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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  - Oct. 23, 2015 -  

Supply Chain News: Pacific Islands and the Supply Chain


There could be a new shooting war very soon, on some scale - is your supply chain ready?

For the past month or so I have been delivering trip reports from the usual Fall season conferences. I am going to take a sharp turn in a very different direction this week, even though I did attend and speak at a good conference at Penn State University last week on Omni-channel commerce. I am will hold back that report for another week, other than to note most of the crowd there politely but noticeably booed when I announced my Ohio State Buckeyes connections. That was before OSU's solid thumping of PSU last Saturday.

Gilmore Says:

Tensions are escalating rapidly, and we could have an incident between the US and China in just a few weeks, if not days.

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But I digress.

When most of us think of a Pacific island, perhaps pleasant images of Tahiti or Fiji or Gilligan's Island run through our heads. But today, we need to think of different kinds of islands - ones that just could have huge supply chain implications.

The first of those would be something called the Spratly Islands in the South China Sea. The second would be the unusual concept of an artificial island, created out of sand in the middle of the ocean. And China, of course, is at the center of both controversies.

China is claiming ownership of the Spratly Islands, a collection of small landforms that as the map below shows are far, far from the Chinese mainland. Vietnam and The Philippines naturally dispute these claims, but lack of course the military might to defend their rights.

By what logic China should claim ownership of these islands I have no idea, but that is what has happened over the last few years. But it gets worse. China has also claimed ownership of seven small rock formations in the same area, around each of which it has now constructed artificial islands, bringing in mountains of sand to create 3000 acres of territory, to which it is adding ports, airstrips, military type facilities and more.

The theory seems to be: Why battle the claims out for years in international courts, when we can just build and occupy the fake new islands and claim a fait accompli.

Why would China want to do this? Part of it is just China's ever present drive to assert what it sees as its historical rights, but it is also no doubt a strategic play too. First, building up a strong naval presence there would certainly give China a powerful position to assert its authority or use its military should real conflict breakout in the region.


It would also potentially give China commercial control of sea lanes for the busiest area of container ship traffic in the world. Would China start using that control to charge foreign vessels for using its territory? China could also claim to control the airspace smack dab in the middle of the South China Sea?

Thanks to Jeff Smith of The Diplomat, I learned that the UN Convention on the Law of the Sea (UNCLOS) does not prohibit land reclamation such as China is pursuing, but Article 60 bars states from claiming expanded rights for artificial islands built atop what were previously just rocks and low-tide elevations. Rather than the expansive 12-nautical mile territorial sea and 200 nm exclusive economic zone granted to "natural" islands, UNCLOS stipulates that artificial islands are only entitled to the rights enjoyed by the original feature before land reclamation, which isn't much.

While China has not explicitly stated what it believes its rights would be, other statements seem to make it clear it would not recognize the limited UN rights cited above.

Tensions are escalating rapidly, and we could have an incident between the US and China in just a few weeks, if not days.

As China proceeded with its island building efforts, many US analysts began to call for "Freedom of Navigation Operations" (FONOPS) around the artificial islands. The FONOP program, in operation since 1979, involves sailing and flying ships and planes through waters and airspace to challenge (and make clear America does not recognize) illegal or excessive territorial claims.

China, to put it mildly, is not in favor of that program.

US Defense Secretary Ashton Carter has repeatedly asserted that the US military "will fly, sail, and operate wherever international law allows." Yet still no FONOPS have yet been ordered - while China's rhetoric has grown more confrontational.

On May 25, China's Foreign Ministry warned that FONOPS were "highly likely to cause miscalculation and untoward incidents in the waters and airspace" and were "utterly dangerous and irresponsible." Around the same time, the state controlled Global Times warned that: "If the United States' bottom line is that China has to halt its [land reclamation] activities, then a U.S.-China war is inevitable in the South China Sea."

On Oct. 15, the Global Times then wrote that China "should be ready to launch countermeasures according to Washington's level of provocation. If the U.S. adopts an aggressive approach it will be a breach of China's bottom line, and China will not sit idly by."

The same day, Admiral Yang Yi warned the China would deliver a "head-on blow" to any foreign forces "violating" China's sovereignty. There have been many more similar warnings and declarations.

This confrontation "is momentous, a defining power struggle between the reigning world power and the rising one," Peter Hartcher wrote last week in the Sydney Morning Herald. "The history of our region is being written in each decision from Washington and Beijing."

This, in short, is a very, very, big and dangerous deal.

So is the US likely to soon sail within Chinese claimed waters? It looks so, as it inevitably must. Hartcher also says that the US Navy is now reportedly planning to sail right into the 12 nautical mile zone that defines territorial limits around the Spratly Islands, defying Chinese claims and asserting freedom of navigation for international vessels.

Folks, this is going to happen. Almost any day.

So what transpires then?

1. China could loudly complain, but take no real action.
2. China could confront US Naval ships, "escorting" them through the waters.
3. China could first warn the US, and then start firing on US vessels if they do not leave the territory.

Given its many public statements on its response to such a challenge, number 1 seems highly unlikely to me. I would hope China would not be so headstrong that it goes for number 3, leaving my guess we see some variation of number 2.

But that of course would further escalate tensions, and lead to months/years of the same scenario repeating itself, which seems likely to inevitably lead to number 3 in the end. Or does America just decide to complain but do nothing provocative?

What happens upon option 3? I have no idea. Perhaps a smallish skirmish leads to some form of diplomatic talks where a resolution is eventually reached. But my guess China will never be willing to give up its claims, though it might agree to allow navigation of its water and air space. For now.

All this, BTW, in the context of the just finalized Trans-Pacific Partnership free trade agreement between the US and 11 other Asian nations, one that notably left China out of the mix. China initially strong opposed the pact, but has been more positive about it lately.

Would China really risk severely harming its Western export golden goose for the sake of a few ersatz islands far from its mainland shore? Most analysts agree China intends to assert its place as the superpower of Asia and achieve some form of hegemony over countries in the region. At some point, it will need to move things to another level to achieve that aim.

If your supply chain is dependent on China or other countries in the region, or growing in China is key to your strategic plan, you sure better keep your eyes focused to this one. Let's pray we don't see a shooting war, but many are worried.

On another bit of cheery news, UK's The Telegraph reported this week that Russia is collapsing economically, and may soon be out of its oil money reserves. What will a cornered Putin do then? Not pleasant to think about either, though with fewer supply chain implications, I think, though getting the price of oil back up is Russia's only path out of its misery.

There are supply chain risks, and there are supply chain risks. The China island dispute is of a class we haven't seen in a long time.

What do you think of these South China Sea island conflict? What do you expect to happen? What should companies be doing, if anything? Let us know your thoughts at the Feedback button (email) or section (web form) below.


Recent Feedback

Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different. 

That would only give a complete perspective with all the players in the pool.

Senior Consultant
May, 22 2016

Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Mike O'Brien
Senior editor
Access Intelligence
May, 26 2016

Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Julie Leonard
Marketing Director
Jun, 27 2016

The IoT Platform in this year's (2016) Hype Cycle is on the ascending side, entering the "Peak of Inflated Expectation" area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn't this contradicting in itself?

Editor's Note: 

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.



Carsten Baumann
Strategic Alliance Manager
Schneider Electric
Aug, 19 2016

I agree totally with Mr. Schneider.

I have always lived by "put it in writing" all my work life.  I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This "putting in writing" can also be used for almost anything else.  Here are some general benefits (only some) of "putting in writing":

1. Everything is better understood between parties involved.  There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood.  This will ensure that all parties concerned confirm the details of the agreements as correct.  This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof.  Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor.  It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members.  "Learn from the past" it is said.

There are many more benefits.  Mr. Schneider is very correct about his call to "put it in writing".

Jo Ann Tudtud-Navalta
Materials Management Manager
Chong Hua Hospital, Cebu City, Philippines
Aug, 21 2016

U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of "Made in USA".

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative's free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring.

Sandy Montalbano
Reshoring Initiative
Aug, 24 2016

 Good article!  I am sending this to my colleagues who work with me.  We have to keep this in mind.  Thanks!

Transportation Manager
Aug, 30 2016

SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I've worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many "picks" per day.

I've learned that one doesn't have to remind Germany about your EDI orders.

Ian Jansen
Sep, 14 2016

Challenge - to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment 

Don Benson
Warehouse Coach
Sep, 15 2016

Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Fulfillment Logistics UK Ltd
Oct, 02 2016

Thanks for the article, but I know there's a lot more to this issue than just the pay rates. Please check out my blogs on the subject at

Mike Dargis
President of asset-based carrier based in the Midwest
Zip Xpress Inc. (at
Oct, 03 2016

Lora, great article! I agree that companies choose the 'safe' solution more often than not. My solution is a bolt-on for legacy ERP's and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.


Inventory Specialist
Nov, 16 2016

This is a game changer in GE's production and prototyping.  It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network. 

Bob McIntyre
National Account Executive
DBK Concepts LLC
Nov, 21 2016

I am referencing to the comment that leasing of warehousing equipment (beyond forklift trucks) is a vision for 2030.
Just recently in Europe, such a business model has started, see here:

I am following with a lot of interest, how the business develops.

Kai Furmans
May, 22 2017

If we limit the standard on judging or determining the best supply chain to just three calculations it does not tell the entire picture.  Financial performance metrics are valuable as they capture the economic consequences of business decisions.  But supply chain managers make decsions and use organizational resources that impact a company's financial well being.  Where is a firm's earnings over a period of time determined by sales less product costs and general/adminsitrative costs?  Where is the metric for determining the sources and uses of cash from three perspectives - operational, investment and financial?  Where are these supply chain metrics: on-time delivery, lead time, response time to customers, product returns, procurement costs, network distance, inventory carrying costs, forecasting accuracy, sourcing time, etc,.  Without knowing the results of all these supply chain calculations the there must be a question as to the accuracy of the 25 top supply chains.

Stuart Rosenberg
Supply Chain Consultant
First Choice Supply Chain
Jun, 05 2017

I feel this ranking misses the mark in SC. It does not seem to consider a key indicator in days inventory on hand, which is key to determining a SC company's ability to forecast, manage inventory costs and reduce aged stock. In additiion I realize it's difficult to understand what goes into the customer survey, but would I assume specific metrics are being asked. For examples customer's opinion on service level differentiation and the ability to deliver the right product on time, which should then be allocated a bigger weighting than 10%. It would also be interesting to take a view of the above list's SKU portfolio complexity, seasonality and launches/promotions. I would again assume some companies on the list above have a far more complex SC to manage and lead, ultimately requiring a lot more innovation within a SC to stay ahead of competitors, and ultimately satisfy their customers demands.  I understand above metrics are difficult to measure, as mentioned in the article, but they somehow need to be considered to give a true reflection. 

Dustin Calitz
Project Commercialization Manager
Jun, 06 2017

A Very Good Article...

While some feel that lean is a scam that pushes for more out of the personnel and out of the companies through reduction of waste and adding value for the customer, there are several things to remember:

1) Lean methodologies are designed and implemented to reduce time wasting, so this may seem that you are working harder as an employee.

2) Lean methdoligies only work when everyone from the janitor to the owner of the company get involved and back the program.

3) Lean methods are there to make you work smarter not harder, although it may feel you are working harder.

4) YES... Sometimes lean methodologies fail! This is due to project overun or taking on too large a problem and trying to fix it all in one go and not taking the smaller problems that are associated with the large problem and fixing them first. Sometimes fixing the small problems leads to resolution of the larger problem.

Michael Hurd
Lean Consultant
Jun, 10 2017

The Supply Chain technology is not considered a problem because traditionally supply chains are thought to be cost centres unlike sales functions. The tendency, in general, to limit expenses and cost cutting on upgrades for technology and for talent have been hindering progress for the businesses. Supply chains lack real time visbility and above all trust across the value chain (not that the participants are dishonest) rather it's about the cascading effects referred to as the bull-whip effect which causes higher magnitudes of disruptions. 

Supply chain real time information should top the list .

Another problem is that of multi homing as so much data is available across several feeds of IOT/Email/Internet /Mobility/ERP that organisations tend to have issues around finding a single platform to collate them for meaning analysis. 

Blockchain (if deployed appropriately) can be a great solution for solving the issues around the supply chain.

Director Supply Chain
Jul, 31 2017

Excellent article.  It very much points to the need for Shared Risk / Shared Reward as we teach at Vested.  Suppliers will respond when they are made part of the team, and they have a lot to bring to the game.  The service provider is the subject matter expert in the services provided, and in an excellent position to enhance the capabilities and services offered by the shipper.

Mike Ledyard
Vested Program Faculty
Vested Way / University ofTennessee
Aug, 04 2017

As the article points out it is not a lack of technology that is holding back performance but rather a failure to form the right sort of relationships.  As well as the length of such relatiohships, practitioners should consider employing arrangements that incentivise both parties to innovate and deliver levels of performance and profit that neither thought possible.  By far the best model I have come across to achieve this is the Vested Outsourcing model developed by researchers from the University of Tennessee.  See for information on the model and case studies that show how others have benefited from creating a Vested deal.

Andrew Downard
Managing Director
AD Supply Chain Group Pty Ltd
Aug, 05 2017

Very informational article. The major focus of logistics is on e-commerce. There is a need to optimize every component of logistics by following the latest trends and technologies. Thanks for uploading this article.

Aug, 23 2017

I have recently co-authored a white paper with my colleague wherein we have looked at 2 fundamental guiding principles  -

1. Always have enough to Sell / Produce
2. Do not have excess to Sell / Produce

These 2 Golden Rules can be the foundation of keeping optimal inventory levels and for organizations to achieve the same. We have looked at a framework which tries to reduce the phase mismatch between Demand & Supply, and tries to bring the shape of the supply curve closer to shape of the demand curve.

We have classified symptoms and underlying root causes for the above "Phase mismatch" and "Curve Mismatch" between Demand and Supply, and then talked about addresssing those individual root causes to strive towards Leaner Inventory levels while maintaining or improving service levels.

So to answer your question, we feel the Companies which have addresed these causes have been able to keep DIO horizontal or even going down, while others have not been able to control rising DIO because of not addressing the root causes.

Sameer Shukkla
Consulting Partner
Wipro Inc.
Sep, 17 2017

You ask why turns are flat or declining despite lots of attention and technology. The answer is, I think, 2 fold: the supply chain environments VUCA (Volatliity, Uncertainty, Complexity, Ambiguity) is on a continuous upward curve and this means that forecast accuracy inevitably declines in parallel - and much of that inaccuracy is hidden by the statistics. For instance a company with, seemingy good, 80% mix accuracy will find that figure is skewed so high by the few high volume / low variability items. 80% of the items will be achieving considerably less than 60% error.

So most item level forecasts used for driving replenishment through an MPS (be it ERP or APS) are simply leading to unbalanced stocks, service threats and continuous expediting / fire-fighting. These schedule interrutions are "variability" that is disrupting flow and, thereby, increasing lead-times, using unplanned capacity and generating excessive (and still unbalanced) inventories.

The replacement in ex-stock supply chains is "enterprise(s)-wide" pull which also uses "push" for extreme/exceptional events. Its other key characteristics are that the supply chain is decoupled and is demand-driven. And now it can be implemented using SAP since they announced they they have co-developed an enhancement for IBP that supports this transformational way of working - up to 50% inventory reduction, requiring less capacity and shorter lead-times all while achieving planned service levels. See and

Simon Eagle
SCM Consultant
Camelot MC
Sep, 17 2017

IoT is without a doubt starting to become a major factor in the profitability of various companies. In the manufacturing sector, we will see it come into the front by the end of 2020 completely. Various sectors have already adapted IoT solutions like the security industry or companies offering BPO Services India. Contact centers not just in India and China but across the world have adapted technology following the principles of IoT. The manufacturing sector is soon going to follow.

John Smith
Research & Development
Octopus Tech Solutions
Sep, 18 2017

I  can speak with some context. While efficiency and tools can reduce inventory, we also see the number of SKUs and new products increasing, and also the number of sales/depot points. This means the inventory in such cases, can start with very high number and with more customization and choices available to the consumer, so there is no end to the long tail of products available within a category. It is unlikely that the slow/dead goods are written off so easily to be not included here.

A larger question, would it be purely an IO problem or also a Demand Planning (Forecast Error) problem? A higher cycle time of service but a better fill rate can improve inventory performance, by aggregation. But a bad forecast can do away all the good work you do in inventory planning.

Do you have numbers for decorative coatings in the list? I did not see something there only for decorative coatings.

Girish Maniyar
Chief Manager Development Initiatives
Asian Paints
Sep, 28 2017

My opinion is that peaks and valley are just nice graphics to explain.  Smooth responses save the day.   3PLs  just adjust to the climate and the areas of movement of Logistics.    One purpose of the 3PL movement was to adjust to an always changing market.   They will never be fixed and will flex as the logistics changes.   3PL companies have vast knowledge of their business.  Their success is their ability to move up and down as the market flows.  They bring a level playing field to the transportation world that in the past was rigid but looked good on spreadsheets.  Industry graphic personnel like to be able to answer all the changes because they can only see documents.  3PLs see the needs, the issues, the positive changes and the knowledge to know why and when to adjust.   They (3PLs) have smoothed the waves of the past and everybody likes to see the spikes so they know something is there to clearly report on. Smooth sailing is boring but sure gets you where you want to go. 

Reo B Hatfield
Chief Operating Executive
Oct, 20 2017

So the horrific and severe worldwide allocation of electronic components is not an issue?  Don't tell that to the automotive buyers.  It's HORRIBLE.  Lead times out to up to 76 weeks.  Why not write about that?  It's killing us, our customers and the big automakers.   

Catherine Dennis
Supply Chain Manager
Indak Mfg Corp
Oct, 26 2017

I suggest McKinsey to do a bit more research in Prof Gattorna’s dynamic alignment. This article only scratches the surface a tiny bit. Much more to be found reading about the alignment concept.

Logistics Manager
Nov, 11 2017

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