct link to Chicago in 71 hours, which is typically a 3-day drive when you factor in daily driver limits and border crossing.

Why is SI becoming more convinced that Rail is the Future? Three reasons:

  1. Fuel Efficiency
    Trains can move a ton of freight nearly 450 miles on a single gallon of fuel. Find a truck that can do that!
  2. Predictability
    The railroads control the rails – and can schedule them to maximize capacity and prevent traffic jams that can delay trucks for hours or more. Plus, well maintained lines and trains that keep to schedules suffer significantly less accidents than traffic on the road.
  3. Adoption by the East
    While the young and immature west might have dumbly abandoned trains just like it abandoned trams (and replaced them with gas guzzling polluting busses), the East is investing Billions in new (high-speed) rail lines everywhere. Consider this recent article in the Economist on how its One Night to Bangkok with Laos committing to invest 6.2 Billion on a new 260-mile passenger and freight railway between Kunming and Vientiane straight through the mountainous region of Northern Laos. Think about that. The GDP of Laos is only 9.3 Billion! That’s a huge commitment for a country the size of Laos, even if the commitment connects China to Thailand and will capture a sizeable portion of the 4 Trillion worth of imports and exports that flow into and out of China. This 6.2 Billion dollar railway will require 196 km of blasting and will create 76 tunnels. To put this into perspective, combined they would form a tunnel long enough to connect Korea to Japan under the sea.

It’s time to ride those rails!

Some Risks Can’t Be Squashed? Can Co-opetition Help?

Good visibility, planning, and mitigation can go a long way to eliminating, or at least circumventing, a large number of internal and external risks in an organization’s supply chain. It can improve quality, smooth transportation, and minimize production line downtime and stock-outs in situations where the risk – such as product contamination, risky transportation routes (due to piracy), and possible port closings (due to impending strikes) can be recognized in advance. However, even though we know some regions are high risks for natural disasters such as hurricanes, earthquakes, tsunamis, and volcanic eruptions, we are generally unable to predict such events with more than a few days warning at best. These risks will never go away – and in situations where only a few suppliers can supply a given raw material or component – and can’t be easily mitigated.

So what is an organization to do? Well, it should start by making sure it has a good Contingent Business Interruption (CBI) insurance policy in place that covers supply chain interruptions, but that doesn’t solve the problem. It can proceed by making sure it knows every backup source of supply, but if the disruption results in a worldwide market shortage, someone is going without and this doesn’t necessarily solve the problem either. It can do its best to identify alternative designs that can work with different, more easily obtained, raw materials – but if such alternate designs are considerably more expensive or less rugged, this doesn’t help either.

As per the title of this posts, some risks can’t be squashed. So how does an organization maximize its resiliency? Co-opetition, short for cooperative competition, might be the answer. Generally speaking, in most markets with constrained supply, there are only a few big companies that represent most of the demand. Think hard drives – how many hard drive manufacturers are there? Cell phones? Motion sensors for game consoles? And every company in the market knows who the other big companies are. And, at any given time, some of these companies will be overstocked and others will be understocked as the market demand sways from one product to another, in ways that are not always predictable.

What if these companies took a lesson from the BRIC, which just banded together to “create a $100 Billion buffer” (CNN Money, Sep 6, 2013) to help protect their economies from shocks when G20 leaders warned that the global recovery is still at risk from volatile capital flows. China is contributing 41 Billion to the fund, Brazil, Russia, and India will provide 18 Billion each, and the new BRICS member, South Africa, is coughing up 5 Billion. The fund — called the Contingent Reserve Arrangement — is being designed to provide member countries with an emergency cushion of cash during times of crisis.

Instead of creating monetary funds, the companies in the co-opetition could create virtual emergency raw material / component pools where member companies affected by a disruption could obtain a limited supply from their competitor or their competitor’s supplier agains the reserve locked up by their competitor. Each of the companies would share in the pain caused by the disruption. And although this means that some companies would, as a result, feel the result worse than they would otherwise as they would be giving up some supply to their competitors, they could take comfort knowing that the next time a disruption hit them severely, they will feel the blow a lot less than they would otherwise as all of the co-opetition members will be sharing the pain. Done properly, each company in the collective could insure that, no matter what, it would be able to keep operating at a baseline and the risk of a severe or catastrophic disruption would be minimized for all members.

Thoughts?

Does Royal Mail Have the Solution to the US Postal Service’s Woes?

In our last post on the US Post Office, we asked will Darrell Issa save the US Post Office. Given that the US Post Offices need to identify immediate savings of almost 20 Billion plus (as it keeps bleeding red with losses of 15.9 Billion in 2012 and 3.2 Billion in the first two quarters of 2013), something needs to be done fast.

In response to this need, as chronicled in our last post, we noted how Darrell Issa, a Representative of California and chairman of the US House Oversight and Government Reform, signed off on H.R. 2748, the Postal Reform Act of 2013, designed to bring the United States Postal Service (USPS) to financial solvency with cost-cutting reforms and innovative new sources of revenue. While the plan had a couple of good points, SI’s conclusion was that it was not going to be enough to generate the savings required.

Not that Royal Mail is in much better shape. As per an article in the Economist last summer, chronicled in this SI post that asked who’s in worse shape, Royal Mail racked up a £s;10 Billion deficit in unfunded pension liabilities. They may have saved over 300 Million in the first phase of their Procurement Transformation, and may expect to save over 600 Million in the second phase of their Procurement Transformation, but that’s a far cry from the 10 Billion they need to save.

However, as per this recent article over on CNN Money on how
“U.K.’s Royal Mail Goes Public” (Sep 12, 2013), the British Government is planning to sell a majority of its take in the Royal Mail through an IPO (initial public offering) that will be one of the U.K.’s largest in decades. The sale will certainly help, but given that the postal service IPO is likely to be valued around £s;3 Billion, that’s less than 1/3 of the shortfall and not a quick fix.

Still, it might indicate the only solution for the U.S. Postal Service that is now losing an estimated 25 Million daily. Specifically, the US should consider selling the US Post Office to a private equity group that can do what private equity groups do – turn struggling businesses with a lot of profit potential around into profit making machines. There are arguments both ways on this topic, some of which are summarized in this Research Roundup, but given that the USPS did 65 Billion in Revenue in 2012, the potential valuation could easily be in the 200 Billion range, and any group that could raise that kind of equity could definitely afford to make up the unfunded liabilities. It’s an interesting thought.