It’s been proven that supply chain risk events can cause a company’s stock to tank and company to lose market value. Now enter the new supply chain risk market makers: the channel checkers. These are the analysts who follow large manufacturing firms’ supply and demand and make a living out of predicting whether production plans are increasing or decreasing. In an article in today’s WSJ, Supply Data Now a Focus of Probe, several such channel research firms are being investigated for possible violation of insider trading rules. Are these firms turning into market makers who cause stocks to go up and down?

Some feel that the insider trading investigation has gone too far in implicating research firms. Certainly these research firms can manipulate stock prices with their reports. While I’m not sure where one draws the line in these cases, I am bothered by the sheer parasitic, non-value added nature of such activities. Making money from both predicting and manipulating the market at the same time? Well, this is America, as some like to say. While channel checkers can create wealth for themselves and those who buy their research, they don’t create jobs.

Manufacturing is an engine of wealth and jobs. For example, the fact that Massachusetts’ jobless rate has remained lower than the rest of the country and is decreasing more rapidly has been attributed to the growth of its manufacturing sector. I wish more resources and focus would be placed on the manufacturing sector. In a blog post on the future of manufacturing, Robert Reich once asserted that “it doesn’t make sense for America to try to maintain or enlarge manufacturing as a portion of the economy.” Unfortunately, this point of view seems to be fairly widespread in our society. Manufacturing is dirty and working-class, while service jobs are more preferable. Having worked in manufacturing, I can attest that this belief is simply not true.

I was recently in Shanghai where I was giving workshops to several groups of supply chain and purchasing executives. Every single workshop participant worked for a manufacturing company, many of which were the Chinese plants of multinational corporations. When I give talks or workshops to groups in the U.S., there is no longer a group composed of 100% manufacturers. The rapid economic growth that manufacturing is fueling in China is palpable.

It strikes me as sad that we’ve got the channel checkers and China has the manufacturing.

-Sherry R. Gordon

Supply chain risk management (SCRM) is the hot topic at conferences, the blogosphere, and in many supply management circles. Supply risk experts, pundits and wannabes are shouting supply risk warnings from every rooftop, inundating us with webinars, talks, and articles, a veritable group of naysayers predicting the end of the world. Yet, it seems that the excitement with which it is touted isn’t being matched by swarms of interested supply risk groupies ready to move forward to defend  (or mitigate, as we risk geeks prefer to say) against this scourge that is rocking the supply chain world. How could that be? Here are a few thoughts I’d like to offer.

1.       They sound a heck of a lot like insurance salespeople. Insurance is just plain boring. “Hey mister, the supply chain part of the sky is falling down. Wanna buy a supply chain risk protection policy?” Yawn. By the way, this is no coincidence. Some supply risk experts ARE insurance industry folks. And while there are insurance solutions, they are largely inadequate.

2.       The origins of risk management are in the financial services area. And we know where their risk management techniques took us and our whole economy. Perhaps the SCRM crowd is afraid to go there.

3.       How motivating is continual doom and gloom, even if it is of the more exotic supply chain risk variety?  SCRM sounds like Chicken Little and people get inured to it after a while.  Sound the alarm too many times and people begin to ignore it. Or at least try to hide their heads in the sand for a while until a risk event comes by to bite them in the keister.

4.       How many times do people have to hear the name of an unpronounceable volcano invoked in the name of supply chain risk before they book a trip to Iceland out of curiosity to see it, drink some Reyka vodka and totally forget about the supply risk part?

5.       SCRM seems too challenging. One person or one department (i.e., Purchasing) can’t adequately address supply chain risk management by themselves. But Purchasing is where people turn to and where SCRM typically begins.  SCRM requires the usual suspects:  senior management involvement/support and cross-functional participation.  This means convincing C-level execs of SCRM’s value and ROI.

6.       Most senior executives know they need to do something. Awareness is the first step. But as usual, it’s the early adopters who actually DO something. SCRM is still in the early adopter phase.

7.       What can you actually DO about supply risk? You can wring you hands in despair. You can buy software. But many companies have not yet reached the level where they can address supply risk organizationally, let alone use a software solution to address it.

8.       SCRM has ROI. Both addressing the risk and NOT addressing it cost money. However, it needs to be figured out and demonstrated for a particular firm’s supply chain situation.  And for the impatient crowd, ROI isn’t realized overnight.

9.       There is too much emphasis on the bad things that can happen and not enough on how to address supply chain risk.

10.   There are currently two silos in SCRM:  supply risk “tree” people (those who focus on risky suppliers) and the supply risk forest people (risk in the supply chain, but not individual suppliers). SCRM needs to address not just the trees, but the entire forest including the trees. Current tools are inadequate.

Hopefully both business practices and risk management tools (software and other) will evolve further and become more accessible, and firms will turn fear and awareness into action.

-Sherry R. Gordon

On June 17th, 2010 at midnight, someone got by PR Newswire’s vetting process and issued a fake press release about cereal maker General Mills. The press release falsely claimed that President Obama was launching an investigation into General Mill’s supply chain. The press released was confirmed to be a hoax and immediately retracted. The Wall Street Journal reported that investors and shorted sellers have previously used false rumors as a means to manipulate stock prices. But it is still unclear how this hoax actually occured or who did it.

Several aspects of this situation are interesting. One is the use of a false rumor about a major corporation’s supply chain as a means of harming that corporation. This event illustrates how important the integrity and functioning of supply chains have become to the overall success of a company. But what’s even more interesting is how universal the understanding of a supply chain’s importance has become. Until the last few years, when various supply chain events such as food, drug, and consumer products contamination and other failures became widely known,  supply chains were a weird term that only some manufacturing and purchasing geeks cared about. If you mentioned that you were involved in supply chain management at a cocktail party, people would nod politely, glaze over and change the subject. The general public’s personal interest has increased at least in terms of awareness about how a tainted product might make its way to them or their children. Now the public knows that somehow supply chains make the world go round.  They are recognized as providing an essential, competitive advantage and their failure as causing disastrous results for consumers and corporations alike —  plus a public relations nightmare for corporations.

-Sherry R. Gordon

Looks like it’s really all over for NUMMI, the Toyota/GM joint auto manufacturing venture in Fremont, CA. Last summer, I wrote a post about the strong possibility of Toyota’s closing the plant (NUMMI: Things Are Looking Gloomy). The plant was losing money. Located in a high-wage area, even potential UAW concessions didn’t seem like enough to allow the plant to continue. And now Toyota has decided to close the plant in April as a result of GM’s pulling out of the joint venture when it filed for bankruptcy. Toyota couldn’t do it alone.

Besides the loss of 4700 jobs at the NUMMI plant, the toll on suppliers will be even greater, according to a December 24th Wall Street Journal article (subscription required). According to Bruce Kern, executive director of the East Bay Economic Development Alliance, tens of thousands of people work for first and second-tier suppliers to the plant. His organization is working on finding new business for some of these suppliers. While Toyota plans to continue use the top 25 suppliers, this still leaves many suppliers without their key customer. Many suppliers have had nearly total dependence on the auto industry and have not diversified. It looks like another blow to the California economy from this closing, one that will reverberate through the NUMMI supply chain.

While another WSJ article describes many suppliers to Detroit automakers as surviving the downturn better than expected, though perhaps not well-poised financially for any big ramp-ups, these suppliers appear to be in potentially worse shape. Many of the NUMMI suppliers are small businesses that have not gotten the credit and considerations that saved some of their larger Detroit brethren from bankruptcy. Of course, the threat of the NUMMI closure and its economic impact has been hanging over the supply chain for quite some time. It appears that some of the suppliers have faced the problem head-on as soon as the automotive downturn started and have been proactively pursuing other business opportunities to stay afloat. But how many of the suppliers did not? And how many can get enough new business to survive?

Because NUMMI was focussed on using lean manufacturing principles and practices that were flowed down to its supply base, there should theoretically be quite a few well-run suppliers who could be suppliers of choice for other industries, should they have the capabilities to make the transition to supplying products that take advantage of their core competencies. A few things are working against them, however. Not to make too many gross generalizations, but many manufactures are better at operations than sales. Customer diversification for a small company identified with the automotive industry is a huge challenge. Lean companies will have an advantage in eliminating waste, doing more with less and being suppliers of choice. Lean can help spur growth and give competitive advantage, but only when there are growth opportunities to take advantage of. Lean suppliers may be able to survive longer than their peers, but only if they find enough business to keep them afloat and new customers to enable them to thrive.

-Sherry R. Gordon

Die casting is manufacturing at its most basic and dirty level. Companies that use casting suppliers must allow additional lead time for procuring the castings, as they are typically a long lead-time item. And die casters are known for being generally at the low end of the manufacturing efficiency and innovation scale. According to a North American Die Casting Association (NADCA) report, the number of die caster was expected to drop from 367 in 1999 to 287 in 2008 and the association halfed its dues this year due to the rough economic state of affairs for the industry. Competition from China and the bad state of the auto industry are two factors. But if you thought that dangerous manufacturing conditions exist only in China, think again

Despite the difficulty of the business econonmically, the inherent danger and dirtiness of the casting manufacturing business was revealed recently in an article in the Concord Monitor about a Franklin, NH company, Franklin Non-Ferrous Foundry. The foundry sounds like a scene out of Dante’s Inferno. Thick brown dust containing lead, antimony, cadmium and other heavy metals covered everything in both the foundry and the office. According to the article, workers joke that they don’t dare drag their feet at work for fear of kicking up a cloud of this toxic dust. Workers were not wearing breathing protection and working near bubbling vats of 2300 degree molten metal without any heat protection. The company was slapped with numers OSHA fines for over 57 violations, 25 of which were in the serious category, which means potentially life-threatening.

What is interesting about this situation is how blase the company owner and workers are about the situation. Most seem more concerned about keeping their jobs than worrying about getting sick or hurt by the situation. As one worker said, as he was given a respirator when he started working there, ““I think it’s fun. You learn new things.” And while the owners have been slapped with hundreds of thousands of dollars in fines, it is not clear which fines have been paid. And OSHA cannot shut the company down, only report violations and levy fines. When a Concord Monitor reporter toured the facility recently, the owner told him that most of the violations had been fixed.

So what would you do if you had a supplier that operated like this, endangering its employees and the environment, yet still supplied you with quality parts at a good price that met your specifications? Die casters, particularly North American ones, are a dwindling species. Would you prefer to deal with Chinese die casters, who are likely to be operating like this without any governmental protections for health and safety of its workforce? If a manufacturer needs the parts to run their business, are they willing to do business with whoever can supply the parts without regard to how the supplier runs its business? What if none of the suppliers offered a clearly safe alternative? And, are you even aware of whether you have a directo or sub-tier supplier that runs its business without health and safety protections in place? It’s a tricky question of ethics and corporate social responsibility.

-Sherry R. Gordon

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An article in today’s WSJ, “Companies More Prone to Go Vertical,” discussed the current trend for some companies such as Oracle, Pepsi, IBM, General Motors, Boeing and Apple, to cite a few,  to return to the practice of vertical integration. Vertical integration can be defined as the degree to which a company owns its upstream suppliers and downstream customers and distribution channels. Some of the main reasons why companies may want to become vertically integrated are to mitigate supplier risk, control distribution channels, increase barriers to entry from competitors.  Boeing, for example, acquired Vought’s Dreamliner operations out of necessity to gain control over troubled suppliers and parts that were having an adverse impact on its Dreamliner program.

While companies don’t seem to returning to the old Henry Ford style of vertical integration, they seem be trying to use it as a method of controlling assets and exerting more control over critical parts of the supply chain. Vertical integration seems to wax and wane over time. Perhaps the global economy with its growing supply risks and increased competition is spawning this new wave.

There are, however, many drawbacks to vertical integration. One is decreased flexibility and potentially higher costs. Once a supplier is captive, there may be more control.  However, there is a cost to increased control, including reduced supplier competition and opportunities to engage with potentially more capable suppliers in the future.  And as business needs evolve, some of the integrated businesses may not evolve, may no longer fit or even be a drag on the bottom line. Vertically integrated companies may find themselves with less attractive overhead and cost structures. And they may be entering industries either upstream or downstream that they have less knowledge of and that may not really mesh with or add value to their real core competencies.

The regulatory environment may determine how far firms are able to go this time with vertical integration. And the competitive environment will ultimately help shape and influence the success of this approach.

-Sherry R. Gordon

In a takeoff of the U.S. government’s Cash for Clunkers program, Toys R Us began a program to help get recalled and dangerous children’s equipment such as cribs, bassinets, high chairs, etc. out of people’s homes. I touched on the subject of dangerous toys and equipment in a post a few months ago, Another Supply Risk: Your Neighbor’s Yard Sale, where I wrote about how recalled children’s items are turning up in yard sales. 

Actually, Toys R Us developed the program well before Cash for Clunkers and wondered how their own cash for cribs program was going to be perceived by the public in light of the government program. They are offering a 20% discount off new gear, regardless of what used baby gear is being turned in — a great, socially responsible idea, in my view. In spite of continued efforts to get dangerous, recalled baby equipment out of peoples’ homes, less than 30% of it is returned to manufacturers.

The Toys R Us program will likely be the first of many similar campaigns by other retailers to rid the system of supply chain mistakes. However, I don’t imagine we’ll be seeing moolah for melamine milk or payments for polluted propofol any time soon.

Sherry R. Gordon

Supply managers and buyers have always had the challenge not just of finding suppliers but finding suppliers who are both high-performing and “best value”. Numerous supplier evaluation and supplier performance management software solutions are now available, where ten years ago very few options existed. Most options that I’m aware of are either SaaS (software as a service) or licensed software solutions that are typically targeted at medium to large-size companies. The choices for software solutions for evaluating suppliers have certainly increased since the days when I was in the supplier evaluation software business. In fact, the whole supplier information and supplier performance management solutions market has heated up as companies are becoming more concerned about the impact of supply risk and supplier performance issues.  For a further description of this market, you can read an analysis that appeared on the Spend Matters blog.

However, some challenges still remain: finding good offshore suppliers and providing small to medium-size businesses with affordable, yet effective supplier evaluation options.  While there are options for finding offshore suppliers or suppliers from developing countries, there are none that I’m aware of that give buyers a good, cost-effective way to know how good these sources really are. 

I thought I would alert readers to a new site for finding and evaluating suppliers – SupplierEvaluations.com. It is based upon a social networking, B2B approach where a community of buyers and supply managers, using an evaluation template and process provided by the site, evaluates suppliers and shares the evaluations with other members of the community. Supplierevaluations.com expects to be operational by mid-September. Users can sign up now to participate when the site goes live.

A recent article in the Manchester Guardian reported on the latest sub-tier supply risk horror story. It is alleged that British supermarket chains Tesco, Asda, Marks & Spencer and dozens of other supermarkets may be inadvertent parties to a different kind of laundering scheme – beef laundering. Greenpeace, after a 3-year undercover investigation, called this situation to the attention of Brazilian authorities, who are investigating reports that major cattle farms and slaughterhouses are sourcing some of their beef from illegal sources. These illegal farms have been deforesting the rainforest to raise cattle. Illegal sources are alleged to have been purposely mixed with legitimate sources in order to hide the illegal beef and leather. This illegal beef is nearly impossible to trace. Apparently Brazilian supermarkets are cancelling contracts with the illegitimate farms, but the British supermarkets are still in the process of auditing and verifying that their meat sources are, in fact, contaminated with illegitimate products.

This situation is disturbing from many points of view. The lack of traceability of the meat is certainly a problem because it is causing deforestation of South American rainforests.  Food safety should also be a critical concern. How does the consumer know that the illegal farms adhere to proper health standards and are not putting sick cattle into the food chain? The meat, leather and cosmetic ingredients that come from Amazon cattle are shipped worldwide, which may mean that many more companies are inadvertently supporting deforestation activities and global climate change.

Sub-tier supplier risk surfaces again. Beef laundering is the latest in a series of unpleasant supply chain discoveries. While such situations may be hard to predict or prevent, they can be mitigated. As companies address supply risk, they need to be continually vigilant about potential risks. And when supply chain problems surface, firms need to act quickly to verify and remedy, if necessary, not wasting time denying the charges. Being proactive goes a long way to avoiding even more damage to the perception of corporations. When the public perceives that a company is not proactive about supply chain risks, the damage caused by poor public perception can easily translate into lost revenue.