Calling Dan Rather

As the world contemplates the twentieth anniversary of the June 4 Tiananmen Square massacres in Beijing, China's human rights record will be juxtaposed against the country's record of economic growth. Surely, news analysis of the day will focus on how much and yet how little things have changed in China since Dan Rather gave the world near-continuous "tweets" from Tiananmen Square.

Yes, lots has changed. To appreciate the extent of China's socioeconomic growth over the past 20 years, consider the following sample of data points. In 1989, the US exports to China totaled $5.8 billion USD while US imports from China were $12.0 billion for a trade deficit of $6.2 billion USD. (As of 1989 the US had run a trade deficit with China for only four years.) Chinese tourism receipts amounted to $18 billion USD in 1989. The population of Shanghai was 12.8 million people. Foreign visitors to China spent $18.6 billion USD during their stays that year. And the first acquisition of a US company by a Chinese one was made (China's national chemical company acquired the phosphate fertilizer unit of USX).

A business person seeking a supplier of low-cost goods in China that year would have been hard-pressed to find a supplier without some significant "assistance" from a government-sponsored agent. The B2B trade machine Global Sources was churning out printed trade journals and Alibaba founder Jack Ma was teaching English and International Trade in Hangzhou.

Twenty years later, US exports to China will likely exceed $71.5 billion while US imports from China will grow to more than $338 billion USD. Shanghai has more than 18.9 million residents (of which a third are migrants from rural areas of the country). China should receive more than 124 million foreign visitors this year--including nearly 2 million Americans. Foreign visitors may spend $300 billion USD this year. Global Sources and Alibaba dominate the online China-trade directory scene. Nearly 70 Chinese companies trade on the NYSE and American consumers purchase Lenovo notebook PCs and Haier home appliances at their favorite stores.

No matter how you slice it, the data are astounding and it has become much easier to conduct business in China. China has boomed since 1989 and no amount of political action and international condemnation or pressure about human rights abuses has had much impact on the country's economic development. And despite the growth in interaction and trade with China, we seem no closer to getting a clearer view of what's happening within the supply chains for most of the world's apparel, toys, electronics, other consumer products and drugs. It's not as if the technology is not readily available to help us to do that.

Any intelligent sourcing manager will tell you that supply chain is all about relationships and the process of monitoring them: face-to-face interaction; constant remote communication; continuous market intelligence about your partners and their businesses; investigative analysis of vendor compliance with local or international health and labor standards.

Establishing a supply base in China (and anyplace else for that matter) is not a one-time activity--it's a continuous event lasting throughout the life cycles of your products. Suppliers change: operations grow or dwindle; factory managers arrive and depart; customers come and go; workers thrive and suffer; local communities embrace and reject their factories. And all these events can have a profound impact on how your supply-chain partners behave and perform for you. No credit report or once-a-year audit will help you monitor the constant changes at your vendors that could ultimately endanger your business. Only a network of connected parties providing continual updates and shedding light on all aspects of a supplier can make this happen. Your supply-chain knowledge network is the most valuable tool in the chest for keeping up with what your suppliers are doing. And Internet-based software can facilitate the sharing of this information.

But for all we're sourcing from China--and for two-dozen years of trade deficits--we don't have much to show on this front. Companies still seem surprised when they one of their offshore suppliers falls down disastrously. Multinational firms can't convincingly learn from each other--or from themselves.

Sure, the Internet did not exist in 1989. But now social networking sites such as Facebook and LinkedIn connect students, researchers and businesspeople around the world, including those in China. Business software applications can link the workflow and transactions of buyers in the US and Europe to their suppliers in China. Linking and tapping into your global supply-chain knowledge network should now be a cinch.

China's government may be hardly more tolerant of dissent now than it was 20 years ago. The Communist Party may occasionally succeed in tamping down on the free-flow of communication in China on the Internet and television (ask any young person in China what he or she knows of the Tienanmen Square protests). But it is falling further out of step with advances in the technology that powers the Internet. Will China really be able to block the "cloud"? Doubtful.

When it comes to shedding light on our supply chains and bringing greater transparency to our networks of supply--in China or elsewhere--vigilance, awareness and participation will be key success factors for purchasing . We have the tools to share what we learn, publicize the risks and opportunities we identify and work with our partners to continuously improve efficiency and social conditions in the supply chain. Why not use them? Twenty years on--Internet in hand--we can each be a Dan Rather, can't we?

The Offshoring Hangover

It all seemed like such a good idea at the time. Particularly in the late '90s and early '00s, outsourcing to low-cost countries (LCCs) held the promise of lower manufacturing and assembly costs and seemed to present a sure-fire way to improve corporate profits. Establishing a supply base in a country such as China also offered an opportunity to establish credibility with the host-country government and tap into the country's explosive economic growth. The outsourcing party was on. Achieving immediate cost savings looked downright easy.

But that was all before high-profile supply-chain failures, skyrocketing oil and prices, rising inflation and upward pressures on factory wages in many low-cost countries in 2007 and 2008 began to change the economics of offshoring. And it was before companies realized that the local infrastructure and skills base might not yet have been ready for the spike in work. Or that their customers would notice a difference in the level of service or quality associated with their offerings.

Now many firms are rethinking their LCC outsourcing programs. Many of the expected economic benefits associated with migrating a supply chain to LCCs have not materialized. In fact, for many firms the ROI associated with offshoring has not been positive. Nearly half of the firms surveyed recently by Grant Thornton LLP indicated that their offshoring activities have either no impact or a negative impact on their ROI. Lower product quality and delivery delays make the top of the list.

As a result, an increasing number of firms (again, nearly half of those surveyed) are planning to reign in their global supply chains a bit and bring operations closer to home. Numerous examples of this phenomenon can be found.

Grant Thornton makes two key recommendations in assessing the data from its recent offshoring study:

1. Look closely at the financial health of your supply base.
2. Monitor the evolving marketplace and respond as quickly as possible to changing opportunities.

We would add another recommendation: leverage the full breadth and talent of your own organization and network of partners around the world to:

• Identify the right suppliers for your firm;
• Assess suppliers' capabilities to serve as reliable partners;
  
• Understand hidden supplier risks and costs (e.g., intellectual-property theft and corruption); and
• Detect as early as possible signs that your offshore suppliers may be at risk.

The internal supplier-knowledge network in most multi-national firms is simply waiting to be tapped. Offshoring need not be a zero sum game. Being fully-informed about your supply base and continually refreshing your supplier market intelligence can help you monitor the opportunities and risks related to maintaining an offshore supply chain.

(Photo credit: centralsq on Flickr)

Staying Put

On Wednesday, the U.S. Bureau of the Census released figures showing that fewer American residents relocated in 2008 than in any year since 1962. The "mover rate" was the lowest since the bureau began tracking such movements in 1948. Still, more than 35 million people changed their residences last year. And based on available U.S. census and unemployment data, we can estimate that roughly 20 million Americans of working age made such a transition for a new job or with job in hand.

What, you may ask, does this have to do with supply-chain planning? Sit tight.

The causes and effects of plummeting home prices and massive job losses on population movement should be fairly obvious: families can't sell their houses (and don't want to purchase new ones until they sell their existing homes); few new jobs exist (or are not considered to be worth moving for); fearing layoffs or having already lost a job, families are holding off on any big moves. We effectively now have a captive society.

And this captivity is, in turn, having further impacts on the U.S. economy. The $16.5 billion move industry has ground to a halt. Not to mention the impacts such behavior is having on related sectors (home improvement services, appliances and furnishings).

Some economists are concerned about the effects this phenomenon will have on macro-economic efficiencies. Quoted in The New York Times, Joseph S. Tracy, research director of the Federal Reserve Bank of New York said: "The thing that would be of deeper concern is if job-related moves are getting suppressed and workers are not getting re-sorted to the jobs that best use their skills,” he said. “As the labor market started to improve, if mobility stays low, you can worry about the allocation of workers." But this view assumes that workers' skills are generally transferable across industries and that the economy benefits more from a continual redistribution of workers.

One important aspect of American (as well as international) economic activity that is overlooked in the efficient-redistribution-of-labor argument is the existence of industry clusters and roles these play in the functioning of industry. Dating back centuries and occurring around the globe, industry, trade or business clusters have been key contributors to the economic development of cities like Hanoi in Vietnam and New York and entire regions such as Silicon Valley and the Upper Midwest in the U.S. Studied and popularized by Michael Porter of Harvard Business School and Paul Krugman of Princeton, industry clusters are now objects of desire for many government economic planners.

In such clusters, industrial know-how, intellectual property, skills and infrastructure are developed and shared. Investments are made by individuals, firms, governments and consortiums that end up benefiting the greater good. Institutional and "tribal" knowledge--though not necessarily well maintained--serves as the glue that enhances productivity within the cluster, binds members of each cluster together and strengthens them over time.

Despite the effects of globalization and the emergence of new offshore (often lower cost and clustered) sources of supply, perhaps we should not forget the important role that traditional centers of production and supply serve. As we watch U.S. automakers struggle to survive, let's not too quickly bemoan a lack of mobility among U.S. workers. To be sure, current economic conditions are creating extreme hardships for families living in cluster areas such as Detroit. But, in a way, could the current slowdown in movement be a good thing? The best folks to have at the ready when the economy picks up again are probably the ones who best know how to produce the goods and provide the services in the industries most affected by the recession.

The Obama administration will promote the development of new industries, but these will be industries closely related to existing ones. Americans won't stop buying cars--we'll eventually need people to build more fuel-efficient cars in a cluster that has a history of building automobiles. We won't stop using personal computers and software--Silicon Valley will continue to churn out ever smaller forms of personal technology. And, yes, eventually we'll need a cluster to help manage complex financial instruments--and it will probably be in a place called New York City.

So what does this all have to do with supply-chain planning? Not much in the immediate future, but potentially lots if you're thinking strategically about how to evaluate and manage your supply-chain risk five to ten years out. Recent supply-chain management thinking would have us planning for a one-way shift in our sources of supply, looking toward lower-cost countries and and abandoning traditional, seemingly-at-risk supplier bases. But, ignoring the historical role of clusters and their potential future influence on your supply-chain would be a mistake. Your suppliers are located where they are for good reason. Be prepared for them to stay put for quite some time. And be sure your strategic supply-chain planning takes into account the importance of returning to them in the future.

(Photo credit: Head_First_Only on Flickr)

At the Top of the Slide

Think you have a good read on what's happening on the ground with your offshore supply base? Most procurement executives probably think they do. Sure, they have their teams of supplier-quality engineers checking in a continual basis with their suppliers. They keep up with all the economic news coming out of China and other export-oriented Asian nations. And from those perspectives, things probably look good: their suppliers continue to meet production schedules and quality targets; and China seems poised for some sort of rebound given all the stimulus money the government is injecting into the economy. Supplier viability appears good.

But supply-chain executives should bear all this news with caution. Your staff in China are likely focused only on your own products. Supplier-quality engineers are not inclined to be tuned in to how suppliers are faring with their other customers. And despite signs that China's public spending may help sway its current economic downturn, other economic data out of China point to tough times ahead. How do you expect your suppliers to react in the face of a downward spiral? How will you react?

The unemployment rate in China is on the rise. And nowhere is this being felt more acutely than in the eastern provinces that helped fuel so much of the country's recent growth. Government figures place the unemployment rate at 4.2%, but according to The New York Times, this number "excludes more than 100 million workers who have migrated from rural areas or between cities to find jobs, often in the export sector, and are now feeling the brunt of dismissals, pay cuts and sharply shortened work hours." These are the workers who have been making your parts and assemblies at such low cost over the last several years.

So, what should you be prepared for in the coming months? One thing is a continuing wave of factory closures (or, at a minimum, some form of supply-chain disruption). Factory managers that lose (or simply fear losing) one or two key customers may decide to shut down their operations and walk away entirely (or shift to making higher-margin products).

From its network of sources in China, SupplyScope is getting word of suppliers actually turning away business--despite the current economic climate--for fear of not getting paid by those potential customers. These suppliers are accepting that it would cost them less to refuse an order than to accept one and never receive payment for their services.

With rising unemployment you can expect an uptick in crime in areas hard-hit by the recession. While the Chinese government does not publish crime statistics (for fear of facing embarrassment for its inability to contain crime), local news sources indicate that crime in Chinese factory towns is on the rise (that Guangdong Province officials recently mandated the installation of a vast network of security cameras should be a good indicator). Consider the risks that crime can pose to your suppliers' workers, to your suppliers' operations and their ability to get your goods from their loading docks to nearby ports.

And there is a human side to all of this that relates to corporate social responsibility. If you don't have a good sense for which of your suppliers is required to (or unwilling to) comply with recently-imposed labor laws in China that protect worker rights (i.e., privately-owned factories are not affected by the laws), you better begin to understand your risks in this area. This doesn't only apply to your China-based suppliers. Tough economic times are going to lead to some harsh decisions by factory managers in all countries. Taking the necessary steps to understand your suppliers' business conditions and plans for responding to the current economic crisis will make you better prepared to manage your supply-chain risks.

Traffic Report: Are Your Offshore Suppliers Moving and Shaking?

The global economic crisis has led to at least a few types of stampedes. At first, individual investors headed for the exits, pulling heaps of money out of stocks and mutual funds.

Then a few months ago, some supply-chain industry analysts and software marketers began beating the drum about "supplier viability." As procurement executives caught wind of this, they sent their organizations into a tizzy: peppering suppliers to attest to their financial health, credit worthiness and viability. Dun & Bradstreet has probably enjoyed a nice pick up in demand for its supplier information reports.

But there may be another stampede underway. As manufacturers in Eastern China grapple with declining demand for exports, look for ways to reduce their cost structure and seek out new domestic markets, they are turning their eyes westward. Not to Europe, the Middle East or Africa, but to Western China.

Cities like Chengdu have already established themselves as key manufacturing bases for companies such as Intel and Motorola. Now they are preparing to benefit from the Chinese government's significant investment in infrastructure in the country's inland regions (to rebuild from the 2008 Sichuan earthquake and as part of China's economic-recovery spending). The closing of thousands of factories in Eastern China has led workers to return to their homes in Sichuan and other western provinces (read: a sizable pool of experienced and workers already accustomed to working in a factory environment).

Does your organization have a good beat on how your China-based suppliers are adapting to the changing economic conditions on the ground?

Do you have any sense for what new risks or costs a move to Western China from the country's east coast by one of your key components suppliers will introduce to your supply chain? (think geography subject to potentially-significant seismic activity and 7 days of additional lead time by boat--nevermind the traffic jams on China's roads.)

More importantly, do you expect to learn of such a move before it happens? Can you be so sure?

If you cannot answer these questions with confidence, then it may be time for you to put down those D&B reports and begin thinking about solutions that can offer you some supplier visibility rather than supplier viability.

Pirates Get It. Do You?

Your firm may not take ownership of your inbound materials--in a financial or legal sense--until the goods reach your nearest port or even your company's receiving dock. But those materials are worth their weight in gold.

And that intrinsic value is much higher than the dollar figure you see listed on your bill of materials (BOM). Pirates in the Indian Ocean understand this concept. It is why they continue to hijack cargo ships (not just oil tankers) and demand astounding ransoms for the release of the ships.

What if, for example, a shipment of your critical components is delayed, lost or destroyed? Sure, your shipment is probably insured. But what good will an insurance payment do you if, in the short term, your sales organization can't deliver on a promised order? The opportunity cost of a delayed or lost sale is easily greater than the value of your finished goods. And it's many times greater than the costs associated with actively monitoring your supply chain.

If you think this argument is overstated, then answer this question: how sure are you that your inbound materials are being delivered in a manner that ensures the security of your supply chain at the lowest total cost?

Unless you're paying dearly for air freight with a carrier that allows you to track your goods, you probably don't really know where or how secure your shipment happens to be.

The recent spate of piracy on the high seas ought to be a reminder of two things:

1. Most buyers that rely on offshore supplier have very little visibility into the transportation links of their supply chain; and
2. Supply-chain risk management should not be solely focused on supplier stability or activities that occur at suppliers' factories.

How often do you ask your supplier about the specific route your shipment of materials will take, the specific carrier that will bear your shipment, the nationality of the flag under which the carrier will travel? Should you be concerned that a shipment from one of your suppliers may be heading through "piracy-prone areas"?

With nearly 10% of global trade passing through the Gulf of Aden--an area that has been hit hard in the last few months by piracy--there's a decent chance your supply chain can be at risk--you'll want to begin paying greater attention to these issues.

As more firms adopt just-in-time (JIT) and other lean manufacturing practices, a huge percentage of the value in the supply chain is tied up on the trucks, ships and planes that carry inbound materials to final-assembly locations.

What can you do? Well, for starters groups such as the International Maritime Bureau (IMB) have been tracking piracy activity for quite some time and offer real-time updates on piracy activities. But realistically you don't have the time and resources to assess the security of your logistics, not to mention continually tracking other risks to your supply chain such as weather patterns, natural disasters, port strikes.

Developing and implementing a supply-chain risk-assessment program and identifying alternative logistics models that may provide a greater sense of security are just a couple of ways to give you and your organization greater peace of mind.

When your supply chain is an iceberg

Now we come to learn that the root cause of the Titanic's sinking 96 years ago today was, of all things, poor supplier-quality management.

A recently published book details how the shipbuilding firm Harland and Wolff (still in existence today) in Belfast, Northern Ireland, resorted to using low-quality iron rivets in its rush to nearly-simultaneously launch the Titanic and two other "Olympic-class" super-liners (the three largest ships in the world at that time).

The narrative of how the shipyard's management team created its own supply-chain challenges - and then failed to address them - plays out like a modern-day supplier-network crisis. It also conjures up memories of how quality problems with a seemingly insignificant component on the Space Shuttle Challenger nearly put an end to the entire U.S. space-exploration program.

In proving their 10-year old theory that faulty rivets contributed to the Titanic's quick demise, the authors (who happen to be metallurgists) apparently conducted an extraordinary amount of archival, metallurgical and forensic research. According to a review of the researchers' findings in The New York Times "...troubles began when its ambitious building plans forced Harland and Wolff to reach beyond its usual suppliers of rivet iron and include smaller forges" with less experience in making higher-grade iron rivets.

The researchers found that not only did shipyard managers take risks with materials, but with labor as well. With a full-on effort underway to launch multiple large ships, Harland and Wolff management brought in less-skilled riveters to help finish the job ("good riveting took great skill," according to the Times article).

All these risks weren't taken without some serious hand-wringing. One of the authors of the book told the Times that shipyard management discussed the shortage of skilled riveters at every meeting for six months leading up to the Titanic's launch. How many times have we seen this scenario play out since the Titanic with other products and industries?

It all comes back to the issue of supplier discovery, due diligence and supply-chain risk assessment. Few companies - especially when faced with aggressive, high-stakes product launch schedules - ever invest in critical supplier-investigation activities. But these are the times when having unfiltered market intelligence about your existing or potential new suppliers is most important. Think about it: all the leading cost-, quality- and delivery-management software tools available today would never have revealed the true weaknesses in the Titanic's supply-chain.

Make the effort and investment to assess your supply-chain before it sinks you.