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Archive for June, 2007
June 26, 2007
by Tim Minahan at 7:12 am
Supply Excellence is pleased to welcome back Sarah Pfaff. A long-time consultant to the world’s leading companies, Sarah now heads Ariant Consulting Group (www.ariant.com), which specializes in strategic sourcing, procurement transformation, and outsourcing strategy.
Last week, Sarah advised readers to get their internal processes and protocols in place before outsourcing. This week, Sarah cautions supply managers to assess and justify their business case for outsourcing — before sourcing these services.
The game show Let’s Make a Deal debuted in 1963 and you can still watch it on many cable TV networks around the world. In 1963, businesses were still attacking purchases the same way – “three bids and a buy.”
Fast forward to today. Services Outsourcing is one of the most important and complex activities a business must manage. Why do companies and even some of their advisors get in the “Let’s Make a Deal” mindset? Doesn’t this simply degrade the strategic sourcing discussion? In my opinion, I think that’s one of the causes of so many eventual Outsourcing failures.
Not too long ago one of our clients approached us after they had issued their RFP for outsourcing a customer-facing call center and received the responses. However, based on those responses and on some internal pressure, they were re-thinking their original scope and trying to figure out what to do. They recognized that the potential savings looked good, but there were other issues they now wanted to consider.
These issues were MAMMOTH. Since they believed the risk of upsetting the customer could be high, they wanted to consider alternatives such as:
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sourcing a different, less visible function; or
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using a new slower transition approach, or
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simply using more automation and not outsourcing at all.
As you can tell, all of these alternatives impact the sourcing process and what to do with the RFP responses. Because they had already begun the sourcing process and committed to an end-of-year project completion, they were having trouble figuring out what to do.
What were clearly missing were the goals for the outsourcing in the first place and whether they could actually implement the changes the outsourcing suppliers needed in order to be able to achieve the cost savings.
Here’s my real pet peeve. Not only was our new client still in the “Let’s Make a Deal” mindset - even with these huge issues now on the table – the suppliers were aggressively pushing forward too. Everyone just wanted to get the deal done – by the end of the year no less! They had all smelled the potential savings and no matter how the project was re-scoped, they still expected us to hit that same general savings level. Ridiculous.
All the strategic re-thinking was getting answered by the short-listed suppliers (whether they were the best qualified or not). If an issue was too big to handle, it was either tabled for later, maybe it could be handled as an SLA, or as part of implementation planning, or post-implementation, or simply never to be resolved.
So what happened in the end? A deal was made – but it wasn’t what everyone originally envisioned, we did get them to go back and address some of the strategic issues and they ultimately did change their savings target.
Even though the potential savings from Offshoring key internal functions can be huge, Services Outsourcing really is too complex to behave like Monty Hall.
Thanks, Sarah. Your insights into the reality of services sourcing are tough medicine. But you offer the right prognosis.
Posted in sourcing, best practices, outsourcing | Add Comment »
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June 22, 2007
by Tim Minahan at 9:29 am
I once knew of a guy who was unrealistically terrified of the Year 2000. Certain that the Y2K computer glitch would bring commerce to a halt and turn the city into a post-apocolyptic Waterworld, he bought a safehouse in the mountains, stocked it with food, and converted most of his wealth into gold bullion bricks.
True Story.
Now most Supply Excellence readers would characterize this person as a paranoid crackpot. (I know I did.) You might argue that he wasted his money and time planning for the most unlikely of events. And you’d be right.
Yet, this is exactly what most supply management organizations do when planning for supply chain risks. (This, or nothing at all.)
“Most companies spend too much time trying to predict and protect against unlikely risk events,” said Venu Nagali, head of Hewlett-Packard’s Procurement Risk Management (PRM) program. Speaking at AMR Research’s Supply Chain Executive Conference earlier this month, Nagali stated plainly: “The geopolitical risk and natural disasters we hear about in the news are low probability events.”
Nagali’s recommendations were echoed by AMR’s own supply risk management guru Mark Hillman who said, “The greatest risks are the day to day operational risks that can detract from shareholder value and performance. You need to focus on high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”
HP tracks three areas or uncertainty:
- Demand uncertainty of its own products
- Uncertainty of future commodity cost and components
- Supply availability
As part of its PRM program, HP has embraced new processes, supplier engagement approaches, and systems to better predict, mitigate, and balance risk across the supply chain.
“Risk has traditionally been put on the weakest players in the supply chain — the suppliers,” said Nagali. “Even today most companies don’t set a forecast. They don’t commit [volume] and just expect suppliers to take on all the risk.”
Nagali says HP’s PRM approach is a generic framework designed to answer three basic questions: How much should I buy? At what price? And for how long?
To answer these questions HP assesses the probability of its demand forecasts and of the cost or availability of supply required to support it. Based on this assessment, HP determines high, base, and low scenarios for its demand forecasts and the probability that each will occur.
The high-tech giant uses this probability analysis to define supplier agreements that share both risk and reward. Depending upon the probability and risk of a particular product or supply market, agreement terms range from a fixed quantity with a market-based discount to a fixed quantity, fixed price contract. HP may also use price caps and floors to protect parties even further.
(Click graphic to enlarge.)

Nagali states simply, “The company that bears the risk, gets paid for it.”
HP first applied this PRM approach to its direct material spend, both for commodity and custom parts and assemblies. The company has since used it to mitigate risk for key and volatile indirect spend categories, such as energy and advertising. In fact, Nagali reported that $7 billion of HP’s spending last year was based on such PRM contracts.
All told, HP has generated more than $445 million in cost savings from implementing its PRM approach. “We help HP take on more risk and save more money,” said Nagali. “But cost savings is not the key objective. Our key goal is to always be certain that we can get the material we need.”
In short, by sharing risk and reward with suppliers, HP has been able to ensure that it is the Customer of Choice when supply markets get tight. And this has helped the company not only to cut costs, but more importantly to gain a leg up on competitors using outdated approaches that require suppliers to take on all the risks of an uncertain market.
Posted in best practices, supplier management, costing, supply risk | 6 Comments »
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June 20, 2007
by Tim Minahan at 8:35 am
When anyone asks me to recommend the most knowledgeable supply management experts, Sarah Pfaff always makes my list. A long-time consultant to the world’s leading companies, Sarah now heads Ariant Consulting Group (www.ariant.com), which specializes in strategic sourcing, procurement transformatino, and outsourcing strategy.
So when Supply Excellence readers began asking for tips on outsourcing advice, I was quick to ask Sarah to contribute her thoughts. In true form, Sarah offers some tough on what it takes to effectively manage outsourcing relationships. Read her recommendations below:
After months of negotiations, a client we’ve been working with finally picked an Offshore supplier for IT services, worked through, signed the contract and kicked off the implementation. The strategic sourcing process we went through to get to this point was fraught with many difficult and emotional moments and we had to deal with the typical issues of strong prejudices and resistance to Outsourcing/Offshoring along the way.
We worked diligently on change management every day, and there were even some people who truly did come around to believing in Offshoring. But when the contract was signed, there were still just as many people who had negative attitudes about Outsourcing/Offshoring as there were in the beginning.
This raises a question in my mind: What should a company be doing to make sure an Offshore Outsourcing Relationship succeeds – especially since there are a lot of people standing around hoping it doesn’t?
What frustrates me is the naïve belief that all that’s needed to manage Offshored Outsourcing is: 1) good SLA’s; 2) an account manager from the provider; 3) escalation procedures and 4) account review meetings.
The fundamental problem with this thinking is that it’s unidirectional, focused on managing the Provider, who already has a vested interest in making it a success. Instead, we should be focused on managing the function, and maybe in particular, the people who want it to fail.
I think the answer is a new discipline called Outsourcing Relationship Management where the focus is multidirectional and comprehensive.
Think about it, we’re talking services, not materials. With services we blame the provider for “not getting it right” then we repatriate. But how did we transition those services in the first place?
Usually our processes are not well documented, to say the least. Then when we outsource and/or offshore we often try to improve these processes and decide to let the Provider learn them as they go. Then we’re willing to go live without using the same rigorous QA processes for Services as we use for direct materials. Isn’t all this just asking for problems?
In other words – we expect to put in effort in order to bring on a new supplier for materials – we certainly don’t expect to “toss our requirements over the wall and walk away.”
And our management of our own organization and the supplier doesn’t end once we take first delivery. We’ve got to treat Services the same way. It takes effort to Outsource services and even more effort to Offshore them.
But, unfortunately Outsourcing Relationship Management is simply a new skill for most corporations. Maybe we need new curriculums to train managers in Outsourcing Relationship Management. They could include the traditional vendor management, governance and SLA management in an Outsourcing context, but also include how to facilitate process changes and reorganizations to accommodate Outsourcing. It’s my opinion, but we just can’t walk away and hope that Outsourcing will work – and we shouldn’t always blame the Provider.
Sage advice, Sarah. Even if it may be tough for some readers to hear. I hope you’ll come back and share more insights on outsourcing and strategic sourcing strategy.
Posted in sourcing, best practices, outsourcing | 1 Comment »
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June 19, 2007
by Tim Minahan at 7:45 am
If the news yesterday that oil prices topped $69 a barrel seemed like the same old story, you’re right. And it market factors suggest that fuel prices will remain high for years to come.
Oil supplies to the West will continue to be strained by:
- an unstable workforce, such as the current strike by Nigerian oil unions
- artificial supply constraints created by OPEC, and
- efforts by foreign governments either to privatize — as in Venezuela – or to hoard oil supplies in emerging markets, such as China’s controversial investments in African oil fields.
But the most immediate and long lasting impact on fuel supplies is closer to home and due to an unlikely culprit: the lack of skilled labor and construction services to build new refineries. According to a Wall Street Journal article last week, the oil industry is reporting that labor shortages and rising material costs are slowing projects that would add much-needed refining capacity in the U.S. And higher costs are also slowing construction of new refineries abroad.
This crisis came out at the Supply Management 2.0 Forum in Houston earlier in the month when Hess Corporation Supply Chain Leader Carl Tatum told the audience that shortage of construction talent and custom equipment were impacting expansion and maintenance efforts. Tatum even shared a story of what can only be described as extortionary tactics from suppliers of critical parts. “We had no choice but to pay it,” Tatum lamented. “We had to keep operations running.” As noted in a previous Supply Excellence post, such factors have prompted Hess’ supply management team to develop negotiation and supplier management methods to become the “Customer of Choice” of their supply base.
Such dynamics are prevalent across the sector. According to the Journal article, oil refineries report that costs for steel have jumped 74% in the past two years, while the cost of skilled labor in the hurricane battered Gulf Coast has risen 60%. And little relief is in sight, as much of the materials, construction services, and labor is moving offshore where projects are booming and where pressures from environmental and social groups are relatively subdued (or, in some cases, forced into submission).
I’m not going to debate whether such dynamics are the result of self-inflicted wounds due to decades of underinvestment by U.S. oil refineries. (Although the fact that no new refinery has been built in the U.S. since 1976 does raise some questions.) I am merely warning supply managers to build rising fuel costs into their energy and category plans for at least the next five years.
Posted in supply management, supply risk, supply market dynamics, Supply Management 2.0 Forum | 1 Comment »
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June 18, 2007
by Tim Minahan at 10:17 am
Risk management was the topic du jour at AMR Research’s Supply Chain Executive Conference in Scottsdale, Ariz. earlier this month. Keynoter Colin Powell set the tone by bluntly stating that, when it comes to risk, we are our own worst enemy.
The retired General and Former Secretary of State told a rapt audience of 800 supply chain and technology executives that the biggest risk to U.S. industry is the rising swell of protectionism among our citizens and legislators. “Our greatest strength that we have is our openness,” said Powell. He lamented that the heightened restrictions of student and work visas since the September 11th tragedy – and the ongoing immigration debate – are diminishing the U.S.’s role as chief innovator and industrial powerhouse. “We are paying a price for these [new restrictions].”
As evidence of his claims, Powell noted that student and work Visa restrictions have caused a drop in the number of foreign students and tourists in America. “It is in our best interest to encourage foreign students to attend U.S. universities because they pay full fare and they take U.S. business practices and cultures back to their countries or they stay and contribute to our workforce and innovation. They also learn to understand and like America, which helps us on the diplomatic front.”
Powell also noted that the drop in work visas has corresponded with a decline in the number of patents filed by U.S. companies. He argues that that U.S. technology firms are now at a competitive disadvantage because, without foreign researchers and workers, the pool of available talent isn’t big enough. “Anytime we set up a barrier for students and others to come here, we are undercutting our competitiveness. And there are always other countries that are eager to take them.” (This sentiment has been echoed by big tech firms like Microsoft.)
The well-informed Power added that our Universities and hospitals are now setting up schools on foreign soil to capitalize on new demand in emerging nations and, in part, to recapture some of the lost revenue due to U.S. visa restrictions. For example, the world-reknowned Mayo clinic is establishing schools in Dubai, Abu Ghraib, and Ryhad. Even the U.S.’ biggest allies are benefiting from the tighter visa restricitions.
Powell notes that 46% of all Australian students are foreign citizens — particularly from China. “And Australia puts these students on the fast track for foreign residency and citizenship.Powell’s point on openness applies not only to student and work visas. It is apropos for trade policy. (As well as business methods patent litigation.) In recent weeks, Spend Matters blog master Jason Busch has rightfully raised concern over new policies designed to protect U.S. businesses from foreign competition, particularly from China. (Supply Excellence readers have gotten a fair dose of this rhetoric as well.)
The message: we can’t legislate U.S. industry back into greatness. History shows that protectionism makes countries less competitive by cutting off access to foreign monies, workers, and innovations. U.S. businesses need to develop and continuously improve methods to compete more effectively, run more efficient supply chains, and out innovate the competition. That’s the only sustainable competitive strategy.
Posted in supply management, skills rectruitment and development, supply risk | Add Comment »
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June 15, 2007
by Tim Minahan at 7:23 am
By now, Supply Excellence readers know my stance on the critical importance of sustainable supply strategies. Over the past year, I have littered these virtual pages with case studies of how industry leaders have embraced environmentally and socially responsible sourcing and supply management practices. (Thankfully, no trees were killed in the process of these writings.)
The important message from these leaders: sustainability is not just good for the planet. It’s good for business. Leaders have found that sustainable practices lower costs, mitigate supply risks, and, ultimately, boost profits.
Retailers and manufacturers have also recognized that concerned citizens will pay a premium for products that utilize environmentally responsible materials and manufacturing procedures or fair trade and labor practices. Global brands like Apple, American Express, and Motorola have used this consumer dynamic to launch an extremely worthy campaign know as (Product)RED, which is part of the broader (RED) program launched by U2 frontman Bono among others in support of The Global Fund, an organization to fight AIDS, Tuberculosis, and Malaria in poverty-stricken regions of the world.
The concept is simple and altruistic: participating retailers, manufacturers, and service providers donate a portion of the profits from select products “to buy and distribute anti-retroviral medicine to our brothers and sisters dying of aids in Africa.” The graphic below from the (RED) website does a great job of illustrating the (Product) RED program:
(Click graphic to enlarge.)

Great and worthy program. However, exeuction has been less than perfect.
Specifically, some (Product)RED sponsors have overestimated just how high a premium consumers will pay for environmentally or socially responsible products. And this may undercut the overall value and impact of the program.
Case in point, I recently picked up a limited edition RED branded shirt at The Gap. The shirt was made from 100% African cotton, suggesting that The Gap is embracing sustainable supply practices itself. (A fact which is verified by on the social responsibility section of its website.) What’s the problem? The shirt, originally priced at $80, had been marked down to $9.00. And this wasn’t a one off anomaly. The Gap store I visited had a table display and two racks of chock full of (Product)RED merchandise with similarly shocking markdowns.
I have no insight into what it cost The Gap to buy materials, manufacture, ship, stock, and promote the shirt. But it doesn’t take a math major to realize that the drastically reduced sale price doesn’t leave much profit to fund the RED donation chain described above. Knowing The Gap, they likely fully funded the program anyway, taking a loss. While truly altruistic, this type of program is not sustainable — in the literal sense — for any business.
To be fair, other (Product)RED sponsors, have achieved a sustainable balance by pricing their RED-branded products more reasonably. For example, Apple offers a (Product)RED iPod Nano that is priced the same as like regular Nanos in its portfolio. This encourages customers to make the right choice and buy the RED version products, increasing the volume of fully funded donations.
(Others like Walmart and Starbucks have also kept a lid on the premiums they charge for products made using socially and environmentally responsible practices. Although, to be clear, neither of these companies is associated with (Product)RED.)
This episode is further evidence that sustainability is really about good business. It requires developing supply, manufacturing, and business strategies that are environmentally and socially responsible and that can generate benefits and profits for the business. In short, a company can’t provide the funds and support to sustain the planet, if they can’t sustain their own business.
Posted in supply management, best practices, enviro/social sustainability, supply risk | 1 Comment »
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June 14, 2007
by Tim Minahan at 6:47 am
“It all starts with spend.”
That’s how Hess Corporation Supply Chain Leader Carl Tatum summed up his company’s current supply management transformation initiative at the Supply Management 2.0 Forum in Houston last week.
Unfortunately, like most companies, Hess has relied on a mish-mash of automated tools and manual processes to aggregate and analyze its spending. This process was time-consuming and resulted in a snapshot of its spending that was limited, incomplete, and often inaccurate. “We use [a major ERP’s] materials master to analyze our spend,” said Tatum. “But 75% of our spending is on services. We tried to use [the ERP’s] service master but it lacks the detail we need for effective analysis.”
Worse yet, this classic case of Garbage-In-Garbage-Out (GIGO) syndrome caused concern and backlash from Hess’ supply chain team and other internal stakeholders. “The real danger of GIGO becomes garbage in Gospel out,” quipped Tatum. (I love that line. The other supply managers in the audience did too.) He adds that, if a teammate or stakeholder finds a flaw in your spend data or analysis it “leads to a real danger of them saying, `I don’t believe any of it.’”
A long time user of e-sourcing tools, the Fortune 100 energy giant aims to overcome these challenges by adopting software to automate spend data extraction, cleansing, classification, and analysis. The Web-based solution is part of a larger, integrated technology platform - which also includes e-sourcing, contract management, and supplier management capabilities - that Hess has adopted to support is transformation initiative.
Tatum is quick to point out that Hess’ approach to spend analysis is much broader than the traditional definition: “Spend analysis by itself is not enough. It’s backward looking. I want to know what I’m going to source next year and the year after that and the year after that,” said Tatum.
To illustrate his point, Tatum pointed out that Hess’ capital expenditures nearly tripled between 2004 and 2006. “If we had blindly looked at our 2004 spend and done our analysis looking backward we would have had some holes in our sourcing strategies.”
Instead, Hess is referring to its program as a “spend intelligence” initiative. Tatum defines spend intelligence as spend data that is “global, clean, categorized, and enriched with vendor-parent linkage” as well as linkage to other associated business information, such as contract details, supplier and market intelligence, and projected demand. (Tatum was kind enough to point out that this approach is an expansion upon a moniker first defined by a former Aberdeen Group analyst.)
Its newly adopted spend analysis solution allows Hess to cleanse and classify data to a common and more accurate classification schema that is currently based on material groups. (Tatum says Hess is in the process of mapping spend data to the UNSPSC schema.) Hess cross-references this spend data with market factors and its own proprietary forecasting model to determine projected demand (and future spending) up to four years out. According to Tatum, blending historical spend data with future demand projections is what is truly required to manage spend and become the “Customer of Choice” among suppliers. Considering the huge variability in supply markets these days, Hess is certainly onto something.
Posted in best practices, spend analysis, Supply Management 2.0 Forum | Add Comment »
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June 13, 2007
by Tim Minahan at 6:47 am
At the final stop on the Supply Management 2.0 Forum in Houston last week, Hess Corporation Supply Chain Specialist Carl Tatum revived the lively debate over the right key performance indicators (KPIs) for supply management success.
“We need something more than year-over-year cost reductions to prove our ROI,” Tatum told the audience of Houston area supply management executives.
(As Supply Excellence readers know, this statement contradicts comments from previous Forums panelists, including CPOs from National City Corporation and Alliance Bernstein. These top procurement execs argued that, in the eyes of the CFO, hard-dollar cost reductions is the only KPI that matters.)
Tatum countered this mindset by suggesting a more profound measure: “The only metric that matters is year-over-year profitability improvement. In addition to lowering costs, procurement must quantify its role in impacting revenues by avoiding risks of supply disruptions and contributing to the long-term sustainability of the business.”
Responsible for supporting oil exploration and production activities for Hess, Tatum’s team is no stranger to risk management. New reports abound that the capital equipment and skills required to build new oil rigs and refinery capacity are in short supply, particularly in the far reaches of Africa or off the coast of Latin and South America. Competing for scarce drill bits or engineering and construction services to expand refinery capacity can be tougher than finding a Nintendo Wii at Christmas.
(And, yes Virginia, there are oil companies trying to tap new sources and improve refinery capacity. More on that in a later post.)
Such factors have prompted Hess’ supply chain squad to adopt a new goal: become the Customer of Choice to its suppliers.
“A customer of choice consistently receives competitive preference for scarce resources across a critical mass of suppliers in its database,” said Tatum, citing a recent Procurement Strategy Council report found that suppliers rated only 5% of customers as “customers of choice.”
At Hess, failure to attain this choice status could cost hundreds of millions of dollars a day in cost overruns and limit the company’s aggressive growth plans. The pillars of Hess’ Customer of Choice initiative include:
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Establish account and category managers: Hess account managers support internal customers in accessing innovation in the supply base and to reinforce contract compliance and process standards. Category managers are responsible for supply performance and supplier relationships on a global basis.
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Create consistent global processes: “To be successful, we must present a consistent face to suppliers with our strategic sourcing, contracting, and supplier management processes.”
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Adopt Web-based tools to improve transparency and collaboration with suppliers: A long-time user of e-sourcing tools, Hess recently transitioned to a single, integrated platform for spend analysis, e-sourcing, contract management, and supplier management. Tatum says Hess expects the common platform will improve visibility, efficiency, and supplier collaboration, and help reinforce standard processes.
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Improve spend visibility and forecast models to better project future demand: Hess uses a blend of automated spend analysis software and proprietary forecasting models to better project future demand and buying requirements. Tatum says blending historical spend visibility with future demand projections is key to providing predictable forecasts to suppliers. “We can predict our demand and spend four years out,” said Tatum. “This helps us more accurately commit business to suppliers so they can reserve or build capacity or skills for our requirements.”
Tune in tomorrow to learn more about Hess’ “spend intelligence” initiative.
Posted in supply management, best practices, supply risk, Supply Management 2.0 Forum | 1 Comment »
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June 12, 2007
by Tim Minahan at 8:01 am
When I first suggested that a declining dollar and aggressive offshoring by domestic companies could turn the U.S. into the next low cost country, many of you shrugged me off as some crackpot protectionist.
Now the ever profound Bo Andersson, Group Vice President of Purchasing for General Motors, is saying that “with a weaker U.S. dollar, the U.S. supply base is more competitive on a global basis.” According to a Purchasing Magazine brief, Andersson said these factors would cause GM to curb previous plans to source more materials from emerging markets, particularly China.
Of course, rising Chinese labor costs, uncertainty of the Yuan, and increasingly unstable trade relations may have also factored into GM’s decision. Higher risks and transportation costs associated with China sourcing were also part of the equation. But one of the biggest motivating factors was likely how Toyota and Honda have successfully snatched up U.S. supply sources to better compete on GM’s home turf.
In fact, GM last year vowed to rethink its global sourcing strategies as part of a broader attempt to overhaul its supply operations, in part because of the success of rival Japanese automakers.
Moves by the world’s biggest auto manufacturers should prompt other supply management organizations to rethink your own global sourcing approaches. (A prediction I had made in my 2007 projections for the sector.) The declining dollar portend lower costs from U.S. suppliers. And, ironically, the U.S. is one of the few regions in the world that has excess production capacity and underemployed skilled labor. (By comparison, European manufacturers are now operating a near full capacity. And China can’t bring enough capacity online fast enough. It is also reaching into the hinterlands to retrain farmers as skilled laborers.)
Remember, going global doesn’t mean pushing your supply to low-cost regions. It means constantly balancing (and rebalancing) supply costs, performance, and risks across a portfolio of suppliers based on demand and supply market dynamics.
Posted in sourcing, LCCS and trade, supply risk, automotive sector | 2 Comments »
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June 8, 2007
by Tim Minahan at 10:44 am
A Wall Street Journal cover story earlier this week warned of inflationary indicators around the globe, including near-capacity production operations in Europe and double-digit wage increases among both laborers and service providers in China and India. The article quotes former IMF Chief Economist summing the current supply market situation this way, “Markets have gotten used to the idea that the global economy will keep producing downward pressure on prices. But that phase may be ending.”
This sentiment is corroborated by the latest Industry Cost Escalation (ICE) Alert from Thinking Cap Solutions, which projects 5% to 10% price increases across 93 commodities. Elizabeth Baatz, editor of the monthly report on commodity availability and pricing trends, offers the below insights into where you can expect to see supply costs rise:
Buyers of industrial components and products will be facing more price increases across a wider swath of industries than ever now. Purchasers of carbon black, particleboard, steel wire, petrochemicals and metal pipe fittings will be negotiating with suppliers in industries which are under pressure to raise average prices by between 13.9% and 10.7%. That’s how much prices must be increased if manufacturers are to achieve the same level of margins that were held a year ago. Underlying manufacturing costs have escalated faster than prices charged by producers for final products. Thinking Cap Solutions’ latest ICE-Alert report identifies a total of 93 industries where average product prices must be raised by at least 5% in order to restore margins to the average levels held over the past five years. From the May ICE-Alert, the table below shows the Top 20 manufacturing industries which need even larger price hikes in order to match the average margin conditions that were held exactly one year ago.
TOP 20 NEGOTIATION HAZARD INDUSTRIES
To restore margins to year-ago or five-year average levels, industry product prices must increase by how much on average
NAICS | INDUSTRY | Yea-ago | 5-yea avg. | 325182 | Cabon black manufactuing | 13.93% | 2.55% | 321219 | Paticleboad & elated poduct mfg. | 12.84% | 8.22% | 331222 | Steel wie dawing | 11.77% | 10.53% | 325110 | Ethylene, benzene & petochemicals | 11.16% | 6.33% | 332996 | Fabicated metal pipe & fitting mfg. | 10.68% | 8.94% | 331210 | Ion & steel pipe & tube mfg. | 10.66% | 5.69% | 326122 | Plastics pipe & pipe fitting mfg. | 9.90% | -11.58% | 332114 | Custom oll fomed metal pod. mfg. | 9.56% | 11.76% | 327420 | Gypsum poduct manufactuing | 9.36% | -6.85% | 322122 | Newspint mills | 9.34% | 6.11% | 332611 | Heavy-gauge metal sping mfg. | 9.10% | 8.78% | 332115 | Metal cown & closue manufactuing | 7.90% | 4.79% | 326220 | Rubbe & plastics hoses & belting | 7.64% | 4.71% | 331221 | Rolled steel sheet, ba & shapes mfg. | 7.54% | 6.67% | 321113 | Sawmills | 7.51% | 2.52% | 333515 | Cutting tool & machine tool accessoy | 7.39% | 9.46% | 333412 | Industial & commecial fan & blowe | 7.22% | 4.24% | 331423 | Seconday coppe smelting & alloying | 7.08% | -8.43% | 331319 | Othe aluminum olling & dawing | 6.90% | 13.27% | 333511 | Industial molds (casting & foming) | 6.82% | 4.93% |
Source: ICE-Alert For more information, call 360-452-6159
For more information about the ICE-Alert or the Top Negotiation Hazard Industries, contact Elizabeth Baatz at ebaatz@ice-alert.com or call Thinking Cap Solutions in Washington state (tel: 360-452-6159).
Also, check out previous ICE-Alert projections here.
Posted in costing, supply risk, supply market dynamics | 2 Comments »
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