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Stuart Rosenberg's Blog

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International Regulations and the Stranglehold on American Supply Chains

 

The dispute concerning chemical regulation rages on – Congress had its first hearing on the Safe Cosmetics Act.  The outcome of these hearings is that the FDA has decided against the regulation of bisphenol-A in food packaging.   So this leaves us with this question; what if anything will be done to update the thirty-six year old Toxic Substance Control Act. 

 

The reaction from environmental groups is one of regret.  They feel the opportunity to adopt and approve such legislation has come and gone.  Large scale reform by the United States Congress has been spoiled by bickering within the environmental health movement.  However, that does not mean that U. S. companies won’t have to endure regulations from the rest of the world.

 

With the European Unions’ Registration, Evaluation, Authorization and Restriction (REACH) any company that sells into the European Union now must avoid chemicals deemed toxic and comply with REACH.   It is not just European regulations that have American companies up in arms and rethinking their products.  The Canadian government voted to ban an antibacterial ingredient as toxic.  This could mean the end for antibacterial ingredients.   

 

The push to acquire loads of new data from suppliers is an arduous task.  However, some companies are seeing that once they get past the money, time and effort spent to build more robust tracking systems, can lead to product innovation and companywide savings. 

 

From 2007 to 2009 there has been an estimated rise of nearly 70% in regulations related to product and materials – RoHS, WEEE and REACH – adapted in different nations attacking the same issues.   Not only are those but regulations becoming stricter and stricter.   We are most assuredly reaching the point where companies will require a firm understanding of the chemicals and other substances which make up the products they which to sell. 

 

SAP has become a major player in this field.   Their software enables companies to track product composition and be in compliance with multiple regulations.   SAP accomplishes this by creating databases that are able to use the bill of materials (BOM), match them to know substances, analyze components and finished goods for compliance.   It is not an easy task or a cheap one but there are companies using the system to great results – time reduced to deal with regulatory issues is 60 to 70 percent.

 

This time savings translates directly to other areas of the supply chain.  Due to all parts and products being catalogued in a database a company’s time to change or revise engineering change orders has been reduced proportionately.   This effort leads to value engineering.  

 

At present most companies are dealing with the regulations as they arise.   Most companies are waiting for the day when all of this data gathering for compliance regulations will deliver a competitive advantage. 

 

In certain markets and with certain products there is a huge advantage to being able to sell your product as environmentally preferable.   Of course, you had better be sure no one can prove you wrong.

 

There is one area where a fir m needs to be careful in dealing with compliance and innovation – substituting a known toxic material with an alternative.  Unfortunately, substitutions happen all the time, whether companies realize or not that these substitutions can be just as dangerous or harmful.

Some examples are:

 

  1. Replacing lead in gas with MTBE.  This was replacing an airborne carcinogen with an aquatic toxin.
  2. Electronics industry in Europe was forced to get rid of lead in solder but its replacement – tin-silver-copper – was not environmentally an improvement.
  3. The pesticide industry is full of these stories.  Too many to go into details now.

 

Too often, these regulations are put into place without due diligence of checking their replacements.  If you don’t make researching the substitutions part of the regulation then this is what will happen.

It sounds incredulous; but lend me an ear for awhile.

 

Many companies don’t plan the size of their inventory.  Instead, they plan their customer service levels.  They set customer service objectives for A items, their best sellers; B items, their more moderate sellers and C items, their worst sellers.

 

The problem with this method is that when companies set customer service objectives, it will affect the size of the inventory. Their finished goods inventory management systems are building safety stocks to meet their customer service objectives, but their inventory planning is not tied to their financial planning.

 

The inventory management system should be tied to the financial plan and the sales plan.   The sales plan and the customer service objectives should be the determining factors in the size of the inventory….as size of inventory will dictate the size of the safety stock. 

 

Without this cross-functional plan imagine the scenario: the inventory increases the inventory until the customer service level improves; then the finance manager applies pressure as the cash resources are strained; then the inventory manager reduces the size of the inventory and customer service levels decrease; customer begins to complain and then the general manager puts pressure on the inventory manager to increase the inventory.  The company is caught in a viscous cycle. This brings us to the question of how to end this cycle. 

 

The best method to avoid this cycle is tying customer service to inventory turnover.  But it goes deeper than that.  With this connection a company can measure customer service in a number of ways.  I find the two best ways are:

 

  1. Line-fill rate
  2. Dollar-fill rate

 

Line-fill rate is the number of lines a customer receives of the total lines ordered, while dollar-fill rate is measurement of dollars received by the customer versus the total dollars ordered.

 

Line-fill rate is a better measure of customer service as the dollar-fill rate does well by the inventory’s ability to earn sales and gross profit. 

However, line-fill rate will vary by company, by type of industry and how it is calculated. If companies “back order” records are kept of cancelled customer orders and ship those items when goods are available.  Companies that use this practice avoid customer reorder of cancelled items. Since those customers order fewer cancelled items, the fill rate rises proportionately. 

 

Turnover, the earmark of well inventory is moving throughout the business.  The higher the turnover rate the lower the line-fill rate.

 

The inventory manager and the customer service representatives for each customer together should consider these goals in setting line-fill rates:

 

  1. What is company policy on line-fill rate?
  2. How are the suppliers shipping?
  3. How and what is our recent line-fill rate?
  4. Are we borrowing money to support inventory and are we running out of space?
  5. Is our competitor’s line-fill rate better than ours?
  6. Is our inventory healthy – excesses or months on hand exceeding the plan?
  7. Do we have the proper systems in place to improve and measure our customer service / turnover relationship?
  8. How many items in inventory compared to last year?
  9. Can the production department handle change in inventory levels?
  10. Are we at end or beginning of a season?

 

Even after these ten items are considered a company may still not deliver or ship all the lines.  There are four major reasons if that happens:

 

  1. Goods are available, but we failed to ship them.
  2. Goods are at the receiving dock, but not yet put away for order filling.
  3. Vendor or another facility of the company’s has failed to deliver.
  4. Company did not order enough.

 

There is a direct relationship between the inventory manager and customer service.   In order to create and maintain realistic goals the inventory manager must determine what this relationship is.  Inventory manager can use the following tools to accomplish that:

 

  1. Accuracy of existing forecasting system
  2. Mix of items in the inventory
  3. Size of the work force
  4. Availability of cash and space
  5. Performance of the competition
  6. Quality of the procurement decisions

 

The final step in setting these customers service/inventory level realistic goals is confrontation.  Yes, confrontation.  Allow me to explain.  The company president knows what he wants the inventory goals to be.  The inventory manager must know if these goals are realistic and set up short term goals.  The basic relationship of investment, customer service and work in the company is usually unchangeable.  The president will set the long term goals and the inventory manager and the customer service manager must create ways to see the goals to a successful conclusion. 

In religious circles there are the Ten Commandments. Well in Inventory Management there are the ten deadly sins of mis-management.  If you are struggling to meet customer demand, you are losing customers and new sales then inventory mismanagement is the primary cause.

All organizations that have embarked upon an inventory and thereby a cost reduction program have its own opportunities and challenges.  Managing for the right sizing of inventory is goal that requires meticulous attention and sustainability to maintain the edge.  The outcome – improved customer service, increased sales, reduced costs and profitability – are well worth the endeavor.

 

In my years as a supply chain professional I have witnessed much short-sightedness or inexperience in managing inventories of various types.   In that time I have compiled a list of deadly sins that must be avoided to ensure the accuracy and right-sizing of inventory.  At the same time as I give you the ‘sins’ I will suggest solutions.

 

Deadly Sin Number 1: Using a narrow measurement of performance

 

Companies alter their forecast management to meet supply chain performance.  This occurs without understanding the nature of the demand and causes of forecast errors.  If forecast accuracy is stressed the fill rates and inventory turns do not improve. Inventory managers have no clue as to how well customer’s needs are met.  At the same time, without realizing how quickly inventory moves through the entire process there is no inventory management.  

The solution is twofold – tracking of the fill rate and inventory turns and develops a realistic and logical forecast system.  How much forecast error a company can withstand is unique to each company?

 

Deadly Sin Number 2:  Unqualified employees manage inventory

 

If warehouse managers, clerks and other employees who have no specific inventory training are making inventory decisions, then there is no doubt of the outcome – wasted inventory is being stockpiled throughout the system and facility.   There is no clear and concise inventory plan.

If a company is emphasizing buying inventory over planning there is no strategic plan in sight, opportunities for improvement will most certainly overlooked and financial benefits will wither away.

Recognize that inventory management requires professional job skills, assign accountability for inventory management and unify inventory planning.

 

Deadly Sin Number 3:     Forecast management without a disciplined process

 

Just like inventory management someone must be held accountable for the forecast and its accuracy.  Disproportionate forecast overrides often is a reflection of a lack internal collaboration on the forecast process.  It is needless to say, but it happens too often, inaccurate input information will lead to erroneous forecasts.  All too often the knee jerk reaction to having too much inventory is to cut the forecast.   But this ‘disconnect’ will separate inventory planning from its vital partner – customer demand. 

It must be recognized and acted upon – forecast management is a collaborative effort.  Have a monthly forecast collaboration meeting with all vital parties prior to the sales and operations meeting.  Do not override a forecast based upon such notions as a ‘gut feeling’ or to ensure ‘the numbers look right’.   If these actions are taken, rest assured the numbers will not look correct and will harm your customers.

 

Deadly Sin Number 4: No internal communication

 

We touched on this in sin number 3 – collaboration.  Let’s go into it a little more in depth.  Promotions and or new product introduction are not reaching all vital departments. Inventory support areas should have this information for their planning and forecasting. 

Companies should not have complete trust in their forecasts without periodic review and adjustments.  Customer demand changes so the forecast should change accordingly.

There is a lack of coordinated input and a multitude of numbers.  Clearly, each department is operating as an independent fiefdom.   Inventory management, sales and finance are all using different forecasts.

To prevent this lack of communication implement Sales & Operations Process meetings.  The goal of these meetings is to reach an accord on the demand side and the supply side.

 

Deadly Sin Number 5:   Not talking to the customers

 

This is just as bad if not worse than lack of internal communication.  There is a mad scramble to service the key customers who will surprise the company with ‘killer’ purchase orders that use unplanned resources – overtime and or expediting - to meet the requirements. 

Supplier inventory planners should be meeting with customers on a regular basis to understand their drivers.  Implement some key programs with the customers such as Vendor Managed Inventory or Collaborative planning/forecast/replenishment. 

 

Deadly Sin Number 6: Preoccupation with the budget

 

We all understand that the budgets are vital to the operations but they must be flexible.  Measure the gaps between the budget and the sales forecast.  Manage this gap through inventory planning techniques. If the gap is too large change the budget, not the forecast.  The forecast is most likely closer to reality than any budget.

 

Deadly Sin Number 7: Using reorder points to manage inventory

 

Many companies do not have a viable Enterprise Resource Planning system so they use Excel spreadsheets to manage the inventory. The spreadsheets cannot provide a window into customer demand.  This lack of transparency will cause excessive inventory and weak customer relations.   In addition suppliers and customers are not given forecast information to share in strategic planning and collaborative inventory management. 

The implementation of either time-phased inventory planning or economic order point.  A firm should have the information of not only what is needed in the short term but also what is needed several weeks in advance.  The benefit of this information will lead to proper management of delivery timelines, truckload quantities and other variables to control costs and maximize customer awareness.

 

Deadly Sin Number 8: Too many Stock Keeping Units (SKU’s) in too many places

 

If you have reached a saturation point where no longer does 20 percent of the items account for 80 percent of sales you have reached SKU abundance.  If this happens there is not a stocking policy – process control rationalization for stocking items.  Once again, when buying is accentuated over planning no one is tracking the SKU levels. If a firm continuously implements their inventory reduction campaign something is amiss. 

The solutions to this sin are multiple:

  1. Introduce an ABC analysis program where inventory is segregated by volume of sales.
  2. Stocking policy based upon velocity.  Ties stocking decisions to the planning thus are preventing any arbitrary decisions.
  3. Centralize the C items of ABC analysis in one distribution center or if not possible segregated from the A and B items.

Deadly Sin Number 9:   Managing all items in the same way

 

This outlook will result in not having too much C items and not enough of the A or B items.  Companies implement the same goal for all items.  Not all items are consumed in the same quantity at the same rate. Companies that endorse this goal will spend an inordinate amount of time on expediting C items.  It is invariably true that companies using ‘the same goal’ concept will use a fixed safety stock methodology to replenish inventory.  Will result in the same problems.

The use of Pareto’s Law or ABC analysis will tie any stocking decisions to customer demand.  In addition, instead of using safety stock for replenishment use safety time. Safety time increases or decreases safety stock in response to demand. 

 

Deadly Sin Number 10: Never trying new methods

 

Still trying to manage inventory through use of spreadsheets.  New technology provides better capability for collaboration in forecasting and inventory planning.   Company does not link itself to its customers electronically. 

There is no company incentive for employees to train on new technologies or methods.  Without stimulus for individual improvement they will less inclined to change.

Emphasize continuous improvement for new and different ideas as opposed to constant return on investment. Make your suppliers and customer’s partners in your business – new technology such as e-commerce makes customer sales forecasting much easier and by sharing purchase schedule with key suppliers and customers.

 

I have found these to be the most common inventory mistakes. However, the prevalent error is a failure to address inventory planning and management in a companywide collaborative approach.  If your organization is constantly putting out fires on a daily basis to meet customer demand, then you are losing the ‘war’ to keep customers and gaining new sales.

Port Labor Negotiations

 

When dealing with maritime supply chains it is anyone’s guess how port labor negotiations will pan out or affect inbound and outbound traffic. A prime example of this was the U.S. West Coast port negotiations amongst the Pacific Maritime Association and the International Longshoremen and Warehouse Union.  Imperative to evaluate your supply chain on a constant basis and introduce contingency plans to avoid potential trouble that negotiations such as these might cause.

 

As the dock employees and employers prepared for an intricate contract negotiation we need to be aware of the disruption to their supply chain and to the effect on the U.S. economy.  The concern is well-founded.  In prior negotiations the Pacific Maritime Association brought in new technology such as scanners, sensors and bar-coding system to make cargo flow more efficient. But at the same time these improvements eliminated 10 percent of longshoremen positions.  Passionate talks resulted in a 10 ten lockout and only intervention by President Bush settled the lockout.

 

While all this occurred in 2002,  a few years later, 2008 to be exact, saw another dispute cause major interruption.  The Pacific Maritime Association (PMA) charged the International Longshoremen & Warehouse Union with deliberately creating work stoppages at all West Coast ports. The International Longshoremen & Warehouse Union (ILWU) counter charged that individual members were merely exercising their rights to protest the war in Iraq.  Ultimately, the sides compromised agreeing to wage rates and to have automated cargo handling systems. 

Once again in 2014 uncertainty reared its ugly head.  The primary issues for both the ILWU and PMA were healthcare c costs, pensions, etc. Compared to past port disruptions based upon automation and wages these discussions were very time consuming.  

 

These negotiations resulted in unpredictable work stoppages, increased costs, capacity challenges, transit time delays and lack of supply chain stability.

 

Not only did each of these three incidents cost the U.S. economy about $1 billion dollars per day but the resulting six months to recover deeply affected retailers, importers, manufacturers and  agricultural exporters.  While companies can track negotiations over time they cannot gain any certainty about the process until contracts have been signed.

 

The best way of protecting your business is to assess the impact of potential disruptions on the current state of the supply chain.  Afterwards, create response plans to minimize the landed costs and delivery times.  Be proactive and appraise potential disruptions before they occur is critical and will make a response plan.

 

There are three phases to this appraisal that need to be followed:

 

  1. Assess the impact of disruption.  Port disruptions will cause companies to deviate from their existing supply chain strategies.  For example, cost-driven companies may be forced to reroute through different ocean routes which have longer transit times.  This will lead to lack of product availability and lost sales.
  2. Explore options.  Form contingency plans for the affected product flows.
  3. Develop alternative sources of supply.  Suppliers closer to distribution centers will avoid material movement via transportation.
  4. Build onshore inventory. Increase safety stock of materials normally routed through ports.
  5. Plan for alternate routes. Map out and assess the viability of these routes.
  6. Evaluate airfreight strategy.   Examine the impact of changing modals from ocean to air by comparing costs, transit time and service.
  7. Prioritize the response options.  The building of onshore inventory and finding alternate routes require long term planning and execution perspectives.  These options should be considered along with three factors: severity, occurrence and detection (SOD).
  8. Severity of impact. A contract negotiation could differ from no impact, a slowdown or a complete work stoppage.  The severity depends on the duration of each scenario.
  9. Occurrence. Use a rating system of 1 to 10. More frequent occurrences will pull the scale toward a ten (most severe and occurrences).
  10. Detection. This is most difficult factor. How can one pre-judge the severity and occurrences of a work disruption? The option here is to build relationships with neutral logistical service providers.

 

To minimize the impact of port disruptions firms should monitor developments of the negotiations from both parties, use response planning options throughout the disruptions and find impartial logistic providers for transportation capacity, alternate routes and space for additional inventory.

 

The sooner planning is initiated for any and all impending disruptions; your supply chain will be able to withstand the disorder.

A manufacturer may turnover inventory 3.6 times, a retailer can have 4.1 turns and a wholesaler or distributor can show turns of 4.4.  What these companies, albeit, in different types of industries, have in common? TOO MUCH Inventory!  Where they may carry it – raw materials, work-in-process or in finished goods – is not necessarily the point.  The point is they have too much money tied up in inventory.

 

From an accounting outlook, inventory is an asset – a buffer against uncertainty.  The complete cycle time of inventory, when needed, when received, sold and sales payment is received is vital to a company’s success. The longer the cycle time, the larger the amount of inventory will be carried against that uncertainty.

 

Inventory turns are important.  While the turns mentioned in the opening paragraph look good on the surface it is important to understand that turns should be compared to rate of days paid.  In other words, when the company receives payment for the goods. The above firms are getting paid every 90 days. Would you like to get paid only every 90 days? This leads to a large capital investment of inventory earning nothing at a large carrying interest rate.  Why do many companies still operate in this manner and accept this kind of performance?

 

In addition to the capital or carrying issue, excess inventory influences service and operations. Unnecessary freight costs were incurred to bring products into facility.  Other costs like manpower hours, warehouse put-away and larger warehouse space than is needed are increased.  A cycle count program, which is based on Pareto’s Law and ABC analysis, will continually count these items to the company’s detriment. 

 

A business does not automatically or deliberately decide to have too much inventory on-hand as part of their forecasting plan.  The reasons for excess inventory are many but some of the more common ones are the following:

 

  1. Loss of sales fear: this is the fear of not having an item to sell as opposed to not being able to sell the item.  This is where companies will put in a hedge factor into their inventories.
  2. Price deals:  Many companies purchase due to “great” price deals. Buy in excess of what is needed or will deplete in a reasonable time frame due to a price they could not pass up. Is it still a good deal when it sits in your inventory forever?
  3. Write-offs: Firms are hesitant to write off the inventory and take a hit to their profit and loss for the year. 
  4. Metrics to measure: there are no metrics or key performance indicators implemented to measure and manage inventory – inventory turns, days in inventory, inventory aging and inventory velocity and no “ABC” analysis.
  5. Supplier performance: suppliers are not managed even the ones who fail to ship on time or less than a pre-arranged percentage of the purchase orders. Extra time and extra inventory are built into the system to compensate for delivery issues.

These are only a few of the reasons for excess inventory. Inventory buildup is not the result of one cause but many create the overabundance of inventory. These causes reflect the lack of priority, processes and control of the inventory.

Excess inventory is not an acceptable situation and needs to be eliminated as quickly as possible. There are some options to carry this out:

  1. Strategy and process: develop a process and procedures to manage inventory. Sustainability for this must come from the C-level management, otherwise a frustrating endeavor.  Included in this, is the development of performance metrics for inventory (some mentioned above), implement lean to add value-added processes, study the entire supply chain from inbound to outbound and make inventory part of the company direction as it pertains to customers, sales and profits.
  2. Distribution network: determine the optimal number of DC’s for today’s business.
  3. Supplier performance: ensure it is a key part of the inventory management and sourcing strategy.   There is more to vendor selection than just low prices.
  4. Effect of global sourcing:  long transit times across the oceans affect the inventories – in costs – that companies carry.

 

Increasing inventory turns and controlling lead or cycle time is vital to a firm’s profitability and long term growth.  However, reducing inventory and preventing excess inventory does not happen overnight.  It took a while to realize the inventory overage, so it will take a fair amount of time to correct.  This action will require focus and diligence.

Just-in-Time opposed to Just-in-Case

 

As manufacturers are reaping the benefits of Lean and Lean Six Sigma or other continuous improvement processes within their facilities the importance of eliminating waste still hold sway.  So the question now facing these manufacturers is this:

 

Has the time come where Just-in-Time inventory levels need to be changed to Just-in-Case levels? With the present and at least near future volatility of the economy this may prove to be the case.  The answer lies within each company’s own supply chain and decided upon based on each company’s individual requirements.

 

Inventory is considered one of the seven (7) wastes in a lean manufacturing environment.  It is any material over and above what is required for use in the process. The JIT environment basically works much like this: a piece per process > one piece delivered > one piece processed > one piece shipped.  Any and all inventory on hand after this process can be viewed as waste.

 

There is no such thing as the ideal situation and it’s quite impractical.  Thus, inventory is carried within the facility.  In practice just about every company carries inventory of some magnitude. And thus many issues ensue – excess storage requirements, carrying costs, increased material handling and obsolescence. The real concern should lie within the raw materials inventory levels as finished goods and sub-assemblies are in company’s control – based upon customer service levels and on-time delivery rates. 

 

Over the past several months many small companies have shuttered their businesses.   Much of this occurred when a primary supplier shutdown operations and damaged your delivery performance. 

 

Under these circumstances perhaps it is time for the remaining small manufacturers to take a good hard look at their suppliers and ask the following questions:

 

  1. How well do you know your first, second and third tier suppliers?
  2. Are any of them at risk of closing their doors and catching you off guard?
  3. Have you looked at their financial health?

 

Maybe the time has come to get to know them better. Harks back to making your suppliers your business partners.  The slightest change or disruption upstream can cause a major effect downstream.   It might be a good idea to carry a few weeks inventory to protect the company until the risk potential with this supplier can be evaluated.  Perhaps a visit to this third tier supplier would be in order to avoid higher future costs.

Start this process by reviewing some of the more vulnerable suppliers.  For example: if you are in the automobile industry start by checking the health and stability of suppliers you share with the North American automakers. 

 

In any industry, in order to implement JIC, and to determine how much and type of inventory need to carry these questions require honest answers:

 

  1. How difficult will it be to source replacement parts?
  2. How long does it take to get customer approval to move the tooling?
  3. How much testing is required if a new supplier is needed in an emergency?
  4. How long can you delay in shipping to your customers before it affects relations?
  5. How much space will be required to carry enough stock in case of emergency?

 

The answers to these questions will point the way to determining the on-hand inventory levels.  In addition, with good strategy and procedures it should also help to determine which components are at the greatest risk. 

 

Please keep in mind that JIC could be a temporary solution to a temporary problem.  It is extremely expensive to carry JIC inventory for every part, so the decision needs to be made as to which parts are the most critical.  Be aware, the carrying cost may increase exponentially, at least in the short run.   Consider JIC an insurance policy but when the crisis is over re-think the policy and return to JIT and LEAN.   

 

 

 

As a reminder, what follows is not meant to depress, but merely to enlighten and educate those of us who do not or cannot understand what has happened to the once great U.S. manufacturing base. 

 

WELL ROUNDED MANUFACTURING BASE = A WELL OILED ECONOMY = INCOME EQUALITY

 

In order to get a better handle on this issue, this will be the first of a short series of articles sorting out this issue from the end of World War II to the present. We will need to look into what really goes on in our domestic economy. Normally such analyses start with a look at the real Gross Domestic Product and personal income on a per capita basis, particularly the “real” variety of this much published number. Here the inflation is removed from the overall incomes and values of the net sum of goods and services produced in this country.

 

The Wide-Angle View: Personal Per Capita Growth Mirrors US Real GDP Growth

 

 

 

Figure 1 - US per capita Real Personal Disposable Incomes & Gross Domestic Product, 1947 to 2014 (2009 Prices). Source: US DOC/BEA

As we can see, on a per capita basis, the size of the economy has consistently increased over last 70 years or so.  As these economic numbers indicate, our national average common incomes have increased even when all inflationary impacts have been taken into account.

 

However, the above graph does not disclose information on who can buy food and other goods with these annual income flows. The most revealing aspect of Figure 1, however, is the increasing gap between Real GDP/capita and real disposable incomes/capita as time goes by. Most of this gap is due to increasing government, federal, state and local fees and taxes which again pay, i.e., for food stamps.

 

More revealing are the various private goods and services producing industries’ contributions to the USD GDP as seen in Figure 2.

 

 

 

Although some service industries, such as the finance and insurance, are high wage sectors, most other elements in the service industries are notoriously low/minimum wage sectors. The goods producing sectors, mainly the manufacturing industries, have been a steady source of good paying employment for people with or without college degrees. The relative decrease in this element of the national economy means fewer and fewer middle class generating opportunities. A closer look at the manufacturing and finance industries will focus on this point, as seen in Figure 3.

This graph contrasts the hasty downfall of U.S. manufacturing with the slow but steady rise of the financial services sector.

 

 

 

 

The somewhat increasing relative employment in manufacturing during the last five years is due to a relatively fixed workforce combined with some increases in employment as the manufacturing industries try to get back to its pre-recession levels.

 

In order to understand why the manufacturing industry has fared so badly it might be of interest to look a bit closer at the post-war economic history of manufacturing.

The rise of the U.S. manufacturing industries and the rise of the U.S. world military and political might are closely related. From a mostly agrarian nation that mainly attracted immigrants into agriculture and extractive activities, the nation went on, through its own inventions and the rapid implementation of technologies invented elsewhere, to become a major industrial power. By the beginning of the First World War, the U.S. was a force, although somewhat reluctant, to be reckoned with in international contexts.

 

The basis for this beginning of the U.S. global might was its ability to mass produce industrial and consumer goods on a scale never seen before. At the end of WWII, the U.S. was the world industrial leader both in output and diversity of industries.

 

As time went on, however, something happened on the way to the promised tide that would lift all boats. First the textile industries found their way to minimum skill countries with cheaper labor. Then the consumer electronic industries started on the same path followed by the auto industry and other high technology industries.

 

From the late 1970’s onwards this relationship continued to deteriorate. The background for this unfortunate state of the US economy is analyzed further below.

The manufacturing industries relative importance (in percent of U.S. GDP) is tied together with the U.S. Gini Coefficient, a measure of income equality or inequality in the U.S. Here we only need to know that an index of zero (0) indicates that the income distribution is equal in the sense that 1% of the U.S. population earns 1% of the income and 2% of the population earns 2% of the income and so on. There is a contrary relationship between the demise of the manufacturing industries and the worsening of the U.S inequality of income and wealth. The fact that by 2014 the U.S. Gini index started to take on Third World dimensions. This precipitous decline in income equality clearly coincides with the demise of US manufacturing’s importance in our economy.

 

The income and wealth distribution index (the GINI coefficient) has by 2014 reached Third World levels, and there is no improvement insight.

Improved bottom lines should, of course, always be the goal of well managed businesses, but the flight of labor-intensive industries has a vicious downward spiral attached to it. As the labor intensive industries relocate to other countries, the opportunities and incomes for large swaths of the homeland population disappear and, unless new needs and wants are created or discovered in the economy, the purchasing power of the remaining population will over time deteriorate.

 

There are very solid theoretical, political and even rational arguments for free trade, from Adam Smith and David Ricardo to the McKinley tariff to Bertil Ohlin. 

Thus, the initial premise behind the policies of “free trade” -- and particularly the free capital movement -- was included to enable trade in goods and services and not simply to establish export machines. What we have today is just another implication of the “law of unintended consequences.”

 

As the above brief analysis has shown, there is a close adverse relationship between the manufacturing sector and the income distribution in the U.S. The outsourcing of industries cannot continue much longer before we, as an economic entity, will have such a deep chasm between the economic elites and the rest of us that it will not matter how cheap the imported goods are, as most of our population will not be able to afford the gadgets they put on their outlet shelves, be it at Wal-Mart, Target or Costco.

 

But let's hope that some of them begin to understand the relationships between the decline of the U.S. manufacturing industries, the generally lower disposable incomes and the propensity to consume the products they bring in from Third World countries.

Please do not misunderstand my intent here. I am not a naysayer or a pessimist but we have had our heads in the sand way too long and this is the result of that denial.

 

On January 28, 2015, the U.S. Census Bureau reported that some 20% or 16 million of U.S. children receive food stamps. This is roughly a doubling since 2007 when 9 million children, or one in eight, received this form of assistance. Further reports indicate that the overall number of U.S. food stamp recipients has reached close to 50 million (matter of public record)

 

We need to ask the following question: Is this just another income redistribution instrument in the Federal toolbox or does this really reflect a more alarming feature of the overall U.S. economic picture?

 

In order to get a better handle on this issue, this will be the first of a short series of articles sorting out this issue from the end of World War II to the present. We will need to look into what really goes on in our domestic economy.

 

1947 – 1953: The Post War Years

Hence, the wheels of U.S. manufacturing were churning ahead with full speed, and the sector’s share of U.S. GDP rose from around 25.5% in 1948 to 27.6% in 1953.  

In Figure 5, the initial post-war years are shown. Here manufacturing’s share of U.S. GDP was rising, and the income equality improving in leaps and bounds. The U.S. had come out of the war with a very efficient and diverse manufacturing sector. The U.S. was the source of industrial export to a war-torn Europe, and its might and prestige was without bounds.

In a June 5, 1947, speech to the graduating class at Harvard University, Secretary of State George C. Marshall issued a call for a comprehensive program to rebuild Europe. This program, later known as the Marshall Plan (officially the European Recovery Program, or ERP), was an American initiative to help rebuild the mostly ruined European economies after World War II. Most of the help was in the form of machinery and infrastructural implements.

 

1954 to 1967: The Eisenhower-Kennedy-Johnson Years

Better times were awaiting the U.S. population, as the middle class and the manufacturing sector expanded, although only in total terms. In comparative conditions, the effect of the Marshall Plan had begun to take hold, and German manufacturing was on the rise, particularly TVs, a newcomer on the European scene, and automobiles gradually took over the European markets.

But the socio-economic scene in the U.S. was one of optimism and belief in the future. Carl Perkins and Elvis Presley were, for the most part, only worried about their “Blue Suede Shoes.”

The Cold War was now in full bloom, and the Iron Curtin had fallen along the central European borders. Worrying signs of unrest in the world at-large would soon move the public attention from personal apparel to war. An armistice had been reached in 1953 on the Korean conflict. Almost 40,000 Americans died in action in Korea, and more than 100,000 were wounded. Consequently, the U.S. population was in no mood for another major war.

 

1968 to 1975: The Vietnam, Mid-East and the Oil Shock Years

Unfortunately, another and more devastating war and more international unrest were on the horizon. When the French left Vietnam after the First Indochina War (1946-54), the U.S. stepped in to assist the non-communist cold war proxy fight. This engagement lasted from 1955 to 1975, although American military advisors had been there since 1950. At the end, the total cost in human life had reached to around 58,000.

During the same period, the world oil supply was endangered by the Middle East conflict. As a reaction to the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) decided in 1973 to instigate an oil embargo on the western nations that sided with Israel. The embargo ended in 1974. The result of this embargo was that global crude oil prices rose significantly (from $3/bbl. prior to the embargo to around $12/bbl. after).

The impact of the global economies was immediate and severe, as the economic structures adjusted to the fourfold hike in energy costs. Structural change takes time and implies both permanent and interim unemployment for large segment of the impacted economies.

Although well-endowed with hydrocarbons, the oil embargo caught the U.S., to a large extent, off guard. Not only did the gas lines at the gas stations become long and tedious, but the various oil consuming industries were suffering. Fortunately, a valuable lesson was, however, learned through this experience: utilize national resources and build up reserves.

 

1976 to 2014: The Relentless Outsourcing Years

As the economic tumults subsided during the late 1970’s and 1980’s, new international trade agreements, both through GATT and bilateral trade agreements were finalized. Additionally, the U.S. managed to get free trade agreements with 20 countries.

Currently the U.S. is in negotiations on regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement and the Transatlantic Trade and Investment Partnership (T-TIP) with the European Union. The objective here is the shaping of high-standard, broad-based regional pacts.

On top of this, the U.S. has bilateral investment treaty (BIT) program that helps: to protect private investment, to develop market-oriented policies in partner countries, and to promote U.S. exports. The BIT program's basic aims are to protect investment abroad in countries where investor rights are not already protected through existing agreements (such as modern treaties of friendship, commerce, and navigation, or free trade agreements); to encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory way; and to support the development of international law standards consistent with these objectives.

Now, one should think these would be powerful tools to enhance the ability of U.S. manufacturing to penetrate most of the world markets for exports. Unfortunately the U.S. manufacturing industries have continued downward and, by 2014, these industries’ share of contribution to the U.S. GDP stood at around 12%, down from around 21% when manufacturing outsourcing started in earnest.

The income and wealth distribution index (the GINI coefficient) has by 2014 reached Third World levels, and there is no improvement insight.

Simultaneously, however, the U.S. participated in the various UNCTAD trade rounds and the more hemispherical NAFTA negotiations. Some political actors heard sucking sounds, but came with no suggestions on how to moderate or restructure the outsourcing phenomenon. There is, however, a strong suspicion that our free trade agreements provided political cover for U.S. companies, particularly the larger corporations, to move production to countries with adequate human skill sets, an economic environment that has lower taxes; and a free trade agreement with the U.S.

Hence, with corporate offices in the U.S. and the production facilities flying a “flag of convenience,” the quarterly reports and bonuses for the leadership started to improve.

Improved bottom lines should, of course, always be the goal of well managed businesses, but the flight of labor-intensive industries has a vicious downward spiral attached to it. and, unless new needs and wants are created or discovered in the economy, the purchasing power of the remaining population will over time deteriorate.

Continuous-improvement programs alone won’t grow American manufacturing-finding new customers, finding new markets, and developing new products that your customers want and need.

Numerous United States manufacturers have built-in many methods of cost reduction and efficiencies for over 35 years.  We all know, recognize and ‘love’ these programs with the following acronyms: MRP, JIT, ERP, LEAN and Six Sigma.  All of these programs lead us to believe in cost reduction, improve profitability and will make the company globally competitive.


To assist these companies in this belief we created agencies such as The National Institute of Standards and Technology (NIST) and MANTEC, both of whom preach on their websites that mastering these programs will lead to growth. However, there is no suggestion that growth has anything to do with marketing and or sales.


Continuous improvement is not about global or external improvements or growth such as customers, markets and sales revenue growth, but rather on internal processes.  With past successes in improving internal processes, many seem to think it is the cure for all the manufacturers’ problems. The implication is clear: if you are excellent at all internal operations, then the company will grow and increase sales.


A perfect example of this situation is gathering LEAN consultants together and posing several questions:

  1. Ask them what measurements they used to determine if their clients had become lean?

 

Most of the time the answer is: if manufacturing company had excess capacity for more sales


 

  1. If lean created more capacity, how did they ensure the company would have more sales?

  

Their answer to that question was uncertainty.


After many years of investing in these programs it does not appear that American manufacturing is growing.   If you examine the chart below with four key aspects where is the evidence of growth?



It is clear to all that since the year 2000, U.S. manufacturing has steadily declined with the lose of over 5,000,000 employees and or jobs and the closings of over 60,000 factories.  The GDP had declined by 3% and where is the capital investment? 


Something is seriously amiss.  The continuous improvement programs have not manifested into real growth for manufacturing. Growth is not going to come from continued cost reduction or the LEAN journey.  Growth will come from the development of plans for finding new customers, new markets and cultivate new products.


Increasing sales and overall growth are not going to automatically occur due to a company’s LEAN certification.  Sales growth requires a singular plan in conjunction with any process improvement project. Otherwise, a firm will reach the end of its LEAN journey with extra capacity but no sales to fill that capacity.  Needless to ask, but I will what the use of extra capacity without filling that capacity? 


Following are five questions that need to asked and answered prior to embarking on any continuous improvement project:


  1. Can you identify the best customers to sell your products to?
  2. Do you know the kinds of products and or services those customers want?
  3. Do you know which customer groups to focus on now and in the future?
  4. Can you and how do you compare your products to the competition’s products in terms of price, delivery, quality, etc, – item by item?
  5. Do you know the specific reasons you lost orders to competitors?

 

Manufacturing has done an extraordinary first-rate job in implementing continuous improvements.  However, we will never reduce our costs (labor) enough to compete with third world countries.


Cost reduction and efficiencies have kept us as participants in manufacturing, but manufacturing is not growing. Manufacturers need to ‘travel’ from internal focus to external focus and create methods to find new market opportunities and sales.  It is very plain that they need to expand their continuous improvement projects to embrace a sales plan and to analyze external factors.

No, this is not a reference to the Paper & Pulp Industry, though it could be considering how much paper money was floating.

 

The textbook definition of free-market capitalism states that the sole function of business is to create shareholder value and that the free market can regulate itself.  Well, we have seen that definition become obsolete over the last 30 to 40 years.   At present the definition is basically “the only purpose of business is to create shareholder value calculated by short-term results with little regulation."

Needless to say this is no longer the capitalism described by Adam Smith. Instead, it is what I will call “financialization”.  Simply put this is the “growing profitability of the finance sector at the expense of the rest of the economy and the dwindling regulation of its rules and returns."

 

As New Deal regulations were slowly dismantled, financial sector growth accelerated along with high risk-taking and speculation.  One of the immense problems caused by finance rising and manufacturing sinking is that a low-employment industry replaced a high-employment industry. At its peak, in the mid-twentieth century, manufacturing generated 40% of all profits and created 20% of the nation’s job. Today finance controls 40% of the nation's profits with 5% of the jobs. The focus of the economy is no longer on making things but making ‘false’ profits: money from paper.

In the past, Wall Street was comprised of banks that financed manufacturing's capital investment and R&D, which made America great. However, today this ‘paper’ money economy has led to Wall Street being the banker of most corporations, which has given them control over key portions of the economy, especially manufacturing.  Furthermore,  Wall Street became the masters of manufacturing, demanding short-term profits rather than funding the strategies that led to long-term growth. Wall Street’s demand for short-term profits forced most manufacturers to slim down their organizations and eliminate the functions that did not show a quick ROI (Return on Investment)

 

Wall Street, freed from its New Deal regulations, loaded companies up with debt, cut R&D, raided pension funds, slashed wages and benefits, and decimated good paying jobs in the U.S. while shipping many abroad.”  The lobbyists for the financial industry were able to remove all of the laws and regulations created during the New Deal. This allowed Wall Street to use many new quick-buck methods such as derivatives to make money from money and have all of their gambling protected by American taxpayers. Allowing finance to gamble with depositor’s money was a terrible decision that led to the crash of 2008 and will lead to another crash in the future unless they can be stopped.

A perfect example of this is the story about Timken Steel Co.:

 

In an article in the Boston Review, Susan Berger a professor at MIT makes the assertion that, “Since the 1980s, financial market pressures have driven companies to hive off activities that sustained manufacturing.” She refers to the example of the Timken Company, which was forced to split into two companies (Timken Co., IW500/299 and TimkenSteel, IW500/442) by the board of directors. The chairman argued that the company should stay together because that is how it had been able to offer high-quality products with good service support. The board overruled him based on the potential of better short-term profits.

 

This stripping down of companies to their core competencies has been forced on most of the large publicly held corporations to some degree. But in stripping them down, many critical functions have been lost. For example, apprentice-type training has been lost in many American corporations because it is long-term training and doesn’t have a good enough short-term ROI. Basic research of new technologies have also been dropped because they are seen by the shareholders as being peripheral to the core competencies.

 

The growth of this new economy also harkens another important question. If innovation is the critical strategy that will keep America in the race and its position as global leader, how can it happen without long-term financial support? This is a very strategic question because most innovation comes from the R&D and new technologies created by manufacturers.

 

Wall Street has the upper hand and continues to focus on short-term profits, rather than investing in manufacturing and the country’s infrastructure. It is hard to see how American manufacturing will be able to compete with the rest of the world like we did in the twentieth century. The sickness destroying America’s economic well being is financial planning. The primary symptom is the loss of U.S. manufacturing.  Manufacturing is the basis of military and economic power.  The movement of American manufacturing to mostly third world nations endangers us.

 

If we are going to have a chance at reversing the decline of manufacturing or developing a strategy of innovation that will keep the U.S. competitive, the current direction of the financial industry must be changed. In its pursuit of short-term profits, they are jeopardizing the long-term health of the economy and the manufacturing sector.

As an industry, finance does not deserve the trust of the American people. Consider just some of their more recent scandals:

  • Private equity and corporate raiding: Corporate raiders contributed to inequality as they dismembered firms, laid off workers, auctioned off the assets and destroyed entire communities to reap huge rewards for few stakeholders.
  • Credit: As regulations slowly collapsed along with oversight of consumer and mortgage lending, Wall Street introduced predatory lending in the form of high-interest-rate credit cards with fees and penalties, payday loans and subprime mortgages. The predatory lending practices “preyed on the poor and made them poorer.”
  • Housing bubble: Big finance bundled bad mortgages and packaged them as toxic securities to be sold all over the world. The bubble bursting forced the economy off the cliff and into the great recession, but nobody went to jail, the shareholders paid the government fines and the taxpayers were forced to bail them out.
  • Public Infrastructure: Another problem created by financialization is that there is less money available for government investment in the real economy. One study suggests we need $3.6 trillion to finance the repair or replacement of highways, bridges, sewer, water, and electrical transmission systems.

 

The problem is in aggregate demand. Although the actions of Wall Street have made the rich richer, it has done little for the average worker. This is a problem because 70% of the economy is based on consumption, and people are not consuming enough to grow the economy. Some of the people in the top 5% of earners are beginning to realize this, and even Wall Street is beginning to examine the problem. Top income earners have benefited from wealth increases but middle- and low-income consumers continue to face structural liquidity constraints and unimpressive wage growth.

 

Thus, despite the roughly $25 trillion increase in wealth since the recovery from the financial crisis began, consumer spending remains lackluster. Top income earners have benefited from wealth increases but middle- and low-income consumers continue to face  liquidity constraints and unimpressive wage growth.  It is no coincidence that the rise of financialization happened during the decline of manufacturing, middle-class income, capital investment, investment in infrastructure, and the rise of inequality.

 

Perhaps the financial industry is an example of free-market capitalism at its best. But its **** for short-term profits has the power to hurt the economy and destroy the manufacturing sector. It is said that these types of capitalists who continually push the legal boundaries would sell you the rope at their own hanging. The one thing that they have proved over the last 4 decades is that they must be strictly regulated. I am convinced that left to their own devices, they will cause another financial crash of the economy.

 

The Dodd-Frank legislation is simply not enough to stop the finance industry from repeating its past crimes, and many banks are still too big to fail. At a minimum, we need to bring back the Glass-Steagel Act that separates the standard banking and investing parts of the bank from the risky instruments like credit default swaps and derivatives, which should not be protected by the FDIC.

Wall Street controls most of the money for capital investment, technology development, and the expansion of manufacturing. The focus now is on short-term investment and making money from money, not in long-term investments that would grow the manufacturing sector. If Wall Street is well regulated and the tools used in financial engineering made illegal, manufacturing might have a chance of getting its share of the money.

No, this is not an advertisement for a tire company, a car or even a track event.

 

The ‘last miler’ has become the a key partner in a changing retail landscape: e-commerce

 

This is about truck drivers who simply drive trucks in the last miles of delivery to retailers, a mom and pop operation, a supermarket or directly to a consumer’s residence.  We need to re-think the outcome of these ‘last milers’ and how they can be merchandisers, salespersons and route managers.

 

The ‘last milers’ is a relatively small segment of the supply chain but it is growing in importance.  As the world’s cities are growing in size – area and population – major distribution challenges are emerging.  With the growth of populations companies are increasingly faced with the challenge of home deliveries within 24 to 48 hours from time of purchase.

 

At several firms – consumer goods – delivery drivers have three jobs.  They must deliver the goods, replenish where and when needed and take orders.  This “model” is perfect for building sound business relationships but it reduces the number of outlets the driver can service. 

 

This new delivery concept for driver can be shown with these two examples:

 

  1. A company that delivers food to consumer’s home calls their drivers “route business developers” as they are assigned the extra task of bringing in new business along those routes.
  2. Another company names their drivers “sales assistants” as they develop close relationships with businesses over a period of time. 

In both instances the company must educate the drivers on billing issues and product claims. 

 

These are not the only new training these delivery drivers must go through.  Many companies have developed other training programs such as:

 

  1. Customer interaction scripts
  2. Delivery completion checklists
  3. Customer follow up
  4. Cultural sensitivity
  5. Technological support through new phone applications.
  6. IPads training to determine stock levels

 

At some companies these drivers are treated as customers.  Drivers can call a central distribution center for any questions or issues that may arise.  This includes a truck breakdown and a switch out of cargo.

 

In the ever growing and increasing e-commerce portion of a retailers business operation companies should re-think this last mile.  The last mile needs to be thought of not merely in terms of cost reduction but in how it will create value.  Instead of rewarding drivers for the number of deliveries they make in a day, companies might create a bonus system if drivers create new business by building (spending more time) relationships with customers.

 

Is the last mile a cost to be minimized or an opportunity to be gained??

 

When a fragile supply chain breaks down, customers don’t get their products, companies lose revenue and brands are debased. 

 

Has this fear hanged over your firm’s head or has this already occurred?

 

As Directors or Managers of our firms supply chain we wear many different hats….depending on the situation.  One day we have to monitor markets, the next day we are concerned with the supply chain cash flow.  As supply chain leaders we need to wear yet another hat…the advocate for supply chain resilience.

 

This role consists of looking at and or searching for vulnerabilities in the company’s supply chain. Manufacturers maintain supply chain partners throughout the globe to take advantage of reasonably priced labor and access to raw materials.  This global economy has made a company’s supply chain more and complex and delicate.

 

Most careful management goes into maintaining such supply lines and the outgrowth of cost reduction, ‘lean’ supply chains and for attaining just-in-time deliveries.

 

Creating efficient supply chain lines can be dangerous, as efficiencies do keep costs under control but creates susceptibility.  These susceptibilities are not only issues for the company but also will have upward and downward consequences for the company’s business partners.  It is not the fashion for a Director of Supply chain to probe into the weaknesses of its key suppliers, it needs to be done.

 

One of the major industries affected by any supply chain disruption is the Pharmaceutical industry.  They must pass numerous quality and safety tests and product trials which usually take years to complete.  Thus, when a particular drug hits the market, these firms have to recapture its research and development costs in as short as time frame as possible.  Any interruption result in a loss of revenue. Additionally, a loss of any key supplier will take months to replace due to the regulatory nature of the business.

 

Supply chain exposures are quite a common occurrence.  In a survey conducted by the Business Continuity Institute it was reported that many companies experienced at least one major disruption in the most recent twelve months, such as adverse weather, IT outages, and outsourced service failures.

 

The risks can run on multi-levels.  Sometimes it is not a firm’s immediate supplier that disrupts a supply chain but the supplier’s supplier and the risk is to the shareholder value.

 

In many organizations supply chain risk management is completely delegated to a risk manager or supply chain manager, when these tow manager should most definitely be working in tandem.

There are some pertinent questions that these two managers should be asking about their own supply chain and those of their suppliers:

 

  1. What don’t we know about our supply chain that we need to know?
  2. Are we relying too much on a single suppliers for major components?
  3. Are we focused too heavily on cost reductions?
  4. What could a closer look at our analytics tell us about these and other hidden risks?
  5. What other risks could we be facing?
  6. Which specific risks are most dangerous?

 

One way to answer these must ask and must answerable questions are to appoint or hire a team to audit and determine the value of each link in the supply chain on the basis of business income.  Another point to ascertain is to ask whether you need to diversify your customers to prevent static supply if a major customer experiences a disruption.

 

Yes, I have just given you a handful of things to do.  Whether you use these devices and questions or create your own an investigation like this will uncover, quantify and better manage your supply chain risk.  You will be seen as the ‘champion’ of supply chain resilience and preventer of a crippling disruption.

Quality should never be seen as an accident.  It should be envisioned as an intelligent and proactive effort.  Poor quality, unsafe working conditions and or ignoring or non-compliance with regulations will lead to business disruption, financial loss, lawsuits and damage to the brand image of an organization.

 

The vehicle for this crisis can originate with any step in the supply chain process, from design to raw materials to production or transportation.   Most of the time the major cause of poor quality can be traced to either inferior raw materials or the lack of design standards.   In some cases in recent times reputations have been ruined not by the former but by lack of social responsibility.

Policies and procedures of quality management of suppliers must be aligned to the company standards who are selling the product.

 

Failures in the supply chain are passed down the line to other firms whose business is to markets these products.  These breakdowns can result in consumer dissatisfaction, regulatory issues and public criticism.  Let us remind ourselves of the tainted toothpaste or the lead paint in toys situations that damaged a company’s image.

 

There are some vendors who are meeting this opportunity with stricter client quality standards set forth by the International Organization for Standardization (ISO), the American National Standards Institute (ANSI and the American Society for Quality (ASQ). In addition, new security standards will have to be adhered to by transportation, shipping and logistics firms. 

 

To ensure vendor observance to the required quality management standards must conduct supply chain audits.  This validation process involves on-site vendor and or supplier audits which will compare actual to required policy standards.  These audits will identify areas of performance disparity and opportunities for improvement.  A constant vigil for quality improvement will reduce the risk of short and long term costly and embarrassing failures.

 

Internal auditors are not the proper route to take under these circumstances.  Independent management system auditors have the skills, geographic exposure and audit experience to effectively state audit protocols, aid in the planning and scheduling process and to guarantee audit goals of company are met.  Independent auditors bring an unbiased viewpoint and are usually up to date with changes in the international standards that need to be considered.

In order for these audits to prove successful several criteria must be met.  They are the following:

 

  1. Set forth in detail all necessary activities
  2. Outline objectives of the audit
  3. All required personnel are available at the time of and the span of the audit.
  4. The audit processes and information necessities are understood and agreed upon

 

Fundamental to any audit criteria and deciding if there is a need for such improvement or to add controls are the gravity of a given quality management failure and the part of management to decide the potential consequences with regard to consumers, shareholders and or regulators. 

 

Many of these independent auditors will also encourage companies to broaden the scope of the audits to include environmental and health and safety management systems (ISO 14001) and (OHSA 18001). These establish explicit requirements in the environment and safety guidelines leading to identification of legal issues that a firm may be faced with.  Likewise, organizations today are faced with and need to consider the social accountability international standards (SA8000), faced with the responsibility of improving working conditions around the world.

 

The closing stage of an audit requires close attention.   This is where the findings are converted into corrective action.  The resulting audit report considers the degree of conformity with the audit objectives and the performance gap and recommends improvements, business relationship changes, “root cause” investigation.  All of these will lead to corrective action to resolve digression from the proper course.

As globalization will only continue companies must protect their supply chains by screening the quality management programs of their vendors.  It matters little if companies are dealing with a few or hundreds of vendors, management audits require clear-cut planning with experienced personnel to be effective.   More than ever before, firms need to grasp the quality management systems of their suppliers, the scope of the involved risks and the controls to be put in place to protect against quality failure and brand damage.

The challenge of today’s ever growing supply chains is the incomplete understanding of the impact that disruptions to your operations befell one supplier’s site.  To help address this issue there is a method, first introduced at Cornell University, and which is slowly gaining influence with some major American corporations.  It is a system to aid in the prioritizing the financial and operational impact of risk – company cannot function properly if the former is not tied to the latter.  It will allow companies to allay risks on their most important suppliers.


The system is called time to recovery (TTR) and time to survive (TTS). Time to recovery is simply the time it takes for a specific supplier facility, distribution center or a transportation center to restore to full tasks after a disruption. In order to accomplish TTR must be combined with the following company functions or valuations:


  1. Details of firms supply chain.
  2. Bills of Materials
  3. Sales volume
  4. Profit margin by product line
  5. Pipeline inventory

 

Time to recovery works in this fashion.  Using all the above roles TTR identifies the risk linked with an interruption at each and any of the supplier sites for the entire time of recovery.


For TTR to be a success must acknowledge that some suppliers may be too optimistic about the true time to recover – supplier realize that too long of a time that they remain out of action will not sit well with their customers or manufacturers.  Thus, part of TTR is to identify bottlenecks at suppliers to ensure the accuracy of TTR information and to discern them from other suppliers whom face little or no disruption in their services.


In order to measure this possible situation companies have adopted time to survive (TTS). This is the time a supply chain can continue to match demand after a facility disruption. Using pipeline inventory and TTR data from supplier one can determine the time that a company will be able to serve customer demand without that particular facility.  If the time to survive is better than it’s time to recovery it is safe to say the exposure to risk will be held in check during the recovery period.  In addition, the ability to match supply with demand will not be seriously impeded.  Of course, if the reverse is true the firm’s financial and operations can be at risk.


These new metrics led to a building of a model that will assess the levels of strategic inventory – inventory used in response to an interference in the workings of the supply chain. TTS and TTR must be combined for two reasons:


  1. How much strategic inventory the firm requires
  2. Where to position this inventory for maximum affect

These two calculations will lead to a strong supply chain for every facility will have a TTS greater than its TTR, saving a firm the cost and time involved in the implementation of strategic services.


TTR and TTS, like any system, must be continuously monitored and adjustments made where and if necessary based upon changes in location and environments. For example, if inventory levels change then risk exposure changes in proportion.  When the risk reaches a certain level the procurement managers need to review those drivers to ascertain the risk modifications.


Time to survive and time to recovery measurements should complement each other.  Together, they allow an organization to work with its suppliers to build strategies to allay supply chain risks.  

In the past Chief Financial Officers gave little recognition to the safety of the overall supply chain.  They were mostly concerned with the bottom line – financial profitability – leaving the supply chain safety to others in the organization.

 

Today, the new brands of Chief Financial Officers realize that supply chain performance does directly impact the profitability of an organization.  They are beginning to look at supply and demand as a financial means to manage inventory on a global scope.  The realization that the slightest miscalculation or interruption (sometimes completely out of their control) can decide the profitability.

 

Supply chain Management or to be more precise supply chain risk management is an essential strategic concern for Chief Financial Officer. This has come about not just due to a global economy but also because of climatic catastrophes and political unrest where many manufacturing facilities are located. 

 

Suppliers/vendors and other third parties have a large influence on supply stability, especially those that are located off shore.  This influence can extend to company performance and brand image.

 

Despite this new view by the ‘new’ CFO’s there is still a resistance to seeing the supply chain in a holistic manner to understand the depth of the exposure a company can be faced with.  Too many times it the issues facing supply chain are met or viewed in individual silos as opposed to the entire picture.

 

Supply chain risk management is not about the firefighting mindset.  One only has to consider the tragedy in Japan – the tsunami – had a perceptible impact on the supply chains of many companies.  Among them being, the steel, automotive, electronics and chemical industries.   Did this disaster raise questions about supply chain risk and security? 

 

As stated above climatic or weather disruptions are not the only threat to supply chain.  What about the political unrest in the Middle East that threatens oil supplies?

 

The CFO makes decisions to decrease inventory levels, rely on a sole supply source and adopts just-in-time manufacturing methodologies.  These are all valid decisions but can a company afford the tradeoffs – quality and business continuity?

 

The disruptions mentioned above are vivid reminders to the CFO that these tradeoffs do not come without risk. 

 

In a highly connected world, an enterprise wide view of the significance of the supply chain is vital managing risk.  These risks can reveal themselves in various areas – internal planning, operations, suppliers, and any category of spend. These risks should force the CFO to consider upstream supplier relationships, together with second and third party suppliers and logistics, as fundamentals tied to the company’s operations.  The organizations’ supplier relationships and supply network are just as important to a company as their internal processes as they are tied to the business model and its success.

 

The new CFO now asks questions on the topic of what might happen to the ability to fulfill customer orders and business operations if a key part of the supply chain was put into jeopardy. 

 

  1. Which suppliers can we depend on for our raw materials and their delivery?
  2. What would happen if we were to lose one or more of them?
  3. How long would we be able to continue operations?
  4. Are there other parties available to us?
  5. Are there enough inventories downstream to sustain us through recovery?

 

Not only these questions but the CFO must keep in the back of his/her mind the following – serious defects in these alternative raw materials, disruptions in transportation, material price volatility, transparency, how soon would the disruption be felt in our operations and for how long and our resiliency.

 

If all of these questions are not proactively answered now risk management becomes CRISIS MANAGEMENT.


When I say proactive it means weekly business continuity planning meetings.  These meetings should assess any and all impact such disruptions to the supply chain can cause and create tested response plans to minimize the impact.   Many companies argue that the cost of implementing these programs is prohibitive.  My question to them is this:  Would you rather pay now for prevention or pay dearly later at the risk of the entire company’s survival? 

 

Just for the record these are some of the proactive strategies that should be considered:

 

  1. Identifying alternate suppliers
  2. Contract manufacturers who can assist at a moment’s notice
  3. Postponement strategies
  4. Inventory buffers

 

In conclusion I leave you with several questions.

 

  1. Do we consider an end-to-end view of the supply chain?
  2. Do we initially focus on a smaller scope?
  3. For our suppliers, do we consider all scenarios that could lead to disruptions?
  4. Do we address our resiliency and response time?

 

CFO’s must work with all management to address these questions in order to make significant strides in limiting supply chain risks and preventing crisis management.

 

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