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.

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.