Monthly Archives: January 2010

Nearshoring? Not on this planet. At least not yet.

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

 

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

 

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group and Global Supply Training.

Where’s Our Leonardo da Vinci?

Leonardo da Vinci, the brilliant Italian scientist, mathematician, engineer, architect, inventor, painter, botanist, musician, writer, and the archetype of the Renaissance man, defined an entire movement almost single-handedly and inspired countless scholars to new and dizzying heights. He probably understood the connection between art and science better than any man alive during the last millennium and even conceptualized inventions (such as the helicopter and the tank) that could not be realized for almost 500 years. He was a leader and a visionary and someone who could serve as a focal point for an intellectual revolution.

Now, it’s true that the 20th century produced its fair share of great minds — Einstein, Feynman, Hawking, and Penrose who helped redefine the very universe we live in, to name a few — but most were fairly specialized, and these minds in particular focussed heavily on the fundamental sciences. In the arts we had the likes of Pollock, Warhol, and Lynch and in philosophy we had the likes of Wittgenstein, Russell, Rand, and McLuhan, but, like their physicist counterparts, they never crossed the divide. The only people who attempted to really bridged the divide were the science fiction writers like Asimov, Clarke, Adams, and Gibson. But even the greats never really crossed the line into the “world” of business which would, of course, at least as far as a scholar is concerned, sully true academic pursuits.

When you meander over into the world of business, in which most of us live in today’s mostly privatized world (where the market capitalization of six private corporations exceed 5 Trillion, which is an amount greater than the current GDP of every country in the world except the US, and the top corporation, Race World International, has a market cap that is three times the annual GDP of the US), and you look at the great business minds like Drucker, Kroc, Porter, and Ford, you see little connection to the sciences, except for Ford, who was an engineer.

We’re supposed to have reached a point where the world is flat but executing global trade, travelling internationally, and crossing the cultural divide seems to be harder than it has ever been. Technology is supposed to be simplifying the supply chain but the sheer proliferation of e-Sourcing — spend analysis, RFX, e-Auction, decision optimization, contract management; e-Procurement — P2P, EIPP, e-Document Management, e-Invoicing and e-Billing; logistics — transportation optimization, LTL marketplaces, and 3PL management; warehousing — inventory optimization, warehouse (layout) optimization, demand planning and forecasting; supply chain finance — discount management, receivables trading, and factoring; visibility — EDI/XML, RFID, and tracking; manufacturing — production planning, lifecycle management, performance management, and collaboration; compliance — regulatory, environmental, and carbon management; and other supply chain technologies is challenging even the most technologically proficient of us to keep up. And the new and improved “paradigms” the consulting firms unleash upon us every decade usually end up in the trash by the next one.

Furthermore, while the modern supply chain is, in some ways, more efficient than it’s ever been — at least at the handful of industry leaders, in many ways, it’s in shambles. We need a visionary who understands the art and science of the modern supply chain and the trillions of dollars in global trade it supports every year. Someone who understands the technology it requires and the science behind it. Someone who sees the architecture on which the supply chain is based and how to engineer a better chain based on that architecture. Someone who is comfortable with the underlying mathematics of modern supply chain models and how to use this knowledge to optimize the supply chain. Someone who hears the melodic, almost musical, patterns of a smooth flowing supply chain. Someone who knows the long history of the global supply chain which actually dates back to pre-history (and the realm of the archaeologist) … centuries before the spice trade in the 16th century and at least as far back as the 9th century during the time of the Vikings who traded with the Franks, Baltic, and Byzantine empire and pioneered trade routes down the Volga and Dnepr and to Northern India and China and essentially traded with the entire known world at the time. And someone with the vision to take the best that the art, science, and business schools (of thought) have to offer and take us firmly into the twenty-first century. Because, when you think about it, we’re still operating like it’s the 20th century, and it’s 2010.

It’s unfortunate that da Vinci lived 500 years ago, because if you take a long, close look at the world we’re supposed to be powering, it quickly becomes clear that we could sure use someone like him today.

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Will the Tigers Truly Latch On To Analysis and Optimization?

This is the Year of the Tiger (in more ways than one) and, according to a recent article in the SCMR on “Supply Chain 2010” which quoted a recent AMR Research Survey on 184 companies that found that performance management was considered the most strategic supply chain technology investment, software applications in 2010 will focus on analysis and optimization.

I hope so, because it would be great if companies

  • actually knew how much they were spending,
  • who was getting the money,
  • what they were getting for it,
  • how much they should have paid vs,
  • how much they were invoiced, and
  • how much could have been saved with better information and more leverage.

And it would be wonderful if companies could clearly see that

  • lowest bid is not lowest TCO,
  • lowest landed cost is not lowest TCO,
  • lowest acquisition cost is not lowest TCO, and
  • even the lowest Total Cost of Ownership is not necessarily the best value because
  • Total Value Management means that you need the ability to simultaneously analyze cost, risk, and non-price factors to make the best buy decision.

So will it happen? Or will those few of you smart enough to understand the incredible value these technologies have to offer continue to outpace your competition by leaps and bounds for another year?

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If You Really Want a Renaissance Education …

then Get Back To The Classroom!

While I was pleased with the fact that the recent article on “Supply Chain 2010” noted that a Renaissance education was needed in the supply chain because, in many ways, it is … I was very displeased to see that “employers are finding short term education most attractive as it doesn’t keep employees out of the office as much” and “can’t justify them being out of the office even for a full day”.

I’m sorry, but these are among the most imbecilic statements I’ve ever read. The cost of an employee being out of the office for a day is nothing with respect to the value a better educated employee brings to your organization, especially in supply chain. In fact, the cost of an employee being out of the office for three months is still literally nothing with respect to the value a much better educated employee will bring to your supply chain organization.

For example, let’s say that employee, who is well paid and makes 100K a year, is about to renegotiate a 10 Million dollar buy. Let’s say the price of the primary raw component is 10% higher than last year and you usually end up accepting price increases that equal 50% of the rise in the raw material index. This says you would be expecting a 10.5 Million contract renewal. Now let’s pretend that there’s a one day class on supply chain finance where your employee learns how, in some situations, companies can save big by financing supplier’s raw material costs. Let’s also pretend this smart employee comes back, does some research, and finds out your supplier is constantly carrying a credit line at 24% to finance the raw materials for the 60 days it typically takes to produce and ship the product and the 60 days it typically takes your accounts payable to pay. And let’s pretend that the raw material is 40% of the cost and that the supplier’s margin is only 10%. This says that the supplier is financing 40% of roughly 9M for 120 days at 24%. Doing some simple math, this says the supplier is paying roughly 288K (0.4 * .24/3 * 9M) in finance fees, or almost 3% of the sale, to service you.

Now, if your buyer figured out that if you bought the raw material on behalf of the supplier and charged them 0% interest that you would be saving them 3%, she could go back to the supplier and say “we know that your raw material costs went up 10% and that you’d normally expect a 5% price increase to cover this cost, but we also know we could take 3% off of your bottom line by buying the raw material for you and charging you 0% interest.” “So, since we also need to keep costs down, we’ll do this for you if you hold prices steady for another year. Your margin will be unaffected and we get better prices that allow us to outsell our competition. It’s win win.” The supplier, who we’ll assume is also well educated, agrees, and your buyer saves you almost 5% with respect to what you expected to pay, which equates to about 500K. Let’s assume this was an expensive one day seminar that cost 2K and tack that on to the 400 in salary and 150 in benefits it cost you for that employee to be out of the office for one full day. That says that the return on your employee being out of the office for one whole day was approximately 196:1. This says the author is purporting to tell me there are still managers out there who can’t justify a 196X return. Ouch! I was hoping their sorry asses would have been the first to be shown the door Fresh Prince style* because you can’t afford managers like that now that we’re returning to the old normal.

Now, this isn’t to say that I’m not a big fan of focussed half-day workshops or online self-study courses, because I am, but that you can’t overlook the value of a classroom education which cannot be equalled. While you can learn a fair amount from self-study, and should learn as much as you can to supplement and enhance your classroom education, you’re only going to learn so much from an on-line class. They’re great for learning the basics and will help you get the most from your classroom experience, as you’ll go to class prepared to engage in a real discussion and learn the advanced applications and deep concepts behind the material (and know what questions you really need to be asking), but they’ll never replace the education you get from a true sensei (which literally means “one who has gone before”). Plus, how much are you really going to learn at work, where you are interrupted with another “fire” or “emergency” every 5 minutes? To really learn something, you have to get out of the office, turn off all your electronic gadgets, and focus on the material. Then, you need to go back to the office and apply what you learned under the guidance of an old pro or a mentor. It’s as simple as that.

*This is how you show Maury the Management Moron the door, Fresh Prince style:

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There’s No New Normal — And There’s Definitely No New New Normal Either!

I was very, very, very disappointed to come across this recent article on ‘The “New Normal” and Its Effects on Supply Chain Management’ in the Supply Chain Management Review because it’s one of the few publications in the place I hold in high regard and, as I pointed out in a recent post, there is no new normal. This means that there is definitely no new new normal either.

The author, who pointed out that senior managers in many businesses are using the catchphrase “The New Normal” as if it were a prescient view of the way things will be from now on, suggested that — since most decisions today are driven by economic conditions — we should consider a New New Normal, defined as a frame of mind where we choose to take the risk of utilizing practices that always work whatever the conditions are. Huh? And double Huh?

First of all, as I said in my last post on the topic, there is no new normal. We’re just in a transitory state on the way to the old normal … coming back after an extended hiatus. Secondly, no practice will always work. Markets always evolve, and practices that work regardless of economic state need to evolve with them. Third, smart companies are already using flexible practices that can adapt with the markets. In short, kill this new normal and new new normal BS and kill the new new new normal BS before it starts. Dust off those old business and economic texts from 20 years ago and start remembering how things in stable economies work — and if you need a reminder, look at the European economies which have been around longer. Then we can get back to the business of running the supply chain.

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