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  April 7 , 2006 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Delphi, the UAW and the Impact on Supply Chain Management for Everyone

We are, I believe, at a significant inflection point in the United States labor market, and therefore I believe the entire supply chain.


As most of you are probably at least generally aware, Delphi, the $30 billion auto parts company that was once an arm of GM but then spun off as a separate, publicly traded company in 1999, filed for bankruptcy protection last autumn. It did so under the leadership of new CEO Steve Miller, who is a tough cookie, to put it mildly. He has been public and blunt about the uncompetitive cost position Delphi finds itself in.


Since then, there has been an interesting public and private dance between Delphi, General Motors, and the United Auto Workers Union. To make a long story short, GM is involved not only because Delphi remains a major supplier, but because the already ailing OEM might be on the hook for some of Delphi’s “legacy” pension and healthcare costs if Delphi can’t pay them. Delphi is also seeking major price increases from GM for what it says are money-losing contractual agreements.


Last week, the other shoe dropped. Delphi filed part of its re-organization recommendations to the bankruptcy court. These included a call to cancel at current prices $5 billion in parts contracts with GM, close many U.S and European manufacturing plants, and for the court to throw out the current union contract. Currently, the highest paid workers get over $27.00 an hour and many more dollars in benefits. Miller is proposing that by 2007 the top wage would be only $16.50 per hour, with significant reduction in net benefit expenses as well.


So here is my thesis: either Delphi will succeed in this move, which will really be the beginning of the end of high manufacturing wages that are not governed really by the supply and demand for labor; or, this will start a real political and economic backlash that could likely end in protectionist moves in Washington.


Either path has significant supply chain management ramifications.


While obviously there has been great concern over “offshoring” and the supposed loss of U.S. jobs overseas, the reality is that the concern has been unable to generate any popular or political critical mass. While there is evidence that pressure from overseas sources has kept manufacturing wage growth in the U.S low compared to our history since the Depression, usually the most noticeable impact has been on the jobs themselves. The plant closes or it doesn’t.


This is different. The auto industry still has such a substantial impact on the country’s psyche and economy, with huge concentrations of employees in many locations, that this won’t get “lost in the news.” Besides shuttering more than 20 plants, Delphi is asking for almost a 50% reduction is total wages. That’s a big number – unprecedented, really.


If Delphi is ultimately successful, I believe it will signal the end of manufacturing and union wages really being much above that would be set by supply and demand. Because the auto industry really defined the top of the union position on the way up, if it is hammered back like this, there will be a similar long shadow across other industries and companies on the way down. We may look back on the last half of the 20th century as a unique period really in history in which non-skilled labor was able to command such a premium over the wages it would gain from pure market forces. Think about that. In all of history, this has really only been the case meaningfully for about 50 years.


As a result, over time, especially as labor costs in China continue to rise, the marginal benefit of offshoring there will diminish. The benefits of automation over time will marginally shrink as wage pressure really slows, at least if you were a high wage payer.


On the other hand….the UAW is quite likely to strike rather than except this Delphi haircut, with potentially devastating effects for Delphi and GM, which itself could slide into bankruptcy from the resulting parts shortage.


In addition, the Delphi move could trigger protectionist legislation in Washington. The potential for such legislation has long been percolating under the surface, increasingly stoked not only by the unions and like-minded politicians, but nightly diatribes by the CNN’s Lou Dobbs and others.


I just returned from the always excellent Supply Chain Executive Forum at The Logistics Institute at Georgia Tech, and Dr. John Langley’s gathering of Supply Chain executives heard a number of presenters reference potential U.S. protectionism generally as perhaps the major threat to the growth of the global supply chain, apart from any of the fallout I think could happen from Delphi.


The upshot – the goods you are sourcing from China and perhaps other spots now could get a lot more expensive.


In either of my scenarios, the rate of growth of offshoring slows, but just how that happens and the type of SCM impact vary dramatically with each path. And continuing what has been a strong theme lately in this SCDigest pages, we’d suggest really looking at multiple scenarios in your supply chain strategy and network design (see Building A Flexible Supply Chain Network, a placing a strong premium on building in supply chain agility.


Do you believe the Delphi labor issue can be a real inflection point in the direction of manufacturing wages and protectionism? Why or why not? What do you believe is the likely outcome of all this? Let us know your thoughts.

Let us know your thoughts.

Dan Gilmore


Featuring SCDigest editor Dan Gilmore - Register Now!

Quote of the Week

"The history of all economic progress is people charging for what was free or what people once did for themselves.”

Author James Gilmore, commenting on the rise of the services and now "experience" economy, at this week's Georgia Tech Supply Chain Executive Forum.


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Q.  In order, what currently are the top five auto companies in terms of global market share?


A. Click to find the answer below

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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We received a number of letters on our piece noting The Gap was unbundling its supply chain function to put procurment more aligned with merchandising and logistics back again as a separate function. We asked whether this made sense in retail, and receive several thoughtful ansewrs, including our feedback of the week from

Tim Meester of Toys "R" Us, who thinks the supply chain funciton shoud stay integrated. W have a couple more good letters on this toipic, and another nice letter on our two-part interview with Dr. Eli Goldratt.


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - on Gap unbundling its SCM function:

A fundamental benefit of integration is more collaborative, timely information passed between partners, which is critical for responsiveness to demand fluctuations, supply deficits, and other market forces.  Another key benefit is aligned, cross-endorsed objectives.  Regardless of the industry segment, sourcing and logistics are both components of the supply chain.


Without integration, there is an inherent opportunity for sub-optimization across the departments.


Good Luck, Gap!    


Tim Meester

Director, Vendor Partnership

Toys "R" Us

More on The Gap:

The issue of whether to integrate sourcing and global inbound logistics functions is a formal organizational structure issue.   “De facto” sourcing and global inbound logistics functions are interconnected and interdependent.  This “de facto” integration is required because global inbound logistics requires complete visibility into the actions of sourcing so that they can insure that the right product is shipped to arrive to meet the critical in-store dates.


Whether the departments are physically integrated or not is only a matter of how the company feels it is important to organize itself.  The reality is that an action in one area has direct impact on the other.  If sourcing activities get delayed then it will directly impact logistics ability to insure that the goods arrive on time.  If logistics factors impact the ability to ship product on schedule then it impacts the decisions that sourcing will be required to make in order to help insure the smooth flow of product to meet the in-store requirements.


The integration between sourcing and logistics is dependent on the ability of one area to see what is happening in the other.  This integration is accomplished through visibility and business intelligence which is reflected through information.  In order for logistics and sourcing to coordinate their activities they must have full access to the same supply chain information and be able to make sense of the implications of deviations to the plan to minimize negative supply results.


Whether sourcing and global inbound logistics departments are physically integrated is not the issue.  The real issue is whether they are practically integrated (regardless of the org chart) so that the global supply activities can be efficiently executed with minimal disruption to overall on-time delivery of product while optimizing global supply chain inventory and asset deployment.


True integration of sourcing and global inbound logistics can only take place when organizations have the right systems in place.   While it is important that there be visibility into activity and product across the supply chain the real value comes when the impact of changes in the activity plans and execution are visible so that the right corrective action can be initiated to minimize negative impact.


Ned Blinick

Blinco Systems Inc


As a general principle. I would think that Supply Chain concept is the best in any situation involving design, product development, procurememt, production and distribution with allied functions including transportation, warehousing and reverse logistics.


Coming to a retail environment, in most cases the phases of design, product development and production in the real sense is non-existent. The real product development cycle invovling most products are handled by the brands (e.g., apparel and garments where the merchandisers work anywhere up to 12  months for a product to be put on the shelf ). Hence where the retailer by itself is not a brand, in such cases the advance planning concepts are restricted to statistical forecasting of goods most of which the  supplier  -to the reailer- is expected to carry in stock or produce on demand.


By separating sourcing and logistics in such a scenerio, perhaps a limited opportunity is lost in integrating the product planning with actual supplies. Perhaps this loss is minimized in the current instance by limiting the sourcing function to strategic purchase and allowing the remaining job, of moving the appropriate materials in time across the warehouse chain,to logistics


T A Krishnan

Larsen & Toubro Limited-India

On Goldratt Interview/Theory of Constraints:

Great stuff.

I remember the TOC rage back in the 80’s and 90’s and JIT before that.  The science or ‘body of knowledge’ continues to evolve.  Lean seems to be a combination of JIT, TQC and TOC concepts.  Some points I found in my 20 years…

- All successful adaptations of any of these concepts are almost like religious awakenings for the practitioners.  The methodology and theory take second seat to the fanaticism.  Someone should investigate the psychological triggers that drive companies and their communities to embrace these tools.  (In the end the methodologies are only tools in a continuous improvement process.)

- Many times there is a do-or-die compelling event involved that drives companies to pull together.  If you look at who has been successful, at least the famous successes, they all pulled themselves away from some brink using the tools as a step-change driver.

- The problem is that religion soon becomes a substitute for common sense and they start trying to force fit the methodologies onto every process.  I have seen production lines that look like a pre-Copernican solar system chart because they are trying to make everything flow to a lean process.  (They forget underlying principles - that they are trying to reduce complexity – in their zeal to use the method).  I have seen well meaning executives try to forces fit lean or JIT on to an Engineer to Order process and all you get are those local optima that you were trying to eliminate.  (i.e.  a pull line between two piles of safety stock!)

- Jack did a good job at making the process rigorous and measurable at GE.  That is the secret I guess, to instill the fervor, but to find a way to keep it measurable and build in the positive feedback that management needs.

- Eli’s overwhelming sense of purpose (and ego) are a fascinating contrast to Alex Rogo’s empathy and likeability.

Christopher J. Russell

Vice President of Sales and Customer Services




Q. In order, what currently are the top five auto companies in terms of global market share?

A. 1. GM (13.2%) 2. Toyota (11%) 3. Ford (10.5%) 4. Volkswagon (7.7%) 5. DaimlerChrysler (7.7%). Many observers, however, expect Toyota to surpass GM soon.

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