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2012

International trade and commerce has driven the development of nations and provided a means for economic growth since ancient times. While the daily movement of people and millions of tons of cargo among nations is taken for granted today, it doesn’t take much to disrupt that movement. Consequently, given the increasingly complex nature of a global supply chain, disruptions such as natural hazards, accidents, and even terrorist attacks offer the potential to create a global ripple effect.

You may have seen Janet Napolitano address that concern last week. Speaking at the World Economic Forum in Davos, Switzerland, Napolitano, secretary of the Department of Homeland Security (DHS), officially announced an initiative, known as the National Strategy for Global Supply Chain Security. The Strategy aims, in the words of President Barack Obama, “to protect the welfare and interests of the American people and secure our nation’s economic prosperity.”

What’s interesting is that the Strategy has two specific goals. The first is to promote the timely and efficient flow of legitimate commerce while protecting and securing the supply chain from exploitation, and reducing its vulnerability to disruption. To this end, Napolitano says DHS will work to understand and resolve threats early in the process, and strengthen the security of physical infrastructure, conveyances, and information assets while also working to maximize trade by modernizing supply chain infrastructure and processes.

The second goal is to foster a resilient global supply chain that is prepared for, and can withstand, evolving threats and hazards—and be able to recover rapidly from disruptions. According to Napolitano, DHS will prioritize efforts to mitigate systemic vulnerabilities and refine plans to reconstitute the flow of commerce after disruptions.

As Napolitano wrote on blogs.reuters, there are three keys to executing the strategy. First, DHS will maximize resources and expertise from across the U.S. government to find smarter and more cost-effective ways to address security threats. This includes developing common standards, streamlining processes, and enhancing information sharing.

Next, DHS will strive to foster what Napolitano calls “an all-of-nation” approach to leverage the critical roles played by domestic governmental and private-sector partners. Since the supply chain includes manufacturing, assembly, consolidation, packaging, shipping, and warehousing, as well as supporting communications infrastructure and systems, all will play critical roles in its protection, she says.

Finally, since protecting the global supply chain is inherently an international challenge, it will take an international effort to protect that global supply chain. Napolitano says it will be vital to continue to think globally, enhancing coordination with the international community and international stakeholders who have key supply chain roles and responsibilities. DHS will seek to develop and implement global standards, strengthen detection, interdiction, and information-sharing capabilities, and promote end-to-end supply chain security efforts with the international community, she says.

I’m intrigued by the strategy. In recent years, advances in communications technology and production cost reductions have certainly contributed to allow global market development and new economic opportunity. Obviously, the global supply chain system that supports this trade is essential to not just the U.S.’ economy, but to a growing number of countries’ economies, and therefore, is indeed, a critical global asset. How the strategy will be received by other countries remains to be seen. But in my opinion, it’s a good strategy and I look forward to learning more about it.

What are your thoughts on the National Strategy for Global Supply Chain Security?

You may have seen President Obama’s State of the Union address Tuesday night, and if not, you’ve probably been reading about it since then. That’s because one of the strongest messages coming out of the speech is that manufacturing is the backbone of a strong U.S. economy. In other words, the economy won’t truly recover unless companies create and maintain manufacturing jobs.

President Obama said “we have a huge opportunity, at this moment, to bring manufacturing back,” on Tuesday night. “But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

The President touched on a number of issues, such as trade enforcement and a skills gap in American manufacturing. That was expected since he has previously endorsed the creation of a national manufacturing skills certification system, which, ultimately, should help manufacturers across all industries. Last fall, President Obama announced the launch of Skills for America’s Future, an industry-led initiative aimed at improving industry partnerships with community colleges to create a nation-wide network to advance workforce development strategies, job training programs, and job placement. 

Considering his previous comments, it wasn’t a surprise to hear the President speak more about insourcing, either. Earlier this month, he explained he would put forward new ways to, as he said then, encourage American companies to seize this opportunity to increase investment at home and bring jobs back to America. At the time, the President mentioned tax proposals to reward companies that choose to invest or bring back jobs to the U.S., and to eliminate tax advantages for companies moving jobs overseas.

Tuesday night, President Obama continued the idea, and went so far as to say the country needs an overhaul of its corporate tax code. That code rewards companies “for moving jobs and profits overseas," Obama said.

"Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world,” Obama added. “It makes no sense, and everyone knows it. So let’s change it.”

Essentially, President Obama proposes eliminating tax incentives that make it more lucrative for companies to ship jobs overseas. The proposal would require American companies to pay a minimum tax on their overseas profits to prevent other countries from attracting U.S. businesses with unusually low tax rates. As an article that ran in the Chicago Tribune sums up, Obama also wants to eliminate tax deductions companies receive for the cost of shutting down factories and moving production overseas. Instead, Obama wants to create a new tax credit to cover moving expenses for companies that close production overseas and bring jobs back to the U.S. He also wants to reduce tax rates for manufacturers and double the tax deduction for high-tech manufacturers to spur the creation of manufacturing jobs in the U.S.

In a second Tribune article, Dennis Hoffman, economist at the W.P. Carey School of Business at Arizona State University, says that as long as Obama is promoting high-tech manufacturing, he’s focused on a sector in which American workers can be competitive. Economically, there would be challenges to try and bring low- or medium-tech manufacturing back to the U.S., Hoffman says. But he also believes the U.S. needs to do research and development here, and high-tech manufacturing, and consequently seize competitive advantage.

Perhaps I’m just pessimistic, but while both Democrats and Republicans in Congress claim to support comprehensive tax reform, it seems unlikely that the compromises that would be necessary to accomplish tax reform can be made in an election year. Be that as it may, there is growing evidence that it’s worth considering insourcing. As evidence mounts that offshoring to a low-cost country may no longer deliver the advantages it once offered, providing tax credits and increasing deductions for companies choosing to manufacture in the U.S. certainly offers some food for thought.

What do you think? Would such tax reform drive a return of manufacturing to the U.S.?

I posted a few months ago about prescription drug shortages and opportunistic price gouging, and wondered then, what—if anything—can be done about the situation. That topic is on my mind again, because as was reported on SecuringPharma, the U.S. Food and Drug Administration (FDA) has recently warned healthcare providers to be vigilant when sourcing injectable cancer medicines. Current shortages could encourage what the FDA terms, “unscrupulous individuals,” to introduce unapproved and potentially counterfeit drugs into the supply chain.

The problem with price gouging is that some generic drugmakers decide to quit making certain drugs because they offer little profit. When the maker of a particular generic drug suddenly stops producing it, other companies typically don’t have enough capacity or time to make up the shortfall before the stoppage begins to effect patients. There also always is the possibility of manufacturing-quality problems that cause drugmakers to temporarily shut down production. When either of those situations occur, some middle-men are quick to take advantage of the shortage by purchasing the available supply and then raising the price by incredible amounts.

While cost is a considerable issue, the more significant concern is that drugs offered on the gray market also pose a safety concern. The gray market operates outside the tightly controlled pharmaceutical distribution channel, where strict standards for storage and handling are enforced, as well as requirements to record the product’s chain of custody. Furthermore, there typically are narrow ranges of temperature and climate conditions required to maintain drug efficacy, and only a tightly controlled supply chain channel can meet these requirements. Failure to handle and store drugs properly may cause them to become inadequate, and in some cases, potentially harmful.

This latest development concerning injectable cancer medications also is disturbing. The FDA notice says that current shortages of injectable cancer medications may present an opportunity for individuals to introduce non-FDA approved products into the drug supply, which could result in serious harm to patients. The FDA reminds health care providers to obtain and use only FDA-approved injectable cancer medications purchased directly from the manufacturer or from wholesale distributors licensed in the U.S.

The disturbing part is that the FDA is aware of promotions and sales of unapproved injectable cancer medications direct-to-clinics in the U.S.—and that they most likely were administered to patients. According to the administration, products purchased include a high percentage of sterile injectable medications and medications whose quality could be adversely effected if they are not stored or transported under specific temperatures.

In these cases, patients were unknowingly placed at risk when they received medications of uncertain purity, storage, handling, identity, and sourcing. That’s because any medication that has not been manufactured in accordance with FDA standards and pursuant to FDA approval—including foreign versions of FDA-approved medications—is considered unapproved. Although the FDA recommends that, in an effort to protect the health of patients, health care providers should use only FDA-approved versions of these cancer medications. However, it’s readily apparent that does not always happen.

What’s interesting is that in certain circumstances, the FDA may authorize limited importation of medications that are in short supply—but it seems that isn’t happening. These medications are imported from approved international sources and distributed in the U.S. through a controlled network, and would not be sold in direct-to-clinic solicitations. If the FDA has arranged for limited importation of the foreign version of a medication, information on obtaining that medication will be available on the FDA drug shortages website, often in the form of a “Dear Healthcare Professional,” letter.

So obviously, there is a problem with the system here where demand far outstrips supply. Some would argue that the solution is to give the FDA more “teeth,” or authority to crack down. However, I’m not sure how well that approach would work.

What about you? What do you think?

2012 appears to be shaping up to be an interesting year for those in the automotive supply chain. There will certainly be challenges, but with those challenges come opportunity.

For example, a recent Businessweek article notes that according to estimates from IHS Automotive, U.S. auto plants this year may operate at about 81 percent of capacity, which is significant considering the fall to as low as 49 percent in 2009. Production is already increasing, the article notes, with GM adding more than 4,300 jobs in four states as the company adds third shifts to its production. But GM isn’t alone in that increase. Ford Motor Co., Chrysler Group, Nissan Motor, and Kia Motors have all either added U.S. production beyond the traditional two shifts or announced plans to do so.

There’s no question automakers are running full-out, Kim Rodriguez, a principal at KPMG’s auto-consulting business in Detroit, says in the article. Furthermore, it isn’t just automakers that are increasing production. Rodriguez says there’s also an effect on other supply chain members, as businesses from auto suppliers to trucking companies hustle to add capacity and find new workers to adapt to the increased production.

Holly Sears, vice president of economic development for the Rutherford County (Tennessee) Chamber of Commerce, says in the same article that auto suppliers nearby are talking about adding third shifts in Rutherford County, which is home to a Nissan plant and about a 75-minute drive from Volkswagen’s Chattanooga factory. Every auto supplier the chamber of commerce has talked to recently has a positive outlook for 2012 and 2013, Sears says.

There are some interesting implications to this boost in productivity, so I was also interested in a recent Businesswire item in which Kelly Thomas, senior vice president, manufacturing, JDA Software Group, referred to what he calls a “new normal”—where most automotive companies now have similar operational efficiency profiles. So essentially, the basis of competition has shifted from operational efficiency in a given functional area to the operational efficiency of the overall value chain. That means automakers are faced with a unique opportunity to improve revenue while reducing costs and improving throughput, Kelly says.

To take advantage of this evolving environment, JDA recommends focusing on several strategies. However, I was most interested in the ability to synchronize option content with parts. As JDA notes, a critical challenge in supply chain management in the automotive industry is the ability to synchronize sales and marketing requirements and forecasts with parts flowing in from suppliers. This challenge calls for demand management on the front end of the supply chain to be seamlessly linked to material requirements on the back end of the supply chain.

The problem of course, is that consumer demand is volatile. So while automakers must anticipate seasonal demand—and as we saw last year, deal with natural disasters—there also is the fact that consumer demand will ebb and flow based on the ecomomy’s health and rising or falling unemployment rates. Add to that fluctuating demand for a particular color and option package for any model of vehicle, and the ability to balance demand management with material requirements becomes even trickier.

But having said that, I do agree with Thomas from JDA in that over the course of the next few years, automakers will face unique opportunities to differentiate themselves. Do you agree as well?

I’ve been thinking lately about “insourcing” or “re-sourcing.” In other words, a return of manufacturing to the U.S. That’s because there has lately been quite a bit of discussion about it, including the White House’s release of a new study.

You may have seen that President Obama is calling on U.S. companies to invest in America. At an “Insourcing American Jobs” forum at the White House, the President, Vice President, members of the Cabinet, and other Senior Administration Officials lead a discussion on ways to encourage U.S. companies to insource American jobs and make additional investments to help rebuild the economy. The President also will soon put forward new ways to, as he says, encourage American companies to seize this opportunity to increase investment at home and bring jobs back to America. They include tax proposals to reward companies that choose to invest or bring back jobs to the U.S., and to eliminate tax advantages for companies moving jobs overseas.

The White House also released a report about insourcing and how companies are increasingly choosing to invest in the U.S. For example, according to the report, real business fixed investment has grown by about 18 percent since the end of 2009. In the past two years, 334,000 manufacturing jobs have been created, while manufacturing production has increased by about 5.7 percent on an annualized basis since its low in June of 2009. That’s the fastest pace in a decade. Finally, continued productivity growth has made the U.S. more competitive in attracting businesses to invest and create jobs by reducing the relative cost of doing business compared to other countries, the report notes.

The White House isn’t alone in being bullish on a return to manufacturing in the U.S. As reported in Businesswire, Reynders, McVeigh Capital Management recently released a paper, “Workforce Rising: Why U.S. Manufacturing is Poised for a Comeback,” in which the co-authors, Patrick McVeigh, president and CIO, and Chat Reynders, CEO and chairman of the firm, explain that several significant factors are at play.

The first is that companies are shifting from offshoring to insourcing as the cost advantages of moving production to China and other locations become less significant. One reason is the increasing wage gap. As the report explains, wages in China are rising at a predicted 15 percent to 20 percent annually while U.S. wage rates are growing at only two percent. That means in a few years, there won’t be much of a gap at all.

Secondly, higher oil prices have pushed transportation costs dramatically higher, the report notes. Consequently, by reallocating resources to the U.S., companies can reduce the distance to the point of sale, and eventually benefit from more accessible, cheaper fuel in domestic natural gas, the report states.

Perhaps the most substantial reason for insourcing is a growing focus on total cost of ownership (TCO). The authors note that TCO includes in cost evaluation “the burden of controlling quality and delivery, transportation, oil consumption, inspection of labor, inventory carrying, and freight and packaging.” As a result, companies that use TCO find it is cheaper and more predictable to keep manufacturing close to home, the report states.

In conclusion, Reynders and McVeigh note that while there is no quick fix, a return of manufacturing to the U.S. is looking more appealing. Furthermore, they predict, as China struggles with growing infrastructure and the emergence of its middle class; as industries built around U.S.-based resources solidify; and as innovation brings production to new levels of efficiency, insourcing will be even more compelling.

I’ve posted recently about whether China is still the low-cost country of choice, but this is different. There are other countries that are quickly becoming (or soon will be) more competitive than China. What I’d like to know is if you think the U.S. is one of those countries?

Do you own—and still use—a digital camera? Would you buy another one? I ask because I was at a recent event where several people took a number of pictures, and as you can probably guess, all of them used their smartphones to take those pictures. I didn’t see a single conventional camera.

That’s because, as Liz Cutting, executive director and senior imaging analyst at research firm NPD Group, says, the best device is the one that’s at-hand when a moment happens that is worth taking a picture. It should be noted here that Cutting’s research shows that consumers who use their mobile phones to take pictures and video were more likely to do so instead of using a camera when capturing spontaneous moments, but for important events, single purpose cameras or camcorders are still the device of choice. I’ll go even further, and say that in my general observations, it seems that cellphones have become the device of choice for taking pictures. Sure, a single-purpose camera may be used for a high school graduation or a piano recital, but even for holiday or birthday parties, it seems that most pictures are now taken with phones.

The reason is that not only are cellphones now suitable for taking high-definition photos and recording videos, they also make it easy to transfer those pictures and videos to sites such as Facebook and Flickr. Consequently, sales of so-called “point-and-shoot” digital cameras that fit in consumers’ pockets have taken a noticeable hit.

For example, according to findings in NPD’s recent Imaging Confluence Study, sales of entry-level cameras began to slide in 2009 as improvements were made to picture-taking phones’ auto-focus, zoom, and low-light features. Then, through November, 2011 U.S. retail sales of entry-level cameras fell 17 percent to 12 million units from 2010, according to NPD. What’s more, U.S. consumers used smartphones to snap 27 percent of their photos last year, up from 17 percent in 2010, according to NPD data through November. Conversely, the share of photos taken with a point-and-shoot camera fell to 44 percent from 52 percent.

That point has not gone unnoticed by camera manufacturers. As a recent Businessweek article explains, Sony, Canon, and Samsung Electronics are all poised to introduce inexpensive digital cameras that include new standard features. The trend is sure to continue as well. Indeed, all manufacturers, including Samsung, need to focus on the value proposition of a camera and what differentiates it versus a smartphone, says Reid Sullivan, a senior vice president of Samsung, in the article.

The result is some cool cameras will soon be available. Sony’s newer cameras focus on taking pictures in 3-D and on capturing and downloading images even in extreme conditions using zoom lenses that capture photos at greater distance and with more clarity than phones. Canon’s flagship point-and-shoot will be called the PowerShot G1X, and will include the ability to prioritize face detection of children to ensure better pictures. Finally, Samsung is introducing a camera that allows users to upload images and videos directly to online sharing sites, including Facebook, Flickr, Picasa, and YouTube.

Those cameras certainly sound interesting, but the more intriguing aspect is the changes taking place in the market. Camera companies noticed sales were sliding due to competition from an unlikely source. To battle that competition, they quickly coordinated supply chain partners and activities to bring new product to market. Furthermore, an interesting twist is that while camera manufacturers must compete with mobile phone manufacturers, they also must continue to compete with each other. I suspect prices will also fall in a bid by camera manufacturers to make cameras even more appealing to consumers.

The situation certainly demonstrates how new, unexpected competition can have an impact on a market.

 

Some news reports and recent developments have me thinking once again about low-cost countries and whether it really is advantageous to outsource manufacturing to China.

The first development was that, as reported in an Industryweek article, a wave of labor strikes has taken place in China in recent months. Most recently, thousands of workers at a plant in eastern China owned by South Korea’s LG Group were on strike protesting the amount of year-end bonuses. Amid complaints that South Korean employees of the factory, which makes screens for electronic products, received higher bonuses, some 600 workers walked off the job at the plant in December. That number later grew to more than 2,000 workers over the course of the strike. After three days, the strike ended when the company raised year-end bonuses from one month’s salary to two months’ salary.

News of labor strikes in China doesn’t really come as a surprise because it is a continuing challenge. As was previously discussed here and here, the result of increasing wage rates in China is that those rates are now only about 30 percent cheaper than rates in low-cost U.S. states. As research from Boston Consulting Group shows, since wage rates account for 20 percent to 30 percent of a product’s total cost, manufacturing in China will only come out to around 10 percent to 15 percent cheaper than is possible in the U.S.—and that’s before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits, or it may even be erased entirely, according to the firm.

In an update to that conclusion, I was interested in a Supply Chain Digest headline that pointed me to some research from AlixPartners indicating that China is expected to remain a leading low-cost country for the foreseeable future due to its mature manufacturing infrastructure and the significant costs of moving production. However, since 2007, the competitive landscape for outsourcing has shifted significantly to favor Mexico, some locations in Europe, and several locations in Asia other than China.

What’s more, according to the AlixPartners’ “2011 U.S. Manufacturing-Outsourcing Cost Index,” Mexico had the lowest landed costs for U.S. customers while other key low-cost countries, including India, Vietnam, and Russia, had higher costs but remained more competitive than China. Looking ahead, as key general manufacturing cost drivers stabilize at more economically sustainable levels after the recession, the firm expects low-cost countries’ advantages over the U.S. will decline. While Asian low-cost countries will likely be more effected than Mexico, China may experience particular negative pressure on landed costs due to wage inflation, exchange-rate pressures, and higher freight rates.

No single factor by itself is likely to shift the cost advantage in favor of the U.S. over China. However, AlixPartners’ research shows that a combination of wage inflation, exchange-rate pressures, and higher freight rates could well erase some—or possibly all--of China’s cost advantage over the next four to five years. That situation, the firm points out, highlights the need for flexible strategies and constant diligence when implementing an aggressive global supply chain strategy.

What I’d like to know, is what you think of the situation. Has your company been effected by wage inflation, exchange-rate pressures, and higher freight rates in China? Secondly, does your company make use of locations in other countries, such as Mexico, India, and Russia? If so, do you see them becoming increasingly important in coming years?

 

I know the line from the movie Field of Dreams is actually, “If you build it, he will come.” But I’m reminded of the basic idea when thinking about electric vehicles.

The premise of mass-marketing plug-in electric vehicles—including both plug-in hybrid electric vehicles and battery electric vehicles—seems like a winner, right? After all, the vehicles offer the promise of improved fuel economy, lower emissions, and a quieter ride than comparable traditionally powered internal combustion engine vehicles. Those attributes are sure to appeal to consumers, especially in the U.S., concerned about both rising fuel costs and the environment.

But in a mismatch of supply and demand, while the vehicles have been built, consumers have not come to buy them—well, at least not in the numbers hoped for by automakers. Although automakers and industry analysts say it’s too early to be critical of a technology with potential likely to be realized over decades rather than years, several news reports indicate that the situation isn’t likely to change soon.

For instance, a Financial Times article reports that sales of electric vehicles are off to a slow start, having been held back by high prices and supply bottlenecks. In their first full year of sales, both Nissan’s Leaf and General Motors’ Chevrolet Volt--the first cars powered by rechargeable batteries--have sold in smaller numbers than the two carmakers expected: about 30,000 units combined.

According to the article, sales of the Volt, which GM fast-tracked through development in a process it likened to a “moon shot,” suffered a blow after batteries caught fire hours or days after severe federal crash tests.

I’ve posted about that before. It’s worth noting that GM says it has the hazard under control, and the National Highway Traffic Safety Administration is still investigating the problem. Even so, the potential for a fire after an accident surely can’t help sales.

Nissan’s Leaf, meanwhile, saw its sales hampered first by distribution bottlenecks, then by Japan’s earthquake, the Financial Times article explains. Consequently, the model sold 20,000 units in the year to November, which is “marginally below expectations,” says Andy Palmer, head of strategy planning. However, the Japanese group says interest is strong enough for it to produce 40,000 Leafs next year, according to the article.

In any event, some analysts, even those who are confident that EVs will prove to be viable long-term alternatives to conventional cars, are cutting their sales forecasts due to slow initial uptake of the first models to come to market. Part of the problem also appears to be initial pricing.

Businesswire reports that, according to research from Pike Research, many potential buyers will hold off on purchases of electric vehicles during 2012 due to the premium pricing of the vehicles. According to data from Pike Research’s annual Electric Vehicle Consumer Survey, the optimal price for a plug-in electric vehicle to engage consumers is $23,750.

That price point, however, isn’t being met. The article further points out that the 2012 Toyota Prius PHEV ($32,000), the Honda Fit BEV ($36,625), and the Ford Focus EV ($39,995) all are clearly beyond the price point (before federal incentives), so consumers hoping for an affordable electric vehicle have been left hoping. By contrast, the sticker price of a petrol Ford Focus is around $17,000.

Some of consumers’ reluctance may also stem from concerns about the validity of the technology, but that will probably ease over time. In fact, Pike Research does forecast that the number for cumulative sales of plug-in electric vehicles will reach 1 million by 2017. But the combination of the introduction of ever more fuel-efficient cars, fuel prices aren’t rising quite so quickly, and that battery vehicles carry a hefty price tag will combine to keep sales down—at least for now.

It’ll be interesting to see if—as at the end of Field of Dreams—customers do eventually line up.