Category Archives: Supply Chain

A Slow Cautious Approach to Pulling Out of China May Be Justified …

… but the justification has NOTHING to do with geopolitical events or economic factors, as suggested by this recent SCMR article. First of all, those are always in flux. Secondly, neither of these factors are the ones that could be limiting your ability to peel out.

There are two primary factors that could be limiting your ability to peel out of China:

  1. available production capability
  2. source material availability

And these are the only factors you should be considering when you are considering how [do] you reconfigure the global supply chain. Because, unless you are selling in Asia, you HAVE to get out of China if you want stable supply streams.

Available Production Capability

First of all, are there alternative near-shore plants? If not, you’re stuck until you (co-)invest in one, get it built, get it up and running, and verify the quality is acceptable. If there are, can they produce the products you need in the quantities you need, or at least a reasonable percentage? If so, are the quality and service levels sufficient. If there are three or more near-shore suppliers that can collectively meet your needs, you shift a considerable amount of your award to them immediately (depending on existing contracts, the time-frames for the suppliers to fully ramp up to support your business, and the time-frames your organization needs to get ready to support the shift) and start the process of shifting all of your award to them.

Source Material Capability

You also have to consider where the raw materials are coming from, and how easy it will be for your suppliers to get sufficient stacks of the materials you need in steady supply. For example, if you need lithium-ion batteries produced by current processes, you need cobalt. 73% of today’s cobalt comes from the Democratic Republic of Cobalt (DRC). The DRC has considerable trade agreements with Qatar. So while the country has bilateral trade agreements with over 50 countries, its relationship with Qatar could cause you problems if you want to use a producer in the middle east NOT in Qatar if another diplomatic crisis (like the one in 2017) arises.

Also, China is the largest producer of grains, gold, coal, rare earth minerals, and two hundred (200) plus other materials, components, and products, so if your production depends on any of these materials, components, or products, you need to make sure your suppliers are located in countries who have good relations with China or have already locked up enough secondary sources to guarantee your product production will be uninterrupted.

That’s it. Yes, you have to consider the economics, because you can’t pay 50% more and not seriously upset (and lose) your (current and potential) customers with the price increase that will result, but with proper investments in new processes, equipment, and talent, costs can be reduced anywhere in the world, and all it will take for the potential supplier to make these investments is enough guaranteed business from you. (So make it so!)

Solving the Sustainability of the Supply Chain is Systematically Strenuous and Surprisingly Serpentine

There have been a lot of articles about the sustainability of supply (chains) lately, and some of them are quite good, but not a single one gives you the full picture. And if you were hoping this article was going to do that for you, then the doctor has bad news for you. That’s not an article, or even a book. It’s a trilogy. Of trilogies. And while the doctor has written that much on this blog by word count, it’s not going to happen today.

What is going to happen is that the doctor is going to give you a bit of an understanding of how broad, deep, and complex the problem really is and how it’s almost impossible for most people to solve, although not that hard to address with a reasonably high assurance of results. (And the answer, as regular readers will have surmised, does NOT involve any Artificial Idiocy, but it may involve complex processes and technologically advanced solutions.)

In order for the supply chain to be sustainable, every step of the supply chain has to be sustainable. Internally:

  • Procurement needs to be sustainable. The processes, technology, and talent required to keep the Procurement organization going need to be sustainable.

If you work down the chain:

  • Logistics needs to be sustainable. The methods used by the suppliers and distributors to pack, store, and ship the product to you need to be sustainable.
  • Manufacturing needs to be sustainable. The methods, energy sources, and water sources used to produce the goods have to be sustainable.
  • Materials need to be sustainable. This means that all of the materials used must be renewable, decomposable, or fully reclaimable in a sustainable manner.

And if you work up the chain:

  • Logistics needs to be sustainable. The methods used to pack, store, and ship the products to your customers need to be sustainable.
  • Sales needs to be sustainable. The processes, technology, and talent required to keep the Sales organization going need to be sustainable.
  • Support needs to sustainable. The processes, technology, talent, and materials used to support, repair, or reclaim the products (for recycling and material reclamation) at end of its lifecycle need to be sustainable.

That’s a lot of sustainability that is required up and down the chain. It’s much more than just identifying a “sustainable” supplier who hits ESG targets, favouring renewable materials, or using virtual work (from home) solutions to reduce the travel and office carbon footprint. And attacking it requires a lot more than just attacking the 5 Cap Gemini supply chain transformation levers of Evolution, Orchestration, Data, Technology, and Talent or the 6 McKinsey next-normal strategy focus areas of Agility, Quality, Sustainability, Resilience, Service, and Cost and Capital because buzz-words are not solutions and you can’t decipher all of these dilemmas at the 30,000 foot view.

In other words, while there are easy two-word answers for reconfiguring the global supply chain for greater supply chain assurance and more sustainability at the 30,000 foot level, when you dig into the details, it’s not so easy as you have dozens of facets to get right to truly optimize sustainability across the supply chain.

In future posts we will dig into a few of these areas as addressing them is a lot more complex than you might think!

There’s No Nearshoring Revolution on the Horizon!

the doctor recently saw a headline that the nearshoring revolution is just beginning, and while he wishes this were true (as he’s been preaching the need for a nearshoring revolution since Sourcing Innovation started, which, for those keeping track, was 17 years ago), it’s not.

A few progressive thought-leading innovators are doing it, but a few is not a revolution. It’s just a few people and organizations who are both willing to do the right thing and wealthy enough to
a) pay for all the upfront costs (where the return may not be recouped for years) involved in shifting a supply chain, bringing new factories online or upgrading those that have been offline for years (or decades) and
b) not be beholden to investors, shareholders, or Wall Street demanding profits now.

The reality is that reorganizing supply chains has a large upfront cost and when most corporations are beholden to shareholders who want profit now, Private Equity firms who want profit now, and Venture Capitalists who want profit now, the last thing they want is upfront cost. They want margin, and the best margins are finding the lowest cost of supply out there and using that, even if it means continuing to source from halfway around the world with all the risks involved (and the losses that would accompany any of those risks), especially if you can buy supply chain insurance at a reasonable cost.

As long as the backward-thinking financial models and economics continue to focus on profit over value or true wealth creation, nearshoring is going to face the same obstacles that Corporate Social Responsibility and Sustainability has faced for the last two decades where everyone says they want it, but unless legally mandated, no one is willing to pay for it. the doctor is aware of multiple surveys that have been conducted in this area over the last couple of decades and while a majority of respondents will say it’s top priority, the majority will not even pay 3% more for a more sustainable product or service as the success criteria they are eventually measured on in Procurement is total “savings” (regardless of the long term cost to society).

The reality is that most corporations bought into McKinsey’s outsourcing push because their managers and primary shareholders were greedy and wanted profits sooner rather than later, and while that mentality persists, they’re not going to be willing to absorb the upfront costs of shifting back. To truly fix the supply chains, which is as simple as “F*CK China” in the Americas and “F*Ck the Americas” in China as the doctor pointed out in his recent post on how you reconfigure the global supply chain, you need a no upfront cost solution for organizations to switch back, or a value proposition beyond assurance of supply.

In the United States of America, for this to happen the MAGA crowd, instead of wasting all their efforts trying to take away basic human rights away from their citizens (while they are simultaneously trying to put an angry grandpa back in office and hide the huge “gifts” they are getting from certain parties that benefit greatly from laws they pass or block), needs to focus on solutions to actually bring the jobs they are claiming to fight for back to the Americas, which could include:

  • interest free loans for building supply chain infrastructure such as factories, distribution hubs, ports, etc.
  • free, or heavily subsidized, training for Americans to do these jobs
  • higher tariffs on any
    imported products that are produced at sufficient volumes in America to satisfy the American market
  • higher taxes on any
    exported products that should be sold at home

Unless the value is created, or China Sourcing is banned wherever products could be sourced from the USA, Canada, Mexico, or friendly Central/South American states, the nearshoring revolution will not happen. There’s no incentive for it to happen, and no Tribore Menendez taking up the charge!

How Do You Reconfigure the Global Supply Chain? That’s Easy!

Ever since the pandemic, there’s been quite a few articles about this despite the fact we’ve known the answer for well over a decade. (Or at least SI was giving away the answer, for free, over a decade ago, even though it seems no one was listening.) Or at least some of use have known the answer for well over a decade. So why was no one listening? Why is the answer still not well known? Is it not clear? Is the new generation not looking on their own and wanting the answer spoon fed to them? Are the articles with the solution either too generic, too politically correct, too vague or not actionable?

It’s hard to say, but to make sure this article is not too generic, not too politically correct, not too vague, and not inapplicable, we’re going to be very, very specific, as politically incorrect as possible, as to the point as possible, and actionable in our messaging. And we’re going to keep it as short and sweet as possible so that the message will be clearly understood.

 

Unless you are selling the product to China (/Asia), when sourcing,
FUCK CHINA.

It’s that simple.

 

Risk Mitigation 101 for Buyers is to have two sources of supply because risk mitigation 101 in systems design is no single point of failure. But over the last three decades, we have built a global supply chain where all roads simultaneously end in China and start in China. When there isn’t a single product you buy where a component or raw material doesn’t get produced or processed in China, it doesn’t matter that you use two different distributors or manufacturers for the product as the choke point is still China. Thus, if the factories or ports shut down because of China’s ridiculous “zero tolerance” policy to an unstoppable epidemic (which is not even as lethal as the bird flu if a large majority of your population that can be safely vaccinated is vaccinated); if the shipping industry gets overloaded due to a lack of ships, workforce (see yesterday’s article on how strikes are going to be your biggest source of supply chain disruptions for the next decade), or containers (which happens, especially since there are way more ships carrying goods from China than carrying goods to China, semi full ships will not load containers to take back until completely empty, and this results in many ships sailing back mostly empty); or critical commodities or utilities expected locally become temporarily unavailable to the factory, you, and everyone else in the world relying on that product, are shut down.

There’s a reason that North America used to primarily source products not made in the USA from Mexico or South America. If there was a disruption, you found out sooner. If a factory had a fire, you could fly in, assess the damage, and send in your engineers to help fix it — quickly. If not, you weren’t far from alternate suppliers you could fly down to assess, and if suitable, negotiate with. If there was a transportation backup, it was easier to clean up — you weren’t waiting for ships, you just sent down more trucks or ordered more rail cars.

And the answer should now be obvious:

  • Home-source anything that can be grown / mined / produced at reasonable economy of scale in multiple geographically separated locations in your home “region” (i.e. multiple states in the US; multiple connected countries in the EU)
  • Near-source anything that can grown / mined / produced at reasonable economy of scale in a relatively near-by country or region connected by land where the product can be shipped by rail and truck (Mexico / Central America / Northern parts of South America for the US)
  • Far-(Over-Sea)-Source only what can’t be home-sourced or near-sourced, which should just be raw materials or small components (i.e. there’s no excuse to be manufacturing and importing washing machines, refrigerators, and cars which are super bulky and weighty when there are only a few core components that need extreme specialization [where it would be hard to find another / build a new factory] or materials that need to be processed pre-transport

Which means that if you are sourcing for the Americas, the amount of sourcing that you should be doing from China is likely about 10% of what you’re actually doing, which, at the end of the day, gave you short term savings in exchange for long term debt including, but not limited to:

  • customer churn and angst
    (happy customers seeing value fork over $$$ a lot faster and in greater amounts than those that aren’t, and they aren’t happy when they don’t get their products on time)
  • constantly increasing transportation costs …
    containers went from < 5K to > 30K during the height of COVID, and while they have come back down, they’re still 30% to 50% more on average, and since most ocean going vessels still use HFO (the dirtiest oil there is, FYI), and the global port strikes are resulting in significant wage increase (partially due to significant inflation in many countries), they’re going to keep going up, especially once you factor in those
  • high carbon taxes
    (everything you make in China is dirty and the shipping is even dirtier)
  • high IP theft …
    even if most of the products don’t make it out of China, everything you produce in China is copied … everything … and some of the copies are now so good, even high end stores in the US are getting fooled!
  • limited options …
    many of your best options went out of business over the last two decades as you believed the overpriced consultants with their false promises that the savings would last forever (but nothing lasts forever …)
  • increased disruptions
    due to the soon to be three-fold increase in natural disasters annually since the China craze began in the late eighties/early nineties (which is projected to be five fold within a decade or so)

On the flip-side, many of the factories you used to use are still where they were. The workforce is still there. The potential is still there. All you have to do is invest in it. It may mean a partial return to the vertically integrated company where you own (part) of your supplier, as you may have to re-enter into co-opetition through conglomerates where you and a group of your peers each minority invest in a new entity to bring that factory back online (or build a new one), but nothing is stopping you. And it might take a year or two (or three) to bring it back, but you can do it, and greatly reduce your supply chain risk in the long term. And, to make it a bit more personal, when you do this, just like Justin, you will have brought SexyBack

In short:

Unnecessary Outsourcing, especially Unnecessary Overseas Outsourcing, broke the supply chain. If you want to fix it, JUST STOP!

To be fair, we should point out that this article is aimed at the primary readership of this blog, which is North America / (Western) Europe as well as the continents of Australia, South America, and Africa. This article is NOT aimed at Asia, because China is part of Asia, which means if you are buying to support an Asian market, in this situation you should be buying from China (and Fuck the Americas), as per our qualifying assertion near the beginning of this article.

Your Biggest Threat of Disruption For the Next Decade is NOT What You Think!

Disruptions are on the rise. It’s a fact, and if you want proof, just visit the World Economic Forum and check out their Global Value Chain Barometer. While some categories of disruptions are holding steady, disruptions are on the rise overall and not a single category is declining.

If asked what the biggest source of disruptions are, depending on where you are located in the world and what industry you are in, you’re likely to say that the biggest sources of disruption are either
a) war and conflict,
b) natural disasters, or
c) cyberattacks.
And while those have traditionally been (among) the highest sources of disruptions, you’d be wrong. The biggest source of disruptions this year have been strikes and walkouts globally. And as the brilliant Robert Reich will tell you, despite the large number of strikes we’ve seen over the last year, workforce revolts are just getting started.

When you consider

  • the rapid rise in inflation globally, especially around necessities (food, housing, healthcare),
  • the fact that, despite the almost two decades of low inflation, intermixed with short periods of stagflation, the majority of the population in many first world countries were financially struggling before inflation came back, especially given that many were out of work for part or all of COVID and didn’t get near enough financial aid to keep their heads above water, and
  • they’re all scared of AI taking their jobs

Many people are near their breaking point. Strikes are going to keep happening, and repeat every 2 to 4 years (depending on the union contract length) until the underlying issue is fixed. But it’s not going to be fixed!

Why? As the brilliant Robert Reich points out, it’s because of the vast inequality between the (super) wealthy and the average person. In the past 45 years, CEO pay has skyrocketed 1,460% while the typical worker saw a pay increase of just 18%. This has led to a vast inequality between a small group of very wealthy people in a mid-size or large company and the average employee. Until this gap is narrowed, the situation is only going to worsen as more and more laborers reach the point where they’re already broke and have nothing to lose by walking off the job, and strikes are going to become much more common than they were in the past 40 years.

The situation could be fixed easily if CEOs and Boards increased worker’s pay each year a few % above the average rate of inflation for the next few years, a move that would cost most companies only a small fraction of their profit (and still keep the differential pay increase between the average worker and the CEO above a 1000% differential using the same baseline), but it’s obvious this is not going to happen (even though that would still be a ridiculous divide). This fact is best illustrated by the current writers’ and actors’ strike that every single person in the world is aware of where the executives have simply decided to do nothing because the unions will come around when the majority of writers and actors (where 99% don’t make enough to pay their rent and eat without side-jobs) get to the point where they are at risk of losing, or have lost, their sh!tty apartments. (And trust me when I say that they are sh!tty apartments! There are two sides to Hollywood, the side you see, and the run down slums you don’t see where the majority of actors and writers live by doing side gigs while waiting for their big break, which won’t come for over 90% of them.)

It’s an utterly ridiculous situation, especially when it would be trivially simple for any government to fix with a one page bill. (For example, it could be solved if all first world governments were to simply pass a law that, in any company with more than ten employees,
1] No single person in the company can earn more than 100 times the lowest paid worker on an hourly basis during a year across all company payouts including, but not limited to, salary, bonuses, stock grants, share grants, and company paid benefits where the definition of worker would include all employees, contractors, and contractor employees doing any work for the company, which would prevent the company from shifting all low paid employees to a subsidiary to try and get around the law;
2] Any individuals found in violation of this rule would get fined $2 for every $1 in excess of their maximum allowed remuneration for the year;
3] Any officers responsible for compensation who knowingly violated this law could be criminally charged and serve jail time; and
4] These Companies would be required to submit a financial statement of compliance listing the full effective compensation of every worker (down to the janitor in the contracted cleaning firm) as part of their tax returns. Just these four simple rules would prevent most CEOs and their overpaid C-Suites from earning more than 1,500 an hour or 3 Million a year as these mega corps have plenty of minimum wage employees under current remuneration models.)

Furthermore, if a reasonable fix was made (in law) that limited executive pay to more than reasonable levels and thus limited the ability of these executives to grow their wealth to ridiculous levels unless they:

  1. paid their workers more,
  2. increased their net company value (to increase the values of the shares and stock options they earned in prior years), or
  3. started or invested in other companies

… the truth is that such a fix would all be fantastic for the economy as it would force a return to classic growth scenarios (and not the current focus of make money today to please Wall Street, even if it bankrupts the company tomorrow), which would create a much more sustainable economy in the long run. (Markets only crash when they are run up to unsustainable levels. This is a result of Wall Street pushing companies beyond sustainable growth levels.)

But it will never happen, because all the Billionaires would simply spend whatever amount of money they needed to buy enough senators and congress representatives to prevent it from happening (or enough judges to find it an unconstitutional law).

Thus, in the interim, across all industries (not just the entertainment industry the news is fixated on) you will have the greedy out-of-touch Billionaires, whose loss of income from a strike event is so negligible they won’t notice it, starving out union workers until they cave to a new union contract below inflation (while giving themselves a big year end bonus for their trouble). This will not only cause you additional disruptions you weren’t planning for (as strikes linger on for weeks and months), but will increase the inequality gap even further (while the workers get even poorer due to pay raises less than inflation), which, in turn, will set the stage for a whole new round of strikes (and disruptions to your supply chain) in two to four years when the contracts end (that the Billionaire executives will deal with in the same way).

Now, don’t get me wrong, I’m not saying Billionaires are bad (because I shouldn’t need to say it), I’m saying that the actions of the ridiculously overpaid super rich and their sole focus on the almighty dollar have set the stage for the first decade in our lifetime where strike-based disruption events will exceed natural disasters, even though natural disasters have almost tripled in the same time frame (and will continue to increase as long as global warming continues to increase).

the doctor would wish you luck, but even that can’t combat greed!