Category Archives: Supply Chain

Supply Chain Difficulties in Latin America

Inbound Logistics recently ran a great article on Beating the Odds in Latin America that did a good job of summarizing the changing situation in Latin America and the challenges associated with your Latin American Supply Chain. Given that it might be true that Latin America “is all about growth”, it’s a market you want to understand.

The first challenge that the article pointed out is that of logistics costs that are high compared to other regions of the world-about 15 percent of the cost of goods sold. Ouch! Like parts of India and Northern China, transportation options are few, roads are not great, rail is (almost) non-existent in many places, and ports are congested. As more investment flows into the region, the situation will improve as it did in China and India. The situation in Brazil in particular is going to improve rapidly with the 2014 World Cup and 2016 Olympic Games on the radar. And this isn’t the only transportation issue. The transportation industry is fragmented in Latin America, with a lot of small players and this makes it more difficult to manage, especially when handling volume spikes.

The second challenge is that of lagging productivity. Average productivity in the region has increased only 1.4% per year for the past 20 years, which is much less than in Asian economies. This is partly due to restrictive labour rules and sector specific regulations but also due to taxes and lack of investment.

The third challenge is that of supply chain expertise — there is a relative lack thereof in Latin America. Universities aren’t even offering logistics degrees yet, yet alone supply chain management degrees. Without even basic Operations Research programs, people entering the logistics field have to learn everything from how to manage a distribution centre to how to interact with customers.

The fourth challenge is that of systems. Technology systems infrastructure generally lack sophistication, and in some cases, even availability. Plus, for an average logistics carrier in the region, a TMS (Transportation Management System) is too expensive for a single company to justify. As a result, many companies end up doing a lot of manual work that is time and cost intensive.

The fifth, and final challenge, that was noted is that of security. Crime is pervasive throughout Latin America, and takes a heavy toll. The homicide rate in some Latin American cities is extremely high. For example, the crime rate in Rio de Janeiro has eight (8) times as many homicides as New York on an annual basis and eleven (11) times as many as Toronto. Plus, surface transportation is the most difficult security risk area of the supply chain in Latin America. Sincethere usually aren’t multiple routes to destinations within a country. In many cases, criminals simply block the highway and start checking trucks to see what products they like and they get away with it because the police are understaffed so they cannot patrol every road.

It’s not an easy situation, but it does appear to be a navigable one for those willing to roll up their sleeves and get their hands dirty.

How Do You Handle Inside Theft? Same Way You Handle Drug Dealers!

Apparel just ran a fascinating article on how former federal agents can help solve retailers’ employee theft problems. According to the article, the same practices used in fighting drug dealers applies to tracking down thieves inside the workplace. In particular, professionally conducted interview and interrogation tactics and procedures play a critical role in identifying the prime suspects in inside theft and solving this costly problem.

Given that the employee theft rate, which held steady at 15% from 1969 to 2006, skyrocketed to an alarming 75% later that year, and that employee theft cost U.S. Retailers $18.4 Billion in 2011, this is becoming a critical issue.

So where do you start? First, start with the red flag employees.

The article notes that there are four types of employee thieves actively engaged in stealing time, money, or products from their employers:

  1. Thieves by Nature
    who enjoy stealing
  2. Employees who feel Entitled
    because the world owes them more than what they earn
  3. Employees Stealing out of Desperation
    as they are in extreme debt or have a drug/gambling/other problem compounded by a weak economy
  4. Theft by Target of Opportunity
    where money in plain sight will be taken

These employees can be identified by well trained private investigators, with experience in the right areas of law enforcement, who can ask probing questions, confirm facts, corroborate allegations, and identify the full magnitude of theft in your organization. These interviews should focus on scheduling, accounting and inventory activities, and similar supply management practices where the greatest opportunities for theft occur. And conducted properly, in full accordance with the law, they will identify the perpetrators of theft much faster than if the organization waits until its losses mount to the point where law enforcement agencies take notice.

Is Co-opetition a Good Thing for Your Supply Chain?

Not too long ago, the ISM ran a cover story on “Collaborating with the Competition”. In this article, they addressed horizontal collaboration, which is the sharing of supply chain assets for mutual benefits, and which is becoming common among some manufacturing groups. This typically occurs between companies in the same industry that, while not direct competitors, market and sell to similar customers and consumers. As an example, if one manufacturer made HDTVs and another made Blu Ray players, which do require similar raw materials and even chipsets for encoding and decoding, they could cooperate in sourcing because, while they are selling to the same consumer, they are not selling the same product. However, this is now occurring between companies that, at least in some product categories, often directly compete with each other. The case of Hershey Co. and the Ferraro Group, as pointed out in the article, is one example. “Higher-end” hershey bars and “lower-end” Ferraro chocolates are in the same price category and target the exact same consumer that will likely only buy one of these products during a trip to the store. This is an example of co-opetition in the supply chain.

According to the “North American Horizontal Collaboration in the Supply Chain Report”, published by EyeForTransport, while still in its early stages, the benefits [of horizontal collaboration] are clearly recognized and there are companies already optimizing their supply chains with this cutting-edge strategy. This is especially true if the collaboration is deep, and extends into sharing warehousing, distribution and even manufacturing capabilities. And of course, the collaboration is going to achieve efficiencies and savings beyond what either company can achieve on its own if you collaboratively optimize everything, as the article recommends. [This echos what the doctor has been saying for years. No other technology or process delivers the returns that optimization delivers, and the maximum effectiveness is always in a collaborative application.] But the real question is, what is the value that is going to be delivered? When you optimize everything within your organization, you maximize the value to your bottom line. But this isn’t necessarily the case when you optimize a joint supply chain.

Why? To understand the rationale, we need to take a step back to the predecessor of horizontal collaboration — the Group Purchasing Organization. The idea behind the group purchasing organization was that if a bunch of companies came together and pooled their total purchasing volume, they could get a better deal from a single supplier than each could on their own. (In simple terms, they are the enterprise version of today’s consumer GroupOn or TeamBuy.) This was true for each company if they all had volume requirements in the same order of magnitude and there was enough companies in the group to take the volume to the next order of magnitude (which, in manufacturing terms, is defined based on the throughput of a production run and the threshold at which manufacturing the product becomes cheaper). If one company had an order of magnitude more demand than the others in the GPO, then the reality is that it could get just as good of a deal if it had a good negotiator, and if a company had an order of magnitude less demand, then it was getting a way better deal than everyone else.

In addition, a deal is only a better deal if it doesn’t help a competitor more than it helps you. So if the GPO contained direct competitors, typically it was only used for buying indirect or non-essential products or services (like office suppliers, maintenance parts, and temporary labour services), and never for components or raw materials used in direct manufacturing. So the organization never saw the full value of what a GPO could deliver unless it joined a smaller GPO that prohibited direct competitors from belonging to the GPO. And then it still didn’t get the best possible deals across the board because smaller GPOs generally had smaller volumes, especially since not all companies were buying the same products or services, or they were not all ready to buy the same categories at the same time.

Co-opetition is taking the concept of a GPO to the next level. It’s essentially saying “why stop at products and basic services when you can also collaborate on warehousing, transportation, and manufacturing asset purchases and take GPOs to the next level”. And while this sounds good in theory, the reality is that you can really only collaborate this deeply with an organization in the same space as you making similar products, and maximum benefit (from an optimization viewpoint) will only be achieved when they are making the same category of products. And if the other companies are making the same categories of products, even if they are not directly competing (like tablets and laptops), they are probably close enough that they are vying for the same consumer dollars (as many consumers have limited disposable income these days), and if the products are that close, and your competitor ends up getting more efficiency gains then you, with the indirect knowledge of your products that they are going to acquire, what’s to stop them from creating a product that directly competes with yours, at a lower production price, using the supply chain you helped them build?

And yes, there are always legal precautions you can take, but first of all, you have to think of every eventuality and then, if the competitor is determined, be prepared for a lengthy, and costly, court case. In other words, the greater the savings are for you, the greater the value your competitor is likely to see. Is it worth it? the doctor doesn’t have the answer, but thinks it is very important that you ask the question!

What is Visibility?

Supply Chain Visibility is a hot-topic, and, as reported in this article in Logistics Management on Defining Visibility late last summer, was the hottest project in 2011 according to a Capgemini Consulting study. Fast forward to 2012, and visibility is a term I’m hearing from at least every other vendor as a selling point of their supply chain services and solutions.

Thus, at this point, I have to ask — what, pray tell, is visibility? When we look up visibility, the first definition returned from dictionary(.com) is the state or fact of being visible, which isn’t very useful since visible is defined as that [which] can be seen. So what do we have to see?

Well, if you talk to a software-based solutions vendor, we have to see the data. Specifically, data on where your order is in terms of production, shipment, or delivery. And this is good, but it’s not enough. While this will tell you that production on an order is three (3) days behind, it won’t tell you why. Is the plant recovering from a backlog, and about to put your order into overtime production tomorrow? Are they suffering from a worker shortage, or strike, and your order is delayed another week? Or have the components and/or raw materials not yet arrived? And if it’s the latter situation, why? Is it a transportation delay? A production delay? Or a raw material shortage that may take months to correct? So you need visibility into the status of your order and all of your supplier’s orders that impact your orders. But this isn’t always enough.

While it would be great to know as soon as a delay occurs that could potentially impact your supply chain, and give you more time to respond and potentially create and/or implement mitigations and counter-measures (such as finding an alternate source of supply or stepping in to help the supplier solve the problem), this still doesn’t give you any indication of problems that could be brewing. That’s why other vendors try to sell you risk-focussed data solutions such as financial viability reports (from credit-based data) and activity reports (from import/export data). But these solutions only allow you to judge supplier viability, they don’t allow you to determine if an external event in the supplier’s locale (such as war breaking out or a likely natural disaster) could take the supplier out even if they are financially viable and low-risk from a business perspective. So other solutions try to sell you country-based risk assessment solutions with data on each of the locales you are doing business with. And this is a type of visibility. As are sustainability tracking solutions which track sustainability data (with regards to environmental, legislative, and other types of compliance data) to try and predict current and future supplier health based upon a sustainability score that goes beyond pure financial data. And this is another type of visibility.

And if you had all these solutions, you could certainly argue that you had supply chain visibility, but the question is, how complete is it? How much do you need to see to be confident that the chances of an unpredicted event are sufficiently low and/or the chances of you not knowing about an unpredictable event soon enough to implement mitigations are sufficiently low? It’s hard to say. It probably depends upon your operation, your risk exposure, and the strength of your supply chain and supplier relationships.

Regardless, visibility is a concept that is hard to narrow down and no one approach completely solves the problem. Keep that in mind when evaluating solutions on the strength of their visibility.

What Impact Will the National Defense Authorization Act (NDAA) Have On Your Supply Chain?

According to a recent press release over on the IHS site, stringent new counterfeit-part regulations in the 2012 U.S. National Defense Authorization Act (NDAA) may have broad international implications that could impact hundreds of of overseas companies that supply Billions of dollars’ worth of items to the U.S. Government. This act, which was signed into the US law on December 31, 2011, not only authorized 662 Billion in funding “for the defense of the US and its interests abroad”, not only included Title X, Subtitle D on “Counter-Terrorism” which deal with the detention of persons the government suspects of involvement in terrorism, but also contains 8-page section 818 on the “detection and avoidance of counterfeit electronic parts” buried in its 565 pages.

This section states that the secretary of the department of defense shall issue or revise guidance … which … shall address requirements for training personnel, making sourcing decision, ensuring traceability of parts and shall revise … the Federal Acquisition Regulation to address the detection and avoidance of counterfeit electronic parts and The revised regulations … shall provide that … covered contractors who supply electronic parts or products that include electronic parts are responsible for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts in such products and for any rework or corrective action that may be required to remedy the use or inclusion of such parts.

In addition, the act states that the Secretary of Defense shall implement a program to enhance contractor detection and avoidance of counterfeit electronic parts and the program … shall require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall address

 

 

  • the training of personnel
  • the inspection and testing of electronic parts
  • processes to abolish counterfeit parts proliferation
  • mechanisms to enable traceability of parts
  • use of trusted suppliers
  • the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts
  • methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit parts is, in fact, counterfeit
  • the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts, and
  • the flow down of counterfeit avoidance and detection requirements to subcontractors

 

 

 

And many other requirements, along with punishments for offenses which an include 2 and 5 Million dollar fines for individuals and 5 Million and 15 Million dollar fines for corporations for first offenses with second offenses garnering fines of up to 30 Million dollars.

This is of grave concern, because the legislation applies not just to counterfeit parts, but suspect counterfeit parts. An organization that supplies parts that are suspected to be counterfeit, whether proven counterfeit or not, will have to remedy the situation on its own dime (which could cost Millions to mint), and if it doesn’t do so satisfactorily, could be fined Millions of dollars on suspicion. And given that the reports of counterfeit parts have soared dramatically in the last two years, with 1,363 separate verified counterfeit-part incidents in 2011 as compared to 324 in 2009, this is a serious concern for anyone supplying products to the US Government. Given that many of these counterfeit parts are commercial electronic components that have wide use across every major technology end market, this is an especially serious concern for suppliers and manufacturers in electronics supply chains.

It would appear that this puts the need for supply chain security and risk management in your electronics supply chain at an all time high, now that even suspected fraud can bankrupt your company. The impact of this legislation could be much worst than 10+2. What do you think?