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2015

Faced with a host of factors—including rising labor wages, limited access to skilled labor and the need for shorter supply chains and lower shipping costs—executives at U.S.-based companies increasing took a favorable view of reshoring last year. Now, the lower costs associated with reshoring are driving more local manufacturing activity, technological developments are drastically changing the way plants operate, and capital investments are on the rise—all of which point to a “landmark year for American manufacturing,” says John Zegers, director of the Georgia Center of Innovation for Manufacturing.

 

In a recent article that ran on Industry Today, Zegers explains that he regularly consults with manufacturing companies of all shapes and sizes on a wide range of projects. Over the past year, those consultations led him to his favorable view of the U.S. manufacturing landscape. As he explains, when it comes to operational decision making, manufacturers evaluate critical factors such as transportation and energy costs; market demand for products; rising labor costs in China and other developing nations; access to talent, tax, and regulatory policies; availability of capital; and currency trends. In 2015 we will see jobs continuing to come back to America as trends around these divergent areas continue to work favorably for bottom lines, Zegers says.

 

In particular though, Zegers writes that the cost of natural gas in the U.S. will play a significant role in reshoring initiatives. The growing abundance of natural gas in the U.S. provides more affordable energy for factories, as well as new opportunities for products and services. In the article, Zegers cites a PricewaterhouseCoopers estimate that high shale gas recovery and low prices could add one million U.S. manufacturing jobs and reduce natural gas costs by up to $11.6 billion annually through 2025.

 

It also is important to look at the manufactured goods themselves. Generally, heavier goods equal higher shipping costs, a value-to-weight ratio that expands in concert with the distance between where they’re made and their market destinations, Zegers writes. Higher transportation costs, combined with increasingly expensive labor rates in distant countries such as China, lead manufacturers of heavy equipment and steel products to shift production from overseas back to the U.S., where these products are also sold. Therefore, shortening the supply chain has become a significant value proposition, says Zegers.

 

It’s worth noting, however, that it doesn’t always make sense to reshore. So, for example, if very low-cost labor is employed, it probably wouldn’t make sense to reshore, Zegers writes. The same obviously holds true for companies with heavy foreign demand because it’s cheaper to manufacture in the location where the products will be sold.

 

Reshoring continues to be intriguing, all the same. Last fall, Boston Consulting Group conducted a survey of senior manufacturing executives at companies with sales of $1 billion. The number of respondents who said their companies are already bringing production back from China to the U.S. had risen from roughly 13 percent to 16 percent over the past year. The number who said their companies would consider returning production in the near future also grew from about 17 percent to 20 percent of the respondents since the previous year’s survey.

 

To be fair, interest in near-shoring to countries such as Mexico, and adopting a regional model of manufacturing worldwide is growing as well. However, in some instances, regional manufacturing may entail reshoring to the U.S.

 

What are your thoughts on reshoring? Is your company considering such an initiative? If so, how does the cost of natural gas factor into those discussions?

Have all the automotive recalls of last year had an impact on the automotive industry? One must wonder.

 

Nissan Motor Co. is recalling about 768,000 vehicles—including its popular Rogue crossover and Pathfinder SUV—for separate problems, the company and U.S. regulators said this week. Some 552,135 Rogues from model years 2008 through 2013 will be recalled because moisture could seep through the driver-side floor and cause an electrical short to wiring that could then cause a fire, Nissan and the National Highway Traffic Safety Administration (NHTSA) said. Of the total, 468,815 vehicles are registered in the U.S.

 

What makes the announcement interesting is that no crashes or injuries have been reported due to the wiring issue, a Nissan spokesman said.

 

Also, 215,789 Pathfinder SUVs from the 2013 and 2014 model years and 2013 Infiniti JX35 vehicles will be recalled for problems related to a secondary hood latch, Nissan and NHTSA said. Of that total, 170,665 are registered in the U.S.

 

Meanwhile, Honda Motor Co. announced it has cut its full-year profit forecast due to rising recall costs. The company cut 6.5 percent off its core annual profit forecast as it set aside an extra 50 billion yen in extra cash to cover an extended car recall to replace potentially faulty airbags made by Takata, Reuters reports. Honda now expects an operating profit of 720 billion yen ($6.1 billion) for the year to March 31, although it previously forecast 770 billion yen.

 

At least five driver deaths in the U.S. and Malaysia, and dozens of horrific injuries, have been reportedly linked to the faulty airbags. There is a risk the airbags may deploy with excessive explosive power, sending potentially fatal shrapnel around the interior of the automobile. Consequently, millions of vehicles produced by some of the world’s largest automakers, including Honda, have already been recalled due to the risk.

 

Honda is paying for the voluntary recall of about 4 million cars in the U.S. alone. Its October-December net income dropped 15 percent as rising costs hit its bottom-line, with the firm taking a $425 million recall-related charge in the quarter, reports an Agence France Presse story. Nonetheless, Honda expects to get those costs back if investigations find Takata at fault, and many analysts say reputational damage from the recalls seems minimal, including in the U.S., Honda’s most important market.

 

Meanwhile, Takata—whose Tokyo headquarters declined to comment on another death reportedly linked to its airbags last week—has been plunged into a public relations crisis at it faces calls from the U.S. government for a criminal probe and lawsuits. One U.S. law firm, which is involved in a class-action lawsuit against Takata and Honda, accuses the companies of engaging in a 10 year pattern of “deception and obfuscation.”

 

Considering charges and allegations last year that GM and Honda knew about potentially deadly defects in their vehicles for years before initiating recalls, and the hit to bottom lines during investigations, it would only stand to reason that other automotive manufacturers would now be forthcoming about the need for recalls. Regardless of whether or not that is the case with Nissan, do you believe automotive manufacturers have changed the way they view recalls? Furthermore, will they change the way they view suppliers—or at subject them to more scrutiny?

Consumer products companies’ effort to capture more detailed information about consumers presents a growing problem. Today, 80 percent of consumers say they are more likely to buy from consumer products companies that they believe protect their personal information. It must be noted though, that only 37 percent of those consumers believe that these companies are adequately doing so, according to new research from Deloitte LLP.

 

Deloitte’s new study, “Building Consumer Trust: Protecting personal data in the consumer product industry,” is based on two surveys completed last summer. One survey polled 70 U.S. consumer product industry executives and senior managers, and the second survey polled 2,001 adult U.S. consumers.

 

“Consumer product companies are collecting more detailed individual profiles, and unfortunately, the more data a company gathers, the more attractive that information becomes to malevolent parties,” says Pat Conroy, vice chairman, Deloitte LLP and consumer products sector leader. “Many of these companies have yet to establish themselves as stewards of consumer data protection, but stand to gain a great deal by strengthening their privacy and security practices and communicating them to consumers. Doing so can help distinguish these companies from competitors and subsequently impact purchase decisions.”

 

Consumers recognize that as companies invest more in targeted digital marketing and compile individual consumer profiles, it creates a greater risk for data breaches. At the same time, recent data breaches in various industries have heightened consumers’ awareness of data security and privacy. In the Deloitte survey, 83 percent of the participating consumers reported they were extremely or moderately aware of recent retail breaches. Furthermore, 83 percent of those consumers consider security breaches of personal data stored with consumer product companies to be a serious or moderate problem.

 

Making the situation more serious, 59 percent of the consumer respondents stated that the knowledge of a data breach at a company would negatively impact their likelihood of buying from that company. What’s more, only 51 percent of the consumer respondents say they would be “forgiving” of a consumer product company that experienced a breach as long as the company quickly addressed the issue.

 

Despite a tendency to overestimate consumer comfort with data privacy and security practices, executives do recognize the risks. Reputational damage to the brand tops the list of risks executives cited (76 percent) with regard to data privacy and security in the survey, followed by loss of current consumers (69 percent) and loss of potential new consumers (64 percent).

 

The flip side of the coin, however, is many executives surveyed are less than completely confident in their own companies’ data and security practices. Only 41 percent of the surveyed executives believe consumer data privacy is “absolutely critical” at their company. Tellingly, 30 percent of the executives “strongly agree” that their company’s privacy and security policies have kept up with recent technology and regulatory changes, or that their company has a consumer communication strategy in place if a data breach occurs.

 

In the end, the Deloitte research shows many consumer product companies do not seem positioned to gain consumer trust based on their current data privacy and security strategies, policies and systems. On the other hand, as the report notes, the field appears wide open for consumer product companies to differentiate themselves through creating a reputation for strong data privacy and security practices. The report authors believe consumer product executives should consider viewing data privacy and security not just as a risk management issue, but as a potential source of competitive advantage that may be a central component of brand-building and corporate reputation.

 

What are your thoughts on data security at consumer products companies? As a consumer, how would learning about a data breach impact your purchasing decisions?

With a potentially massive snowstorm bearing down yesterday, politicians and transit officials in New York and New Jersey closed the city’s subway system, blocked off interstate highways, banned travel and, for all practical purposes, closed the region. Their decisions were made in part, on forecasts from National Weather Service experts.

 

Unfortunately, those weather experts misjudged the path and impact of the blizzard that struck the Northeast yesterday and today, in large part because they used the wrong forecasting model, several independent meteorologists now say. Rather than rely on their own forecasting system—upgraded in recent weeks—the federal experts relied instead on a well-regarded European computer model that predicted the worst of this storm would squarely hit New York City. That system earlier had outperformed the U.S. forecasting system in predicting the path of Superstorm Sandy.

 

This time, however, the European forecasting model was wrong. The winter storm, predicted to be one of the worst ever to hit New York City, produced only roughly eight inches of snow in the city.

 

Today, as travel bans were lifted and transit services were gradually restored, the impact of yesterday’s decision to shut down the subway and order most drivers off the roads continued to be felt across the region. What’s more, New York Governor Andrew Cuomo, New Jersey Governor Chris Christie and New York City Mayor Bill de Blasio now face a blizzard of criticism because millions of people missed work and school even through the streets were largely clear.

 

That’s certainly not to imply the storm was a washout. Indeed, as the storm pushed across eastern New England today, it brought whiteout conditions driven by gale-force winds. As snow continued to fall today, forecasters were still expecting the predicted two to three feet of snow. In Shrewsbury, about 40 miles west of Boston, 31 inches had fallen this morning while nearby Worcester had received 26 inches of snow and was on track to break records. In Framingham, about 15 miles west of Boston, there was about 30 inches this morning.

 

In some respects, it’s easy to say it’s wintertime, and, well, snow happens. However, climate change reports from last year indicate this type of winter storm—and summer torrential rains, for that matter—will become more common.

 

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 storms, and how the supply chain would be disrupted if major highways are closed—as they were yesterday in some areas. 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. That would enable companies to address the potential for reducing or disrupting production capacity, reduced demand for goods, and even the inability to do business.

 

The challenge for many of these companies 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 is even more daunting.

 

Did your company see any impact from this blizzard in the Northeast? Are there any provisions for this type of storm?

A study of counterfeits of a single medicine brand has identified similarities which suggest one criminal organization is likely behind the trade, say scientists from pharma company Roche and the Institute of Forensic Science in Switzerland.

 

The team systematically profiled samples of the unnamed product in capsule form taken from 33 separate seizures around the world between 2004 and 2013, reports an article on Securing Industry. The researchers then analyzed the chemical composition of the counterfeits—along with packaging—which was discovered in a number of different distribution channels.

 

Writing in the journal Forensic Science International, the authors, led by Klara Dégardin, a counterfeit analysis expert at Roche, explain that the counterfeit capsules were screened using techniques such as near infrared (NIR) and Raman spectroscopy, followed by chemical testing in the lab, while the packaging was studied using visual comparison with genuine products. Other intelligence data such as the date and country of seizure, amount of fake product seized and the seizure type—online, pharmacy or in-transit—was also taken into consideration.

 

The team identified strong linkage among the capsules seized at the different production steps, indicating the presence of a main counterfeit network dominating the market. The interpretation of the links with circumstantial data provided information about the production and the distribution of counterfeits coming from this network, the research team writes.

 

The results of the analyses “favor the hypothesis of one single main network dominating the market” for this particular counterfeit, with production carried out at industrial scale, the authors determined.

 

Material information gathered from seizures constitutes the only tangible trace of the illicit action, the authors write. Furthermore, traditional ways of investigating this type of crime have failed to solve the problem as the counterfeiting persisted over several years. The data gathered via this process “may not be sufficient for Court, but [is] amply sufficient for intelligence-led action,” the authors write.

 

Admittedly, the profiling approach “is still in its infancy,” the researchers write. However, they also believe the pharma industry could learn a lot from the way this approach is implemented by agencies tackling the trade in narcotics. That’s because while detecting counterfeit is chemically relatively simple for specialists, much more information can be gained from the analyses in a forensic intelligence perspective. Analytical data can feed criminal investigation and law enforcement by detecting and understanding the criminal phenomenon. Profiling seizures using chemical and packaging data constitutes a strong way to detect organized production and industrialized forms of criminality, write the authors.

 

This forensic intelligence perspective has the potential to be generalized to other types of products. Indeed, this may be the only reliable approach to help the understanding of the organized crime phenomenon behind counterfeiting and to enable efficient strategic and operational decision making in an attempt to dismantle counterfeit network, the researchers conclude.

 

What are your thoughts on the work of the researchers and their forensic intelligence? Do you think this may become a wide-spread practice in the pharmaceutical industry?

Because the development of artificial intelligence (AI) is growing so quickly, many of the world’s leading scientists and entrepreneurs now urge a renewed focus on safety and ethics to prevent dangers to society.

 

A recent open letter stating just that was signed by famous physicist Stephen Hawking, Skype co-founder Jaan Tallinn, and SpaceX and Tesla Motors CEO Elon Musk. A list of other signers reads like a Who’s Who in artificial intelligence—including the co-founders of DeepMind; the co-authors of the textbook “Artificial Intelligence: a Modern Approach;” and top minds from universities such as Harvard, Stanford, Massachusetts Institute of Technology (MIT), Cambridge and Oxford, as well as from Google, Microsoft and IBM.

 

Future of Life Institute carries the letter, titledResearch Priorities for Robust and Beneficial Artificial Intelligence: an Open Letter.” The letter explains that AI research has explored a variety of problems and approaches since its inception, but for the last 20 years or so has been focused on the problems surrounding the construction of intelligent agents—systems that perceive and act in some environment. In this context, “intelligence” is related to statistical and economic notions of rationality, or the ability to make good decisions, plans or inferences. The adoption of probabilistic and decision-theoretic representations and statistical learning methods has led to a large degree of integration and cross-fertilization among AI, machine learning, statistics, control theory, neuroscience and other fields, the letter notes.

 

As AI research continues, it now seems likely its impact on society will correspondingly increase, the authors note. The potential benefits are huge, since everything that civilization has to offer is a product of human intelligence; we cannot predict what we might achieve when this intelligence is magnified by the tools AI may provide, but the eradication of disease and poverty are not unfathomable, the open letter continues.

 

To me, the most striking—and perhaps, ominous—comment is, as the authors note, due to the great potential of AI, it is important to research how to reap its benefits while avoiding potential pitfalls.

 

More to the point, they wrote, “We recommend expanded research aimed at ensuring that increasingly capable AI systems are robust and beneficial: our AI systems must do what we want them to do.”

 

This letter may not come as much of a surprise to those following AI or the notable researchers. Indeed, Stephen Hawking memorably expressed concern about AI in a BBC News interview last month. Hawking said then that efforts to create thinking machines pose a threat to humans’ existence. While the primitive forms of AI developed so far have already proved very useful, Hawking said he fears the consequences of creating something that can match or surpass humans.

 

The development of full AI “could spell the end of the human race,” Hawking said.

 

“It would take off on its own, and re-design itself at an ever increasing rate,” Hawking said in the BBC interview. “Humans, who are limited by slow biological evolution, couldn’t compete, and would be superseded.”

 

Elon Musk has publicly expressed similar concern. Indeed, last fall, he told an audience at MIT that “we should be very careful about artificial intelligence.” AI may even be “our biggest existential threat,” he said.

 

“With artificial intelligence, we are summoning the demon,” Musk said at the meeting.

 

What are your thoughts on either the potential use of AI to make better decisions in the supply chain or the researchers’ concerns?

President Obama is poised today to introduce new proposals to protect U.S. businesses and the government from cyber-attacks—including increasing the prosecution of crimes conducted through computer networks and toughening penalties for them, the White House announced. Under the steps to be outlined by the president, companies that share information about cyber-threats with the government would be shielded from liability, according to a description of the proposals provided by the White House.

 

“If we’re going to be connected, then we need to be protected,” President Obama says.

 

President Obama is scheduled to promote the initiatives, which would need congressional approval, at an afternoon appearance at the National Cybersecurity and Communications Integration Center.

 

“Today, at a time when public and private networks are facing an unprecedented threat from rogue hackers as well as organized crime and even state actors, the president is unveiling the next steps in his plan to defend the nation’s systems,” the White House said in a statement.

 

The measure Mr. Obama is proposing would encourage companies to share cyber-threat information with the Department of Homeland Security’s National Cybersecurity and Communications Integration Center, which would swiftly pass it on to other government agencies and industry groups being set up to help monitor and disrupt attacks. Companies would get “targeted liability protection” for doing so, the White House says, as long as the companies took steps to protect consumers’ personal information.

 

In addition, President Obama’s plan also “would allow for the prosecution of the sale of botnets, would criminalize the overseas sale of stolen U.S. financial information like credit card and bank account numbers, would expand federal law enforcement authority to deter the sale of spyware used to stalk or commit ID theft, and would give courts the authority to shut down botnets engaged in distributed denial of service attacks and other criminal activity,” according to the statement.

 

A focus on cyber-security isn’t new. Indeed, President Obama has tried for three years to persuade Congress to pass a cybersecurity bill. However, earlier efforts on such legislation stalled amid opposition from civil libertarians who feared it could allow too much government prying, and from conservatives who argued it would create a new bureaucracy. Administration officials hope that the severity of the Sony attack and the recent hacking of numerous retailers will change the political situation—although President Obama does face a Congress controlled by Republicans.

 

Nonetheless, initial reactions from some companies that would be affected was positive. Nicholas Ahrens, vice president for cybers-ecurity and data privacy at the Retail Industry Leaders Association, says in a New York Times article today that retailers had already set up a cyber-intelligence sharing center and would continue to coordinate with U.S. cyber-crime officials.

 

“Collaboration between industry and government to share threat information is crucial in the fight against sophisticated and persistent cyber-criminals,” Ahrens says in a statement, the New York Times article reports.

 

Be all of that as it may, privacy groups are expressing concern. The Electronic Frontier Foundation, for instance, has questioned the proposed legal immunity, arguing existing rules allow companies to coordinate efforts sufficiently already and challenging a potential provision that may allow the Homeland Security Department to share data in “near real time” with the NSA, FBI and Secret Service, reports an article on The Guardian.

 

White House officials insist the proposed information-sharing system would not put privacy at risk because the disclosed information will principally concern the method of attack on computer data and systems, rather than the content itself.

 

What are your thoughts on cyber-attacks? Should the U.S. government be able to use information about attacks to hopefully prevent other attacks?

Although the consortium expanding the Panama Canal now makes new claims for cost overruns totaling $737 million, and workers continue to strike and then return to work, the $5.25 billion Panama Canal expansion project is still on track for completion early 2016. As the project gets closer to completion, it puts a renewed focus on necessary U.S. infrastructure as well as the potential impact on supply chains.

 

The scale of the Panama Canal expansion, which had originally been planned for completion in 2014 but has been pushed back due to delays, is enormous. It will add a significantly deeper and wider third shipping lane and a new system of locks to accommodate massive so-called “post-Panamax” vessels. These cargo ships, which may be as much as two-and-a-half times larger than current ships, will transport goods from Latin America—and more importantly, Asia—directly to East Coast ports and back. Consequently, there will be a change in trade patterns that have been used for more than 100 years in the U.S. The change is expected to have an effect on most industries.

 

One change is that some private companies are already moving operations to be closer to new U.S. hubs because some estimates say the new trade routes will put shipping companies in reach of nearly two-thirds of the nation’s population, writes Doug Davidson, a global commercial banking market executive for Bank of America Merrill Lynch, in a recent CFO article. For example, Porsche and Kia have both relocated operations to Georgia.

 

It isn’t just private companies that are making changes. Post-Panamax vessels require at least 50 feet of draft in freshwater harbors and massive cranes to move containers from the ships. Because the ships need deeper harbors, a growing number of ports along the Gulf of Mexico and East Coast are being upgraded to accommodate the larger ships. Projects at numerous East Coast ports are now under way, including deepening projects for harbors, such as those in Miami and Charleston, S.C.

 

Indeed, a Miami Herald article explains that Port Miami officials have high hopes their port will be the first port of call for post-Panamax ships once the Panama Canal expansion is complete. There is competition, however, from Port Everglades and Jacksonville, which both also have expansion projects underway.

 

Port Miami is deepening its harbor from 44 feet to 50-52 feet and widening part of its shipping channel, the Herald article reports. As part of its three-prong strategy to boost cargo and improve efficiency, a new port tunnel to speed truck traffic and a rail link to the FCC rail yard near the airport have also been added, the article explains. By the time the dredge is completed next summer, the port’s post-Panamax improvements, which were funded by state, local and federal sources, will have cost about $1.3 billion.

 

Although there has been criticism concerning the high cost, the equation is simple for Port Miami Director Juan Kurlya, who says “The bigger the ships, the more cargo, the more jobs,” the Herald article reports.

 

Nonetheless, the upgrades to the ports are just the beginning. The complicated network needed to transport goods first from ship, then perhaps by train or semi-truck to warehouses, stores or other businesses needs to evolve as well. In fact, many of those operations must be overhauled or enhanced to handle the expected increase of goods coming in from the Panama Canal.

 

At the same time, port cities offer a new path to domestic growth. As Davidson writes in CFO, as the movement of goods shifts from West Coast to East Coast harbors, numerous suppliers of goods and services will also move geographically. That means a shift in location for suppliers of products ranging from concrete to cranes, as well as professional services companies offering everything from IT and staffing services to insurance.

 

When the Panama Canal expansion project is complete, what changes will be necessary for your company’s supply chain?