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2012

 

When you hear “same-day delivery,” do you think of pizzas, sub sandwiches, and flowers? Yes, me too.

That’s why I’m interested in an evolving story. Walmart is testing same-day delivery in select markets. Walmart isn’t alone in that practice either.

The San Jose Mercury News reports that in their attempts to keep pace with Amazon, Walmart and eBay both announced plans for same-day delivery in selected parts of the San Francisco Bay Area. Amazon and Walmart promise customers that for just a slight delivery charge, their online purchases will be delivered within hours of ordering—in eBay’s case, delivery can be in less than an hour.

Walmart’s beta testing of the same-day delivery service, called “Walmart To Go,” actually began in Northern Virginia and Philadelphia, rolled out to Minneapolis earlier this month, and now includes San Francisco and San Jose, Calif. About 5,000 general merchandise items, including flat-panel TVs, other electronics, and toys are available for same-day shipping. The delivery charge is $10 for an unlimited number of items, with no minimum purchase.

Walmart’s service works this way: Customers place orders until noon and select a four-hour window to receive the delivery that day. Walmart then uses UPS trucks to deliver the merchandise. The process is a little different in San Francisco and San Jose—where Walmart has had an online grocery delivery service under way since 2010. There, shoppers must place their order by 7 a.m. and Walmart uses its own trucks for delivery.

I’m interested in whether some, or all, of the retailers determine same-day delivery service is more complex and costly than they anticipated. Indeed, some analysts caution that same-day delivery is a financial risk and logistical nightmare for companies other than restaurants or florists.

It’s incredibly hard to pull off, says Fiona Dias, chief strategy officer at ShopRunner, a Web service that coordinates shipping for retailers, in the Mercury News article. We haven’t found a way to economically do same-day delivery, she says.

The largest challenge is for the companies to have both sufficient merchandise and stores and warehouses spread throughout a delivery area. Then there’s the delivery cost. Dias believes that if Walmart only charges $10 for deliveries, that amount will cover less than half the cost of one order. eBay offers even cheaper deliveries: the company offers three free deliveries, after which customers are charged $5. However, orders must be at least $25.

The math doesn’t make sense, Dias says. It only makes sense if the truck is full. But if there’s only one package, it just doesn’t make sense, she says.

Another interesting aspect is that Walmart is shipping products from it’s stores rather than warehouses or distribution centers. But as an article that ran on the Wall Street Journal earlier this month notes, that practice is expensive. In fact, it can be three to four times the cost for the retailer to pick items and pack them from a store versus having a really efficient, automated process back in a distribution center, Al Sambar, a retail strategist at consulting firm Kurt Salmon, says in the article.

Actually, even Amazon hasn’t found a way around the high cost. The Mercury News article also reports that Chief Financial Officer Thomas Szkutak said this year that same-day delivery on a broad scale isn’t economically feasible. While Amazon began same-day delivery in 2009, the service has been limited to a handful of cities. However, Amazon has also been aggressively expanding other delivery services and built more warehouses. In fact, Amazon now has a total of 40 warehouses in the U.S. to enable delivering merchandise to customers quicker.

Frankly, I can’t see how same-day delivery is a viable alternative for any of these companies. But as a consumer, it would be nice to have a big screen television or other such merchandise delivered when I want, for $10, rather than the $50-$75 some big-box electronics retailers charge. Maybe that’s the hook: lure customers away from other retailers, and increase sales volume. Even so, it sure seems like a losing proposition.

What do you think? Can same-day delivery prove worthwhile?

As Hurricane Sandy bears down on the eastern U.S. and Canada, and gets closer to converging with a host of other weather systems to create what some have termed a “Frankenstorm,” our thoughts and concern are with those people whose lives will soon feel an impact. At the same time, we are interested to see what impact the storm has on the supply chain.

At the time of this writing, landfall is still a few hours away but advance flooding driven by heavy rain and strong winds is already taking place. Landfall is predicted Monday night somewhere between central New Jersey and southern Delaware. But most of the eastern U.S. will feel Hurricane Sandy’s effects, making the exact landfall spot less important than the overall trajectory.

In this particular storm, hurricane-force winds extend up to 175 miles from the center of the storm, and tropical-storm-force winds extend up to 485 miles from the center. In other words, portions of the coast from Virginia to Massachusetts will suffer hurricane-force winds as the storm moves toward land, according to forecasters. Winds of tropical-storm force could stretch all the way north to Canada and all the way west to the Great Lakes, where flood warnings were issued yesterday. Some states already see snow, and have issued blizzard warnings for mountainous stretches of Maryland, Virginia, and West Virginia.

The storm triggered evacuation orders for hundreds of thousands of residents who live near the coast in several states. It also forced the cancellation of more than 12,000 airline flights, the mass closure of schools, closing of the New York City subway system and all of the region’s commuter trains and buses, and perhaps most telling, the closure of U.S. stock and options markets.

As the New York Times reports, another fear in the northeast is that winds from the storm will knock down power lines, and that surging waters could flood utility companies’ generators and other equipment. Consolidated Edison doesn’t offer an estimate of how long customers in the New York City area might be without power if the storm played havoc with its network. But Jersey Central Power and Light warned as long ago as Friday that repairs could take 10 days after the storm passed through. Another utility in New Jersey, the Public Service Electric and Gas Company, says restoring power could take a week.

While the storm itself is fascinating, I was quite interested to see an article in The Wall Street Journal noting that home-improvement retailers Home Depot and Lowe’s—key suppliers of disaster-preparation and repair supplies—have kept stores open as long as possible as Hurricane Sandy approaches the East Coast, and that they also have inventory ready to deploy after the storm passes.

Terry Johnson, a senior vice president of operations at Lowe’s, says the company has sent more than 400 truckloads of water directly to stores without going through distribution centers. Furthermore, it has sent more than 200 trucks from distribution centers with additional supplies like tarps, batteries, and flashlights.

Ahead of Sandy’s arrival, both Home Depot and Lowe’s activated their respective disaster-command centers, hubs that coordinate across the companies’ teams and with emergency-response agencies at all levels of government, the Wall Street Journal continues. Both companies’ command centers have been working to get product into stores for storm preparation, while simultaneously planning to have inventory staged outside the storm’s path to deploy once roads are passable again.

Home Depot, for example, keeps trailers loaded with recovery supplies—water, chain saws, cleaning supplies, wet dry vacuums—ready to go at various distribution sites that aren’t directly in Sandy’s strike zone. That way, trucks can move as soon as weather allows for safe driving, a spokesman said.

Johnson at Lowe’s says that following past disasters like hurricanes, the company can turn itself around to post-storm inventory in about a day. Once the company has identified a need, it will put product on a truck, and if there’s enough to fill it, it will be released, he says.

“It’s really important to be efficient, but it’s more important to get the product where it’s needed,” Johnson says.

Stay safe, everyone.

 

Does it seem to you there is a shortage of supply chain talent? I ask because it seems this is a recurring news topic.

The results of a survey conducted by Manpower Group last spring found that the hardest jobs to fill--around the world—are skilled trade workers, engineers, and sales representatives. More recently, I am intrigued by an initiative to educate community college students and veterans so they possess skills considered critical to manufacturing operations. Lately though, I have seen articles detailing a lack of talented individuals in procurement, logistics, and the supply chain in general.

So, for instance, Mickey North Rizza, formerly research director with Gartner Supply Chain and now vice president of advisory services at BravoSolution, says there is a critical shortage of people who are qualified to manage global procurement. In a video on SupplyChainBrain, she explains that a study by Gartner uncovered a number of areas of concern regarding procurement, relating to basic, intermediate, and advanced skill sets. Specifically, companies want individuals who are experienced building relationships with partners across the supply chain.

It’s an advanced leadership style that’s really missing, says Rizza, adding that new-product introduction expertise is nowhere to be found. The ability to address sustainability issues is similarly lacking, she says.

I was also interested to see that Frost & Sullivan recently hosted its third annual strategy workshop for logistics, titled “Supply Chain Transformations 2012,” in Mumbai, India. The workshop focused on critical challenges faced by the Indian logistics sector, including the human resource shortage. Key workshop topics were how to encourage young adults to enter the field, as well as how industry players and logistics institutes can find trained personnel with the skill sets required to sustain the industry.

Finally, in another SupplyChainBrain video, David Ecklund, director of the Global Supply Chain Executive MBA program at the University of Tennessee, explains that senior supply-chain executives expect employees to possess a number of core competencies, such as global business acumen, transformational capabilities, the ability to deal with integrated business systems, and possess a complete understanding of what he calls, “the whole concept of how the value chain ties to supply.”

Some of the biggest gaps in supply-chain talent today, however, are related to problem-solving abilities, global leadership skills, business experience in worldwide environments, and customer relationships, Ecklund says. Today, supply-chain executives don’t spend enough time out with customers understanding their challenges, he continues.

Nevertheless, there are steps companies can take to turn the situation around. In the SupplyChainBrain video, Rizza says companies can address the issue by setting up development and training programs that emphasize analytics. As for new-product introductions, managers need to understand how to achieve a deeper understanding of market needs, well beyond a focus on cost. They must also do a better job of managing business-to-business relationships, she says.

Srinath Manda, Program Manager, Transportation & Logistics Practice, Frost & Sullivan, explained during the workshop that the immediate for the logistics sector regarding skill gaps and other human resource issues is for companies to create well-defined job roles and career paths for the existing and prospective workforce. They must then take up promotional efforts in association with professional institutes to build a sustainable pool of appropriately-qualified workforce to meet the industry’s needs, Manda says.

It seems then that the solution will involve equal parts education, and on-the-job training conducted by employers resulting in experience. But I believe promoting the supply chain in the first place is paramount. There is a critical need to get college students interested in the supply chain in the first place. That must be addressed by industry associations to keep the talent shortage from being cyclical.

 

The growing number of cases of fungal meningitis related to steroid injections raises some troubling questions. The Centers for Disease Control and Prevention (CDC) now reports that there are 257 confirmed cases, including 20 deaths, across 16 states.

HealthDay News reports that on Tuesday, criminal investigators from the U.S. Food and Drug Administration visited New England Compounding Center (NECC), the specialty pharmacy in Massachusetts which produced contaminated steroid injections linked to the meningitis outbreak. Securing Industry went further, however, calling the event a “raid” and noting that the FDA agents were backed up by local police. The article explains that the agents searched the company’s offices and seized documents in the raid.

So far the deaths have been linked to fungal contamination of supposedly sterile vials of methylprednisolone acetate used as an epidural treatment for back pain, although some cases of meningitis have been seen in patients receiving other NECC products—including another injectable steroid called triamcinolone acetonide, and a cardioplegic solution used during heart surgery. Because other NECC drugs are under suspicion, health officials now face the possibility that some of the more than 100,000 shipments of other drugs from the company may have caused other types of infections, according to an article that ran yesterday in The New York Times. Furthermore, those officials are now working to warn doctors and patients alike of the risk. Indeed, the FDA has given state health departments a list of more than 131,000 shipping invoices for products from NECC that were sent all over the U.S., the article reports.

Dr. William Schaffner, an infectious disease expert at Vanderbilt University, said in a conference call on Wednesday for health officials from various states, there is serious concern about the possible contamination of all the products from the center that were supposed to have been sterile: all injectable medicines and other products used during surgery, the New York Times article reports. Some health departments were planning to investigate whether certain types of fungal infections in the past year were connected to products from the company, and would be going over death records, he said.

While there is no doubt compounding pharmacies provide a valuable service, the case does raise questions about the companies’ quality control systems, which are not considered to be as stringent as those required for pharmaceutical production plants. A Pharmaceutical Commerce article notes that the recent outbreak highlights the long-standing gray area in which compounding pharmacies operate. Technically, FDA has very limited oversight over pharmacies of any sort.

Compounded drugs “are not approved by FDA and they don’t undergo that same premarket approval for safety effectiveness that FDA approved drugs do,” Kathy Anderson, an acting FDA director, said in an Oct. 4 teleconference, the Pharmaceutical Commerce article reports.

The meningitis outbreak also raises concerns about how medicines are tracked—or rather, aren’t tracked—through the supply chain. So, for example, FDA investigators are still trying to track down the tens of thousands of NECC product that remains unaccounted for, which some observers say points out the need for a national track-and-trace system which could be used to identify and treat patients exposed to potentially hazardous medicines.

So, should compounding pharmacies be subject to the same FDA oversight as regular drug manufacturers? That’s an interesting question, and one that may come up in Congress—given recent interest in the outbreak. The HealthDay News article explains that two members of Congress--Rep. Edward Markey of Massachusetts and Rep. Richard Blumenthal of Connecticut—have already asked the U.S. Justice Department to investigate whether NECC violated any federal laws or regulations. The request seems to indicate at least some lawmakers would be open to discussions concerning FDA oversight of compounding pharmacies.

What do you think? Should compounding pharmacies be under the same scrutiny as pharmaceutical manufacturers?

 

While unemployment in the U.S. hovers at just under eight percent, it’s interesting to also see that there are roughly 600,000 unfilled manufacturing jobs manufacturers say they can’t fill.

An article that ran in Businessweek reports that according to research last year, 67 percent of respondents reported a moderate to severe shortage of available qualified workers. In the article, Harold Sirkin, a senior partner at Boston Consulting Group, says manufacturers could solve most of their problems finding good people by offering higher pay and training new hires.

On the other hand, many manufacturers say that while such an approach worked in the past, it is no longer viable. Instead, they say they no longer have the time or resources to commit to training new hires because entry-level skills have become so sophisticated.

With that in mind, I’m quite interested in the progress being made in “The Right Skills Now—Precision Manufacturing Initiative” by the Manufacturing Institute, the National Association of Manufacturers (NAM), the National Institute for Metalworking Skills (NIMS), and American College Testing (ACT). An outgrowth of President Barack Obama’s June 2011 Job Commission Report on the need to encourage innovation and advanced manufacturing in the U.S., the initiative aims to educate and train—then certify—community college students with skills considered critical to manufacturing operations.

Right Skills Now was first piloted in Minnesota at Dunwoody College of Technology and South Central Community College. Graduates of the program earn college credit and an industry certification that can help them land jobs anywhere in the U.S. While tuition is $12,600, many students get financial aid, says Debra Kerrigan, who oversees the Dunwoody program.

USAToday recently reported on 64 students currently taking part in the program at two Minnesota community colleges. The program trains them to run computer numerical controlled (CNC) machines in just 16 to 18 weeks. Upon graduation, they are virtually assured a job in the Minneapolis-St. Paul area at a starting wage of about $18 an hour after a six-week paid internship, USAToday reports.

This seems like a win-win situation. Because the education and training process is considerably quicker, students are able to gain certification and begin work sooner. The flip side of the coin is manufacturers can hire workers with specific, however limited, expertise and skill sets quickly instead of waiting for students to earn Associate Degrees.

I also saw more news yesterday of an initiative aimed at tapping another labor pool. Businesswire reports that GE, Manufacturing Institute, Alcoa, Boeing, and Lockheed Martin have launched a coalition to train U.S. military veterans for jobs in advanced manufacturing. Their goal is to train and match 100,000 veterans with employment by 2015. The “Get Skills to Work” coalition, which will be managed by the Manufacturing Institute and supported through financial and in-kind commitments from GE, Alcoa, Boeing, and Lockheed Martin, will focus on accelerating skills training for U.S. veterans; helping veterans and employers translate military skills to advanced manufacturing jobs; and empowering employers to recruit, onboard, and mentor veterans.

Coalition partners will work with local community and technical colleges to establish the Manufacturing Institute’s “Right Skills Now” program, the article explains. The partners will engage their regional supply base to ensure the certifications being offered meet the immediate skill needs of local employers, and will work with the U.S. Departments of Defense and Veterans Affairs, as well as local military transition offices and bases, to recruit veteran participants.

I think these are worthwhile programs, and I applaud the efforts of GE, Alcoa, Boeing, and Lockheed Martin to train, educate, and find employment for military veterans. At the same time, however, I also wonder how much of a dent these efforts will make in the overall U.S. manufacturing skills shortage.

What do you think? Does your company have unfilled manufacturing positions? If so, what will it take to fill those jobs?

 

Reported incidents of counterfeit electronic component parts this year are maintaining a fast pace. Furthermore, incidents of counterfeit parts have quadrupled since 2009, which highlights the need for continued vigilance, and improved detection and avoidance measures, according to information and analytics provider IHS.

Counterfeit incident reports from the beginning of this year through the end of August averaged 107.3 per month, up slightly from 107.1 in 2011. On a sequential 12-month basis, a total of 1,336 separate verified counterfeit-part incidents have been reported for transactions involving a minimum of 834,079 purchased parts, IHS reports. These figures are considered conservative because purchased parts reflect only a subset of all reported incidents.

These counterfeit parts often are cheap substitutes or salvaged waste components that fail to meet quality requirements, leading to potential failures. Failure, in turn, could lead to risk to human safety and national security, and, of course, impact product cost and quality. What makes the situation more complex is that each incident can include thousands of purchased parts. On average, more than 1.4 million purchased parts have been involved in suspect counterfeit and high-risk transactions during each year for the past decade, according to IHS.

As reported previously by IHS, the expense to resolve a single such counterfeit incident can be substantial. Testimony given at a November 2011 hearing of the Senate Armed Services Committee revealed how the U.S. Missile Defense Agency learned that mission computers for Terminal High Altitude Area Defense (THAAD) missiles contained suspect counterfeit devices which may have led to an entire system failure. The cost of that fix was nearly $2.7 million.

Counterfeit parts represent a serious and growing risk to the electronics supply chain in general, and to the aerospace and defense industry in particular, says Rory King, director, supply chain product marketing at IHS. Each month, more than a hundred counterfeit incidents comprised of thousands of suspect parts are reported. That’s why the spotlight is shining squarely on tighter policies and procedures aimed at counterfeit detection and avoidance.

The U.S. Department of Defense (DoD) is working to update the Defense Federal Acquisition Regulation (DFAR) Supplement to the Federal Acquisition Regulation (FAR). These updates are part of measures intended to regulate the detection and avoidance of counterfeit electronic parts as part of the National Defense Authorization Act (NDAA) of 2012.

Among other requirements, NDAA Section 818 seeks to significantly improve systems for the detection and avoidance of counterfeit electronic parts at all tiers in the supply chain, at the same time shifting the burden of costs associated with rework or corrective action for issues involving these parts back to defense contractors. IHS reports that would specifically spell out new requirements for analyzing, assessing, and acting on these reports of counterfeit electronic parts and suspect counterfeit electronic parts.

Part of the problem is the sheer scope involved. A bill of materials or parts list for a military application system can include somewhere between hundreds to tens of thousands of purchased parts, so even if one percent of the parts are counterfeit, it can still be a staggering number of parts. Also, once they have entered the supply chain, counterfeit parts can surface time and again for years. So while the U.S. government is working to tighten regulations, and information services organization ERAI offers a means for reporting and investigating suspected counterfeit electronic parts and components, one must wonder if that’s enough.

What do you think? Are counterfeit parts just an unavoidable part of business? Will new government regulations slow the influx of counterfeit parts?

 

At first, considering the state of the U.S. economy as well as that of foreign countries, it may not seem as if there’s much that’s encouraging for U.S. high-tech/electronics executives. Nevertheless, they remain optimistic about the long term future of global trade and U.S. exports due to rising demand for high tech products around the world, according to the results of a new survey.

UPS’s annual “Change in the (Supply) Chainsurvey, which was conducted by IDC Manufacturing Insights, asked U.S.-based senior-level supply chain decision makers in the high-tech/electronics industry specifically about their companies’ exporting. Among executives expressing optimism in the long term growth of exports, nearly one third attribute that optimism to the steady increase in disposable income in emerging markets. Another third cite rising labor rates in traditional low-cost manufacturing countries as a primary factor, while approximately one in five executives cite legislative changes such as recent free trade agreements in Asia as a key factor. Indeed, a large majority, 81 percent, of U.S. high-tech executives anticipate recent free trade agreements in Asia will increase their company’s imports and exports to and from the region.

Interestingly, although North America is expected to remain the largest high-tech consumer market over the next three to five years, demand for high-tech products is actually expected to decrease by seven percent in the region. On the other hand, demand in other markets is expected to increase, and by as much as double-digit percentages in some regions.

The anticipated shift in consumer market demand for high-tech goods brings opportunities and challenges for high-tech companies, says Ken Rankin, high-tech marketing director at UPS. Global demand will continue to grow in new and existing markets, causing supply chain executives to shift not only their fulfillment operations but also their sourcing strategies to serve those markets. UPS has already begun to see such a shift as companies look to India and Brazil as key markets not only for fulfillment but for production as well, Rankin says.

Specifically, according to the survey findings, executives report plans to increase sales/fulfillment in India, the Middle East, and Africa by 22 percent each—and in Brazil by 18 percent. Sales/fulfillment in other South American regions is expected to increase 19 percent. Also ranking on the list of top high-tech consumer demand markets were Eastern Europe (cited by 15 percent of the respondents), Korea (13 percent), China (8 percent), and other Asian nations (8 percent).

What I found interesting are the implications for the supply chain. So, for example, when asked to assess individual opportunities for international trade growth, only about 25 percent of the executives said they believe their company’s import/export capabilities are best-in-class, while 72 percent of them believe there are opportunities for improvement. Of that group, 22 percent report that significant opportunities remain for their company to improve its import/export capabilities.

Furthermore, the executives list supply chain costs (noted by 72 percent of the respondents), lead times (40 percent), and responsiveness (18 percent) rank as the top three drivers of change in the high-tech supply chain for the next three to five years. Nearly half, 48 percent, of high-tech executives cite extended lead times as one of the top three pain points in the import/export process, in addition to managing inventory (cited by 42 percent of the executives), and end-to-end visibility (38 percent). Unstable suppliers and intellectual property protection follow closely behind on the list of pain points, with 37 percent and 30 percent of the executives citing the issues respectively.

Clearly, those factors all have the potential to become significant supply chain challenges if not properly addressed. Success in these markets during the next few years will, to a large degree, hinge on a company’s ability to deliver innovative products to growing markets, while also working to improve import/export performance.

 

Details are emerging as police and company officials investigate, but what is known for sure, is that the riot two weeks ago at the Foxconn factory in Taiyuan, China has cast the company—and perhaps Chinese labor in general—in the spotlight again.

Foxconn makes components, parts and assembles devices for large electronics companies, such as Hewlett-Packard, Sony, Amazon, and Apple. The Taiwanese company, which posted net profit of more than $900 million in the first half of 2012, employs roughly one million people in China. The Taiyuan factory itself has 79,000 employees.

Foxconn has suffered through several years of bad publicity related to a rash of worker suicides, factory accidents, and allegations of poor working conditions. Then came events two weeks ago. Reuters reports that about 2,000 Chinese employees of an iPhone assembly company fought a pitched battle into the early hours of Sep. 24th, forcing the plant to be shut down. Authorities sent 5,000 police to restore order after what the plant’s Taiwanese owners said was a personal dispute in a dormitory that erupted into a mass brawl.

However, some employees and people posting messages online accused factory guards of provoking the trouble by beating up workers at the factory. Indeed, The Wall Street Journal reports that dozens of workers who were questioned said the rioting, which caused 40 injuries, was in part the result of growing tensions as guards severely enforced strict rules on the campus. One worker said in the article that a drunken fight between two workers sparked a violent attack from a number of security guards striving to control the situation. The scene of the guards beating the workers led their friends to call others for help, and before long, a full-blown confrontation between guards and workers had broken out.

Other workers described being yelled at or physically intimidated, and two workers said there had been previous attacks by guards on the campus. What’s more, they said in the WSJ article that pressures from working long hours—shifts of 10 to 12 hours are common—on assembly lines, recent transfers of large groups of workers from other locations, and discontent about a lack of overtime work during the weeklong National Day holiday were all likely contributing factors to the violence,

Geoffrey Crothall, research director at Hong Kong’s China Labor Bulletin, says in a Businessweek article it makes sense that tension between guards and workers would be a factor in the incident given what’s known about the heavy-handed ways of Foxconn’s security apparatus.

“They have a longstanding reputation of being heavy-handed and harsh with workers,” Crothall says in the article.

It’s true that the situation seems to have improved for workers in Shenzhen: wages have gone up, and working conditions seem to have improved. They seem to be changing that plant into one more focused on research and development and product development, says Crothall. But for product assembly, the bulk is now being done by the factories in the provinces, which may not have seen similar improvements, he says

Another important factor is the rising rights awareness of a new, younger generation of Chinese workers, says Crothall. That has helped drive a surge in protests across China, which have increased this year, by workers more aware and more assertive of their rights, he says.

Workers are better educated and have higher expectations about what work should involve, says Crothall. They have a greater sense of self-worth—they believe that they should be treated with dignity and self-respect. And they will stand up to anyone that doesn’t treat them that way, he concludes.

In the end, the riot raises questions about the sustainability of China’s manufacturing capabilities and labor management. It also poses a challenge to the government that is struggling to satisfy the soaring expectations of a new generation of Chinese workers who expect higher wages, better working conditions, and are less willing than their parents to make personal sacrifices for China.

What do you think? Is this just an issue for Foxconn, or do the events foreshadow the changing nature of manufacturing in China?

The past two weeks have been busy ones for the FDA as the federal agency continues to clamp down on the flow of unapproved drugs sold by illegal Internet pharmacies.

Most recently, the U.S. Food and Drug Administration (FDA) announced that it—in partnership with international regulatory and law enforcement agencies—took action against more than 4,100 Internet pharmacies that illegally sell potentially dangerous, unapproved drugs to consumers. Actions taken include civil and criminal charges, seizure of illegal products, and removal of offending websites.

The announcement was made during the 5th annual International Internet Week of Action (IIWA), a global cooperative effort to stop the online sale and distribution of potentially counterfeit and illegal medical products. As the FDA explains, this year’s effort, Operation Pangea V, took place between Sept. 25 and Oct. 2, and resulted in the shutdown of more than 18,000 illegal pharmacy websites and the seizure of about $10.5 million worth of pharmaceuticals worldwide. The goal of this annual effort, which involved law enforcement, customs and regulatory authorities from 100 countries, is to identify producers and distributors of illegal pharmaceutical products and medical devices, and remove their products from the supply chain.

During Operation Pangea V, the FDA targeted websites selling unapproved and potentially dangerous medicines. In many cases, the medicines can be detrimental to public health because they contain active ingredients that are approved by FDA for use only under the supervision of a licensed health care practitioner, or they may contain active ingredients that were previously withdrawn from U.S. market due to safety issues.

For instance, among the illegal medicines identified through the operation were Domperidone, which was removed from the U.S. market in 1998 because it may cause serious adverse effects; Isotretinoin (previously marketed as Accutane States), which is only available through restricted distribution in the U.S.; fraudulent versions of “generic Tamiflu” that contain the wrong active ingredient which may cause a severe allergic reaction; and Viagra, which should not be used by consumers with certain heart conditions—and consumers taking this medicine without the supervision of a health care professional may not be aware of potentially severe drug interactions.

The FDA sent Warning Letters to the operators of more than 4,100 identified websites. As a follow up, the agency sent notices to Registries, Internet Service Providers (ISPs), and Domain Name Registrars (DNRs) informing them that the websites were selling products in violation of U.S. law. Finally, the FDA is working with its foreign counterparts to address the remaining websites that continue to offer unapproved or misbranded prescription medicines to U.S. consumers.

“Internet pharmacies that illegally sell unapproved, counterfeit, or potentially adulterated or substandard drugs are an inherently international crime problem,” says John Roth, director of the FDA’s Office of Criminal Investigation. “The FDA is pleased to work with INTERPOL [the international police agency] to fight this problem. Because these criminals don’t respect international borders, the international coordinated law enforcement response represented by Operation Pangea demonstrates that international cooperation is the best way to protect the American public from the risk of unsafe drugs.”

News of the operation quickly follows an announcement last week that the FDA had launchedFDA BeSafeRx—Know Your Online Pharmacy,” a national campaign created to educate consumers about the dangers of buying medicine from fake online pharmacies and help them safely buy medicine online. According to the FDA, the campaign is aimed at consumers who have purchased, or who would consider purchasing, prescription medicines from an online pharmacy that isn’t associated with a health insurance plan or local “brick and mortar” pharmacy to save money or for convenience. These consumers may not have health insurance, may have recently lost their health insurance coverage, or may have reached their coverage limits for prescription medications, says the FDA.

In a sense, I’m glad to see the FDA take these actions to better protect the supply chain. However, I also think the FDA needs a little more “bite” to accompany its “bark.”

What do you think? Is this an uphill battle? Should congress move to give the FDA more authority?

 

The rising cost of labor in China is at the heart of much discussion about reshoring. However, the Minneapolis Star Tribune recently ran a story, which I saw in the Chicago Tribune, explaining that the root of reshoring for some companies is simply to end the “hassle” of operating in China.

The story includes the example of Calibur11, which makes cases for consoles such as the Xbox 360. Two years ago, the company was cash strapped, and to cut costs, it shifted manufacturing operations to China. The results of that move, unfortunately, were far from what management expected.

One of its vendors lost $700,000 of tooling equipment, and another demanded a $150,000 “fee” to release the product. To make matters worse, the company also found out its product was being sold on the black market.

“We just kind of got kicked right in the teeth dealing with China,” says Calibur11 owner Coy Christmas in the article. “It’s been a horror story.”

Darlene Miller, owner of Permac Industries, a high-precision machine shop, explains other problems in the Star Tribune article. In 2006, she hired a Chinese contractor to make machine blades to exacting specs. But each shipment arrived flawed, with some blades not uniform, made of the wrong material or falsely labeled “certified.” Complicating matters, she had to buy a year’s worth of blades at a time.

Miller says the company spent thousands of dollars on an outside testing lab, but she was at wit’s end after three years. Eventually, the company found a Wisconsin company to make the blades—and without the shipping, testing, and reject costs, it actually beat the Chinese company’s price, Miller says.

But while there is plenty of anecdotal evidence that U.S. based companies may be reshoring, the larger trend may be that rather than reshoring, companies are beginning to near-shore instead. Hal Sirkin, a senior partner at the Boston Consulting Group, says in a recent IndustryWeek article that the group believes the costs of producing in Mexico are the same or lower than the costs of producing in China this year. The group actually says it could already be cheaper to produce in Mexico than in China due to China’s rising labor wages.

It isn’t just Mexico’s labor wages that make the country appealing for production. A key consideration for a growing number of companies is that production in Mexico enables shortening supply chains, and consequently, enables them to cut costs. That’s because there are extensive rail and road links that make it easy and inexpensive to ship goods north to the U.S. So in contrast, shipments from China to the U.S. often take between 20 days and two months. Shipments from Mexico, on the other hand, take a week at most and usually just two days.

Mexico has already become the world’s fourth largest car exporter this year, jumping from fifth place, according to the IndustryWeek article. This year alone, Nissan, Ford, and BMW announced plans to open new factories or increase production in Mexico. Audi also announced that its plant in San Jose Chiapa, central Mexico—set to open in 2016-- will create 3,000 to 4,000 jobs and produce 150,000 cars a year. The move will lower Audi’s costs and increase profit margins while delivering a definite competitive advantage with customers, Uwe Hans Werner, an Audi spokesman, says in the IndustryWeek article.

While Mexico offers a large, skilled workforce, and close proximity to the U.S., Canada, and South America, the country is not without problems. Chief among them, or certainly at least most alarming, is the high crime rate. There also can be problems locating local suppliers for parts and packaging. Some companies have resorted to using suppliers in Europe, and having them ship parts to Mexico.

Nevertheless, there still—depending on the company, its supply chain, and customer base—can be a compelling business case for expanding or even beginning operations in Mexico.

What do you think? Is your company reshoring or near-shoring?