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2014

U.S. manufacturers may be losing up to 11 percent of their earnings annually as a result of increased production costs stemming from a shortage of skilled workers, according to a new study from Accenture and The Manufacturing Institute.

 

That was interesting to see but the growing scale of the issue is surprising. The study, “Out of Inventory: Skills Shortage Threatens Growth for U.S. Manufacturing,” explains 39 percent of the 300 U.S. manufacturing executives surveyed described the shortage of qualified, skilled applicants as “severe,” and 60 percent of them report it has been difficult to hire the skilled people they need.

 

Furthermore, the report notes when manufacturers are unable to fill roles, overtime, downtime and cycle times increase; more materials are lost to scrap; and quality suffers. More than 70 percent of the respondents reported at least a five percent increase in overtime costs, and 32 percent reported an increase of 10 percent or more. As manufacturers used overtime to maintain base production levels, 61 percent said their downtime increased by at least five percent because they lacked enough people to run and maintain the equipment. Cycle times also increased at least five percent at 66 percent of the respondents’ companies.

 

“The skills shortage facing U.S. manufacturers is apparent from this report and its severity can be measured in dollars,” says Matt Reilly, senior managing director, Accenture Strategy, North America. “U.S. manufacturers’ plans to increase production and grow manufacturing roles over the next five years are positive indicators, but they are likely to exacerbate the problem. Given today’s limited pool of relevant talent, companies may have to forget the notion of finding the perfect candidate. Instead, they should look for candidates with more generalist skills, and develop them to match the specific work that needs to be done.”

 

Successful companies, according to the report, spend training dollars as part of an overall strategy designed to address critical skill shortages, with clear objectives set for the short-, medium- and long-term.  Based on Accenture’s ongoing research, the report suggests manufacturers take steps that include: maintain a current inventory of in-house skill sets and regularly map that against current and anticipated skill needs to inform talent strategy as well as training investment decisions; leverage digital technologies to make skills training available to employees as needed; and incorporate nationally-recognized, certified training programs to build standardized skill sets.

 

More importantly, I believe, the study suggests manufacturers engage with educators at colleges, community colleges, trade schools and high schools to build a pipeline of future skilled workers, influence curricula and lend employees to help teach specialized skills to potential manufacturing recruits of the future. Indeed, manufacturers across the U.S. are targeting schools and colleges to let young people know manufacturing is a valid career path, and that manufacturing plants aren’t dark and dirty places.

 

Another interesting option is apprenticeships. Last month, the Obama administration announced $100 million in federal grants for creating or expanding apprenticeship programs. Apprenticeships are “underappreciated and underutilized,” says U.S. Secretary of Labor Thomas E. Perez in an article in the Buffalo News.

 

Perez says that when he hears a parent say, “I don’t want my kid to do an apprenticeship; I want my kid to go to college,” he points to the program at Tampa Electric in Florida, which pays apprentices about $32 an hour as they learn how to maintain and repair electrical power systems and equipment. The apprentices can earn as much as $70,000 as full-time employees.

 

“There’s a bright future in America for people who work with their hands,” Perez says. “We need to do a better job of marketing it and explaining to parents and others that these jobs are tickets to the middle class.”

 

Has your company experienced a skills shortage? If so, what is it doing about the problem?

 

 

There are times when it seems everybody wants to emulate Apple, which isn’t anything new. On the other hand, the case was different when Boeing’s leaders recently said the company would be more like Apple.

 

Speaking to Wall Street analysts at an annual meeting last week, Boeing Chief Executive Officer Jim McNerney said the company wanted to be more like Apple in the way it innovates, rather than doing a “moon shot” development every 25 years, Reuters reports. Dennis Muilenburg, Boeing’s chief operating officer, expanded on the Apple comparison, saying Boeing’s forthcoming 777X jet was an example of using “evolutionary” technology steps to deliver a “revolutionary” product.

 

"We’re still going to deliver revolutionary capability,” Muilenburg said. “The way we deliver is to build on technology we have. We get to the same end point if you take 10 low-risk, well-managed steps rather than one big step.”

 

Actually, the announcement isn’t surprising. After spending billions of dollars on the 787, addressing downward pricing pressure from airlines demanding “more for less” and facing continued cutthroat competition from Airbus, it makes sense. That’s why Boeing will focus on reducing costs, introducing innovation only in incremental steps, and where possible, “replicating systems and technologies already proven and paid for,” to develop new airplanes, McNerney says, according to a Seattle Times article.

 

Toward that end, the company will ask top engineers to reuse already developed technologies on new platforms rather than starting from a blank sheet and making everything new, says Muilenburg. In the past, Boeing has had best engineers working on the new thing. Moving forward, the best engineers will be working on innovative reuse, he said.

 

The plan then is that by focusing on producing new airplanes more efficiently and cheaply, Boeing will be able to achieve several notable business objectives. For example, the company is working to cut $2 billion in structural costs from the company’s defense business and improve its market share in the single-aisle aircraft market—where it has about a 50 percent market share. Boeing also plans to extract cost savings from its suppliers, which represent as much as 70 percent of the company’s costs, says Muilenberg, the chief operating officer.

 

Boeing, of course, isn’t alone in feeling the heat of the prolonged business environment. Indeed, Tom Enders, chief executive at Airbus Group, expressed similar thoughts at the Berlin Airshow last week.

 

The industry can no longer afford to “bet its shirt” on game-changing projects that “lead to a crazy game of chicken with the competition and leave nothing to pay the bills,” Enders said, according to a Reuters report which ran in the Chicago Tribune.

 

Coming out of some bruising years, I can see why companies are thinking of reusing innovation. But there is something about Apple’s strategy that stands out. Yes, the company does regularly roll out new versions of existing products, and each new version is an evolutionary development.

 

However, more importantly, Apple developed the iPod, iPhone and iPad. Sure, there were, and have been, other versions of music players, smartphones and tablets. But it has been the Apple products that have been the most successful and defined the market. There clearly has been technology carryover as well, so there are similarities among Apple devices. In the end though, such innovation reuse isn’t possible without first, clear and definitive innovation, and second, market dominance.

 

All of which certainly isn’t to imply that Boeing or Airbus cannot successfully reuse carbon fiber technology or new engine designs to achieve their objectives. It is worth noting though, that while Apple’s strategy sometimes looks deceptively simplistic, in reality, it’s much more complex—and even more difficult to successfully execute.

 

What are your thoughts on innovation? Is your company using evolutionary technology to create revolutionary products?

 

 

Earlier this week, Taiwanese prosecutors indicted five former employees of Foxconn Technology Group for allegedly taking kickbacks from suppliers.

 

The Taipei District Prosecutors Office said in a press release that the five people, all of whom were involved in procurement, had received more than 160 million new Taiwan dollars ($5 million) in bribes from 10 suppliers over two years, starting in July 2009, an article in the Nikkei Asian Review reports.

   

Foxconn, also known as Hon Hai in Taiwan, is the world’s largest maker of computer components and employs approximately one million workers at its factories across China. Those workers assemble products for top international brands such as Apple, HP, Sony and Nokia.

   

Prosecutors said the kickbacks came in the form of “entertainment fees or service fees,” according to Nikkei Asian Review. “In exchange for the illicit payments, the suppliers were promised better deals. They could be selected as the group’s official vendors, quoted a higher price, get increased volume, and receive payment faster,” the prosecutor’s office said.

   

An article running on The China Post adds more detail, explaining that Liao Wan-cheng and Teng Chih-hsien, who were senior managers at a Foxconn procurement unit, were charged with breach of trust for accepting kickbacks from 10 suppliers in exchange for clearing quality checks and buying their equipment, prosecutors said. A middleman was also charged, that article reports.

   

The allegations surfaced after Taiwanese media reported last year that Teng had been detained by police in the southern Chinese city of Shenzhen for allegedly taking bribes from suppliers.

   

Foxconn said at that time, it was reviewing its acquisition procedures and the integrity of managers, and that its operations in China had not been affected. The company has since said that the alleged violations were limited to the procurement of consumables and accessory equipment.

   

The investigations—and now indictments—have me thinking about corruption, and specifically, bribery in the supply chain, as well as how it can be prevented. For example, companies can improve expense management and documentation. By requiring documentation for every expense and transaction, it’s possible to close some of the loopholes that allow bribery. Some companies also have internal hotlines or tiplines employees can use to report suspected corruption.

   

More importantly, companies can work to create teams and ensure the entire team meets with suppliers. That’s an essential process for companies working to establish a presence in new markets. That’s because it’s more difficult for anyone—or even a couple people—to receive bribes when the whole team deals with suppliers.

   

Nonetheless, that doesn’t mean there aren’t ways around such steps and processes. It also doesn’t mean some employees won’t be tempted to ask for kickbacks, and it certainly doesn’t mean some suppliers won’t offer expensive gifts in hope they gain more favored status or larger orders.

   

What are your thoughts, either about Foxconn or the potential for bribes in the supply chain? Does your company have steps to prevent such activity? Finally, have you ever been offered a bribe?

 

 

Surprisingly, the U.S. Department of Justice indicted five Chinese military officers for computer hacking, economic espionage and other offenses earlier this week. The indictment alleges that the defendants conspired to hack into American entities, to maintain unauthorized access to their computers and to steal information from those entities that would be useful to their competitors in China—including state-owned enterprises. Among other things, it also alleges that in some cases, the conspirators stole trade secrets that would have been particularly beneficial to Chinese companies at the time they were stolen.

 

It has been known that such activity was taking place. Last year, a report by cybersecurity firm  Mandiant Corp. attributed cyber espionage attacks against 141 companies to a clandestine Chinese military unit known as Unit 61398. Mandiant says it traced computer penetrations to Unit 61398 by digital signatures left in malware, the use of Shanghai phone numbers, and social networking information posted by some of the hackers. The report said Unit 61398 had stolen “technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists.”

 

The five suspects the Justice Department named this week allegedly worked from the same building.

 

“The range of trade secrets and other sensitive business information stolen in this case is significant and demands an aggressive response,” the U.S. Attorney General, Eric Holder, said at a news conference. “Success in the global market place should be based solely on a company’s ability to innovate and compete, not on a sponsor government’s ability to spy and steal business secrets.”

 

Predictably, a response was quick. China promptly summoned the U.S. ambassador and warned Washington it could take further action, the foreign ministry said in a statement.

 

The U.S. Ambassador to China, Max Baucus, met with Zheng Zeguang, assistant foreign minister, on Monday, when Zheng “protested” the actions by the U.S., saying the indictment had seriously harmed relations between both countries, the foreign ministry said in a statement on its website. Zheng also told Baucus that depending on the development of the situation, China “will take further action on the so-called charges by the United States.”

 

“The Chinese government and military and its associated personnel have never conducted or participated in the theft of trade secrets over the Internet,” the foreign ministry quoted Zheng as telling Baucus.

 

At the same time, U.S. officials maintain that Washington draws a clear line between economic and security-related cyber activity.

 

The question in all this becomes, “Well, what happens now?” Which is a good question for companies to ask if they are doing business in China, or with suppliers or partners in China. It stands to reason though that doing business in China could now get even tougher, although any retaliation may not be immediate or obvious, industry analysts and executives say in an article on Reuters.

 

“U.S. companies were having difficulty anyway,” says Howard Anderson, a senior lecturer at MIT’s Sloan School of Management in the article. “This will give them more difficulty. The Chinese will use any excuse to turn to internal suppliers.”

 

While one would indeed believe it may consequently become problematic for U.S.-based companies to do business in China, it also is time the U.S. government acted. As Eric Holder, U.S. Attorney General, said the Administration will not tolerate actions by any nation that seeks to illegally sabotage American companies and undermine the integrity of fair competition in the operation of the free market.

 

What are your thoughts on the situation? Is it time the U.S. acted on cyber espionage and other crimes carried out by the Chinese government, military or both? Secondly, what impact will these actions have on international supply chains?

 

 

It’s interesting to see stories such as that of Generac Power Systems. In 2001, the company shifted production from Wisconsin to China because companies there could make a key component for $100 per unit less than was possible in Wisconsin.

   

Now, however, Generac has brought manufacturing of that component back to its Whitewater, Wis. plant, an article in the LA Times reports. That change came about after company leaders realized that what began as a $100 difference in the cost of producing an alternator in China, narrowed considerably as the Chinese yuan jumped in value and Chinese wages and other costs soared. The tipping point finally came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant, executives said in the LA Times article.

   

Today, the company can produce an alternator in the U.S. using one worker in the same amount of time it took four workers in China. Although there’s still a small price difference, Generac execs believe having greater control over product delivery makes up the difference.

   

That example shows how the tide has turned to a certain extent, or at least it’s starting to turn, and companies are re-shoring to the U.S. There are several factors at play. For example, there is a significant U.S. energy-cost advantage, driven largely by the 50 percent drop in natural-gas prices since large-scale production of U.S. shale gas in 2005, contrasted with rising energy costs in China. U.S. manufacturers also have growing concerns about a seeming lack of quality control in manufacturing facilities in China.

 

Labor costs though, are the most significant factor. Harry Moser, founder of the Reshoring Initiative, a nonprofit that works with companies to bring manufacturing jobs back to the U.S., has said that Chinese wages have been rising by about 15 percent to 18 percent per year, compounded since about 2000. Consequently, the labor cost/unit of output in China is now roughly three times what it was in 2000, he says. That means for some products, offshoring so-called “hidden costs”—duty, freight, packaging, carrying cost of inventory and innovation impact of separating engineering and manufacturing—are now enough to overcome the manufacturing cost gap between Chinese labor and U.S. labor, he says.

 

Nonetheless, re-shoring isn’t a simple process and it doesn’t always go smoothly. Indeed, United Technologies Corp. provides a cautionary tale in in a MarketWatch on-line story on the Wall Street Journal. As the story explains, the company’s move to relocate an Otis elevator plant from Mexico to South Carolina in late 2012 was expected to save money and help fill orders faster by having design engineers and production workers in the same building. Furthermore, since more than 70 percent of Otis’ customers in the U.S. and Canada are east of the Mississippi River, company executives told The Wall Street Journal in the fall of 2011 that the relocation would lower the company’s freight and logistics costs by 17 percent.

 

But the moves didn’t quite work out as planned, and company executives now say the company tried to do too much at once. In addition to moving the plant, the company consolidated products and implemented an enterprise business system. Adding to the complexity, Otis closed two other U.S. facilities, in Arizona and Indiana, and transferred those workers to South Carolina.

 

Resulting production delays created a backlog of overdue elevators. Some customers canceled their orders after being left waiting months, people in the elevator industry say, the MarketWatch article reports. What’s more, the plant Otis was leaving behind in Nogales, Mexico, had to stay open for half a year beyond its planned closing date to deal with the backlog. While Otis has resolved the bulk of the problems and is working through the order backlog, the delays cost United Technologies $60 million last year and will continue to weigh on earnings through the first half of 2014, the company notes in the article.

 

“I think we failed on both the planning and the execution side,” Robert McDonough, chief operating officer for the United Technologies unit that includes Otis, told analysts in March.

 

Has your company moved any operations back to the U.S.? If so, how did it go?

 

     It probably wasn’t a good idea to read the new “National Climate Assessment” on a rainy day. The new normal for the Midwest will bring extreme heat, heavy downpours and flooding. Then again, in years to come, the Northeast can expect heat waves, heavy downpours and a sea level rise. The Northwest won’t have it much better, with a sea level rise, erosion and increasing wildfires. Finally, the Southwest—with its increased warming, drought and insect outbreaks—will see a growing number of, and severity of, wildfires. That’s all just, well, terrific.

 

I saw the impact of the Colorado wildfires last year on highways, transportation and the supply chain, but the part of the climate assessment that most caught my attention was the U.S. researchers’ focus on rain. They wrote that large increases in heavy precipitation have occurred in the Northeast, Midwest and Great Plains, where heavy downpours have frequently led to runoff that exceeded the capacity of storm drains and levees, and caused flooding events and accelerated erosion.

 

Interestingly, this report came out the week after serious flooding in Florida and Alabama. As NPR reported, nearly 2 feet of rain fell on the Florida Panhandle and Alabama coast in the span of about 24 hours earlier this month. The flooding caused the states to close highways, stranding motorists.

 

That event reminded me of heavy rain in Tennessee in 2010, which produced flooding that ultimately closed I-24, a major route used to transport goods from the south to northern states, and vice versa. Then last year, seven inches of rain fell on Chicago overnight, leading to flooding that ultimately closed all highways and interstates around the city, and swamped homes as well as businesses, warehouses and distribution centers.

 

Unfortunately, it seems significant rains and resultant flooding that causes supply chain disruptions are expected to become regular occurrences. The problem is that global warming has warming has, on average, put more than a trillion gallons of extra water into the air over the contiguous 48 states, probably closer to two trillion gallons, say Kevin E. Trenberth at the National Center for Atmospheric Research and David R. Easterling at the National Oceanic and Atmospheric Administration, in a recent New York Times article. That extra water has to fall as rain or snow.

 

Consequently, “It rains harder than it used to,” says Dr. Trenberth, who added, “When it rains, it pours,” in the article.

 

With these types of weather events expected to happen with greater frequency, companies may wish to revisit initiatives to review how suppliers may be effected by flooding, and how the supply chain would be disrupted if major highways are closed. It would increase their ability to mitigate risks before they develop and, perhaps, lead to creating plans to react quickly and flexibly in the event of such disruptions.

 

One problem, however, is that only about one in six Global 2000 companies apply sourcing solutions specifically to their risk management programs, writes Matt McGovern, market segment manager with IBM Procurement Solutions, in an IndustryWeek article. What’s more, even fewer companies use dedicated supplier lifecycle management solutions.

 

The challenge holding many of these companies back is that with a large and increasingly global supply base, and supplier data scattered across disparate and diverse systems, most companies are simply overwhelmed with supplier information management—and applying this information to supplier risk management, McGovern writes. Indeed, the typical Global 2000 company has more than 20,000 suppliers in its network, which makes collecting, analyzing and applying information across processes and systems a substantial challenge.

 

Does your company already take the possibility of heavy rains and flooding, or other events, into account in risk management? Granted, this type of rain isn’t—thankfully—on par with other natural disasters. However, if it’s expected to become more common, will it be seen as a disruption to plan against?

 

 

 

The use of counterfeit electronic components may have serious consequences in all industries, but their use in defense systems may compromise performance and reliability, risk national security, and endanger the safety of military personnel. As a result, the prevalence of counterfeit electronic parts in the U.S. aerospace and defense supply chain drew the attention of the Senate Armed Services Committee and prompted a call for change within the U.S. Department of Defense (DoD).

 

Earlier this week, the DoD issued its final rule on Detection and Avoidance of Counterfeit Electronic Parts, which reflects several significant changes from the initial rule it proposed a year ago. It also ends speculation that the requirements might be extended to non-electronic components sourced for use by the DoD.

 

There are several points worth mentioning. For instance, the DoD revised a key term in DFARS 202.101, dropping the proposed term “counterfeit part” and replacing it with “counterfeit electronic part.” The change clarifies DoD’s intent to limit the scope of the final rule to only counterfeit electronic parts, not other items in the DoD supply chain, explain Jon W. Burd and Craig Smith in an article from Wiley Rein LLP which ran on Lexology.

 

The DoD also revised the definition of “counterfeit electronic part” to expressly acknowledge an intent element. In the final rule, a counterfeit electronic part is one that has been “knowingly mismarked, misidentified, or otherwise misrepresented.” That definition is a response to industry concerns that the scope of the rule could have swept up unintentional production, packaging or marking errors that were not designed to mislead the buyer.

 

There are two other points in the rule that caught my attention. First, the DoD has included greater flexibility for contractors to implement “risk-based” systems for detecting and avoiding counterfeit parts. The final rule implements a new DFARS clause, which requires covered contractors—those with contracts subject to the Cost Accounting Standards—to implement business systems to detect and avoid counterfeit electronic parts. Nevertheless, the rule recognizes that such systems need not be “one-size-fits-all,” and expressly acknowledges that contractors may adopt “risk-based policies and procedures” for the system. Furthermore, in the preamble, DoD suggests that this risk-based approach recognizes that contractors who rely on original equipment manufacturers and other trusted suppliers have a lower risk profile that affects how they should be required to manage supply chain risks of counterfeit electronic parts, Burd and Smith wrote in their article.

 

A final DoD revision is to explain that the clause must be pushed down to all subcontracts at all tiers—including subcontracts for commercial items and commercial-off-the-shelf (COTS) items. Although the clause applies directly to only a limited set of prime contracts covered by the CAS, the rule notes that any electronic part procured by a CAS-covered prime contractor is subject to the restrictions concerning counterfeit and suspect counterfeit parts, without regard to whether the purchased part is a commercial or COTS item. Consequently, Burd and Smith write, DoD will require prime contractors with covered contracts to impose the requirements for detection and avoidance of counterfeit parts throughout their supply chains for those covered contracts.

 

An earlier proposed draft was, in some ways, more stringent so this final rule—which responds to industry concerns—may be better received. There were, for example, concerns that the rule would financially harm some suppliers, and perhaps even force others out of the market. Spreading the cost through the supply chain to include prime contractors, subcontractors and off-the-shelf items should alleviate that risk to some degree.

 

If you are in the A&D industry—or, for that matter, other industries—what do you think of the final ruling?

 

     As U.S. and Canadian businesses plan to expand their business overseas this year, chief among executive’s concerns are supply chain failures, data breaches and political instability.


     Indeed, the Chubb Group of Insurance Companies recently completed a survey, which found that 52 percent of the participating companies plan to increase its overseas activity in 2014. Respondents to the 2014 Chubb Multinational Risk survey identified the top overseas business threat as supply chain failure 19 percent. A data breach/cyber event (15 percent) was ranked second, and government/regulatory investigation and political instability were tied as the third (13 percent) most significant threat. In a sign of the times—and perhaps with the Japanese tsunami, Hurricane Sandy and floods in Thailand in mind—the survey respondents named natural catastrophes as the fourth largest threat to supply chains.


     As both large and small companies seek new business opportunities abroad, their supply chains are increasingly confronted by a number of potential threats, says Kathleen Ellis, senior vice president and worldwide manager for Chubb Multinational Solutions. Consequently, as they expand their international business operations, companies need to take a more holistic or global approach to managing risk, she says.


     Not surprisingly, in spite of their growing concern regarding supply chain failure, only 56 percent of the survey’s respondents indicated their company has a business continuity plan that addresses overseas risks, and 22 percent of the companies that do have a plan have never tested it, according to survey results. Of course, larger companies are much more likely to be prepared for overseas business interruptions than smaller companies, the results indicate. That may perhaps be because while risk management plans typically cover at least a company’s critical Tier 1 suppliers, large companies are able to more broadly cover their suppliers through the second, third and fourth tiers.


     “The lack of business continuity plans and testing is disturbing,” says Ellis. “Companies are left exposed to significant supply chain failures and associated business interruption costs that can undermine their financial results and stability. It’s equally important for companies to assess whether their overseas suppliers and vendors also have up-to-date, well-tested business continuity plans.”

 

     Another recent survey also examined risk management programs. The government shutdown last fall offered an opportunity for the Institute for Supply Management (ISM) to measure the effectiveness of manufacturers’ supply chain risk management programs, an article on IndustryWeek reports. While only 16 percent of the companies studied reported being affected by the shutdown, 85 percent of those which activated their risk management plans say they performed well, says Paul Lee, research director of the ISM.


     According to ISM, the strategies most frequently included in a risk management plan are to find alternate suppliers, talk with critical suppliers, qualify more suppliers, buy extra suppliers, and talk with major suppliers. What’s important to remember, is that while these strategies are critical in the case of a major disruption, they also may pay significant dividends on a day to day basis.

 

     “As supply chains continue to globalize, extend and increase in speed, the opportunity for something to go catastrophically wrong increases geometrically,” says Simon Ellis, practice director, global supply chain strategies with analyst firm IDC Manufacturing Insights, in the IndustryWeek article. “But it’s not just the possibility of one huge event that manufacturers need to prepare for—risk management also includes monitoring the hundreds of little daily disruptions that taken together can seriously impact the health of your supply chain.”

 

     Is your company planning international expansion, or additional expansion? If so, how extensive is your risk management program? Does it extend beyond key suppliers or partners?