Environmental Damnation 15: Waste, RoHS, & WEEE

Waste is bad, and legislation that requires waste to be minimized, dangerous chemicals and compounds to be avoided, and products to be properly recycled and reclaimed and safely disposed of is good. But it’s not good for your supply chain if new legislation comes into effect faster than you can react.

While all products should be designed with recycling and reclamation in mind, it takes time to identify new designs that use safer materials, build new production lines, and get the products to market. And while efforts should currently be in progress to redesign each and every product that contains a substance restricted in at least one major market, sometimes a design does not yet exist that uses an alternative chemical or compound and a more restrictive or new legislation could threaten a major product line.

This is becoming more likely by the day. While the US might not be as advanced as the EU in terms of environmental legislation, some states, like California (which just sent “a bumper crop of environmental legislation” [nrdc.org] to the Governor) are making a push and it won’t be long before it’s even harder to get products approved in some states than it is in the EU. Furthermore, as noted by SI in the past, when even countries like India and China (through the initial Order 39 in 2006 and the updated version in 2012) are considering more restrictive Environmental Legislation (which can be thought of as their own version of RoHS – the Restriction of Hazardous Substances Directive, one can be sure it won’t be long before this type of legislation become the norm and not the exception.

And while there is a lot one can do to prepare for the coming reality, it all takes time, money, and preparation.

First of all, one needs to make sure the organization has a good bill of materials system in place that tracks each and every compound and chemical that is used in each and every product produced, imported, and exported.

Then, one needs state of the art trade document management systems that properly completes all of the necessary import and export documents to make sure that, provided the goods are compliant, they are not held up or confiscated at the border.

Finally, one needs to implement a good online collaborative design solution that will allow all parties within the company and its partners to design, and produce, alternative products that are compliant with the relative legislation where the company wishes to produce the product or import it for sale.

And while all of these systems are systems that the company should have in place regardless of current or expected legislation, it requires time to identify the right systems, implement the systems, and learn to use the systems to their maximum potential.

Infrastructure Damnation 11: Postal Services

While most Supply Chains don’t run on public postal services, and instead rely on private transportation companies for both their freight and package delivery needs, public postal services are still needed. Why?

Without public postal services, there would be an effective private monopoly in mail and package distribution. While there are multiple private options, without a public body to set baseline prices, there is no incentive for the private companies to be competitive. As long as the private companies thought they could charge more, it is very likely that rates would increase across the board, consistently, until the average company switched to independent bike couriers.

More importantly, without public postal services, the average consumer would not be able to afford to shop online as much as she does now, which would likely lead to an across the board decline in sales for many companies, which would, of course lead to a decline in order volumes and Procurement’s negotiating leverage with its suppliers.

And this is looking like a reality in multiple countries right now. As discussed here on Sourcing Innovation over the last few years, The First World Postal Services Are in Trouble and the, US, UK, and Canadian public postal services are all deep in debt and may need to drastically reduce services in the coming years in order to balance the books and keep in business. Consider SI’s recent posts on the US, UK, and Canadian postal services (including, but not limited to, our posts that asked if the U.S. Post Office Can Be Fixed and Too Bad the US Post Office Did Not Follow Royal Mail’s Lead). They are billions in debt (Canada Post is over 1 Billion in debt exclusive of pension liabilities, the recently privatized Royal Mail has a debt to equity ratio of 91% (which puts its debts at over 1 Billion US Dollars, and US is over 100 Billion in debt (cnsnews.com) when underfunded pension liabilities are taken into account, and it’s not getting any better.

While one may think that this will never happen, as Canada has had its own public mail service since 1867, the US has had a reliable public service since the Pony Express started back in 1860, and the UK has had public mail since 1516 — but we could be just a few years away from the day it’s private bike courier for mail and small packages (and we need a Dark Angel for reliable deliveries). It is likely that Royal Mail is only still in existence because it was privatized (and that postal services in North America, if they do not drastically restructure operations, will have to follow suit).
And while you might not see a large impact to your supply chain, since the 3PLs and trucking companies are here to stay, when your order volumes decline and you have to pay double just to send a contract across town, you will.

Risk Management in Migration to Low-Cost Countries, Part II

Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

In Part I, we noted that efficient migration to low-cost countries has become a necessary, competitive trait because ignoring low-cost country sourcing within the corporate agenda is now a risk in itself. However, low-cost country sourcing has become so intricate that it carries significant risks if improperly managed. We already discussed that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process and discussed the quality concern and noted that where there is expertise in a well established industry, quality will generally not be an issue. But this is just one risk area.

As far as other risk areas, geography is a critical component that is ignored more frequently than it is acknowledged when selecting a low-cost location. Geography plays a dual role when managing risk. First, geographical risk can be assessed based on the proneness of one location to experience a natural disaster and its ability to recover. Secondly, geography should be assessed on the location’s accessibility to reach end markets quickly. Logistics and infrastructure play a key role here, but a strategic location is a competitive advantage that will nurture mobility.

Low-cost countries will also have different laws, rules, and regulations that permeate their business culture. Some countries will have strong intellectual property (IP) protection schemes but they may not enforce or penalize infringement. Others won’t have any at all, which in many cases has motivated corporations to exit low-cost locations. IP transgression may have huge repercussions to a company, especially if prosecution in a foreign country is favorable. Corporations must ensure that robust confidentiality agreements, contractual terms and conditions, and enforceable jurisdictions are in place with all entities that are engaged from the beginning.

Financial regulations, taxing structures and commercial activity compile an extensive bundle that may pose both risks and advantages. The best way to capitalize on tax breaks, financial incentives and even logistics benefits is by understanding the trading regulations and agreements low-cost countries have in place and how can they be leveraged advantageously. From subsidies, to temporary-tax-free importations, most low-cost countries today have mechanisms to incentivize investment. It will also be critical to understand which regulations can negatively impact the operation or may affect the Total Cost of doing business. Some good examples of this are anti-dumping laws and penalties that are applied to specific commodities and products, which will vary in time and form constantly.

Political and social instability are stigmas that often become associated with low-cost countries. In many cases this image is misunderstood or exaggerated by the media. The reality is that focused social issues may transcend the commercial barrier when unwarranted fear is passed onto potential investors. Social unrest is unpredictable and can easily scare away opportunities, but in many cases, specific industry sectors may be protected from it and may even be thriving in spite of it. The best way to manage something like this is to understand how the macroeconomic landscape behaves as a whole from the very beginning.

Some companies have shown interest in approaching migration on a “testing the waters” type of approach to mitigate risk, which may entail transitioning only a small portion of their volume to a low-cost country, or running pilots to ensure a safe migration. While this conservative strategy is common and could be effective, is not necessarily the most beneficial. “Testing the waters” may actually be very expensive in the short-term and may not provide the full benefits of a well-run migration strategy; in some cases it may even be considered somewhat “risky” since companies may incur in dead costs, expose competitive strategies and not leverage the full potential of the local network.

Strategic sourcing best practices are a key element on risk mitigation, as many of them include the evaluation of multiple dimensions of the offshoring and migration process. They also help understand suppliers and establish collaborative links with them and other local entities that can help define a clear picture of the local market, the networks and uncover the opportunities that may have not even been considered in the first place.

With all this in mind, low(est) cost should not be considered as the only metric on which to base a migration decision. Finding an ideal low-cost country with low risk will depend on its sustainability potential. In some cases the lowest cost may also come with higher risk, and so a well-balanced strategy that demonstrates long-term value is the best formula to keep both costs and risks down. A balanced combination can only be drawn through leveraging accurate data and expert advice on each of the risks areas of cost migration.

Thanks, Diego.

Risk Management in Migration to Low-Cost Countries, Part I

Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

A few decades back, corporations started to talk about migrating costs to low-cost countries. These discussions were driven by the inherent advantages that locations in East Asia, Eastern Europe, and Latin America presented. Today, this is no longer merely a strategic notion but a well-established commercial trend. Efficient migration to low-cost countries has become a necessary, competitive trait.

One of the primary reasons companies decided to migrate to low-cost countries in the first place was precisely to mitigate risk, whether by reducing cost or by decreasing the probability of supply chain or operational disruption. Eventually, this strategy became so popular that companies understood that without implementing structural changes to reduce their cost base, they could perish. Consequently, as the trend evolved into a global practice, it became clear that ignoring low-cost country sourcing within the corporate agenda was a risk itself. Today, the global sourcing paradigm is complex, and in many cases, world class organizations are now even moving out from well-known countries in Asia to “nearshore” locations in Latin America.

However, as ironic as it may be, low-cost country sourcing is so intricate that it carries significant risks if improperly managed. This preamble sets the tone to our main discussion, as risks factors, whether known or strange, will present themselves regardless of the low-cost country strategy.

Common sense dictates that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process. Surprisingly enough, many corporations overlook this first step because foreign market research can be both expensive and time consuming. Regardless of how arduous the efforts are, some risk factors will not be identified easily or early enough. Thorough research and preparedness will always prevail as the first risk mitigation strategy. That said, many risks of low-cost country sourcing today are well-known, and best practices will facilitate managing risk from the initial stages of the migration process.

Typically, low-cost countries are surrounded by some level of both reputation and myth. Getting to know the real landscape is paramount when migrating costs. The first premise that comes to mind is that low-cost is associated with low quality. Generally speaking, this is not true, especially when we understand the strong industries in the markets we pursue. The likelihood is that where there’s expertise and a well-established industry, quality will not be an issue. What we need to determine instead is whether the location in scope has the adequate environment to sustain and develop the industry in the long-term. Beyond generating an understanding on local suppliers, labor rates, and raw materials, corporations must consider multiple areas of risk and audit the local market itself.

This is particularly important because any company migrating a manufacturing process or even a service should determine if the local market itself would be receptive to it and support regional demand. This step would mitigate risk by reducing costs and opening new markets, making the location an efficient link within the supply chain and a source of revenue.

However, quality is just one concern that needs to be considered when outsourcing to a local market. In Part II, we will explore some of the other risks that need to be addressed.

Thanks, Diego.