Category Archives: Global Trade

Influential Damnation #96: Consortiums

Consortiums, better known as Group Purchasing Organizations (GPOs), will be one of your biggest organizational conundrums of the year. Regardless of whether your organization is currently using a GPO or not, this will be the year that you can’t live with them, you can’t live without them.

Backing up, a Group Purchasing Organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain price reductions from vendors based on the collective buying power of the GPO members. The idea is that the GPO is able to leverage economies of scale, in the form of more volume and more efficiencies, then the members can individually achieve on their own.

For example, a supplier might offer price reductions at 1,000 units, 10,000 units, and 100,000 units and offer 2%, 3%, and 6% discounts at each price level. On its own, an organization that only buys 20,000 units would only be able to obtain the 3% discount but if it banded with five other organizations that required a similar amount of units, each organization could obtain the 6% discount. In addition, if only one contract needed to be negotiated and cut, each organization could reduce the amount of negotiation and administration overhead required to negotiate the contract and save even more.

From this perspective, given the rapidly rising costs and the increasing difficulty in negotiating discounts, GPOs look like a dream come true and a way to cut costs across the board.

But this comes at a costs. First of all, the GPO has to be funded — so, either the organization has to pay a fixed membership cost every year or a percentage of each transaction. Secondly, the GPO has to be managed just like every business processing outsourcing (BPO) provider. This isn’t always easy because not only does the organization have to manage the relationship and insure that the GPO is working on categories that are important to the organization, but it has to make sure that the GPO is taking the organization’s needs into account.

And now we get to the double edged sword. The best deals materialize when the combined volume allows a supplier to hit peak production (which allows them to produce the product at the lowest possible cost) and offer their customers the lowest possible cost. However, getting to peak production often requires combining the needs of a dozen or so different organizations, each of which has its own viewpoints and goals for each category. In other words, while you might prefer Supplier A’s products, because your Engineering department feels that they are of superior quality, the other GPO participants might prefer Supplier X — the least favoured supplier of your organization.

And this is why GPOs are quickly going to become the “you can’t live with them” (because you will always be fighting your coopetition to get your needs addressed first) but “you can’t live without them” (because, with costs skyrocketing, you won’t find any savings in your low-volume or indirect categories without them).

There’s a reason we call them “consortiums”, and that’s because “consortium” is derived from the word “consort” which is the action of habitually associating with someone or something that is done with the disapproval of others. And consortiums breed disapproval. But this is the year of damnation, so jump right in. You will regret it. But what choice do you have?

Infrastructure Damnation #13: Ports & Labour Strikes

Last year, in the fourth quarter during the critical Christmas shipping season, truckers, clerks, dockworkers, and other union workers went on strike and effectively closed the Ports of Los Angeles and Long Beach. The Port of LA typically receives over 330,000 TEUs (Twenty-Foot Equivalent Units) of loaded inbounded containers each month, which equates to roughly 4 Million or so TEUs a year. A single TEU container can hold up to 47,000 lbs of cargo and can accommodate 796 bushels of soybeans or approximately 6,192 shoeboxes. (That’s a lot of shoes! At the rate of 1 pair a day, it would take over 17 years to wear them all.) And while we haven’t yet been able to find a tally of the losses, as a benchmark, if the ILWU (International Longshore and Warehouse Union) went on strike and shut down all the west coast ports, estimates are that it would cost the US economy 2 Billion a day. A complete shutdown at the ports of Los Angeles and Long Beach would, thus, likely cost the US economy over 1 Billion a day since, of the roughly 116 M short tons of foreign imports that came into West Coast ports in 2012, 74 M (over 60%) of those short tons were through the ports of Los Angeles and Long Beach!

In 2013, a 40-day labour strike occurred at the Kwai Tsing Container Terminal in the Hong Kong Dock Strike. This strike cost Hongkong International Terminals almost HK $5 Million in daily losses as the loss of over one third of the workforce caused average delays of 2 to 4 days for all ships. That’s a loss of roughly HK $200 Million!

In 2012, the industry was almost paralyzed when the East Coast ports threatened to go on strike on October 1, as this strike was only narrowly averted at the last minute. This strike could also have cost the US Economy Billions.

In 2008, in protest of the Iraq War, the ILWU encouraged longshore workers to “shut down all West Coast ports” by walking off the job on May 1, 2008 to “Make May Day a ‘No Peace, No Work’ holiday”. On that day, more than 10,000 ILWU workers from all 29 West Coast ports voluntarily stopped work, effectively shutting down all west coast ports for a day.

In 2007, we saw the German National Rail strike of 2007. While it was only for 3 days, starting on November 14 and ending on November 17, it was the largest strike in history against Deutsche Bahn, shutting down freight service as well as passenger trains. Even though management brought in managers and other employers to keep trains running, more than 40% of freight trains — needed to carry cargo to and from docks — were halted. The strike cost over € 50 Million a day.

Strikes aren’t a new occurrence. We can keep going, all the way back to (at least) the 1792 Philadelphia River Pilot’s strike. More importantly, since unions aren’t going anywhere (and are, in fact, gaining ground in the emerging and newly emergent economies), strikes aren’t going anywhere either.

And they will bring your global trade to a halt if you are not prepared for them.

How do you prepare for them? Keep an eye on all of the ports, rail, and trucking companies you use to move your goods and when their union contracts expire. When expiration draws near, monitor the situation. If it looks like talks will break down, make sure you have alternate options at the ready. Have plans that use other ports, and other trucking companies, even if those ports are further and those trucking companies cost more, if the goods are critical to your bottom line — and if they are strategic, and small enough, consider air freight from a secondary airport to a secondary airport. (Solutions like FreightOS can often help you identify nearby ports and airports and relative costs.) While the hope is that you will never need to use less efficient and less cost-effective options, if the alternative is risking your goods trapped in a port for months, a less profitable sale is still much better than no sale. (Remember, No Sale, No Store.)

Regulatory Damnation #34: Tariffs

While taxes alone are not damning, as taxes, like death, are one of the only two certainties in life, tariffs, on the other hand, are one of the ongoing nightmares of the Procurement world. Tariffs make the complete personal income tax code of the United States look like a kindergarten book.

For example, the current HTS (Harmonized Tariff Schedule) of the United States is 3,536 pages. And that’s just the US HTS code. The 2007 LIGIE for Mexico is 684 pages, and there have been hundreds of pages of amendments since then.

With 196 countries in the world today, extrapolating, that’s over 200,000 pages of HTS / HS (Harmonized System Code) classifications that an organization needs to be on top off to determine international import and export duty rates. But that’s just the tip of the iceberg. It’s not just keeping track of rates, it’s figuring out the rates that apply. For example, let’s say you want gloves, is it:

    4007.11.70 Leather - full grains   - glove and garment
    4017.12.70 Leather - split grain   - glove and garment
    4107.19.70 Leather - whole hide    - glove and garment 
    4017.91.70 Leather - other         - glove and garment
      ..
    4023.10.40 Apparel - articles      - gloves, mittens and mitts
    4203.29.XX Apparel - cowhide       - gloves
      ..
    6116.10.08 Gloves  - coated        - other
      ..
    6116.92.08 Gloves  - cotton        - other
      ..
    6116.93.08 Gloves  - synthetic     - other
      .. 
    6116.99.35 Gloves  - other textile - other
      ..
    6216.00.08 Gloves  - impregnated   - other
      ..

there are so many (dozens upon dozens of) classification of gloves, that it’s hard to find the right one – and if you pick the wrong one, and especially if you pick the wrong one with a lower tariff rate, then your organization is at risk of significant fines and penalties.

So how do you deal with this? There’s only one way — get a trade market intelligence solution which is kept up to date by people around the globe as classification updates and rate changes come up and easily searchable by the average Procurement professional who is not an expert in H(T)S code structures. There aren’t a lot of options, but SI recently covered one company, Integration Point, that has been building such a solution for almost 10 years. Why do you need a third party? Integration Point, which maintains a global content team, made over 2 Million updates to their global H(T)S code database in 2014 in an attempt to keep up with the never ending string of updates that are regularly released by countries around the globe. (Some countries release updates on a weekly basis. For example, Brazil once updated its HS code 80 times in one year.)

Economic Damnation #05: Currency Strength

As indicated in the prologue to this series, there are dozens upon dozens of challenges being thrown at you as a Procurement professional on a daily basis. Causing you nothing but grief and agony, these damnations collectively do nothing but divert your attention from critical strategic planning, (should-cost) modelling, and supply assurance.

Today we are going to discuss damnation #05, currency strength — one of the ten economic damnations that we will cover before this series is over. This damnation is particularly relevant with the recent volatility in the Ruble, Renminbi (Yuan), and the petro-dollar — which might be used as a hedging strategy in some organizations.

Currency fluctuations can quickly destroy the best laid sourcing plans when sourcing internationally from countries that use a different currency, even if the contract is being executed in the currency used by the buyer.

In the situation where the contract is being executed in the currency used by the buyer, if that currency devalues against the currency being used by the supplier, then the supplier may not be able to afford to honour the contract without risking bankruptcy (as the supplier’s costs would exceed their sales). In this case, the supplier may simply cease to honour the contract.

In the situation where the contract is being executed in the currency used by the supplier, and if that currency increases significantly in value compared to the buyer’s currency, then the buyer may not be able to afford to buy from the supplier (as the buyer’s costs would exceed what the customers are willing to pay) and may be forced to break the contract (and risk the ramifications).

In either situation, there is a disruption in supply and the potential for significant financial and legal ramifications down the road. And this is one damnation that is never going away as currencies never remain stable. And while it will forever damn us, it is not always impossible to predict when currencies are likely to fluctuate.

How? Through the use of Purchasing Power Parity (PPP), we can determine when a currency is undervalued and when it is likely to rise in the future or when a currency is overvalued and when it is likely to fall in the future. It’s not perfect, but it’s better than flying blind. (For a good definition of PPP rate, review Dick Locke’s classic post on Undervalued Currencies, Part I).

So how do you determine PPP? One way is to simply look them up on the World Bank site. And how do you determine if a currency is over or under valued? You compare the official exchange rate to the PPP rate. If the PPP is (significantly) greater than the exchange rate, then the currency is undervalued. But if the PPP is (significantly) less than the exchange rate, then the currency is overvalued. How much? Divide the rates to get a percentage.

So how do you put this to use? Since floating currencies don’t always settle near the PPP rate, which some analysts are prone to believe, you look at historical variations and see where the trend over time is. If the currency is undervalued by 30% but the historical trend is that the currency is only undervalued by 20%, then it is likely that the currency is going to rise and that should be taken account in one’s projections. But if the currency is undervalued by 15% and is historically undervalued by 25%, then it is likely that the currency is going to fall. (For a more detailed explanation and example calculations, see Dick Locke’s classic post on Undervalued Currencies, Part II.)

Now, this won’t account for the situations where one country, like the US, is intentionally lowering the value of a major market resource or currency basket, like the petro-dollar, in the hopes of decreasing the value of another market resource or currency, like the Ruble, in the hopes of weakening an economy, like Russia, as these situations can only be detected by geopolitical (trade) monitoring (which will be discussed when we cover damnation #25, among others), but it will give you a much better understanding of relative currency strength and how the currency value is likely to change over time based on historical trends.

Sixty Five Years Ago Today

The legacy of the Dutch East India Company, which was the first multinational corporation in the world, fades into obscurity when the Netherlands officially recognizes Indonesian independence and brings to an end the existence of the Dutch East Indies.

On March 30, 1602, the Dutch East India Company, which was also the first company to issue stock, was established when the States General of the Netherlands granted it a 21-year monopoly to carry out trade activities in Asia. The largest of the European companies engaged in Asian trade, it had a fleet of 4,785 ships, which put the British East India Company a distant second at a mere 2,690 ships.

It’s monopoly status with quasi-governmental powers enabled Dutch East India Company to enjoy huge profits for almost two centuries until it want bankrupt as a result of corruption and was formally dissolved in 1800 and its operations taken over by the government, which created the Dutch East Indies out of the territories that were controlled by the Dutch East India Company. This colony continued to be one of the most prosperous of the European colonies and enabled the Netherlands to gain and retain global prominence in the spice trade for almost 150 years, until World War II when Japan’s occupation dismantled much of the colonial state and economy.

Following the Japanese surrender, the Indonesian nationalists declared independence and fought to secure it during the subsequent Indonesian National Revolution. A few years later, the Netherlands formally recognized Indonesian sovereignty at the 1949 Dutch-Indonesian Round Table Conference and the legacy of the Dutch East India Company, which led global trade for almost two centuries, like all good things, came to an end.