Skip navigation
2011

A great deal has been written in recent months about risk mitigation and surviving supply chain disruptions because, unfortunately, the disasters in Japan this past spring illustrated just how fragile the global supply chain can be. However, even if the earthquake, tsunami and after effects hadn’t occurred in Japan, risk mitigation and supply chain disruptions would still be valid yet—in my opinion—underemphasized concerns.

 

An article earlier this week on SupplyChainBrain raises some interesting points. The authors, Bindiya Vakil, president & CEO at Resilinc, and Hannah Kain, president & CEO at ALOM, define supply chain resiliency as the ability of a company to recover from a disruption, as determined by the time and cost of recovery. They go on to write that resiliency is a function of everyday decisions such as which suppliers the company uses, how volume is split between sources, where manufacturing facilities are located, how much inventory and second sourcing has been put in place, and so on.

 

What complicates matters is that in recent years, many companies have adopted lean and just-in-time practices as well as adopted a build-to-order manufacturing model. Consequently, today’s global supply chains are overly optimized to suit operational parameters such as lead time and inventory reduction, and have low levels of buffers that would help to withstand disruptions. The result is that small disruptions now have the potential to significantly effect the supply chain.

 

Given those circumstances, supply chain risk management then becomes more important than ever before. However, there are a number of challenges and common mistakes. In the article, the authors outline five mistakes commonly made in managing supply chain risk, and offer suggestions regarding ways in which companies can improve the resiliency of their supply chain.

 

One of those mistakes particularly struck a chord with me. That is, what the authors call “subconsciously endorsing the ‘diving catch’ approach.” Essentially, this is what happens when a company applauds the efforts of a few or a department that resulted in narrowly averting disaster. In baseball parlance, somebody made a “diving catch” that ended a dangerous situation or an inning.

 

I’m reminded here of a situation at a previous employer that, while not a supply chain disruption, does offer some similarities. The company’s largest customer regularly changed order quantities after production had started, would add additional products to the order, and also requested delivery earlier than was originally specified. As directed by company management, the production and shipping departments always changed the order and met the customer’s delivery requirement--and of course, were considered heroes. I’m sure many of you have seen similar situations. Anyway, the practice continued for years with this customer until a new executive began to analyze the situation. It turned out that after all the overtime, additional costs for expedited shipping, and lost revenue from other customers whose orders were delayed while the company focused on the largest customer’s changed orders, the company broke even at best—and usually lost money--on those orders.

 

What was missing there, and what is still missing for many companies, is a post-crisis review. That’s a perfect opportunity to assess not only what went wrong, but also why it happened and how it can be prevented from happening in the future. That way, the company can take steps to be proactive toward risk management rather than constantly reacting. Considering the globalized nature of today’s supply chain, there’s no way to prevent every disruption. However, it certainly makes sense to take steps to minimize their impact on the supply chain.

I’ve been thinking the past few days about oceans, large ships, and port cities. Not because I’ve got vacation on my mind but, instead, because I’m intrigued by some recent news about the Panama Canal and the business of moving in-coming goods from port cities to the rest of the country.

 

As work continues on the Panama Canal expansion project, it makes sense that the Panama Canal Authority (ACP) continues to strengthen its ties to U.S. ports expected to benefit from the widening of the canal. A recent story that ran on JOC Sailings reports that the ACP and the Tampa Port Authority (TPA) renewed their memorandum of understanding to increase cooperation and bolster trade via the canal to the eastern U.S. The move will enable the two parties to share information on modernization and improvement, as well as technology, and also exchange market studies to help each party develop business.

 

Furthermore, the South Carolina State Ports Authority (SCSPA) recently renewed its partnership with the ACP too. Again, areas of cooperation between the ACP and the SCSPA, which owns and operates marine terminals in Charleston and Georgetown, S.C., include information sharing, joint marketing efforts, exchange of data, capital improvement plans, training and technology.

 

But I’m more interested in the news that, as global trade volumes continue to rise, inland ports are increasingly considered as critical components in the global supply chain because these inter-modal distribution centers that are connected directly to major seaports offer the means for cost-effective import distribution to customers. Consequently, inland port space is expected to be in high demand, according to a recent white paper from Jones Lang LaSalle, a financial and professional services firm specializing in real estate.

 

The growth of inland ports—such as Dallas-Fort Worth, Chicago, Kansas City, St. Louis, Atlanta, Memphis, and Columbus—makes sense because they essentially offer a way to economically and efficiently move products from seaports to areas with greater concentrations of customers. These areas feature proximity to a population of 3 million people within 200 miles, a major direct connection to a seaport via a Class I railroad, a Foreign Trade Zone status and an ample supply of commercial real estate for warehousing and distribution.

 

What’s interesting is that management at gateway seaports understands the importance of connectivity and developing direct rail shipping that works in harmony with inland port operations. In fact, many ports are working to become more agile in their ability to accommodate a variety of vessel types, as well as develop the technology and improved business practices that will decrease “dwell” or waiting time in ship scheduling, off-loading and land distribution, says Rich Thompson, executive vice president and leader of Jones Lang LaSalle’s global Supply Chain & Logistics Solutions consulting group. Connectivity to inland ports is an important part of this strategy, he says.

 

What’s more, the emergence of inland ports also highlights the growing and vital role that inter-modal rail plays in the supply chain. Railroad companies have made major financial commitments to infrastructure, service and terminal improvements in recent years. Thompson says the firm expects to see rail increase in importance with its clients because they recognize that rail/intermodal can help stem rising transportation costs while also supporting corporate sustainability initiatives.

 

What about you? Is your company making use of warehouse and distribution space at inland ports? If so, let me know. I’m interested in hearing about the cost savings as well as whether or not you’re now able to get products to consumers faster.

While news of the stalemate in Washington regarding dueling proposals to allow the federal debt ceiling to be raised is depressing, other recent news does offer reason for optimism. According to the results of a survey, nearly 90 percent of the respondents are confident about future expansion—and nearly half of them reported growth over the last six months of 2010. They are, consequently, investing in their companies and recruiting talent to prepare for growing demand.

 

Nearly 3,400 professionals participated in ThomasNet’s Industry Market Barometer (IMB), a survey of buyers and sellers of industrial products and services. Respondents-- most of whom represent small and midsize businesses--include business owners and managers, sales and marketing executives, engineers, and purchasing agents from manufacturers, distributors, and service companies in North America.

 

The research reveals two subsets of respondents. The first are “Outperformers,” defined as those companies that not only grew in the last half of 2010 but also expect further growth by June 2011. A second group, “Optimists,” also expect growth by June 2011, but their business stayed the same or even declined in the back half of 2010.

 

The two groups essentially have the same objectives. For instance, respondents’ top priorities include increasing production capacity, adding new lines of products and services, upgrading facilities, and managing costs. Indeed, the key initiatives where companies planned investments during the 1st half of 2011 include increasing production capacity (cited by 80 percent of respondents) and 63 percent of the respondents plan to add new lines of products or services. Perhaps more significantly, nearly 9 out of 10 (88 percent of respondents) cited managing costs as an initiative in which they will be investing, in particular software (35 percent). And, of the 61 percent of the respondents noting their companies plan to focus on managing inventory, 45 percent of them plan to invest in software.

 

The second finding I was most interested in is respondents’ plans to invest in a more strategic use of the Internet. That’s largely driven by a realization that the website is instrumental to the company’s success. In fact, three-quarters of the respondents believe that their websites made a significant contribution to the company’s growth during the second half of 2010. Even more compelling, of those respondents identified as “Outperformers”, 88 percent reported that their website contributed to corporate growth with 42 percent stating it contributed to new revenue growth, 53 percent stating it opened up new sources of business, and 54 percent stated it helped them serve customers better or more efficiently.

 

While the so-called Optimists reported less success from their websites, but the data is still compelling: 54 percent reported their website opened up new sources of business, 44 percent stated it helped them serve customers better and 33 percent reported it contributed to new revenue growth.

 

Here’s the intriguing part: Even though the respondents clearly recognize the compelling value of websites, they also realize its shortcomings, namely that there are significant obstacles when conducting research and sourcing via the Internet. Sourcing professionals, for example, report there is not enough detailed product or capabilities information readily available through companies’ websites. In addition, a lack of technical information, and limited access to CAD drawings and pricing information on some company’s websites inhibits sourcing professionals’ ability to find information they need.

 

In the end, while I expected encouraging results, I was pleasantly surprised by the level of confidence among respondents. Secondly, although respondents’ beliefs about the importance of the corporate website were more favorable than I expected, the realization of shortcomings and lack of information at some companies’ websites is about what I did expect.

 

What about you? Are these results about what you expected?

According to a recent study of supply chain activities, as much as 80 percent of total supply chain costs are determined by the network in place and not by decisions the supply chain team makes on a daily basis within that network. While I expected the percentage to be high, I did find the 75 percent to 80 percent range a bit surprising.

 

By the way, a special thanks to Sheena Moore’s Afternoon Coffee column on the Spend Matters website for pointing me to an article that had run on IndustryWeek. Anyway, according to the authors--Alan Kosansky and Ted Schaefer, president and director of logistics and supply chain services, respectively, at supply chain optimization system provider Profit Point--the reason that as much as 80 percent of the total supply chain costs are determined by the network in place is that the existing infrastructure significantly determines the types of decisions and degrees of freedom that are available to supply chain decision makers. As a result, they explain, many companies are challenged by use of warehouses, distribution centers and sources of supply that lack thoughtful design.

 

The article offers a number of suggestions that can be used as cost-saving measures to improve both margins and the bottom line. The first, as you would well expect, is to assess network structure because it offers the biggest opportunity to reduce those expenditures.

 

The reason, is that once manufacturing and distribution assets are in place, and major transportation contracts have been negotiated, there is only limited opportunity to improve operations and efficiencies in the supply chain. The time to discover the biggest supply chain improvement opportunities, the authors note, is during assessment or reassessment of the infrastructure in place, such as manufacturing capability, raw material sourcing, major transportation lanes, distribution facilities and delivery to customers.

 

Given that a company’s existing supply chain infrastructure is a primary cause of daily disruptions and short-term challenges, the next logical step to realize maximum cost savings is to optimize supply chain infrastructure. The companies that experience the smoothest and most profitable operations are the ones that routinely re-evaluate both operations and infrastructure, and, consequently, tend to become supply chain and profitability leaders. It therefore makes a great deal of sense to make infrastructure evaluation a regular practice.

 

The authors go on to list a number of other suggestions, but one more particularly caught my eye. That is, to consider technological analysis when making supply chain decisions. I’m often amazed at how prevalent the use of spreadsheets has become. What’s more amazing, is that companies continue to make critical decisions based on data in those spreadsheets even though decision makers realize spreadsheets’ limitations.

 

To be fair, as the authors point out, spreadsheet analysis can evaluate a potential change in a business plan or supply/demand balance and, perhaps, project the impact of a given course of action. On the other hand, when decisions involve multiple products made across multiple manufacturing sites, shipping and distribution point issues while serving thousands of customers, the use of spreadsheets alone simply is no longer sufficient due to the complexity and sheer volume of data. Instead, companies should make use of today’s sophisticated tools that enable users to effectively consider all the available options to ensure supply chain infrastructure is used effectively.

 

I would like to know what you think. Does your company evaluate supply chain infrastructure on a regular basis, and, if so, how frequently? What impact do you think it has on operations and profitability?

Reading news headlines often offers a mixed bag of reports. For example, there can be good news, such as that Apple announced its profits have more than doubled. The flip side of the coin, however, is recent news that networking giant Cisco Systems is eliminating jobs in an effort to reduce its operating costs.

 

In a widely reported story, which I saw in the Chicago Tribune, Cisco announced it will lay off 4,400 workers after an additional 2,100 workers accept early retirement. The combined cuts represent about nine percent of the company’s workforce. Cisco also plans to sell its manufacturing facility in Mexico to Foxconn, and transfer 5,000 employees to the contract manufacturing company as part of the deal. The moves, in total, are expected to reduce operating expenses by $1 billion.

 

This type of news probably doesn’t come as much of a surprise to most of you. Not necessarily the efforts at Cisco, but rather that a company is going through a round of layoffs to reduce operating expenses. It has, after all, been a fairly common process over the course of the past two years or so.

 

But the practice does illustrate how the country can be going through what some refer to as the “jobless recovery.” That is, how the economy—and manufacturing—can be recovering while unemployment continues to hover at just under 10 percent and companies continue to lay off employees. The answer, is that by increasing manufacturing productivity despite layoffs, companies have been able to improve profitability.

 

An article in BusinessWeek brings up some interesting points. The author, Rick Wartzman, explains that companies are essentially able to do more with fewer employees. So, due to tremendous gains in productivity, it now requires far fewer individuals to actually manufacture products than it used to take. So, what took 1,000 people to produce in 1950—the dawn of a golden age for blue-collar work—now requires about 185, according to the Federal Reserve Bank of Chicago, he writes. In 1979, at the all-time peak, more than 19 million men and women in the U.S. were engaged in manufacturing. Today, fewer than 12 million U.S. workers are engaged in manufacturing, Wartzman says.

 

The downside, however, is that the practice in turn, places an emphasis on particular skill sets—and it’s increasingly difficult for companies to locate workers with those skill sets. For instance, ManpowerGroup last month released the results of its sixth annual Talent Shortage Survey, which shows that one in three employers globally reports difficulty filling jobs due to lack of available talent.

 

Here in the U.S., according to ManpowerGroup’s survey, the number of employers struggling to fill roles has jumped 38 percentage points to the largest percentage in the history of the survey—52 percent of the companies surveyed. Furthermore, according to the survey, which included almost 40,000 employers across 39 countries and territories, the hardest jobs to fill are technicians, sales representatives, engineers and skilled-trade workers.

 

With that in mind, I’m enthusiastic about the recent creation of a national manufacturing skills certification system, which, ultimately, should help manufacturers across all industries. The system, backed by President Obama, is a plan by the National Association of Manufacturers’ Manufacturing Institute to train and certify some 500,000 community college students with skills considered critical to manufacturing operations. The Manufacturing Institute will work with the president’s Skills for America’s Future program to implement the system, which will provide certification through competency-based education and training.

 

What about you? Are you optimistic about manufacturing in the U.S.? I don’t mean about returning to historic high numbers of manufacturing jobs, because I think those days are long gone. Instead, I mean are you optimistic about manufacturing quality and profitability, as well as a career path for those trained in manufacturing practices of today?

A flurry of lawsuits, countersuits, and appeals for the U.S. International Trade Commission (ITC) to ban the import and sale of various electronic devices and other products has caught my eye. It seems the one generating the most buzz is the back and forth between Apple and Samsung. However, there certainly are plenty of others as well.

 

For example, Apple also filed an ITC complaint against Taiwanese smartphone maker HTC (which produces smartphones running Android software from Google) in March, accusing HTC of violating 10 of Apple’s patents related to the manufacture of the iPhone. Last week, Apple received a preliminary ruling in its favor. But as an Associated Press story that was picked up by Forbes reports, an HTC spokesperson says the company believes it has a strong case for an appeal of the U.S. ITC ruling that HTC violated two Apple patents.

 

As reported in that story, HTC said it does not yet have the full ruling and analysis to determine the details of the findings. However, according to General Counsel Grace Lei, the company is highly confident it has a strong case for the ITC appeals process and is fully prepared to defend itself using “all means possible.”

 

In other recent news, another AP story reports that a Samsung unit has raised the stakes in its on-going patent dispute with a German competitor over energy-saving LED lighting technology. Samsung LED announced that it asked the U.S. ITC to bar products from Osram GmbH and two units from entering the United States. South Korea-based Samsung LED said it also filed a lawsuit in U.S. District Court for the District of Delaware alleging infringement of its LED patents, and seeks unspecified damages.

 

Samsung LED has targeted Osram, Osram Opto Semiconductors and Osram Sylvania in the actions. Munich-based Osram GmbH is a unit of German industrial engineering firm Siemens AG, while Osram Sylvania is Osram’s North American operation. These moves are the latest in the on-going dispute. Last month, Samsung LED sued Osram Korea and two local companies that sell its products in South Korea in retaliation for what is said were suits by Osram at the U.S. ITC, in the Delaware court and in Germany.

 

The crux of the situation is that Samsung LED alleges infringement of eight patents covering what it calls “core” LED technologies. That’s notable considering that these technologies are used in products such as lighting, automobiles, projectors, mobile phone screens and TVs. In a statement—perhaps hinting at what’s to come—Samsung LED announced that it intends to vigorously enforce its intellectual property rights, and that these lawsuits reflect Samsung LED’s commitment to that enforcement.

 

What’s interesting is that such complaints and lawsuits over patents are common in the technology industry and seldom lead to market disruptions since lawsuits take months or years to resolve and often end with payments of licensing fees rather than import bans. For example, some insiders expect HTC to seek a settlement with Apple in the next six months, by paying out a certain amount of damages and, possibly, future licensing royalties. On the other hand, HTC could develop workarounds to circumvent Apple’s patents, pay damages in a settlement, and move forward.

 

Nevertheless, the lawsuits and complaints do show just how critical it is for technology companies to develop and then maintain technological advantage by protecting intellectual property as fiercely as possible. Protecting such product and technology information, however, is increasingly difficult given the exchange of information among global partners and suppliers in the supply chain.

 

What do you think? Are patent lawsuits and ITC complaints just part of business today?

As commodity prices began to rise earlier this year, many companies began to warn of the impact of those costs on 2011 profits—and many declared their intent to raise prices. At that time, advisory firm The Hackett Group began conducting a quick poll of supply chain and procurement executives to assess just how companies were responding to input cost inflations and identify the best practices they were adopting to manage it. The poll asked questions such as: “How much input cost inflation is being absorbed vs. passed on to customers?”, and also, “What are the longer-term plans for identifying ways to reduce the impact of future inflation on input costs?”

 

To tell the truth, I had forgotten about the poll. But I recently saw some of the results in an article running on the SupplyChainBrain website. According to The Hackett Group, the combination of rising commodity prices as well as labor and services cost inflation could potentially reduce corporate profits by as much as nine percent in 2011 and 2012. So, for a company with $27.8 billion in revenue, Hackett’s study estimated that the loss could amount to a $150 million per year hit to the bottom line.

 

Companies have already seen commodity prices increase by nearly five percent over the past year, and key commodities such as crude oil and metals have risen dramatically--with some prices more than doubling over the past two years. At the same time, labor and services cost inflation are, in part, being driven by a tightening of labor markets in India, China and other low-cost labor markets. With that in mind, executives responding to the survey expect that, over the next 12 months, the rate of inflation for commodities overall will rise by more than 30 percent. They also expect the rate of inflation for labor to more than triple.

 

Survey respondents also reported that their companies will pass half of these additional costs onto their buyers but the other half of these costs will be absorbed by the organization. In addition, while most respondents in the Hackett study say they can effectively anticipate commodity price increases, more than 60 percent say they have not been successful at mitigating these costs. Part of the challenge, says Hackett chief research officer Michel Janssen, is that few of today’s executives have experienced significant inflation (last seen in 1981) so they must now learn how to best manage inflation challenges.

 

Like the proverbial deer in the headlights, executives at many companies see the approaching danger, but they don’t know how to get out of the way, Janssen says. There’s real potential for all this to have an impact on growth, profitability and consumer prices. It’s very tough to keep your promises to Wall Street when you can’t accurately forecast or control your expenses, Janssen says.

 

Hackett’s study does offer some recommendations to mitigate input cost inflation. For example, the group recommends that companies focus on integrated input-cost planning, forecast and plan for changes in commodity prices, and use robust scenario planning to link supply plans--including pricing, with demand/business plans. The group also recommends using an integrated approach to commercial risk management so users can better understand commercial objectives and create a “spend portfolio” managed by procurement and finance working collaboratively. Finally, Hackett recommends that companies move beyond simple input-cost mitigation, and, instead, consider broader cross-functional approaches to cost mitigation, such as changing product designs, financial hedging, or vertical integration such as acquiring a critical niche supplier.

 

I am curious, however, about what you see. Do you think the rising cost of commodities and labor will significantly impact your company’s bottom line? If so, what is your company’s plan to address these costs?

The combination of earthquake, tsunami, nuclear disaster and rolling electrical blackouts in Japan last spring have had a significant impact on global supply chains serving industries such as consumer electronics and automotive. For instance, a CNNMoney story last week reported that Texas Instruments, Sony Ericsson, and Research in Motion all delayed launching new products due to global supply constraints. Everyone also is generally aware of the setbacks to Japan’s automotive production. However, news last week indicates that Japanese production is either in or near full swing—and some analysts expect a full recovery by September.

 

According to an IHS iSuppli press release last week, some Japanese companies have already recovered from the disasters, and the entire electronics industry is expected to complete its rebound by the end of the third quarter. Interestingly enough, this restoration will coincide with the historical peak season for electronics and semiconductor sales in the third quarter.

 

Of course, the duration of production disruptions varied depending on distance from the earthquake epicenter. So effected companies that were farthest from the epicenter required only one to two weeks to restore production. The flip side of the coin is that companies closest to the disaster could require as long as four to six months to return to normal.

 

In the history of the electronics supply chain, nothing has had such a broad impact as the Japan earthquake, tsunami and nuclear disaster, says Dale Ford, senior vice president for semiconductor market intelligence at research firm IHS. The worldwide repercussions of the catastrophe illustrated the global and interconnected nature of the electronics industry, and the impact of the disaster reverberated through the materials, components and equipment segments of the supply chain. Still, even the semiconductor companies that suffered the most direct damage from the quake, will resume full production near the end of the third quarter, Ford says.

 

In other news last week, a widely carried Associated Press story also reported that while Japan’s industrial production is still about nine percent below pre-quake levels, it has risen sharply. Indeed, Japanese factory output posted the sharpest rise in nearly six decades in May. That growth, which was broadly in line with market expectations, prompted the Japanese government to upgrade its assessment of industrial production, describing it as, “on a recovery trend,” says the AP article.

 

The jump helped drive a rally on the Tokyo Stock Exchange. Specifically, the benchmark Nikkei 225 index climbed 1.5 percent to 9,797.26. As expected, chief among the industries driving such expansion include transport equipment, general machinery and chemicals.

 

For example, transportation-related production rose 36 percent during May as automakers such as Nissan Motor Co. continued to restore capacity. Nissan actually resumed full output at its Iwaki engine factory in northeast Japan last month, and Chief Executive Carlos Ghosn said that overall production at the company has mostly recovered and will be back to normal by October, according the AP report.

 

What do you see in your supply chain? Has your industry been effected by the disasters and recovery in Japan? If so, is business now back on track?