There is No Bright Side to a US-China Trade War

I’ve read a few pieces over the last couple of weeks that some Asian nations expect that a drawn out reciprocal trade war between the U.S. and China could have a bright side for them as they expect that they can lure more manufacturing or agricultural exports their way.

Sounds good in theory, but here are the problems with that theory.

1. A lot of outsourced production over the last two decades has become highly specialized to the point where very few nations have factories with production lines that can produce the goods.

2. The modern electronics industry relies on rare earth metals, and China is the majority producer for many of these — in fact, only a few nations on the planet produce some of these rare earth metals.

3. The only nation that can rival China in agricultural production in Asia is India.

4. A number of companies that need supply assurance have locked in contracts with Chinese (multi-)nationals that can’t be easily broken without penalties.

5. International trade requires logistics infrastructure — good roads, reliable trucking, modern ports, large cargo carriers, etc. Something that not many countries in Asia outside China and India (and to some extent Japan and South Korea) have a lot of.

In other words, there’s not a lot of outsourced production that can be easily switched to other Asian countries, and, most importantly, if China becomes unattractive to the U.S., which we must remember controls about one quarter of global GDP, then

6. Central and South American sources can be just as attractive, and can be easier to source logistically.

Trade wars are never good, and there is no bright side, especially in this trade war.

Thirty Five Years Ago Today …

Apple Computer’s Macintosh personal computer goes on sale in the United States, beginning an era. As the first mass-market PC with a GUI (graphical user interface), built-in screen, and mouse, it set a new standard for the modern computer age.

While it wasn’t adopted en-masse initially due to its high cost (compared to the Commodore 64 and the IBM clone market), it set a new standard when when Apple consolidate down to 4 models 5 years later — the Power Mac G3, the iMac, the PowerBook G3, and the iBook — with more competitive prices and aesthetic designs, Apple became profitable and started its trek to become the brand of choice for the discerning enthusiast.

Now every device, including our pocket phones, have built in screens, GUIs, and trackpads (mouse replacements). The Macintosh ushered in a computing revolution. It just took a few years longer than Apple expected.

What Should Drive PE Investment?

The M&A frenzy cycle that we have been discussing on and off for the past year hasn’t really died down, and this has spurred the PE cycle where PE (Private Equity) firms, wanting to capitalize on the frenzy around the Procurement space, are buying (majority investments in) vendors (that appear) ripe for a turn-around or market growth with just a little boost to their platform.

By investing in the right platforms, PE forms are looking to acquire vendors that they can flip (public or private to a bigger PE firm or bigger software vendor) before the M&A frenzy dies down. But just buying any old firm — regardless of how good the turn-around opportunity looks, how good the base technology platform is, or how much the vendor’s platform can be improved with additional investment or roll-up acquisitions — isn’t the answer.

Nor should the vendor follow the same rules that companies should follow when doing M&A. What should a P&E firm look for?

Operations

The firm should either have an efficient operational model or the P&E firm should be able to make the model efficient. If overheads are too high, there should be a way to bring them down quickly — either through new leasing arrangements, new (data center) hosting arrangements, cheaper back-office support operations (using PE personnel or outsourced providers for non-critical operations, etc.).

Talent

Whether the goal is a turn-around, an improved platform, or just taking the platform to a wider market, that’s going to take talent. The majority of the core talent that built the solution and the core talent that can take it to market, sell it, and implement it should still be at the company. Otherwise, it might be a better investment to build something from scratch.

Portfolio Synergy

Whether it’s turnaround or a growth strategy through an improved platform, there typically needs to be results within a few years. The best way to make this happen is if the solution has synergy with the customer base in the rest of the portfolio. For example, if the solution being considered is an indirect sourcing platform but most of the customers in the PE firms stable of companies are direct sourcing manufacturers, the PE firm will have zero advantage in trying to take the solution to market.

Just like M&A vendors should not pursue mergers or acquisitions that get synergy from redundancy, PE firms should not pursue acquisitions that just look cost effective. Only those investments in firms with solid platforms, good talent, efficient operations, and and an attractiveness to the markets they know are worthwhile, as those are the only companies with near-term growth potential — and the only companies the market will want to consider.

Hopefully PE firms will take this advice and save/grow those companies that will help the market as a whole. Only time will tell.

How Do You Find Hidden Costs? Part II

Last year we noted that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them. Sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin. But the margin is only one hidden cost.

There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find the hidden costs. All of them.

In our last post we noted that one way to find hidden costs was to look at production costs, particularly:

  • raw materials
  • energy
  • labour
  • overhead costs

But, as noted in our opening paragraph, there are also hidden costs in the transportation of the goods. And hidden costs in the costs associated in the transportation of the goods — which can include interim storage, dock / port fees, extra tariffs, etc. And what costs are hidden?

  • Fuel Surcharges
    yes, these are valid if there is a contract that allows them, but if the contract is well written, they are supposed to be in line with actual fuel cost increases and decreases above a maximum cost … typically what will happen is suppliers will raise when fuel prices go up, but NOT decrease when they fall back down – that’s unnecessary hidden cost
  • Interim Storage
    some suppliers will use shippers that do a lot of cross-docking, especially with LTL, and some might even temporarily store goods to make sure they only run trucks full – this can incur storage costs and even delivery delays — if the combined costs of this intermediate storage and delay to your supply chain is more than just shipping a LTL truck direct, that’s a hidden cost
  • Dock/Port Fees
    sometimes a supplier or shipper will always blindly use the closest port, even if a port a couple of hundred miles away has half the fees and has carriers that cost less — this is also a hidden cost — remembering that the busy ports are always near capacity, the difference can often make trucking the goods an extra couple of hundred miles a profitable venture
  • Extra Tariffs
    if you are buying from a supplier that has multiple locations in Asia, which one they manufacture in and ship from matters greatly as export tariffs differ by country and import tariffs greatly differ by country; if the right location isn’t chosen based on the destination, these are extra hidden costs as well

Supply chains are fraught with hidden costs, and while it could take a lot of analysis to find out how much they are costing you and whether they are worth dealing with, the reality is that a lot of them are not that hard to find if you just trace what happens from finished good back to raw material.

Happy tracing!

AI — Almost Smart Enough to Replace Common Sense!

Almost!

If you’ve been following the doctor‘s deep dices in AI in Procurement () and AI in Sourcing () Today, Tomorrow, and the Day After over on Spend Matters Pro [membership required], you should be firmly aware that, in the true definition of the term, there is no AI in any enterprise software platform today. Period. In fact, what’s there isn’t even close.

You’ll also know we define AI today as assisted intelligence where AI helps you identify relevant information, trends, etc. much faster than you could on your own and augmented intelligence where AI supplements your intelligence with advanced algorithms and capabilities that allow you to make informed decisions many time faster than you could without the technology — and that even the most advanced platforms out there struggle to even deliver assisted intelligence. All the majority of platforms do is deliver RPA – robotic process automation, which is just a fancy way of saying they can automate complex workflows under a wide variety of conditions, provided somewhere along the line an expert has created enough rules and models for it to follow.

And if you’re willing to spend enough money, you too can buy a state of the art system that will tell you that people like to drink coffee in the morning and that if you have a lot of employees they will form a line to get it and they will waste a lot of time waiting for it if you don’t have a big enough coffee area and coffee pre-brewed and pre-poured. You know, the same thing any current or former Starbucks barrista would tell you for the price of a coffee.

And the doctor wishes he was joking. This was what he found in his twitter feed just before he had to stop everything and write this post!


Wow! How much did they spend on this software that documents basic process times and runs simple models to determine that some things take time and any action that reduces that time for multiple workers can save time and money? Hire any lean specialist to just walk around your operation for a day and you’ll get a hundred common sense recommendations like this.

the doctor thinks WeWork should say WeWereRippedOff!

Especially since the other “observation” was equally obvious and if they simply required people to book a room, log a count, and asked a secretary to review the logs for two weeks they’d learn in ten minutes that people prefer to work in smaller groups because smaller groups get things done!

I wonder if they are training these systems on Pigeon English? (At least we know the dangers that common from Pigeon droppings … )