Category Archives: Supply Chain

Grading The Prophet on His Supply Chain Predictions …

Hopefully you’ve been paying attention over on LinkedIn as The Prophet has been sharing his predictions for the Procurement and Supply Chain space for the coming year as the vast majority are right on the money.

When the series is done, the doctor will discuss each prediction in more detail, but for now, he’ll just direct you to the articles so you can catch up before The Prophet completes the series and you miss possibly the best intelligence on what is coming your way in 2024 (and what you need to consider if you are going to be anywhere near prepared for it):

Current Grade: A!

There is a Price of Relocating to “Friendly Countries”, but There Are also Corresponding Cost Reductions

A recent article in El Pais on the price of relocating factories to ‘friendly countries’ noted that according to the European Central Bank (ECB), 42% of the large companies in the Old Continent that it has recently surveyed have resolved to produce in allied countries as a means of reducing risks. However, this relocation carries economic consequences, and international institutions — such as the IMF and the ECB — warn of its impact on growth and soaring prices.

The article is right. Some prices will go up as countries move out of countries in, or likely to engage in conflict, both of the physical (war) and the economic (closed borders, significant tariff increases, rolling lockdowns, etc.) variety, and move to more “friendly” countries. (As far as SI is concerned, it shouldn’t just be “friendly” countries, it should be “friendly countries close to home”. At least companies are realizing that China and/or the lowest cost country is not always the answer when that answer comes with risks that, when they materialize, could lead to skyrocketing costs and losses that dwarf five years of “savings”.

Furthermore, even though 60% of those contacted said that changes in the location of production and/or cross-border sourcing of supplies had push up their average prices over the past five years, this hasn’t been true across the board, it doesn’t have to be true, and some of those could still see savings as they optimize their new processes, methodologies, and supply chain network. (Changes don’t reach full efficiency overnight, and sometimes it is two or three years before you can optimize a supply chain network due to existing contracts, infrastructure, etc.)

Why are costs (initially) going up for many companies?

  • wages: many of the “friendly” countries are more economically mature, or advantaged, with a higher standard of living buffered up by higher wages / better social systems
  • utility charges: in “friendly” countries that are using newer, cleaner, sources of energy or limiting energy production from burning (coal, oil, natural gas) have energy costs that are often higher as the initial infrastructure investment has not been amortized, water costs could be higher if more processing inbound or outbound is required, and so on
  • production overhead: chances are that the factories are newer, required a large investment that isn’t anywhere close to being paid off yet by the owner, and you’re paying a portion of the large interest payment to the investors/banks as part of the overhead

However, it’s important to note that:

  • productivity: will go up when you move to a locale where the workforce is more educated and skilled and is better able to employ automation and modern practices, and thus gets more efficient over time, countering the initial wage increase
  • energy costs: will reduce over time as a solar farm or wind farm can produce renewable energy for decades, with the initial investment often being paid back within one third to one quarter of that time; as a result, energy prices should remain flat(ter) over time than in the locales where they are still burning dwindling fossil fuels (which rise every year in cost) and have not yet invested in renewables
  • overhead: will decrease once the investments are paid back (and the interest payments are gone), which means it can stay flat as other production related costs rise (compared to older plants which will eventually reach a point where the revitalization investment becomes significant on a regular basis)

In addition to:

  • logistics costs: will reduce when you choose a friendly country closer to your target markets (since most freight is ocean freight on fossil fuel burning cargo ships)
  • disruption costs: will reduce as less risk translates into less (costly) disruptions over time

So while costs may go up a bit at first, at least relatively speaking, they will go down over time, especially as network and process optimizations are introduced and obtained from experience with the new network, suppliers, and technologies.

What Impact Will Power Politics Have on the Sustainable Acquisition of Raw Materials?

the doctor doesn’t know, but it’s a question we need to ask, and answer, before politicians run away with an agenda that maximizes their bank account while simultaneously maximizing economic and environmental damage.

In September, JPMorgan Chase CEO Jamie Dimon stated that geopolitics is the world’s biggest risk and, more specifically, that we have dealt with inflation before, we dealt with deficits before, we have dealt with recessions before, and we haven’t really seen something like this pretty much since World War II. And while he didn’t mention power politics in particular, we’ve seen a lot of first world countries elect leaders with protectionist/centrist viewpoints, a directorial demeanor, and anti- free-trade stances.

Due to a loss of jobs, a loss of manufacturing, and a lack of reliability of supply, we’ve seen a lot of pushback on China (which is a major global source of many raw materials, and rare-earths in particular) while India is gaining ground in the BRICS (thanks to the anti-Russian Sentiment among those Pro-Ukraine and the instability of the Brazilian economy along with the China pushback), the United States implementing Buy American policies, the EU taxing anything they are sanctioning or trying to enforce “Buy EU” policies on, and the UK making decisions since (and including) Brexit that no one understands.

Now, we should all be buying local to the extent possible (which might be the local farm, the state farm, or the farm one country south if ours is too cold to grow the produce we need; and, similarly, a factory in the country or a neighbouring one), when it comes to certain raw materials, especially rare earths and metals for which we do not have (more sustainable) alternatives, one doesn’t always have a choice. And the reality is that, for a given country, only one country will have the most sustainable source of rare earth and/or metal supply when you take into account the mining operation, the processing operation, and global shipping. And if protectionist/centrist/trade policies prevent purchasing from that country, and the next two or three most sustainable (and/or most economical if your company is in/selling primarily to a developing country and you can only afford so many sources), the alternatives are not good.

So while it’s hard to quantify what the current era or power politics will have on the sustainable acquisition of raw materials and (precious) metals, it’s a question your organization needs to answer if you rely on such, and take steps to inform your local lobbying organizations to make sure that critical, sustainable, sources of supply are not blocked until alternatives are developed (especially if your organization needs to hit carbon [reduction] targets).

And if you don’t think this is an important topic, then why did Dr. Naoise McDonagh, a Lecturer at Edith Cowan University and a former Board Member of the Australian Institute of International Affairs, recently publish an article in the interpreter (published by the Lowy Institute) on why Australia must play the geoeconomics game, or risk being side-lined.

Dr. McDonagh believes that acts such as the US’ IRA (Inflation Reduction Act) or the EU’s Critical Raw Materials Regulation, designed to drive growth in a particular industry (and, in particular, North American or EU-based EV supply chains) will act as a vast black hole sucking global capital from other destinations operating on purely comparative advantage terms which includes Australia.

Dr. McDonagh argues that these acts, and similar measures being implemented globally, are part of a geopolitical transition that is creating a two-level world economy: a standard economy with normal market access and a de-risked economy with restricted access for actors of concern. And since the types of restricted access we are seeing typically revolve around rare earths and metals, this means that we need to ask the question we asked in the title: What Impact Will Power Politics Have on the Sustainable Acquisition of Raw Materials?

the doctor doesn’t think the answer is obvious, and definitely doesn’t agree that Dr. McDonagh’s insistence that the answer for Austrailia is the 10-year Australian Renewable Industry Package because the doctor believes the question is more nuanced than anyone currently understands. However, the doctor does agree with Dr. McDonagh’s reading of the situation and that power politics is quickly becoming one of the most significant risks to your supply chain, which is even more unpredictable than strikes and natural disasters.

If you have a partial answer, comment on LinkedIn. We need them before bad decisions are made for us.

Source-to-Pay+: An Introduction to Supply Chain Risk

If you missed the risk series, you might want to catch up. Risk doesn’t just stem from your immediate inbound tier 1 suppliers, it stems from your entire inbound supply chain. Your Supplier “Risk” Management solution only gives you a partial picture at best. Find out what you need to get the rest!

1: The Beginning
2: End-to-End
3: Corporate Risk
4a: Third Party Risk, Part 1
4b: Third Party Risk, Part 2
5: Supply Chain Risk, Generic
6: In-Transport Risk
7: Multi-Tier Supply Chain Risk
8: Analytics / Control Center
9: Cyber Risk

Source-to-Pay+ Part 8: Analytics / Control Center

In Part 1 we noted that Risk Management went much beyond Supplier Risk, and the primitive Supplier “Risk” Management application that is bundled in many S2P suites. Then, in Part 2, we noted that there are risks in every supply chain entity; with the people and materials used; and with the locales they operate in. In Part 3 we moved onto an overview of Corporate Risk, in Part 4 we took on Third Party Risk (in Part 4A and Part 4B), in Part 5 we laid the foundation for Supply Chain Risk (Generic), in Part 6 we addressed the first major supply chain risk: in-transport, followed by the second major supply chain risk: lack of multi-tier visibility in Part 7.

In almost every article to date, we’ve highlighted that a key aspect of every risk management system is good analytics, and, in particular, a good control centre to manage the data, the analytics, and the insights gained from the analytics (as well as the plans created around those insights).

Capability Description
Graph (Analytics) Support Standard analytics based on numeric data is not enough. As we have illustrated through this series, risk is more than numbers, roll ups of numbers, and trends on numbers. Risk is relationships, risk is connections, risk is propagation, risk is feedback. You have to be able to track the impacts across chains that span entities, geography, and time.

The risk application must natively support graphs, graph algorithms, and graph analytics. It must be able to count the number of impacted nodes up and down a BoM, multiple BoMs, a chain, and multiple chains. From this, it must be able to calculate an impact of a delay, a shortage, and a catastrophic failure based on BoM requirements, production times, costs, and margins.
Multi-level Metrics and Trend Analysis Even though graph analytics is key for supply chain risk analysis, good old fashioned metrics and KPIs are still key for analyzing risk potential at a point in time, and over time based on changes (and comparison to past trends that have led to risk and failure). For example, an increase in delivery times in every shipment, decreasing raw material supplies going into a source supplier that provides a refined version of that raw material, increasing failure in key components, etc. all indicate increased risk.

The application must support the definition of metrics based on arbitrary formulas, roll ups, and drill downs. It should also support basic trend analysis, allowing for comparison between time periods, similar trends, and historical trends of interest. it should also be capable of projecting the trend for an arbitrary time period in the future based upon the current trend progression and the most likely continuation based upon correlation with similar and historical trends.
Real-time Data Monitoring & Automation The application needs to integrate with third party data feeds, get (near) real-time updates, update all of the metrics the data relates to, monitor the changes against alerts, update the trends, and determine if any updates indicate trends of interest, significance, or concern. This all needs to happen automatically.

The application must support an open API, support standard data formats, be aware of standard data records used in direct supply chain, integrate with third party data feeds for all types of supply chain (risk) data out of the box, and be able to normalize all of this data into a standard data store (warehouse, lake, lakehouse, etc.). It must support rules-based alerts, integrations, monitors, and workflows to allow for appropriate automation support.
Mitigation Plans The platform must support the definition of mitigation plans, with individual actions, objectives, and impacts. Mitigation plans should support multiple stages, actions should support detailed definitions and expected outcomes, objectives should support a metric-based definition, and impacts should support detailed cost definitions.

It should be easy to instantiate an instance of a plan when a risk event is detected or defined by a user, track updates in real time as new data comes in or users define new data, track the impact of a recovery action (if it decreases the time to recovery, etc.), and auto-generate progress reports on a regular basis, as well as roll up all of the impacts, and recoveries, for users who need it. It should also support the creation of what-if scenarios to calculate the potential impacts of a potential action (in a given timeframe), and allow for cost vs impact vs margin/profit improvement calculations to help an organization determine if the action could be worth it, especially if the associated chance of success is limited.
Surveys The platform also needs to support the creation of surveys that can be distributed to multiple parties up and down the chain to collect data for analysis purposes.

The surveys must be capable of collecting numeric, type-valued, and open-valued data, as required.