Category Archives: Global Trade

Risk 2011: Geopolitical

In our last post, we discussed the top three environmental risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a geopolitical perspective.

03: Corruption

Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight. This is one risk that’s never going away.

02: Terrorism

Terrorism is on the rise, and terrorists are getting their hands on more powerful and destructive weapons by the day. And it’s not just religious extremists that you have to be afraid of. There’s also anti-establishment extremists, new-age radical groups, and anarchists. Each of these groups could decide that your goods or services are against god, pro-establishment, anti-progress, or too orderly and decide that your corporation needs to be taken down here and now. One well planned strike and your factory, or headquarters, is a smouldering crater.

01: Geopolitical Conflict

Civil unrest can often quickly escalate into civil war and civil war can quickly result in cities, counties, and even provinces becoming inaccessible and if the conflict escalates, entire borders will close. Once a border closes, nothing gets in our out. Your factories become cut off from the rest of the world, and all of your inventory, tying up all of your capital, becomes inaccessible for an indeterminate amount of time. And your supply management organization, like the goods in your cut-off factory, is at risk of total destruction.

Risk 2011: Society

In our last post, we discussed the top three technology risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from a societal perspective.

03: Economic Disparity

Economic disparity, also known as economic inequality, refers to the disparity in the distribution of economic assets and income. Economic disparity can negatively impact a Supply Management organization in a number of ways. An obvious impact is if the majority of the target population in the geographic regions in which the parent organization operates, and wishes to sell the product, cannot afford the goods or services being offered, than Supply Management will be stressed to lower the price point or risk serious resource cutbacks as the organization faces reduced revenues and operating resources. A less obvious impact is that economically disadvantaged groups may also have restricted access to food and water. This in turn increases the severity of the top two societal risks to your supply chain.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.

Risk, Risk, Risk: 2011 Did Not Improve Matters Any

The World Economic Forum recently released it’s 6th Global Risks report, 2011 edition, and it’s filled with economic, environmental, societal, geopolitical, and technological risks that are plaguing global supply chains across the globe. Some of these have not changed since SI first reviewed the 2nd edition back in 2007, and some are new. However, they all have the potential to bring your supply chain to a grinding halt. In this series, we will review each category of risk, focus on a few risks of immediate relevance and discuss how they could impact an average supply chain.

At a high level, the risks identified were:

Environmental

  • Air Pollution
  • Biodiversity Loss
  • Climate Change
  • Earthquakes & Volcanic Eruptions
  • Flooding
  • Ocean Governance
  • Storms & Cyclones
 Technological

  • Critical Information Infrastructure Breakdown
  • Online Data and Information Security
  • Threats from New Technology
 Societal

  • Chronic Disease
  • Demographic Challenges
  • Economic Disparity
  • Food Security
  • Infectious Diseases
  • Migration
  • Water Security
Economic

  • Asset Price Collapse
  • Extreme Commodity Price Volatility
  • Extreme Consumer Price Volatility
  • Extreme Energy Price Volatility
  • Fiscal Crisis
  • Global Imbalances & Currency Volatility
  • Infrastructure Fragility
  • Liquidity / Credit Crunch
  • Regulatory Failures
  • Retrenchment from Globalization
  • Slowing Chinese Economy (<6%)
 Geopolitical

  • Corruption
  • Fragile States
  • Geopolitical Conflict
  • Global Governance Failures
  • Illicit Trade
  • Organized Crime
  • Space Security
  • Terrorism
  • Weapons of Mass Destruction

That’s a lot of risk to consider, spread across five categories and thirty-seven risk types, each of which could manifest in dozens, or hundreds, of ways across your global supply chain. In the next five posts we’ll discuss what SI thinks are the top risks in each category and why.

Will 2012 Be The Year Manufacturing Returns to Mexico?

Alix Partners recently released their “2011 U.S. Manufacutring-Outsourcing Index” and it had a few surprises. First of all, not only is Mexico now the country with the lowest-landed costs for U.S. customers (which SI has been predicting would be the case for some time now), but the four other major outsourcing destinations analyzed — Romania, Russia, India, and Vietnam — all had lower landed costs than China as well.

Alix Partner’s projected landed costs from China for the next four years based on the three assumptions of:

  • 30% annual increase in wage rates, consistent with Chinese wage inflation over the last several years,
  • 5% annual increase in the strength of the yuan, consistent with the widely accepted estimate of the undervaluation of the yuan by 20% to 25% relative to the US dollar, and
  • 5% annual increase in freight rates, consistent with increasing fuel prices.

If these assumptions hold true, then the landed cost of manufacturing in China will equal the cost of manufacturing in the U.S. by 2015! (And if only one of the predictions come true, the savings from outsourcing for an average organization will only be 10% in the best case!) In other words, at this point very little is needed to erode not only some, but all of China’s cost saving potential in manufacturing outsourcing.

It would seem that for companies looking to outsource manufacturing, the writing is already on the wall: unless you already have a Best-In-Class operation in China, the chances of realizing any value (given the initial start-up costs associated with outsourcing and streamlining such an operation) are quickly approaching zero as time goes on.

Key Takeaways from the UL Product MindSet Study, Part II

A couple of posts ago, we discussed some Interesting Facts and Figures from the UL Product MindSet, a recently released study that quantitatively surveyed 1,195 manufacturers and 1,235 consumers across a range of export and import markets in high-tech, building materials, food, and household chemicals. Then, in our last post, we reviewed four key takeaways from the UL Product MindSet Study. Today we are going to discuss our fifth, and final, takeaway from the study.

MANUFACTURERS NEED TO GET A GRIP ON REALITY!

They need to take off those rose-coloured glasses, put them on the floor, and stomp them to bits. And then they need to take the bits and grind them into dust. The findings illustrate that manufacturers are so far out of touch with reality that it’s downright scary.

First of all, let’s review the standard Gaussian curve. In a standard curve, only 31.8% of the population is one standard deviation from the norm. If we accept that only one standard deviation from the norm is enough to be “ahead of the curve”, then, at most 15.9% of the population can be ahead of the curve (and, similarly, 15.9% of the manufacturers will be behind the curve). However, the report found that an extreme majority of manufacturers believed they were ahead of the curve in safety, reliability, sustainability, and innovation. In short, this means that:

  • 81.1% of manufacturers are out-to-lunch when it comes to product safety
  • 81.1% of manufacturers are day-dreaming when it comes to product reliability
  • 78.1% of manufacturers are high-on-fumes when it comes to sustainability
  • 73.1% of manufacturers don’t-have-a-clue when it comes to innovation

The reality for the majority of manufacturers (68.2%) is that, they are, at best, on the curve. But since the reality is that, if they don’t continue to progress as their supply chains evolve around them, it won’t be long before them are behind the curve, they should just assume they are behind the curve, because 15.9% of them are and 68.2% of them aren’t far from being among that 15.9% without continued improvement efforts. So when they are done grinding those rose-colored, haze-inducing, glasses into dust, they need to get to work!

Furthermore, I see no evidence that the majority of manufacturers understand sustainability. I know it’s hard with all the greenwashing out there, but if one just ignores the hype and uses a little common sense, one can define sustainability as that which sustains operations and the environment at the same time. With this definition, it is easy to see that if an organization is not reducing its environmental footprint and at least maintaining, if not increasing, profitability at the same time, it is not sustainable. So 69% of manufacturers are wrong when they say that environmental products aren’t profitable — because, defined (and designed) right, they are.

And those manufacturers who do understand some of the basics of sustainability obviously don’t understand it’s importance. First of all, it’s not just about sustaining the environment, its about sustaining operations for generations to come. If the resources available are depleted before they can be replenished, there’ll be no materials to make new products. No products, no profit. No profit, no business. It really is that simple. As a result, sustainability should be as important as safety and reliability, not only one-fifth as important. Secondly, with even the majority of consumers in developing countries (such as China where four-fifths of the population would buy a truly green product over a non-green product if proof of claims could be provided), an organization is leaving what is potentially the biggest gold-vein available to it untapped. And finally, if manufacturers as a whole don’t change their understanding and their views, then the lot of them are are being hypocritical! (It is impossible to be ahead of the curve in sustainability, as 94% of manufacturers ridiculously claim to be, while not placing the same importance on sustainability as is placed on safety and reliability.)

Yes this is harsh, but face it, manufacturers are not going to move forward if they continue to believe the all-rainbows-and-roses picture that some other misguided (or is that money-grubbing?) analysts are painting for them. But there is a bright side. Whereas a typical organization would probably pay five, or six, figures for that rainbows-and-roses report, this post is 100% free.
(So, to any manufacturer reading this, stop calling me a downer and get to work! If you do, maybe you’ll be one of the 15.9% that is truly ahead of the curve and reap the rewards that come from earning that status.)