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Supply Chain Mega-Risks to Consider
Supply Chain Graphic of the Week, plus more Supply Chain News Bites
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Guest Expert Insight - Talking Supply Chain Risk in a Language Everyone Understands - Money!!
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Supply Chain Graphic of the Week: Inventory Changes by Industry 2006 to 2008


This Week's Supply Chain by the Numbers - Toyota Capacity, New Factory for LG, Offshoring in Reverse, RFID in Apparel



All things considered, it was a pretty fair week on Wall Street.  Our Supply Chain and Logistics stock index finished the week with modest gains in all groups.

In the software group, Manhattan climbed 3.8%, closely followed by JDA (up 3.7%) and i2 (up 3.6%).  In the hardware group, both Intermec and Zebra were up (3.6% and 1.2%, respectively).  In the transportation and logistics group, Expeditors International gained 3.6%, followed by Yellow Roadway (up 3.5%).

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Supply Chain Mega-Risks to Consider


Risk management has become a fundamental element of current supply chain thinking, but how far do you take it? I really liked some of the recent thoughts in our column, for example, on connecting risk analysis to actual dollar impact, as suggested by Mitul Shah of Infosys in a recent Expert Insight post.


But how far should you take it? I believe there are a number of fairly sizable, general supply chain risks for most of us lurking out there, most of a geo-political nature, for which many companies would do well to give some consideration. They are listed below, in order of probability from my view:


Terrorist Incident at a US Port: The possibility of a terrorist incident at a US port at some point seems, to me, to be quite high – and others agree. In fact, I remembered and found an article we did on a study by one research institute in 2007, where we wrote that “Ports are attractive targets because they are vulnerable, and due to the perceived potential for economic damage and loss of human life. For supply chain professionals, however, there is another aspect – the potential for an unimaginable supply chain disruption.” (See Thinking the Unthinkable - The Economic and Supply Chain Impact of a "Dirty Bomb" at Ports of Los Angeles and Long Beach.)


The study we reported on then said that if there were a “dirty bomb” incident at LA/Long Beach, the overall economic damage could be in the hundreds of billions of dollars. One big driver of that was how long the port was closed after the incident: a few weeks, a few months, a year? More?

Gilmore Says:


If oil soared literally overnight, I am sure some companies would be more agile and, therefore, hurt less than others that aren’t as well prepared.

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The question is what would happen from any sort of incident in one port at other ports. Certainly, all ports would be closed for awhile. When they opened up, they would do so in a very slow and controlled fashion. The flow of goods would come to a crawl for some time.


An executive at Payless Shoes, a major importer, told me several years ago that all the investments they had made in compliance, security, arrangements with carriers, etc., would pay off in such a situation – their containers would move first.


The likelihood of something happening eventually seems strong, even as we race (sort of) to change technology and process to thwart such an attack. Whether any incident would be a minor or major one is a total unknown.


Is your company prepared? Is everything running through one port, which may be the one hit? Have you asked the TSA what it thinks might happen, and how companies can be prepare? Do you have contingency plans for the flow of goods and domestic supply?


Israel Attacks Iran over Nuclear Capabilities: Making any predictions about what may happen in the Middle East is a Fool’s Errand, but I, nevertheless, think the likelihood of some sort of eventual Israeli strike on Iran’s nuclear capabilities - just as they did against Iraq in 1981 – is fairly high.


Indeed, earlier this summer, VP Joe Biden gave - according to some – a go-ahead of sorts for such a move. Many have said the US would not be unhappy to have Israel do some of the dirty work for us. Just this week, former Israeli ambassador to the United Nations and best-selling author Dore Gold is on the news shows saying Iran must be stopped.


If such an attack occurs, oil prices would immediately skyrocket, easily to the $150 or so level we saw in mid-2008, according to Stephen Schork, a widely respected oil industry analyst.


How high, and for how long, depends heavily on what happens next. Iraq, basically, just folded its tent in 1981. If Iran counteracts, we may see $200+ oil for months.


If oil soared literally overnight, I am sure some companies would be more agile and, therefore, hurt less than others that aren’t as well prepared, and/or can’t adjust their transportation strategies and inventory/logistics trade-off curves as fast.


Have you thought about this potential development, or performed any scenario planning? 


Swine Flu Outbreak: To be honest, I have thought that this has generally been overblown, and that the risk of a true pandemic overstated, but am less confident of that now.


The CDC has recently said that 30-50% of the US population could become infected this winter, even as they madly try to get a vaccine to market.


Will there be an impact on companies and supply chains if a major outbreak occurs? I notice Clorox is often the top Google sponsor for searches on Swine Flu – looks like they expect a bump in sales from 24 x 7 disinfecting.


Many/most would go the other way – as an easy example, restaurant traffic would likely plummet even from today’s lousy numbers. It could be better or worse in other countries, perhaps changing demand there substantially or complicating sourcing processes; factory workers might just stay home.


I have less understanding of how to prepare for this or make contingency plans, but it’s something I would be thinking about, and looking to react quickly as things developed, rather than being caught behind the curve with too much or too little inventory.


Fall of the Dollar/US Inflation: The US is falling into debt by trillions more than previous years, and the Congressional Budget Office just raised its deficit projects by additional trillions over the next decade.


All kinds of things can happen if this plays out as some predict: Interest rates rise, maybe substantially, as the US has to pay more and more to borrow the money needed to finance the debt. Inflation, perhaps of Jimmy Carter-era variety, arises as the government decides that printing money is the only way out of the mess.


Seeing this, there is already talk in some quarters (China, Russia) of replacing the dollar as the world’s reserve currency. That would put further pressure on the dollar to the downside.


Warren Buffet recently warned of some very negative effects coming down the road from this deficit binge.


Beyond the macroeconomic impact, there would be supply chain impacts. In general, oils, metals, and other commodity prices should soar. What is odd this time, though, is that the US, with a greatly weakened dollar, could be hit much worse than other countries in terms of such commodity inflation.


If general inflation and/or interest rates soar, the cost of holding inventory becomes much greater. However, this could also occur with much higher transport costs from rising oil prices (still, for now, denominated in US dollars), so what the trade-off curve would look like there is uncertain.


In theory, US goods would become much cheaper, and exports would rise – while the price of imports would soar, and the advantages of offshoring would be altered. The calculus of where you make products would shift dramatically.


So, are you doing your supply chain planning based on assumptions of the types of low inflation and a relatively strong dollar we have seen for three decades? Or are you considering what might change under the other scenario about which many now warn?


That’s all the “disaster” scenarios I have room for now. I know most of us just go about our jobs and let someone else worry about this kind of stuff – but let’s remember that with every crisis, there are supply chain winners and losers.


Are these risks the type of things companies and supply chain strategists should worry about and plan for? What would you add? What do you think are the most likely to occur, and what will be the impact? How can companies prepare? Let us know your thoughts at the Feedback button below.

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Catching up on a variety of reader letters this week.


Our feedback of the week is a very thoughtful response to our piece on China Increasingly Pursues an "Industrial Cluster" Strategy from Matt Taylor of Epicor. He obviously knows the topic well, and if you are at all interested in China, we encourage you to read it. S. Balasubramanian of Honeywell also weighs in on this topic.


Steve Wilson suggests adding at least one more to the list of Seven Timeless Supply Chain Challenges from Dr. Paul Dittmann of the University of Tennessee (and Whirlpool before that) – and we think he’s right.

Finally, Dick Bower, VP of Supply Chain Services for American Woodmark Corporation, sends in a potential example of true cross-docking in a non-retail setting, in response to SCDigest Editor Dan Gilmore's call for responses (See In Search of a Non-Retail Cross Docker). It’s an interesting logistics model that American Woodmark has, as learned through some email exchanges, but not exactly what we were looking for.

Feedback of the Week– On China Industrial Cluster Strategy:

China is a big place and, in all similarly large countries, the “clusters” develop out of practical constraints as much as from government direction. Silicon Valley, Wall Street, Bangalore, Dubai, Singapore are all shining examples of clusters. In China, one can immediately think of Changcun (Automotive), Dongguan (Machine making), Shenzhen (Electronics), Dalian (ship building) as current and shining examples of clusters that have been part government and part private enterprise.


The slowness in the “Go West” program has been blamed on many things, infrastructure and regulation mostly, but also the Sichuan earthquake caused massive infrastructure loss.  What we are now seeing is a huge amount of new infrastructure – areas are going from dirt roads to elevated highways, from slow, rural coal-fired trains to high-speed, intercity express trains – in the space of 12-24 months.  The area around Chengdu has since the 1970’s been a center for military-related manufacturing, to support the military bases moved there as part of a grand plan to distribute the PLA amongst a few major centers to avoid a single-strike knockout of defensive capability.  The “Go West” campaign aimed to provide leverage on that existing capability, especially in machining, assembly and electronics.  This combined with Chengdu, being one of the world’s oldest continually inhabited cities with a history of over 4,000 years, makes for a potentially attractive location for A&D-related companies, or those requiring similar capabilities.


As pointed out, there is risk in any cluster that it may never “gel” – there are any number of ‘export parks’ around China that are still mostly empty land, primarily because there was no real, sustainable advantage other than transitory assistance with investment, land or tax.  What China is famous for is creating new infrastructure at break-neck speed (Shanghai has built 7 new sub-way lines in 5 years for 2010 Expo) when there is clear and compelling need or vision.  


From my observation with any of these areas being promoted, the clearer the vision, and the greater the ability of different people to consistently articulate the vision, the greater the likelihood of it coming to fruition.  I do strongly advise all companies considering entering any area, not just clusters, is to get out there and meet people directly. Talk directly to local people, local & provincial government, accountants, lawyers, business journalists, existing businesses to get a wide and informed viewpoint.  Do not get trapped by advisors and startup consultants into working only with their networks and contacts.  Transparency can still be a challenge in some locations, and often the best way to get it, is to open the doors and look inside yourself, so that you have knowledge and opinion to balance what you are told. 

At the end of the day, companies should choose where to locate based on their business strategy and capability to maximize their return on investing in a specific location.  There are too many factors to consider before making any statements about whether to be leader or follower in moving to a location. One needs to consider customers, resources, suppliers, infrastructure, together with your own strategic plans. 


I think that any company pursuing a relocation or opening in a new location, be it a “cluster” or not, should approach it from a holistic point of view and evaluate the option in consultation with customers, government, suppliers and business partners. 


There is no right or wrong decision – it is about making a decision that makes sense for your business.


Matt Taylor

More On China Industrial Cluster Strategy:


Industrial Cluster as a concept has been experimented way before now. The great civilizations of the past were basically created due to industrial clusters.


While the benefits are apparent, one key failure would be that in case of an economic slump, the entire chain would go down, pulling hundreds to thousands of jobs with it. As they say, its better not to put all your eggs in one basket.


S. Balasubramanian


On Seven Timeless SCM Challenges:


What’s missing is the eternal struggle of cost versus service.  Perhaps this could roll up under supply chain strategy, but it needs to be explicitly recognized. While always a push to reduce costs, it’s also true that customers continue to demand ever higher levels of service, which one can define as high inventory fill rate, short order-to-delivery lead time, and/or “customized” services such as building display pallets and product labeling, etc.  Often, high levels of service drive supply chain costs well beyond optimal.  Yes, it is possible to improve both, but that presumes relatively low current performance.


Another issue to recognize is simply acknowledging a dynamic environment.  Witness the events of the last five years, with the longshoreman strike on the West Coast, the capacity crunch in transportation in 2004/2005, last year’s dramatic rise in fuel prices and, of course, the current “great recession."  What was a problem in the past may not be so important in the future, and what was taken for granted may be difficult or scarce going forward.


Steve Wilson

On Non-Retail Cross Docking:


Interesting observations about non-retail cross docking.  We might be an example like you are looking for…and maybe not.


American Woodmark Corporation is a kitchen cabinet manufacturer that supplies Home Depot, Lowe's, as well as builders and distributors.  In some respects, we do serve retailers (Home Depot and Lowe's), but there is a difference.  Our product is made to order and shipped directly to the consumer’s home. 


To accomplish this, we use a network of 3rd party cross-dock delivery agents.  Our network design allows us to build/ship truckloads (multiple kitchens for multiple consumers) into the cross-dock points.  Those agents have already received an ASN and set appointments for delivery.  The truckloads are received, broken down by kitchen, and loaded out for delivery (mostly for the next day).  Our “dwell time” at the 3rd party cross dock averages just under 3 days and we are working to lower that further.


Dick Bower

VP, Supply Chain Services

American Woodmark Corporation


What were the top 5 countries in the 2007 World Bank ranking of top countries in terms of logistics competitiveness?


(1) Singapore; (2) Netherlands; (3) Germany; (4) Sweden; (5) Austria