Are American Companies Threatening Their Own Supply Chains?

A recent article over on CNN Money on how “Starbucks is in Hot Water over China prices” (Oct 21, 2013) has me wondering. According to the article, Starbucks is charging more in China for a cup of coffee in China than it is in Chicago or London (with a medium size Latte costing $4.40 vs $3,20 and $4.00). Similarly, it is charging as much as $18 in China for its Starbucks Coffee mug, that sells for between $10 and $14 in the US.

This is despite the fact that it is doing quite well in China, with strong sales contributing to a year-on-year jump in revenues in the Asia Pacific region of 30%.

Is this how you want to be treating a country you rely on for low-cost product production?

In the case of Starbucks, it could be argued that the mugs are not a main source of income, and since the coffee beans are not sourced from China, Starbucks isn’t really relying on China for its supply chain. But consider Apple, which is using refurbished parts to repair products in China and limiting some warranties to one year, as compared to the two and three years it offers in North America.

We all know that Apple relies on Foxconn Technology Group for it’s iPhone and iPad production, and is thus heavily reliant on China in is Supply Chain.

The last thing Apple should want to do is get the attention of China’s government, that recently recorded fines against five international dairy firms after they were accused of fixing the prices of baby formula, and that is currently investigating production costs and price setting practices at 60 pharmaceutical companies as part of a wider anti-corruption crackdown.

But this post isn’t about Starbucks or Apple, but about every company sourcing from China that also does business in China. Considering their dependence on China, shouldn’t they be treating the Chinese market with the fairness that they demanded for years? How many years were we conveying the message that American negotiators shouldn’t stop until they paid China price, as Chinese sellers had a history of charging foreign buyers more than native buyers?

If we want to get China price, shouldn’t we be charging China price, or at least a price that’s fair with respect to what we charge else where? Otherwise, what right do we have to complain about unfair competition or about a government that might respond by slapping fines on us and/or adding new export tariffs to punish us for our relatively un-ethical pricing measures.

Perks and pitfalls of knowledge diffusion in the supply chain


Today’s guest post is by Professor Ralf W. Seifert & Olov H. D. Isaksson.
Ralf W. Seifert is Professor of Operations Management at IMD and he teaches in the “Leading the Global Supply Chain” (LGSC) program.
Olov Isaksson is a PhD candidate at the Chair of Technology and Operations Management at EPFL, specializing in buyer-supplier relationships. He previously worked at Henkel as a supply chain project manager.

Do you collaborate with, and learn from, your suppliers, or are you serving them the knowledge to compete with you head-on on a silver platter? This question is increasingly relevant in today’s global competitive environment. Firms are routinely leveraging global sourcing to gain cost advantages but competition nowadays occurs between supply chains, rather than businesses. Thus keeping an eye on your supplier’s ambitions is vital.

Case in point, just look at the ongoing patent infringement lawsuits between Apple Inc. and Samsung Electronics Co. Apple turned to Samsung as a supplier for its new iPod and iPhone products back in 2005. At first the two companies jointly developed the components, which gave Samsung an insight into Apple’s technology and operations. Being the only supplier for the processors, Samsung also gained critical knowledge on Apple’s prediction of the market size for the iPhone. In 2010, Samsung launched its own smart phone and has since become Apple’s largest competitor. Today, Apple still remains dependent on Samsung, but it is trying hard to diversify its supplier portfolio.

The above situation exemplifies the negative aspects of knowledge spillovers in the supply chain — i.e. how important knowledge that exceeds the scope of the formal transaction can be diffused between customers and suppliers, and then be used in a rivalrous manner. At the same time, spillovers can also have positive effects and lead to a competitive advantage for the supply chain as a whole.

How does your desire to draw on trading partners for innovation balance with the need to protect strategic knowledge? And, to what extent do you take co-competition from suppliers into account in your supplier assessments? We engaged 34 executives from different high-tech firms and asked them about their opinion. Their consensus: recognizing knowledge spillovers is a critical issue in today’s supply chains. Both suppliers and customers are seen as important sources of information for innovation (see Fig 1).

“We get plenty of valuable information about the market, its players in the value chain and its main drivers from our customers and suppliers. My business relies on it. It is a great input for our R&D portfolio,” said Dr. Ir. Kees Joziasse, Director of Innovation at Corbion Purac.


Figure 1
While most high tech firms protect their innovations through patents, most of the executives stress that knowledge spillovers occur outside formal collaborations — to a large extent via personal interactions between employees of the firms (Figure 2).


Figure 2
Greg Nelson, Sr. Director R&D LED Systems at Philips highlights that employees possessing important knowledge must be conscious of the risks and rewards of knowledge spillovers when interacting outside the firm:

“Knowledge spillovers in the supply chain are a clear attention point. There is a need to create awareness up front with people who have these contacts and to have an explicit policy regarding what can be transferred. Policy restrictions must be balanced with the potential benefits that can be derived from collaboration and not hinder speed in the process. While policies and procedures are not always 100% effective, they do help create awareness in the organization to guard against unintended transfers.”

The Supplier Perspective

While a supplier can learn from its customers, it cannot choose who wants to buy its products/services. Still, Ted Smith, EMEA Sales Director at ON Semiconductor suggests that firms can leverage knowledge spillovers and gain a competitive advantage by carefully choosing collaboration/innovation partners.

“We typically don’t select which customers to do business with, but we do select customers to innovate with. We work with selected alpha-customers, or early adopters, who support supplier innovation in return for a head start in the market.”

The Supply Chain Perspective

Good and enduring partnerships can lead to a competitive advantage for the supply chain as a whole: Mukesh Singh, Senior Regional Manager at BASF explains that “Suppliers easily share their new learning/knowledge if the customer has a strong supplier relationship management program.”

However, it is important to agree upfront how innovative output that is generated in a collaboration should be divided. Dan Negrea, Managing Director AEMtec GmbH and Chief Technology Officer at ECMS exceet, elaborates:

“We strictly consider the background and foreground intellectual property (IP) in our cooperation with partners. The background IP is a source of information “for free.” The foreground IP is normally shared between our company and the customers. Product related IP goes to the customer and process related IP stays with us. In most cases, cutting edge products require the parallel development of a product and a manufacturing process.”

The Customer Perspective

Most executives viewed knowledge spillover as a positive phenomenon. Reflecting on the Apple-Samsung example, others might beg to disagree. Managers do need to protect important knowledge from potential competitors and patents offer only limited protection. Thus, strategic supplier assessments and a detailed supply chain contract are vital to mitigate this risk. If the knowledge in question is critical, in-house production or vertical integration of the supplier might still outweigh short-term gains.

Takeaways

Knowledge spillover readily occurs in your supply chain. Managers need to be aware of the risks of negative leaks, which can have detrimental consequences for the firm. At the same time, knowledge spillover can offer significant benefits for your supply chain if suppliers leverage newly acquired competences to your advantage. These are our recommendations:

  • Explicitly recognize the potential of knowledge spillovers in collaboration and sourcing decisions up-front! What do you need to protect from your competitors? Are there limitations in your supply chain contract? To what extent can your enforce non-use, non-disclosure and non-competition clauses in a global marketplace?
  • People buy from people. Make sure that employees are aware of the risks and benefits of knowledge spillovers! Create an appropriate policy regarding disclosures and interactions outside the firm!
  • Have a clear strategy with regards to each supply chain partner! Do you want a win-win situation or to squeeze a supplier? In collaborations, clearly agree upfront how innovative output shall be divided! If the knowledge is strategically important, in-house production or vertical integration of the supplier might be the safer option.


Thanks Ralf and Olov for this interesting take on Supply Chain collaboration.

Cross-Border Shipping with Mexico


Today’s guest post is from Dick Locke. Dick, who has delivered seminars to over 100 companies across the globe, is a seasoned expert on International Sourcing and Procurement who wrote the book. (His guest posts are still archived.)

the doctor sent me this article from Inbound Logistics and wondered if I agreed. Well, mostly, but I think it overstates some difficulties. I operated an International Procurement Office in Mexico and we were able to get on-time delivery to our US customers in the 98% range over long periods of time … and that included supplier performance, cross border performance and logistics performance in two countries.

Some of the issues the article mentions are common in every country. Natural disasters are just one example. Every logistics network has to have backup plans when problems occur. And of course, when you’re operating in another country you have to have an open mind to doing things their way.

The article does have some good points:

* Exporting from Mexico requires using a Mexican customs broker. If you are moving goods to the US, you will probably want a US customs broker also, unless you want to have your own people at the border. Yes, that’s an extra step in the process.

* The border does jam up around Christmas as many expatriate Mexicans ship presents south.

* Of course you need to understand your country’s security related requirements, such as C-TPAT in the US.

* You should always avoid insuring every shipment and rely on a blanket policy

* You do need to keep track of goods crossing the border

But some is either overstated or applicable to any country, and some I disagree with.

* If you are shipping LTL there are several LTL logistics companies, all aimed at industry. DHL, Fed Ex and UPS as well as local Mexican companies such as Estafeta all do cross-border LTL work.

* You are not “guilty until proven innocent” under Mexican customs regulations any more than you are in the US or other countries. And the US has the same five year “statute of limitations” on customs errors … and it’s five years from your last import of a product.

* I wouldn’t ask a Mexican carrier to price services in US dollars. Fuel costs are in pesos as are nearly all of the carrier’s operating expenses. Asking to price in dollars will get you a higher price and possible attempts to renegotiate if the dollar weakens.

As an observation, the Mexican trucking industry is changing. Twenty years ago, it was a collection of small, independent1 truckers. Today there are bright, new, shiny trucks on the Mexican roads and large, serious logistics services available.

1 Extremely independent. Mexican truck drivers were the last of the wild west cowboys. A habit of stopping off overnight at what were euphemistically called “cantinas” made on time delivery really difficult. Times have changed.

Reuse, Recycle, Remanufacture – Call It What You Want, But Just Do It!

Sourcing Innovation has been promoting sustainability since the beginning and design for recycle since the very early days, which is essentially what you are doing if you are designing for remanufacturing, which is finally starting to take hold in parts of the industrial sector, as per this recent article over on ThomasNet from the green & clean on “a solution that makes both economic and environmental sense”.

When you think about the average complexity of today’s consumer products, especially in electronics, it becomes clear that when a product breaks, it is typically only one component that is broken and a replacement of that component makes the product useable again. That’s why a lot of computer, tablet, and phone manufacturers have entered the refurbishment business – once the damaged or defective part in a product that was returned under warranty or reclaimed upon disposal by a customer, it can be reused and, more importantly, resold.

But the concept doesn’t end with electronics, and doesn’t end with refurbishment. Electronics can be designed more modularly with re-manufacture in mind, so that parts can be upgraded en-masse when the products are returned en-masse in a regular upgrade cycle. For example, if laptops were designed for easy replacement of not only memory and drives, but processors and peripheral connectors (in anticipation of USB 4, Thunderbolt 2, etc.), the previous generation models could become the next generation models and resold as either lower-end offerings in the same market or new offerings in a foreign, emerging market.

And automotive suppliers, who not only know that parts wear out, but when parts are likely to wear out, and which parts wear out together, could not only design their engines to make it easy to replace parts, such as spark plugs, batteries, belts, filters, and pumps that wear out quickly, but also the engine block as a whole, that is going to wear out in 7 to 15 years, depending on the average annual mileage. Given the choice, many people on a fixed income (who don’t live by the ocean and have rust to worry about) would rather replace the engine for 3,000 to 5,000 and keep the car for another 7-10 years if the frame is fine than pay 25,000 or 30,000 for a new car. And while this may not look as attractive from a bottom line perspective to a manufacturer, it significantly reduces the chance of the customer migrating to a different car company, which is very common if a competitor is offering a significantly better deal on a comparable car.

Plus, if the components are themselves designed for remanufacturing, it will be relatively easy for the manufacturer to reclaim the raw materials from the damaged or defective components, which is where a lot of the cost comes in, especially if we are talking rare earth metals. For example, the price of praseodymium-neodymium oxide exceed 1.25 an ounce and prices of terbium oxide (a semi-conductor that is used as an activator for green phospors in colour TV tubes) exceeded 12.00 an ounce this summer, and that’s cheap. Gold, a metal used in many electronics products, exceeded $1400 an ounce. And while there is not much gold in a single laptop, when you put fifty of them together, you’d likely get an ounce. And given that there are roughly 100 Million PC laptops and computers sold a year, that’s close to 2 Million ounces of gold that need to be reclaimed!

And, as per the green & clean article, remanufactured products offer cost savings in the 45% to 60% range! So if doing the right thing isn’t enough, that should be enough of a justification to invest in remanufacturing! This goes double if you are in electronics (for some of the reasons given above) or automotive, where the global market for remanufactured auto parts is projected to reach $122.8 Billion by 2018.

So, regardless of what you want to call it, it’s time to do it. It’s not just good environmental stewardship, it’s good economics.