Supply Chains and Their Financial Risks

When a fragile supply chain breaks down, customers don’t get their products, companies lose revenue and brands are debased. 

Has this fear hanged over your firm’s head or has this already occurred?

As Directors or Managers of our firms supply chain we wear many different hats….depending on the situation.  One day we have to monitor markets, the next day we are concerned with the supply chain cash flow.  As supply chain leaders we need to wear yet another hat…the advocate for supply chain resilience.

This role consists of looking at and or searching for vulnerabilities in the company’s supply chain.  Manufacturers maintain supply chain partners throughout the globe to take advantage of reasonably priced labor and access to raw materials.  This global economy has made a company’s supply chain more and complex and delicate. 

Most careful management goes into maintaining such supply lines and the outgrowth of cost reduction, ‘lean’ supply chains and for attaining just-in-time deliveries.

Creating efficient supply chain lines can be dangerous, as efficiencies do keep costs under control but creates susceptibility.  These susceptibilities are not only issues for the company but also will have upward and downward consequences for the company’s business partners.  It is not the fashion for a Director of Supply chain to probe into the weaknesses of its key suppliers, it needs to be done.

One of the major industries affected by any supply chain disruption is the Pharmaceutical industry.  They must pass numerous quality and safety tests and product trials which usually take years to complete.  Thus, when a particular drug hits the market, these firms have to recapture its research and development costs in as short as time frame as possible.  Any interruption result in a loss of revenue. Additionally, a loss of any key supplier will take months to replace due to the regulatory nature of the business.

Supply chain exposures are quite a common occurrence.  In a survey conducted by the Business Continuity Institute it was reported that many companies experienced at least one major disruption in the most recent twelve months, such as adverse weather, IT outages, and outsourced service failures.

The risks can run on multi-levels.  Sometimes it is not a firm’s immediate supplier that disrupts a supply chain but the supplier’s supplier and the risk is to the shareholder value.

In many organizations supply chain risk management is completely delegated to a risk manager or supply chain manager, when these tow manager should most definitely be working in tandem.

There are some pertinent questions that these two managers should be asking about their own supply chain and those of their suppliers:

1. What don’t we know about our supply chain that we need to know?
2. Are we relying too much on a single suppliers for major components?
3. Are we focused too heavily on cost reductions?
4. What could a closer look at our analytics tell us about these and other hidden risks?
5. What other risks could we be facing?
6. Which specific risks are most dangerous?

One way to answer these must ask and must answerable questions are to appoint or hire a team to audit and determine the value of each link in the supply chain on the basis of business income.  Another point to ascertain is to ask whether you need to diversify your customers to prevent static supply if a major customer experiences a disruption.

Yes, I have just given you a handful of things to do.  Whether you use these devices and questions or create your own an investigation like this will uncover, quantify and better manage your supply chain risk.  You will be seen as the ‘champion’ of supply chain resilience and preventor of a crippling disruption.

The Mirage of United States Manufacturing Re-Emergence

When we listen to the news, whether television, radio or newspapers, we hear many reporters and columnists state that U. S. manufacturing has turned the corner and is on the rise once again. The days are over when manufacturing jobs were sent overseas and ‘lost’ to foreign competitors.  The argument by these commentators is that due to increasing foreign labor costs, cheap oil and automation jobs are returning to American, making America the manufacturing center of the world.  

The term “manufacturing re-emergence is the new terminology coined for this event.  However, a recent study by the Information Technology and Innovation Foundation paints a completely different picture.  According to this report real manufacturing value added is still at 3.2 percent, far below 2007 levels.  In addition there remain two million fewer jobs and 15,000 fewer manufacturing companies than there were in pre-2008 levels.  A good part of the growth since 2010 is due to a cyclical recovery, specifically in the automobile and durable goods industries.

While it is true some companies have reshored some jobs they are very modest and companies continue to send manufacturing jobs overseas.   While this symmetry between companies coming and going is an improvement it is hardly a re-emergence.

Much of the hoopla concerning this so-called comeback is a misreading about U. S. cost advantages, such as Chinese wage growth, global shipping costs, the U.S. dollar, the shale-gas boom and American productivity growth.  The persistent belief that these factors are the drivers that will return production to the United States without real legislative action is naïve.

There are five myths that need to address.  They are the following:

1-      China’s rising labor costs will soon match U.S. wages

2-      Global shipping costs are unusually high so U. S. can produce more for U. S. and European markets.

3-      The Shale Gas boom gives U. S. a great advantage.

4-      Currency fluctuations will fix the trade deficit.

5-      Superior U. S. productivity growth will restore jobs.

Let’s address these one at a time:

1-      Chinese wages are still just 12 percent of the average U. S. wages for 2015.  Chinese push to open the interior to manufacturing will reduce the growth in wages.

2-      Undersupply led to skyrocketing global shipping costs in 2008.  Today shipping costs are more in line by falling 93 percent since 2009.

3-      Reduced costs for shale energy have only benefited the petrochemical and drilling operations.

4-      The United States has had a trade deficit since 1975 and the trade imbalance is just growing and growing.

5-      U. S. productivity is not increasing faster than any other industrial country.  In fact, it is growing slower than China’s or Korea’s.

The examination on U. S. manufacturing should not be conversant upon subjective evidence, promotional consulting reports or reports from think tanks whose agenda is to keep bad news from dampening further global integration support.  From an in depth analysis of available data on U. S. manufacturing workforce, value added productivity, U. S. manufacturing is not in re-emergence but rather a recurring growth mode.