Posts filed under 'Global Supply Issues/Risk'
May 8th, 2008
Sean Delaney - Iasta UK
Well I couldn’t resist this…especially since I was once one of these buyers. What is more interesting for me is that having crossed over to the “other side”, the negotiating styles used by the supermarket buyers (Tesco’s etc) certainly sounded very familiar.
When showing these tactics to Duncan Bullivant, the Chief executive of Henderson Risk Group, a seasoned hostage and kidnap negotiator, the article writes “even he was surprised”. Duncan then goes on to say ”not only do I recognise the phrases, I recognise all these tactics in every aspect of business I have done in the last few years.”
The tactics and behaviours during negotiations have evolved over the years from being more physical, to more psychological. For example, not long ago there was the story of one buyer, who used to attend meetings with a water pistol, and fire water, at the supplier, if the supplier didn’t meet his demands. Is this procurements’ equivalent to water boarding?
One strategy is called the “clock face” which involves 41 sequential steps as the buyer seeks to coax the best price out of the supplier. Tactics include threatening to de-list the supplier (which in reality could lead a supplier going out of business), threatening to go over their head to their bosses, play good guy and bad guy, deliberately misunderstanding something, and just when you think you may have made it, the final stage is the partnership stage. This is where suppliers may be deliberately left to feel the odd one out, before bringing them back into the fold.
Tired? Well, I certainly was after reading it! Quite clearly those more sophisticated suppliers will prevail and there is already evidence of this. Furthermore, as the supply base consolidates, and they become equally sophisticated, an impasse will inevitably be reached. With raw material prices rising so rapidly, I think this may be the final tipping point in relations.
However, back to negotiation techniques used, I can’t help feel that there is a serious case for the automation of the negotiating process. How much more sophisticated can one get? I would argue that in the future, it is imperative to keep it simple. Capacity constraints, and the securing of scarce resources, are going to be the key sourcing variables.
Entry Filed under: Global Supply Issues/Risk, Optimization, Reverse Auctions, Sourcing News, Supply Management Best Practices, e-Sourcing Marketplace
April 30th, 2008
David Bush - Iasta
Supply & Demand Chain Executive recently ran an article that asked Global Sourcing: Is It Really Worth It? Given ever increasing material and labor costs, a declining dollar, rising fuel prices, and increased risk, it’s a good question!
The article listed the following advantages of global sourcing:
- cost, especially w.r.t. unit & labor costs
- access to fresh research, design, or specialized intellectual capital
- availability of new technology and capacity
- supports plans to sell or service locally
- proximity to raw materials
- quality
However, there are a number of disadvantages as well. Although not specifically mentioned in the article, they include:
- cost - transportation, export, and import costs add up!
- quality
- risk
- proximity to raw materials
- lack of a skilled workforce
As the article points out, whether or not global sourcing is right for you depends upon the category, market conditions, and other alternatives you have at your disposal. This is determined by asking the right questions. The questions in the article are a good starting point. They are:
- What are the specific parameters that would make global sourcing a good business decision? Be sure to consider:
- payment terms
- direct costs
- delivery costs
- planning process synchronization
- working capital
- flexibility in production & capacity
- quality
- What are the macro-economic and geopolitical assumptions that could impact this decision through the lifetime of the contract? Be sure to consider:
- direct costs
- potential fluctuations in inflation and currency exchange
- geopolitical environment
- supply chain risk
- special trade preference programs
- government requirements
- How do we monitor these assumptions for change? Be sure to consider:
- timely monitoring of customer demand w.r.t. forecasts
- available sensing mechanisms to detect changes to raw material, labor, & energy costs
- dramatic shifts in currency exchange
- pending legislation or current court cases that could challenge assumptions
- pre-shipment quality issue identification
- early identification of potential delays
- What are the alternative supply sources? Be sure to consider:
- key materials and / or components
- transportation providers
- ports of exit and entry
- What is the exit strategy? (In case things go really wrong.)
Entry Filed under: General, Global Supply Issues/Risk
April 7th, 2008
David Bush - Iasta
I saw a very informative article on SCDigest about getting out of strategic supplier relationships. Obviously, preparation for this type of event is paramount and the authors give some great advice for moving on. Since nothing last forever, it is important to have contingency planning ready for every supplier. Among some of the tips offered:
Identify it before it goes south, indicators include:
- It takes multiple requests on either side before the action is taken. Early in the relationship, the request-to-action cycle is usually very short.
- It becomes necessary to make requests for items or service that used to be offered without asking.
- The buying organization starts to feel it is being “nickel and dimed” by the supplier.
Develop a plan:
“Stop and identify the interfaces throughout the process. Meet with someone in charge of each step and find out what a change would do to their part of the process,” Lorrie Mitchell, a partner in consulting firm Mitchell Enterprises, recommends. “This is the point where communication will make or break it. Once you have checked out all processes, personnel, cost, etc. repercussions caused by a change of suppliers, you need to socialize this data to your end-users’ upper management. Basically, you have to construct a pros and cons statement of remaining or changing the alliance relationship. When you have facts, you can discuss and get the ever-important buy-in.”
Don’t move without the new vendor in place and all possibilities analyzed:
Legal: It’s ideal to end the relationship at the expiration of any current contractual arrangement, but this isn’t always possible. Companies in that case need to understand commitments, and whether a potential buy-out of that commitment makes sense.
Confidentiality Agreements: Take steps to ensure any agreements made with the partner around confidentiality are not violated, for example with users talking to new vendors about the current partner’s trade secrets.
Intellectual Property Issues: Companies need to well understand and enforce internal restrictions around the partner’s IP. They need to carefully vet and resolve any open intellectual property issues, which may be very tricky if negotiated during a break-up.
I found this to be a really detailed and valuable amount of information, packed into a relatively brief story. There is no one size fits all playbook for such important things, but the advice was general enough to be very helpful.
Entry Filed under: General, Global Supply Issues/Risk, Suppliers
March 31st, 2008
Oscar Pacheco - Iasta
Global Sourcing has certainly been a trend in recent years and its benefits are clear…..increased cost savings being the primary. As with most initiatives the key is in implementation and a strong recommendation has been to include a Local Procurement Office (LPO) as part of a Global Sourcing program. The LPO is a procurement group placed in country and performs a variety of activities to ensure the supply chain is functioning within the local country.
A recent Accenture study, Global Sourcing for High Performance - Leading practices and the role of international procurement organizations in China highlighted not only the need for an LPO but for the LPO to be an integral part of the company’s procurement department. This means this group should not exist in isolation doing their thing in some foreign land, but it should be involved in the day to day activities, projects, events, etc, just like the head procurement group. The eSourcing tools and applications available today are a very effective method of facilitating the integration of these LPO. These tools give procurement organizations the ability to share a wide variety of information and knowledge including: standardized RFI/RFP/RFQ information, access to supplier information, and a record of past activities.
Additionally, these tools are valuable for keeping an LPO up to date on the sourcing activities on going, which can lead to coordination of projects, spend aggregation, and standardization on specifications.
As the sourcing world becomes more and more global, the ability to communicate, coordinate and share knowledge become more and more difficult. Effectively using the technology available today can allow a global procurement group to operate as a cohesive team.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices
March 26th, 2008
David Bush - Iasta
Today, I welcome a guest post from Jason Busch and Lisa Reisman. This article was used for our latest newsletter, Iasta Insights, which has been running bi-monthly since 2004. You may sign up to automatically receive the newsletter, by following this link.
I’m not sure about you, but we find it almost hilarious how politicians tip-toe around the “recession” word. Seriously, why can’t our President and others call the economic situation for what it is? At least when it comes to the sourcing and procurement world, we don’t need to be as careful. After all, we’re not running for office or trying to obfuscate the truth – or the numbers as the case may be. And even one “R” word can be a boon for us and our companies. The word that we’re referring to here is re-sourcing.
Before you get confused, let us explain. Re-sourcing is quite a simple concept. It involves going back and re-bidding a category which you might have previously sourced. And it just so happens that with the economy the way it is today, there could not be a better time than now to revisit a range of categories that you previously achieved savings in. So get ready to dust off the old e-sourcing tool as re-sourcing becomes an “R” word which you can get the rest of the company excited about.
What categories of spend are ripe for re-sourcing today? A good many, in fact. But the sourcing environment is not always cut and dry. On the one hand, there remains relatively high commodity price inflation in areas such as oil, energy, plastics, metals and food related products despite rising inventories and capacity. So in categories where raw material inputs comprise a material portion of the overall total cost, it might make sense to adopt a sensible sourcing approach where suppliers separate out the raw material components from their bid (and agree to tie the underlying elements to some type of market index). This will create significant competition in a market with slackening demand where suppliers are hungry for business.
But in areas where raw material inputs matter little – or are less transparent in the actual pricing – such as hotel spend, office products, or temporary labor, re-sourcing strategies can be quite simple indeed. In these cases, simply identify a list of new suppliers who you want to invite into the fray and join them with a previous approved bidder list. In some cases, you might find that the supplier landscape has changed quite a bit since the last time you revisited the category. Other times, it will look the same. But it’s always worth spending some time on supplier outreach to ensure that you’re creating a bidding environment – regardless of whether or not you plan to use a reverse auction, sealed-bid, multi-round, or optimization environment (or even a combination thereof) – with the maximum amount of competition.
If our experience about the hungriness of suppliers to participate in re-sourcing projects is any indication, you’ll find that each category will be hit or miss (but you’re more likely to find hits as the economic picture gets bleaker). The only challenge is you often won’t know before starting the re-sourcing process whether or not you’re going to achieve the type of results you’re hoping for.
A good way to test the waters is to reach out to suppliers you’re not working with today and engage them in conversation before bringing the process online. Find out what’s going on. How are inventory levels, orders, etc? Practice small talk by commiserating about the state of the economy and see if they take the bait. Then, once you’ve satisfied your curiosity that there really is a good opportunity, it’s time to pull the re-sourcing trigger – one category at a time.
Jason Busch is editor of the blog
www.spendmatters.com and Content Director for Spend Matters Navigator (link to spendmatters.siderean.com, a procurement and operations research hub.) Lisa Reisman is co-editor of the blog
www.agmetalminer.com and Managing Director of Aptium Global.
Entry Filed under: General, Global Supply Issues/Risk, Supply Management Best Practices
March 25th, 2008
David Bush - Iasta
These are not the days of Spies Like Us, any more. ELP recently had a breakdown of some of the strongest LCCS countries of the old Soviet Bloc. Even though these countries would be excellent from a European perspective (because of proximity), we notice a large number of suppliers being utilized from the region, in our US based clients, as well. ELP summarized the strengths of each here:
Hungary-
High growth rates especially in electronics, automotive and steel. High education levels are spurring research and development in, for example, ambient intelligence. German and English widely spoken.
Czech Republic-
The most popular location in Eastern Europe for offshoring. Production of cars and automotive components account for a fifth of industry and are gaining ground, but focus of new investments is shifting from production activities to services.
Poland-
Major investors are Japanese companies, mainly from the electronics or automotive industries. So-called business process outsourcing centers are gaining importance. Growing industries are renewable energies, environmental projects, logistics and services.
Slovakia-
Manufacturing is growing fast, particularly machining, building, automotive, electronic. Plastic and construction materials. Slovakia offers low taxes, relatively low low wages and high productivity.
Slovenia-
Wages in Slovenia are relatively high but so is productivity. Infrastructure and language skills are very good. Slovenia has low corruption. Industry is growing rapidly especially in machine building, chemicals and electronics.
Bulgaria-
Very low relative wage levels coupled with high growth rates. Many companies have announced modernization and expansion investments. In 2007, investors were especially interested in the energy and water supply and distribution.
Croatia-
Leading industries including metals are attempting to improve competitiveness. Corruption remains a problem.
Baltic States-
Language skills are good, especially English and Russian. Important industries include metal and machine building, industry, telecommunication and It software and services. All Baltic states have high growth rates.
Romania-
High growth rates. Main industries include automotive, chemicals, machining and electronics. The IT sector is growing fast.
I will have to say, from my perspective; I have seen very high quality and professionalism in Poland. I am sure the other countries are also highly educated and perform well. This should not just go for the supply base, however. Iasta has an Eastern European outpost and the sourcing community (although not as advanced as other Western countries), is progressing quickly and has a grasp on eSourcing. I do foresee this collective group catching on and closing the gap on best practices, quickly.
Entry Filed under: General, Global Supply Issues/Risk
March 17th, 2008
David Bush - Iasta
A couple months ago, I received a newsletter from Denali under this title. The is content very, very good and is a “sneak peek” at the bigger set of information available, at Denali Intelligence, a category specific market intelligence service.
There is some fascinating analysis in this FREE newsletter.
Some economists project that the US dollar is now undervalued and will rise soon, but the current momentum is downward and will continue to be so into most of next year. A chief source of downward pressure comes from foreign central banks and investors as they work to reduce the volume of US dollars in their portfolios. Simply put, US imports flood foreign investors with payment dollars that they must absorb or reinvest. As the tide of dollars is traded, supply and demand laws take over … and the dollar surplus drives the “price” downward.
In 2008, on average, prices of imported goods will rise 3% to 4% to directly adjust to the recent dollar depreciation. How quickly this inflation will occur depends on the particular market parameters (degrees of demand, supply and competition), but most of the price adjustment is expected to occur by mid 2008.
World demand for the commodities used in construction and manufacturing, such as cement, steel and energy, is straining supply capacity. Therefore global conglomerate suppliers do not need to absorb as much of the exchange rate loss when they get paid in cheaper dollars than they expected. Metals, plastics and cement international product prices are already displaying this impact, but the prices of materials produced in the domestic U.S. market are insulated from this effect. The decline in foreign supplier’s interest is sometimes first observed in reduced auction participation. In these occurrences, domestic suppliers may regain an advantage previously lost to foreign competition.
I find this so interesting. Not only has Denali Consulting created a tremendously valuable resource (and business), they are also distributing useful parts in the form of a dense newsletter. I know these guys well and this is a rapidly expanding business for them. It is well worth looking in to, for any sourcing professional that does not have its own supply market research team.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Suppliers
March 13th, 2008
David Bush - Iasta
Even in these very turbulent economic times, we are still seeing a large volume of reverse auctions being executed. However, now is a good time to remember the definition of cost avoidance, as explained on the eSourcingWiki and pulled from CAPS.
Cost avoidance is a cost reduction that results from a spend that is lower then the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken.
This accounts for the situations where spend is higher due to higher demand but overall cost per unit is lower, where up-front investments reduce overall spend in one or more categories over a multi-year initiative, and where a process improvement or product replacement resulted in a lower operating cost or cost per unit compared to what the company would have spent had the company not improved the process or replaced the product.
Or to add to these guidelines, cost avoidance can potentially be measured and impacted when the market conditions are raising unit costs but the introduction of competitive bidding lowers the delta between your former pricing and the new escalated pricing.
Although the concept of an on-line reverse auction is not necessarily within the definition of cost avoidance, I have seen it work many times this year already. A recent example in packaging had suppliers with 20% increases across the board. However, the auction concluded with a 1-2% savings in some lots and no more than a 5% increase in the other lots.
As always, it is critical to enforce best practices and know your market and suppliers. This tactic is not a guaranteed outcome, but should not be summarily discounted either.
Entry Filed under: General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices
February 27th, 2008
Michael Lamoureux
What is Corporate Social Irresponsibility? Simply put, it’s the practice of not being socially responsible as a corporation. What is social responsibility? Although heavily debated, it’s something that 71% of adults in the US believe corporations are not doing, or at least not doing well, according to a recent study by Harris Interactive. Why is it important? If it leads to even a one point change on Fortune Magazine’s “Americas Most Admired Companies”, it can translate into 107M of additional value for your corporation. Furthermore, the portfolios of the most admired companies show cumulative returns of 126% while those of the least admired show cumulative returns of only 80%. Furthermore, a good CSR program can make any company more competitive.
So what is it? Simply speaking, it’s the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of that of the local community and society at large. It’s responsible production, socially responsible labour relations, community involvement, environmental cognizance, and sustainability. It’s about a commitment to do things right.
What is right? That’s up for debate. The specifics will depend on local regulations, industry standards, your shareholders, and your corporate values, but at a high level, you can pretty much count on needing good labour, health and safety, environment, and community conduct codes.
But it’s not just as easy as raising wages, reducing greenhouse emissions, or opening a day care. For example: One company reduces its emissions of greenhouse gases. One increases its spending on recycling. Another provides free child-care facilities for its workers. Another raises the wages of its lowest-paid workers. All of these things cost money: suppose, for the sake of argument, that all four have reduced profit by the same amount. Which company has done most to protect the environment? Which has done most to advance social progress? Overall, how far has each company improved its triple bottom line? Bearing in mind the cost, can you even say that any of them have done so? (The World According to CSR, The Economist, January 2005)
It requires a strategy - and that requires a good process to develop one, a process that is described in the new wiki-paper over on the eSourcing wiki:
Corporate Social Responsibility: A Sustainable Solution. It’s complete with over a dozen in-depth references, so check it out!
Entry Filed under: General, Global Supply Issues/Risk
February 13th, 2008
Michael Lamoureux
Free Trade Zones, Foreign Trade Zones, Special Economic Zones, and Sectoral Promotion Programs may all sound like the same entity, but, depending on the country, they can be vastly different. Where global trade is concerned, they can be a great advantage, if understood and used properly, or a relative disadvantage if not well understood.
In the US, a Foreign Trade Zone is an enclosed area, operated as a public utility under the control of US Customs, with facilities for handling, storing, manipulating, manufacturing, and exhibiting goods. Merchandise may be exported, destroyed, or sent into Customs Territory from the zone, in the original package or otherwise. The advantage of the zone is that, although items shipped from the zone are subject to Customs duties if sent into Customs Territory, they are not subject to customs duties if reshipped to foreign points! Furthermore, the usual formal CBP entry procedures and payments of duties are not required on the foreign merchandise until it enters CBP territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Foreign Trade Zones can have a huge impact on your working capital and supply chain financing requirements.
A Chinese Special Economic Zone is a different entity entirely. In the People’s Republic of China, a special economic zone is given special policies and flexibile measures by the central government to allow them to encourage foreign investment. The policies allow them to utilize a special economic management system that contains special tax incentives and greater independence for international trade activities. In a SEZ, there is no tax on foreign investor funded companies during start-up years before making a profit, no tax in tax in the first two profitable years, and only half of the normal tax in the third and fourth years.
In India, a Special Economic Zone, which was modeled after the China Special Economic Zones, is a foreign territory for the purposes of trade operations, duties, and tariffs. The specifics vary from zone to zone, as they do in China, but the zones also borrow some of the concepts that originated in the Foreign-Trade Zones Act of 1934 in the US, making them interesting entities.
Mexico has Sectoral Promotion Programs that establish lower tariffs on the importation of inputs for the use of various products, and the special economic zones of Brazil are different entities still. For more information on free trade agreements, foreign trade zones, and special economic zones, see the Free Trade Primer over on the e-Sourcing Wiki which can be used as a good starting point for your research.
Entry Filed under: General, Global Supply Issues/Risk
February 6th, 2008
Michael Lamoureux
Optimization can not only be used to reduce cost, but it can also be used to reduce risk. In this post I’m going to overview how you can effectively support seven common risk mitigation strategies in a proper strategic sourcing decision optimization solution (including the solution offered by Iasta, if you’re wondering).
Capacity Assurance
You can create exclusion constraints that restrict supply to suppliers with a minimum amount of capacity to insure that the suppliers can handle the award they receive. Furthermore, you can create qualitative constraints that restrict award to suppliers with spare capacity to insure you can cope with unexpected demand surges. Although forecasting significantly more demand than you actually have is bad, especially if you stockpile inventory and don’t dynamically order and pull as needed, forecasting significantly less demand and not being able to meet that demand is much worse - because then your brand takes a big hit in the public market, which is much harder to recover from.
Compliance
These days, there are a dizzying array of regulations that may need to be complied with such as REACH, RoHS, Part 11, ITAR, and SOX (etc., etc., etc.), and failure to comply with any one of these regulations can result in huge fines, delayed or stopped shipments, or confiscation and destruction of inventory. Thus, it’s key that you insure that each product you source meets the regulations that you have to meet. Optimization supports this by allowing you to exclude suppliers that don’t meet any of the requirements, and limit supply to suppliers that only meet the standards of some of the countries you ship product to.
Distribution Alternatives
A strategic sourcing decision optimization solution that supports freight lanes can support multiple carriers, allowing you to select the lowest carrier, and lowest cost shipping lane per carrier, between a supplier warehouse and a buyer distribution center. (If the product doesn’t support multiple shipping lanes per carrier for each warehouse-distribution_center pair, you can always create a second instance of the carrier and associate that with alternate routes. You can then account for total volume discounts offered by the carrier by defining the discounts on all instances of the carrier.)
Dual Sourcing
From a risk mitigation perspective, sole sourcing is a bad idea. A really, really bad idea. With decision optimization, you can use allocation constraints to force an award to at least two carriers, and even specify an approximate award breakdown, such as a 20-30-50% split between the three lowest cost carriers.
Incentives / Performance Based Contracts
Let’s face it, some suppliers will perform much better if they get a bonus for good performance. By using negative discounts, you can determine how much a given award would cost you if the supplier performed exemplary under an incentive structure, and by using penalties, you can determine how much an award would cost if the supplier performed poorly (providing you also factored in an adjustment for the higher cost of processing more returns).
Lead Time Reduction
You can use a qualitative constraint to capture the average amount of delivery time for each carrier on each lane and limit awards to a given distribution center, set of distribution centers, or all distribution centers to product from supplier warehouses that can reach the destination(s) in a maximum (average) timeframe. Thus, if you’re selling a product for which demand can fluctuate significantly, you can make sure you can always restock within a given timeframe as soon as the sales data starts to spike unexpectedly.
Price Hedging
Strategic sourcing decision optimization can help you figure out what contract length might be optimal for a given commodity. For example, if your predictions are that oil is going to keep rising for the next year, with a peak price that’s $20 per barrel above what you’re paying now, and your main supplier thinks that it’s going to top out at a peak price that’s only $10 per barrel more than what you’re paying now, and is willing to give you all the oil you need at only $5 more per barrel than the current market price, you can run scenarios for a 6 month demand window and a 1 year demand window at different price points. Then, you can see that if cost keeps increasing at a rate that is only two thirds of your prediction, it’s probably better to hedge for a full year.
And, of course, proper strategic sourcing decision optimization also gives you:
Total Value Management
Since it allows you to capture all your costs - unit, freight, utilization, and impact costs (by way of adjustments) - as well as any discounts available to you from a supplier for the purchase of certain products in sufficient quantities. This means that you’ll always get the lowest total cost of ownership with respect to your business constraints.
Entry Filed under: Global Supply Issues/Risk, Optimization, Supply Management Best Practices, Technology
January 31st, 2008
Sean Delaney - Iasta UK
In a previous entry I talked about how the utilisation of Spend Analysis software makes the rational of a vendor reduction programme less relevant. When reading the latest report from The World Economic Forum on the risks for 2008 I am convinced this logic will now start to gain more momentum.
According to the WEF there are 4 major risks to be aware of over the forthcoming decade. What is most disturbing is that all 4 will have an immediate effect on sourcing decisions.
In summary these are:
• Systematic Financial risk – this has already been well documented in recent weeks. The lack of liquidity in markets will have a negative effect on business investment and therefore increase capacity constraints in the global supply chain.
• Food Security – Global food prices are at record highs whilst stocks are at 25 year lows….”population growth, lifestyle changes, use of crops to manufacture bio fuels and climate change – are likely to sharpen over the coming decade”. There is already evidence of this in the UK. During the last 10 years land used for Agricultural purposes has fallen by 8%. In addition land still in use is increasingly being used for the production of Bio fuels. The price of wheat is at all time high. Furthermore during the same period the population has grown by 2m to 60m – this is predicted to grow to 69m by 2027!
As anicdotal evidence of the scale of the shift the other day I was at my son’s children party. When I was talking to one of the Dads he mentioned that an old colleague was, until recently trading currencies and he is now trading livestock in Australia…buying millions and millions of dollars of cattle one day and selling the next. What’s more is he is achieving higher returns than he was when he was trading currencies.
• Supply Chain Vulnerability – “Improvements in technology and global logistics, along with reduced trade barriers, have led to a historic expansion of international and intra-regional trade over the past 20 years”. Although this has widely been seen as a benefit the WEF are saying now our risks are too concentrated in core areas. For example the concentration of raw material ownership in the hands of say State controlled funds or the impact on wage price increases in China.
• Energy – the increasing demand for energy coupled with the requirement to reduce CO2 emissions is going to cause difficulties. I am already seeing the growth in the demand for specialist energy buyers to mitigate organisational risk. However when we see 17% increase in fuel bills universally applied by all suppliers, clear evidence of collusion in the market and what is worse more political influence on the supply it seems that such a move is now punitive.
I would like to add a fifth risk that since none of these risks were mentioned in the same report for 2007 volatility caused by globalisation should be added too!
From this it is quite clear that there is need for global supply chains to be more diverse and as mentioned before this can be achieved with decent (real time as possible) spend analysis. Furthermore this technology should be used to monitor production, commitments and deliveries. Reports should also include commitment further down the supply chain.
The use of sourcing optimisation technology is now essential and especially the use of “what if” scenarios is a must. In fact the speed of change could require optimisation scenarios to be computed more frequently and not just at the point of “award”. This would allow for the inclusion of such things like the effect of climate changes to raw material stocks or the increase in the average wage in China.
It is now obvious that it should be a priority to use both of these technologies. However what has struck me is that combining these technologies together would achieve far more powerful results. I don’t know the exact probabilities by my guess is that the benefits would be exponential and thus reduce the probability of major a catastrophe in a global supply chain.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Optimization, Spend Analysis, Technology
January 28th, 2008
David Bush - Iasta
There is an economic storm brewing and its called a recession. I believe Zig Ziglar once stated that experts have predicted 36 out of the last 2 recessions. The problem is, that nobody actually knows if we are in a recession until the economy is already pulling out of it. To start, I think it is important to understand some macroeconomic definitions:
Recession: a decline in any country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.
Stagflation: a period with out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually a recession.
Depression: “a recession is when you lose your job; a depression is when I lose mine.” - Newspaper columnist Sidney J. Harris
In all seriousness, we look to be in the middle of a legitimate economic downturn which might, in retrospect, be a significant recession with a dash of inflation to make it really fun. I was discussing this issue with our COO, Jason Treida, who is of the opinion that this should be a very good time to really re-examine the reverse auction strategy and implementation. Basically, the theory goes that suppliers with less than full capacity production or deployment, will be very aggressive to gain/maintain business. In fact, many drop prices without provocation. This makes a lot of sense and the pressures being exerted on every company will force strong resulting pressure on many suppliers in the supply chain. However, it will only work consistently when applied to the proper supply markets which have those prior existing situations.
The global economy is much more complicated to distill into a basic maxim, however. So, I pinged Pierre Mitchell to bring a little class and panache to ESF, a nice change from the beer swilling alehouse that I call home. According to Pierre:
My POV is that it’s not a question that means much because the USD weakness and the rise of commodity prices does not lend itself to using RA’s for leveraged categories – a great strategy when riding deflationary markets – and unfortunately deflation is happening in the consumer markets but is being dampened by commodity prices from the back of the supply chain. Hopefully firms already have LTAs and other hedges in place – if not they need to find other things they bring suppliers than a checkbook. It is however a good opportunity to do better demand management and other broader cost reduction and innovation improvement efforts.
Excellent analysis, as usual. I just hope things do not get as bad as we are hearing the pundits prognosticate, or we may see the practice played out with live ammunition.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices, e-Sourcing Marketplace
January 18th, 2008
David Bush - Iasta
Sshhh! It’s America. When I was in Europe last month, it was a lot of fun drinking $9 coffees and $7 deli sandwiches. It was also obvious that it is not the good ole days of the powerful dollar. I came across this article, which refers to the USA as the newest LCCS opportunity. This, of course, is not exactly like China or India was a few years ago, but the point is taken. Sourcing in the USA is becoming a strong strategy for many foreign companies that are taking some hard hits on the current exchange rates. 2008 should make for some interesting changes in supply chains.
Entry Filed under: General, Global Supply Issues/Risk
January 11th, 2008
David Bush - Iasta
Now it seems like there is a never ending stream of coverage on regarding “The China Price” for outsourcing the manufacturing production of various products. So, when I ran across this article in Fortune Magazine, I was not surprised by the content and story line but was happy to see supply management guru, Andrew Bartolini, of Aberdeen, quoted repeatedly. Obviously, Fortune is a mass audience publication and it is good to see Aberdeen, and Andrew, get some nice publicity outside of the niche of supply chain specific periodicals. Of course, the article is short and offers little depth on the topic, but that would be expected as it is not a research briefing. The gist of the article is about doing your due diligence before fully committing to China sourcing, which should come as no surprise. Congrats to Andrew for big timing us all!
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk
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