Skip navigation
2014

As June 2nd approaches, people at companies whose products depend on tantalum, tin or tungsten (3 Ts) as well as gold—which are used in products ranging from coffee can lids to high-tech electronics and even jewelry—are watching events in Washington, D.C. closely.


These minerals often are mined in conditions of armed conflict and human rights abuses in Africa. What’s more, the profit from the sale of these minerals is used to finance continued fighting in the Democratic Republic of the Congo (DRC) and adjacent countries.


In a requirement that is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was supposed to take effect on June 2, 2014, the U.S. Securities and Exchange Commission sought to compel publicly traded companies to track the source of all relevant raw materials in their products, then file annual reports stating whether those goods were DRC conflict-free, conflict “undeterminable” or “not found” to be conflict-free. The National Association of Manufacturers and the U.S. Chamber of Commerce, along with other business interests, promptly sued when the law was passed, arguing that it was overly burdensome and costly—especially for companies which only use small amounts of the minerals in their products.


In a ruling two weeks ago, the U.S. Court of Appeals for the District of Columbia held that forcing companies to publicly declare which products aren’t “DRC conflict free” violates the First Amendment. The label “requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups,” the appeals court majority wrote. “By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech.” At the same time, the court upheld the rest of the rule, including provisions that require companies to conduct due diligence on their supply chains to determine the minerals’ origins, among other measures.


Consequently, the SEC will implement large portions of the rule, SEC Chair Mary Jo White said Tuesday, Reuters reports. In testimony before a U.S. House of Representatives committee, White said the recent appeals court ruling that struck down a provision of the conflict minerals rule doesn’t justify delaying the rest of the regulation’s requirements. The court “went out of its way” to uphold the vast majority of the rule, White told lawmakers, Reuters notes.


Later Tuesday evening, the SEC’s Director, Division of Corporation Finance, Keith Higgins issued a statement that explained in more detail how compliance will work when the deadline kicks in. He wrote that SEC will waive compliance with some of the rule’s disclosure and auditing requirements, but still require certain other disclosures to be made. So, companies which aren’t required under the rules to file a “conflict minerals report” should proceed with disclosing some details about inquiries they undertook to determine the origin of the minerals, Higgins wrote. Those who must file a conflict minerals report, he wrote, should still proceed and provide in the document a description of the due diligence they undertook to determine the mineral’s origin. However, companies at this time won’t have to declare publicly whether or not their products are in fact “DRC conflict free” or “not found to be DRC conflict free,” Higgins wrote.


It’s unclear how the SEC will address the part of the rule that was struck down by the appeals court. The finding could, for instance, be remanded to a lower court for further proceedings.


Notwithstanding, companies face increasing pressure from socially-responsible investors, non-governmental organizations, commercial customers and consumers, so complying with this rule—or even becoming conflict-free—may generate a competitive advantage for companies seeking to explain their position to socially aware consumers. Furthermore, greater supply chain transparency can help companies develop a more resilient and efficient supply chain.


Whether or not your company makes use of conflict minerals, what do you think of the Court of Appeals’ findings?

Old perceptions of low-cost and high-cost nations are no longer valid because manufacturing cost competitiveness around the world has changed significantly over the past decade, according to new research from The Boston Consulting Group (BCG). For example, for manufacturing, Brazil is now one of the highest-cost countries, the UK is the cheapest location in western Europe, Mexico now has lower manufacturing costs than China, and costs in much of eastern Europe are basically at parity with the U.S., the firm found.


The firm has developed a tool—it calls the BCG Global Manufacturing Cost-Competitiveness Index—to track changes in production costs over the past decade in the world’s 25 largest goods-exporting nations. These 25 countries account for nearly 90 percent of global exports of manufactured goods, BCG notes. The index covers four direct economic drivers of manufacturing competitiveness: wages, productivity growth, energy costs and currency exchange rates.


“Many companies make manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” says Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis. “They still see North America and western Europe as high cost, and Latin America, eastern Europe, and most of Asia—especially China—as low cost. In reality, there are now high- and low-cost countries in nearly every region of the world.”


The research identified several distinct patterns of change in manufacturing cost competitiveness over the past decade, but two shifts particularly caught my eye. First, there are the countries BCG labels “Under Pressure.” These five economies have historically been considered low-cost manufacturing bases—China, Brazil, the Czech Republic, Poland and Russia. And yet, all have seen their cost advantages erode significantly since 2004. That erosion has been driven by a confluence of sharp wage increases, lagging productivity growth, unfavorable currency swings and a dramatic rise in energy costs, BCG explains.


The second group is countries BCG calls “Rising Stars.” Most notably, the overall manufacturing-cost structures of Mexico and the U.S. have significantly improved relative to nearly all other leading exporters around the world. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates and a big energy-cost advantage largely driven by the 50 percent fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005. Interestingly, Mexico now has lower average manufacturing costs than China, according to BCG’s research.


By the way, this finding reminds me of a previous BCG report on Mexico. Last summer, the group explained the key drivers of Mexico’s improving competitive edge are relatively low labor costs and shorter supply chains due to the country’s proximity to markets in the U.S. The industries expected to see the biggest production gains from manufacturing in Mexico are transportation goods, computers and electronics, appliances, and machinery. These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico, Eduardo León, a BCG senior partner based in Monterrey, said at the time.


“While labor and energy costs aren't the only factors that influence corporate decisions about where to locate manufacturing, these striking changes represent a significant shift in the economics of global manufacturing,” says Michael Zinser, a BCG partner who is co-leader of the firm’s Manufacturing practice. “These changes should drive companies to rethink their sourcing strategies, as well as where to build future capacity. Many will opt to manufacture in competitive countries closer to where goods are consumed.”


Have you or executives at your company recently evaluated the cost of manufacturing in various countries or regions? Furthermore, do you think that China is losing its edge and that Mexico is a “rising star?”



 

Google, Apple, Intel and Adobe Systems settled a class-action lawsuit alleging they conspired to refrain from soliciting one another’s engineers and other highly sought-after technology workers to prevent a salary war.

 

The roughly 64,000 tech workers who had filed the lawsuit against the companies had planned to ask for $3 billion in damages at trial, according to court filings. That could have tripled to $9 billion under antitrust law. The trial had been scheduled to begin May 27 in San Jose, Calif.

 

Terms of the settlement, announced yesterday, aren’t being revealed yet. Those details will be provided in documents that will be filed in court by May 27, according to Kelly Dermody, an attorney representing the workers.

 

Interestingly, a Justice Department investigation first brought the agreements to light. That inquiry ended in 2010 with an antitrust complaint against Apple, Google, Intel, Intuit, Adobe and Pixar for banning cold-calling workers at other companies. The companies settled the complaint, but didn’t admit guilt. There were no financial penalties, either.

 

Originally there were seven defendants in this lawsuit. However, settlements with Lucasfilm and Pixar (both now owned by Disney) and Intuit were reached last year. Those companies agreed to pay a total of $20 million.

 

At the heart of the lawsuit is, essentially, a “gentlemen’s agreement” that the companies created to retain employees by not cold-calling others’ workers. The companies maintain that the so-called “no-poaching” cartel wasn’t illegal because they still could hire employees from their partners in the arrangement, as long as the workers themselves initiated the inquiries about vacant positions.

 

Executives at the companies also allegedly wanted nothing in writing. As an article in the New York Times reports about documents filed in the case, there is the story of an Intel recruiter who asked Paul S. Otellini, then Intel’s chief executive, about a deal with Google.

 

“We have nothing signed,” Otellini wrote back, the NYT article reports. “We have a handshake “no recruit” between Eric and myself. I would not like this broadly known.”

 

Furthermore, Eric E. Schmidt, then Google’s chief executive, wrote in another email in the case: “I don’t want to create a paper trail over which we can be sued later,” the article reports.

 

Be that as it may, there seem to be a number of documents filed in court to the contrary. Indeed, the case was based largely on emails among Apple’s late co-founder Steve Jobs, former Google CEO Schmidt and executives at other Silicon Valley companies, a Reuters story reports.

 

For example, in one email exchange after a Google recruiter solicited an Apple employee, Schmidt told Jobs that the recruiter would be fired, court documents show, Reuters reports. Jobs then forwarded Schmidt’s note to a top Apple human resources executive with a smiley face, the story reports.

 

Apparently though, not all executives at Silicon Valley tech companies were involved. For instance, Google also attempted to persuade one of its former executives, Sheryl Sandberg, to join the no-poaching pact after she became Facebook’s chief operating officer in 2008. Sandberg refused to go along and Facebook continued to recruit Google employees, according to a sworn deposition that she provided in the case.

 

It will be interesting to learn about the details of the settlement next month, as well as watching the fallout—if there is any, which seems unlikely.

 

In the meantime, what’s your perspective on the case? Would you call talented employees at a rival company and attempt to lure them away? Is there anything wrong with that? Furthermore, would an agreement to not “poach” rivals’ top talent artificially keep wages low?

 

     In recent years, most supply chains have experienced a disruption. Actually, most of them have suffered through multiple events each year.

 

     What’s more, global executives report that not only are supply chain disruptions growing in frequency, they also are having a larger negative impact, according to research from Deloitte. For instance, 53 percent of the executives replying to a survey last year said supply chain disruptions have become more costly over the last three years.

 

     They aren’t alone in that thinking. In an article that ran on Forbes last year, Steve Culp, who leads Accenture’s Risk Management practice globally, wrote that significant supply chain disruptions reduce the share price of affected companies by as much as seven percent on average.

 

     What makes the situation more complex, is companies’ increasing reliance on third parties to accelerate their global growth strategy and decrease time-to-market for their products and services. The other side of the coin, however, is a reliance on external parties for critical services also makes companies more vulnerable to business interruptions. This is especially true when businesses know little about their third-party vendors’ resiliency and recovery capabilities, according to a new PwC U.S. whitepaper, “Business continuity beyond company walls: When a crisis hits, will your vendors’ resiliency match your own?”

 

     If companies lack insight into their critical vendors’ resiliency and recovery capabilities, they run the risk of their own strategic goals being derailed, the paper notes. To protect against business interruption risks, companies should institute a business continuity management program that encompasses—among other factors—vendor risk. The PwC paper outlines a number of steps that may help companies examine interruption risk among vendors.

 

     There are two points in the paper that really stand out to me. The first is that all vendors aren’t equally important to an organization, so it’s critical for companies to take a risk-informed approach in determining which vendors are most integral to operational resilience. PwC identifies a number of critical risk variables that organizations should take into account when assessing their third parties, including potential revenue and inventory impact from loss, labor, country and geopolitical risks and regulatory and cross-border issues. These risk variables then provide a framework for organizations to determine their spectrum of vendor risk, and identify the factors which should be highly safeguarded in the event of a crisis.

 

     Secondly, it’s imperative to understand where the organization ranks in importance among the vendor’s customers because that rank may negatively impact market share, brand and reputation if there is a disruption. Although an organization may have reached a mature level of operational resiliency and recoverability by developing its own business continuity management program, failing to understand how a vendor will react to a disruption could have long-lasting consequences.

 

     “In a world of ever increasing dependence on third-party vendors, you need to know if you can count on the other party when a crisis strikes,” says Phil Samson, principal in PwC’s Risk Assurance practice and the firm’s Business Continuity Management services leader. “It’s all about transparency—asking the right questions and pushing the right levers to determine whether your vendors will be able to weather a serious business interruption and quickly resume business as usual. The more you know about your own needs, your vendor’s capabilities, and the robustness of your resiliency plans, the more comfort you’ll have about staying on track toward your long-term strategic and operational goals even when faced with adverse developments.”

 

     Has your company examined partners and suppliers lately to evaluate how they will respond to a business disruption? Equally important, how will they treat your company if there is a disruption?

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. manufacturers are optimistic about the domestic economy—and that optimism is growing—but finding skilled workers continues to be a problem, according to the findings of a new report.

 

     The majority (56 percent) of the U.S. industrial manufacturers who took part in the survey plan to add employees to their workforce over the next 12 months, according to the Q1 2014 Manufacturing Barometer, released by PwC US. The most sought-after employees will be skilled labor (33 percent), followed by production workers (30 percent) and professionals/technicians (28 percent), the respondents report. In addition, there is an increase in plans to hire white collar support personnel (20 percent), compared to only seven percent in last year’s first quarter.

 

     Unfortunately, I’m reminded of another recent report, which noted that while executives recognize the need for supply chain talent with the “right skills, experience and mindset to harness the value of supply chain innovations,” finding and retaining that talent is challenging. For example, more than 65 percent of the respondents to a survey conducted by MHI and Deloitte Consulting LLP indicated that process, technology and skillset gaps exist within their company.

 

     Bobby Bono, PwC’s U.S. industrial manufacturing leader, says PwC’s report found similar thoughts among executives. While industrial manufacturers have continued to indicate a focus on hiring skilled labor, they are also increasingly concerned about the lack of qualified workers, he says.

 

     “As the economy continues its growth path and the unemployment rate decreases, we will likely see an increased need for worker training programs aimed at helping companies support expansion, lift production and support innovation,” Bono says.

 

     Interestingly, I have also seen announcements of new manufacturing education and training initiatives in the past few days. For instance, PRWeb carried a story last week that Mazak Corp., which designs and manufactures machine tool solutions, is doubling its support for one of the SME Education Foundation’s scholarships: the Mazak Manufacturing Technology Scholarship. The scholarship program will now provide four full-tuition scholarships for the next two academic years. Both incoming and current students pursuing a degree in engineering technology or mechanical engineering technology at Cincinnati State Technical and Community College in Cincinnati are eligible to apply.

 

 

     In other recent news, Kronos Incorporated and AME Institute (the scholarship funding arm of the Association for Manufacturing Excellence) announced a new scholarship for students interested in manufacturing careers through the Dr. Sherrie Ford Manufacturing as a Career Path 2014-2015 Scholarship Program. Scholarships will be awarded to 15 U.S.-based student applicants entering an accredited college or trade school in the next academic year. Each recipient will receive a financial scholarship, and an additional signing bonus will be offered to those recipients who complete their programs and enter the manufacturing workforce.

 

     Finally, there also is AME’s Adopt a School Initiative, which has been created to connect manufacturing companies with schools in their communities to give students practical learning experience. The program provides STEM students with hands-on manufacturing experience and access to mentors. It also creates opportunities for teachers and students to attend conferences and workshops at reduced rates.

 

     While it’s encouraging to see the growth of college scholarships, it seems that long term, more work still needs to be done at the high school level to promote and encourage those students to plan on a career in manufacturing and the supply chain. While that’s not a solution to the immediate need for skilled talent, it would help create a pipeline for talent.

 

   What do you think about finding talent—both immediately and long term? What role do you think establishing a relationship with local high schools could play?

     Supply chain executives want to invest in powerful new technologies and business innovations to improve supply chain performance, but they are hampered by a shortage of qualified talent and continuous pressure to cut costs, according to a new study by MHI—an international trade association that represents the material handling, logistics and supply chain industry—and Deloitte Consulting LLP.

 

     “Respondents clearly identified the need to rethink their approach to supply chain management,” says Scott Sopher, principal, Deloitte Consulting LLP and the leader of its Supply Chain & Manufacturing Operations practice. “In the past, organizations addressed supply chain challenges primarily through cost reduction and operational efficiency efforts. Today’s global supply chains require a new focus on technology and innovation as well as a willingness to invest in these areas for the long term. A true commitment to innovation will help organizations better prepare for the future, manage supply chain risks and stay ahead of the curve.”

 

     I was interested to see that, according to the report, “Innovations that drive supply chains – The 2014 MHI annual industry report,” the top two strategic priorities of executives are supply chain analytics and multichannel fulfillment. A growing interest in supply chain analytics among executives isn’t surprising. As global supply chains become larger and more complex, it certainly makes sense to plan on leveraging analytics that produce insights which may lead to improved customer service while reducing costs and risk. Indeed, nearly 80 percent of the survey respondents said supply chain analytics is a “very important” or “moderately important” strategic priority.

 

     Secondly, consumers’ demands are evolving, and their expectations are high. That places more demand and risk on retailers, and while most now do a decent job on the front end handling orders through their various channels—retail, wholesale and online—many retailers are struggling to adapt their back-end fulfillment processes, the report explains. With that in mind, it makes sense then to see that nearly three-fourths of the surveyed retailers expect their investments in multi-channel fulfillment to increase over the next three years.

 

     Although executives recognize the need for innovation, there are—unfortunately—significant barriers. For instance, companies recognize the need for supply chain talent with the “right skills, experience and mindset to harness the value of supply chain innovations.” On the other hand, finding and retaining that talent is challenging. For example, more than 65 percent of the survey’s respondents indicated that process, technology and skillset gaps exist within their company.

 

     It’s also worth pointing out that cost reduction is still a high priority for many supply chain executives, according to the survey. It reports that more than 70 percent of the respondents across industries said that controlling costs is a top priority for their companies and their customers. Although executives recognize a need for emerging innovations, those cost cutting initiatives may stand in the way. For example, a focus on cutting cost may still prevent companies from implementing sustainability programs, even though almost 80 percent of the survey respondents believe sustainability is at least “moderately important.”

 

     Of more importance to the executives, however, is that mobility and machine-to-machine technologies can improve responsiveness and customer service by providing supply chain workers with the information they need, when and how they need it. Indeed, almost 75 percent of the respondents noted that their companies will continue to invest in this area—and nearly half of the respondents said plans call for increasing their investment over the next three years.

 

     Are these results what you see as well? While there is a clear and pressing need for innovation, do a talent shortage and cost reduction initiatives stand in the way?

 

 

     It’s been a rough week for anyone interested in IT security. First, Microsoft ended support of its Windows XP operating system, which means most ATMs, scores of industrial equipment and solutions, and even computers used at hospitals are now vulnerable. Then there was news of the Heartbleed bug, a flaw in encryption software used across the Internet.

 

     News of Heartbleed surfaced on Monday, when it was announced that a flaw in a widely used Web encryption program (OpenSSL) opened hundreds of thousands of websites to data theft. Developers rushed out patches to fix affected web servers when they disclosed the problem. However, many large consumer sites aren’t vulnerable to being exploited because they use specialized encryption equipment and software, according to Google’s researchers.

 

     Nevertheless, companies and government agencies are now rushing to determine which products are vulnerable so they may set priorities for fixing them, which will block hackers from gaining access to user names, passwords and other sensitive information. At the same time, millions of users are trying to determine if they need to change passwords at some sites, whether they should change passwords now or wait until next week, or change passwords now and then again next week.

 

     By the way, some security experts have recommended not using the Internet at all for a few days. While certainly a safe tactic, it, unfortunately, doesn’t seem practical in today’s world.

 

     As the week continues, the news seems to get worse. Many websites—including those run by Yahoo, Amazon.com and Netflix—quickly fixed the hole after it was disclosed Monday. But yesterday, both Cisco Systems and Juniper Networks, two of the largest manufacturers of network equipment, announced that the security flaw affects some of their routers, switches and firewalls often used by businesses. That means hackers might still be able to capture usernames, passwords and other sensitive information as it moves across corporate networks, home networks and the Internet.

 

     Companies often use firewalls and virtual private networks to protect their computer systems, says Matthew Green, an encryption expert at Johns Hopkins University, in an article on the Wall Street Journal. But if the machines that run the firewalls and virtual private networks are affected by the Heartbleed bug, attackers could use them to infiltrate a network, he continues.

 

     “It’s pretty bad,” Green says. “Lots and lots of people connect to these things.”

 

     What makes the situation more vexing is that these devices likely will be more difficult to fix. Two factors that come into play are that the process involves more steps and, secondly, businesses are less likely to check the status of network equipment, according to some security experts.

 

     At the end of the day though, it could be a fairly straightforward fix. For example, Bruce Schneier, a cybersecurity researcher and cryptographer, says, “The upgrade path is going to involve a trash can, a credit card, and a trip to Best Buy,” in the Wall Street Journal.

 

     Things may not be quite that simple, at least not yet. That’s because products available at retail stores right now likely were shipped before the Heartbleed bug was revealed on Monday. That means they may also contain the defective software.

 

     So ultimately, as is also the case with Windows XP, the solution to the Heartbleed problem involves time, money, and effort. In both cases, the companies likely to be hardest hit are those which are small to mid-size, and may find it difficult to marshal the money, manpower, or both necessary to take steps quickly.

 

     What impact does this have on your company and supply chain? Secondly, how closely will you be watching trusted partners and suppliers to see how they respond?

     I’m sure you already know that after 12 years, today is the end of the line for Microsoft’s Windows XP operating system. Starting today, free support and updates such as security patches for the software will stop.

 

     This doesn’t come as a surprise because the move has been planned for a long time. With that advance warning, many users—both individuals and corporations—have already switched to Windows 7 or even Windows 8. But for a variety of reasons, many others are still running Windows XP. The system is actually still widely used.

 

     For instance, an estimated 95 percent of bank ATMs run on Windows XP, explains an article on CNNMoney. It also notes that GE Intelligent Platforms—which sells industrial software—has discovered 75 percent of its utility customers still use Windows XP. Hospitals are another example, where thousands of devices, including computers that store patient records, still run Windows XP as well.

 

     “It’s literally everywhere still,” says Ryan Permeh, chief scientist at cybersecurity provider Cylance, in the CNNMoney article. “Every point that’s running XP is ripe for worms. They haven’t been much of a common occurrence in modern times, but any new vulnerability could result in mass infection with very little remediation.”

 

     What’s interesting is that such an infection can start innocuously enough. For example, unable to breach the computer network at a big oil company, hackers infected the online menu of a Chinese restaurant popular with oil company employees with malware, reports an article that ran on the New York Times. When  the workers browsed the menu online, they inadvertently downloaded code that gave the attackers a foothold in the business’s vast computer network. The lesson for that company and others, the article continues, is that cybersecurity vulnerabilities can be located in the unlikeliest of places.

 

     Indeed, what has become apparent is that while companies have focused on email and use of personal smartphones and other devices by employees, a greater problem may be the number of third parties granted remote access to corporate systems. What’s more startling is that this access comes through software controlling all kinds of services a company needs.

 

     Two surprising examples are that heating and cooling providers can now monitor and adjust office temperatures remotely, and vending machine suppliers can see when their clients are out of certain sodas and snacks, the New York Times article explains. Those vendors often don’t have the same security standards as their clients, but for business reasons they are allowed behind the firewall that protects a network. If hackers can break into one system, they have an opportunity to break into them all.

 

     “We constantly run into situations where outside service providers connected remotely have the keys to the castle,” says Vincent Berk, chief executive of FlowTraq, a network security firm, in the New York Times article.

 

     Some good news in all this is that security providers are continuing support for Windows XP—for the time being. Symantec, for example, states on its website that the company is committed to providing the best possible security for its customers. The statement continues to explain that while the company encourages its customers to follow best-practice security procedures and update their systems to more secure operating systems when possible, Symantec will continue to release antivirus definitions and product updates compatible with Windows XP for the current product cycle. It does not say, however, how long its offerings will include support for Windows XP.

 

     What I’d like to know, is what impact you think this will have on your supply chain. Specifically, how do you now view smaller partners and suppliers which may not have the same types of firewalls and in-house IT department capabilities as their larger counterparts? Is conducting business with them now seen as a cybersecurity threat?