Chain Reaction

We have been warning of double digit inflation and it has finally coming true. Even the drinks on US flights have gone from $5 to $6, a 20% hike. They know we’re expecting inflation so they give it to us. This is how spirals get started. Just last week, P&G followed Dow’s lead announcing a 16% hike in prices for its products. Are the politicos in Washington going to let this fester while they worry about the election only to find that interest rates need to be jacked way up to crush it? I hate to say it, but I fear we are in for a very tight-money fed this Christmas.

This week’s commentary examines the rising price of fuel and the supply chain.  Here’s some of what we talked about:

Our top questions these days are all about how to respond to high oil prices. Even the most respected and well-heeled global supply chain leaders are wondering how quickly everyone else can flex their supply network designs to offset the risks and challenges posed by $150-a-barrel oil. The answer: not quickly enough, unfortunately.

Oil has been ridiculously cheap for almost 20 years, coinciding nicely with the development of supply chain management as a widely recognized discipline in business. Not until 2005 did our current steep climb begin. Certain sensible principles like leaning inventory, outsourcing low value-added work, and rationalizing suppliers have gotten out of hand as we have chased cheap labor and just-in-time deliveries around the world.

We have thoughts on a fix: Railroads. Rail is dramatically cheaper per mile than truck transport, and yet, according to the American Association of Railroads freight traffic is down from last year. Carload traffic, which handles bulk shipments of stuff like coal, was down 3.6% in June 2008 compared to June 2007. More telling is that intermodal traffic (containers that fit onto trucks for their “last mile”) was down 4% in the same period. So, containers full of toys and furniture shipped from China are still rumbling eastward on Interstate 80 despite $5.00 per gallon diesel. Why?

You can subscribe to the Chain Reaction companion newsletter here. What do you think? What other fixes might there be for high oil prices (which aren’t likely to go away)? Let us know here.

We recently met with Hewlett-Packard executives to discuss their sustainability and green initiatives. Hard to argue that HP has gone above and beyond the call of duty in this realm, and it’s made it a corporate mission to do more. So my collegues Stephen Stokes, CJ Whelage, and I laid out a challenge for the HP team, and extend it to all laptop manufacturers. And here it is:

Take a new step in thinking about energy efficiency for notebook computers and develop a 12-volt notebook instead of the industry standard 16- to 20-volt varieties.

In doing so, HP and other laptop makers would let consumers, in part, take advantage of the extra electricity generated in various vehicles, allow the use of notebooks on long journeys, and open up access to mobile and fixed computing to a greater cross-section of the developing world where reliable electricity infrastructure is rarely in place.

Can you imagine a world where notebooks are handed out with car charger adapters? Consider the following:

Currently, global sales of notebooks exceed desktop sales and are currently running at around 97 million units annually. Assuming a three-year notebook lifetime and a conservative 20% market growth retrospectively, this implies an installed base of roughly 236 million units. With the typical average power usage levels of 20 watts, and an average daily usage rate of 8 hours, we estimate annual global power usage of notebook to be of the order of 10.4 terawatt hours (that 10.4 million-million watt hours). On average, residential U.S. power rates are 10 cents per kilowatt hour, that’s more than $1B worth of power, power that would have resulted in almost 6 million tons of CO2e (carbon dioxide emissions) being emitted into the atmosphere.

Now, picture this: If 30% of all notebook users used the existing free energy available from automotive recharging for 60% of their notebook electricity demand, annual savings could top more than 1.8 trillion watts of energy. That’s enough to support the annual electricity consumption of more than 175,000 U.S. households and a reduction in GHG emissions of more than a million tons of CO2e (see Figure 1).

In a world looking over longer timescales to expand the fleet of electrical and other hybrid cars, this free energy may not be around forever. But we predict it can significantly dent consumer product energy usage and the resulting greenhouse gas emissions, globally, in the decadal timescales over which HP’s plan is draped. During that time, the notebook market will continue to flourish.

HP seemed keen to take this challenge seriously and we look forward to seeing what they can do with it. What do you think? Any other notebook manufacturers up for the challenge? Let us know.

Last week, I had the pleasure of closing SAPICS’ 30th anniversary conference in Sun City, South Africa. What I saw and heard there renewed my faith that the African continent promises growth opportunities that are still badly underestimated by the outside world. Back in December, I wrote a bullish piece on Africa as an emerging business hot spot. The madness in Zimbabwe and Kenya earlier this year, however, drew out the perennial cries that the continent is somehow beyond redemption and maybe we were falling into the same trap of false hope that bedeviled Afrophiles for hundreds of years. Sorry, but I’m still optimistic, and 1,293 attendees from Africa and the wider world at the SAPICS event make me more confident than ever that this time it is different. I wrote up why in this article for our sister publication (complimentary subscription here) and blog, First Thing Monday. You can read what some are doing to help build tomorrow’s supply chains in Africa, today here: “Africa Opportunity: Building Supply Chain Foundations.”

I recently saw a demonstration of Oco’s product sets for business intelligence (BI) and was impressed. What stood out was the power of simplicity the Waltham, Massachusetts-based software-as-a-service (SaaS) vendor had managed to capture. From its easy user interface (UI) to the logic of how and why it might help companies manage their supply chains better, Oco took me from zero to 60 in seconds.  Read my full account here.

By now, many of you have seen our Top 25, but what about the next 25? One of the benefits of the methodology we use is that the list itself doesn’t stop at 25, it actually goes much deeper. So here is recognition of the next 25, the companies that landed in slots 26-50 in the ranking. Among these, several interesting themes emerge, as we note on the jump. Read the rest of this entry »

Since first publishing the AMR Research Supply Chain Top 25 in 2004, we continue to hear feedback every year about how to refine the rankings. Our main mission has always been to highlight examples of supply chain leadership and, in so doing, to elevate the importance of the profession. In 2008 for the first time, we explicitly recognized four examples of leadership in supply chain that demonstrated specific areas of practice. Our methodology for selection was a traditional nomination and committee selection process whereby all AMR Research staff were invited to nominate companies and selections were made by our research leadership.

Here’s a look at some of these winners.

Technology Use in the Global Supply Chain

Colgate-Palmolive was nominated, along with about a dozen other companies, and cited specifically for outstanding achievement in managing supply chain processes on a single global ERP platform. The extraordinary performance that brought Colgate-Palmolive to the top of the nominee group was in part, demonstrated discipline in stating and sticking to an SAP strategy for most of the essential business processes underpinning the supply chain. The other part of the story was Colgate’s consistently strong operating and financial performance against the highest metrics of supply chain excellence.

Leadership in Corporate Social Responsibility in the Global Supply Chain

Unilever emerged as our chosen recipient for its longstanding tradition of approaching supply chain with concern for the unique market conditions in each country in which it operates. This tradition was described by leading management thinker CK Prahalad in his book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

We also had the pleasure of interviewing Pankaj Gupta of Hindustan Unilever, whose “Vitality” initiative encompasses training and small business development support for thousands of people downstream in the supply chain.

Leadership in Environmental Sustainability in the Global Supply Chain

As a huge global player in the chemical industry, Dow Chemical was an early leader of the Responsible Care initiative that sought to limit health and safety problems arising from chemical handling. More recently, Dow has taken aggressive steps redesign its supply chain for better visibility and collaboration along the chemicals manufacturing and distribution network to minimize risks of hazardous material spills and to reduce energy consumption.

Excellence in Small(er) Packages

Finally, in response to frequent requests that we find a way to include smaller companies among those considered for the Top 25 we created a special category to recognize supply chain leadership among small to mid-sized companies. This year’s winner was ViaSat, a manufacturer of satellite systems that has enjoyed robust growth with the surge in wireless communications. ViaSat stood out for its innovative approach to demand-driven principles in an engineering intensive supply chain. Learning from companies in the Top 25, ViaSat has been able to support rapid growth and position the company for further geographic expansion.

Looking ahead we want to find as many examples of leadership across these dimensions as we can. The business press is always on the lookout for such stories and we know the supply chain professional community appreciates lessons learned from fellow practitioners. For 2009 we will accept nominations for these four awards from any and all sources. Our specific selection process will be defined over the next six months and we would appreciate suggestions.

Our High-Tech industry analyst, CJ Wehlage, sent this article on Foxconn from the China Tech News, saying this is “a good example of the difference between national law and local law. Foxconn’s tax rates will probably change under this new ruling, unless they restructure as noted below.” 

Lots of smart people took issue with my China Syndrome article a while back, but the fact remains that many supply chains have a lot eggs in this basket and I’m not so sure we really understand the rules of the game yet.

“Foxconn Not A High-tech Enterprise Under China’s New Standard?”

Ian Hines, senior director of supply chain strategy and planning at Wrigley Germany, wrote this very fair response to our recent column on the imminent collapse of China. Mr. Hines offers this retort:

China Meltdown was an interesting article and enjoyable reading but from my perspective I think you could be wide of the mark. Personally, I am far more optimistic about China. The West might expect or secretly even hope for an outcome such as you describe but I don’t expect it to happen.

 

My take is that the article presents a very Western view of a culture that one has to experience to even start to understand. From my time in China, my view is that the Chinese think differently and have very different expectations than we might think.

 

I could take issue with many of your comments but let’s start with statistics:

 

Statistics

 

• I’m not sure that quoting a 2005 report on running two sets of books contributes to your argument that workers are not protected. Life in China is very different than the West; there is less protection and no litigation but it all works.

• I’m also not sure that the 2004 Gini ratio is a sign of impending doom. It is of course true that Chinese people’s living standards vary and that they benefit from economic development differently. But the key point is that living standards for most people are improving. This year, the government is implementing a new labor contract law, which will help the lowest paid.

 

Tiananmen cocktail

 

Your argument here relies on the three assumptions that:

 

• People are overworked
• There are, or will be, unmet expectations
• Increasing awareness will generate discontent

 

Personally I do not fully subscribe to any of the three assumptions, I also don’t believe (or see) that there is a danger of an impending labor backlash.

 

Near-shoring

 

Regarding your comments on near-shoring, there is some noise right now and, of course, the US is again considering Mexico. BCG recently wrote a report titled “Mexico’s evolving sweetspot in the globalization landscape”. They argued that there are four criteria some or all of which need to be met for Mexico to be advantaged:

• a.               Significant logistics costs
• b.               Stringent responsiveness requirements
• c.               Large labor component (benefiting Mexico over the US)
• d.               Strong managerial involvement

 Many products do not drive any of these criteria.

 

The reality is that there are still good reasons for sourcing from China and good reasons for a “China plus One” strategy.

 

Oil prices will impact that but notwithstanding current inflationary pressures Vietnam labor rates, for example, are just 40% of those in China. Furthermore, the current round of global inflation will increase Western salaries by more in absolute terms than we will experience in Asia making China more, not less, competitive.

 

Another view

 

Perhaps it is more interesting to think of China in a different way:

 

• China recently suffered a terrible earthquake and 90 million-plus people died. A Chinese survey found that more than 98% of the people were satisfied with the Government’s quick action. Compare this to the US government performance after the New Orleans debacle. The key point is the Chinese people have confidence that their government is doing better and better for the people and the country.
• Traditional Chinese culture focuses on harmony and the current society is one of the most harmonized in Chinese history. Also, contrary to Western opinion people are free to express their opinion … totally different from 6/4/1989 and Tiananmen Square.
• Chinese people do not believe the Western way (and particularly the US way) is the only way to manage a country. The current global economic crisis was triggered by the US sub-prime crisis, which in turn was caused by US consumer greed. Such an event could not have happened in China.
• However, China is becoming more democratic, particularly compared to 10 years ago.
• Do the Chinese suffer a lot and have pain in their lives? My experience of living in China is that they have lot more fun than suffering!

Conclusion

 

It is easy to stand on the sidelines and predict the imminent collapse of a distant land; those predictions were being made in 1976 during the worst of times for modern China but they did not come true. The Chinese star is still rising; my belief is that this will continue for many years to come. For most of world history, China has been a leading nation. The Chinese people are smart, industrious, patient, and collective. China itself is open to the outside world. If there is a concern it is that as China becomes wealthier, she may be too heavily influenced by Western cultures and lose some of her natural resilience. –Ian Hines.

Mr. Hines gives us something to think about. What do you think?

We’re going to continue to bang the drum: Double-digit inflation is on the horizon (Dow is now looking to raise prices up to 25% across the board). The business case for sustainability in supply chain keeps getting stronger as does the argument that globalization is coming home. This also reminds me of a decidedly un-fun segment on Squawk Box a while back when our research on the challenges facing chemical production in the US showed a big problem for American manufacturing. As Becky Quick so pithily put it, “we’re hosed”. That video is no longer available, but here’s another recent discussion we had with CNBC about this issue.

We’ve also heard from some of you about the topic. One reader in the software industry said the consensus at a recent conference was prices would have to go up, even in the software industry. Another reader responded simply, “Ouch”.