Recovery Rising: Why and How

Latest numbers out of Europe show growth in manufacturing, so says the euro-version of the Purchasing Managers Index.  Obviously, stock markets are moving haltingly forward suggesting investors see an upside in corporate profits.  The question is why and how is this recovery happening and what should supply chain executives do to prepare themselves and their companies to ride the wave upward rather than be pounded into the sand.

One reason why is $2 trillion in governement stimulus spending.  Complexities aside, the most obvious place government can spend (other than handouts) is on infrastructure.  In the US, roads, ports, telecoms networks, hospitals, schools, etc., all have a crumbling vibe about them.  We built this stuff during our glory days when Detroit ruled the world and Camelot made DC the center of the thinking man's universe.  Now (connect through JFK or LAX for the guided tour) we have a bit of a third-world feel to what was once a glorious, epic backdrop to our post WWII sense of purpose.  Europe of course, is far more at home with the idea of government-led infrastructure buildouts, both recent and historical, and is benefiting as we speak.  The lesson should be obvious - find a way to contribute to the rebuilding effort and join in the fun.

The types of infrastructure up for a refresh are many and varied.  High tech companies can expect massive spending on data centers and communications networks.  Building supplies and mechanical equipment makers will be busy laying new foundations and repaving roads.  Commodities suppliers should see strong demand both for virgin materials and for recaptured waste.  An energy overhaul is getting underway also, just as the western world's aircraft fleet screams for wholesale replacement.  Coming on the heels of a crushing recession and financial scare, such rebuilding is more urgent than ever. 

The new news is that virtually none of our tried and true approaches to business and supply chain will work in this emerging economy.  Europe's good news points in the right direction.  Supply chains in Europe are oriented more to maintenance of human welfare rather than production of goods.  Infrastructure built to serve such a mandate - whether created by sustainability concerns or just a lack of space - is essentially closed loop.  This means take back facilities are just as important as distribution systems and multi-media customer service systems are just as important as sales.  Recovery will depend on thinking of supply chains as built on an infrastructure intended to conserve resources more than simply harness them.

For now, that mindset positions companies to get some of this government spending.  Next year and beyond, it will allow competition on terms that consumers, regulators, and ultimately investors are going to demand.  In the longer run it also includes looking to the developing world as a huge demand stream for stuff we have come to take for granted in the West and North.  Tapping these markets will require the same philosophy of infrastructure rebuild now dominating our recovery efforts.  The nucleus of it for supply chain strategists is a shift in mentality from operations designed for production to operations designed for maintenance.  See this principle taking root at companies like General Electric, Johnson Controls, and Unilever and one begins to see the recovery is already well underway.

The Obama Effect

We had a research leadership meeting the other day, and, in response to a request from Safeway, decided to outline a set of questions surrounding the implications of President Obama's ambitious policies for supply chain professionals.  The outline, which is shown below, unedited, will be followed in time with answers drawing from our best analysts and from field research among our members.  For now, I want to put it out there and ask any readers with opinions or insights to contribute at will. 

The times, they are a-changing and we'd better think broadly about what it all means.

                                               

The Obama Effect

 Trillions of dollars of new federally driven spending will pour forth over the next four plus years as expansionary policies coupled with ambitious structural changes combine to forever alter the dynamics of the US and world economy.  This overview will break down the Obama-effect into five buckets of activity which will each drive many billions in revenue across industries and will, in the process, change forever the competitive playing field for companies.

 

Infrastructure 

The big spend: Roads, bridges, pipelines, rail, ports, waterways, government and public facilities of all kinds are in line for a refresh.  How much money will be spent and by which purchasing authorities?  When will these projects happen and what criteria will govern selection of contractors and vendors?  Who stands to win?

 

The new network:  When the big build-out is complete how different will the supply chain be?  Will new markets be accessible that were not before?  Will new alliances emerge in a post-industrial US economy that change the way logistics is handled?  Will global sourcing and manufacturing be easier, harder or just different?

 

The new rules:  Following a generational public investment new rules can be expected to govern use, maintenance, and financing of our public infrastructure.  What reporting and transaction requirements might this mean for supply chains?  Will new standards accompany access to and use of infrastructure?  Which will be mandated and which will emerge as market standards?

 

Energy

The big spend:  The Smart Grid concept implies a massive, and integrated system of energy technology, generation, and transmission.  Where and when will the money be spent and who will decide?  Which technology and engineering standards will emerge and will these be based on science, politics, money or all three?  Who will win the most business and control the platform for the future?  What related spending outside of the Grid will matter – insulation, local power generation, batteries – and how will these evolve?

 

The new network:  Assuming the Smart Grid comes anywhere near its potential, what are the implications for business?  As consumers of energy, will business have new options for locations of its operations?  Will energy sources be impacted enough to reduce oil price volatility thus dampening its effect on costs and profits?  Will certain kinds of businesses be in position to generate positive net energy and how will this be managed as part of the supply chain?

 

The new rules: Again, new rules can be expected to govern use, maintenance, and financing of our energy system.  What reporting and transaction requirements might this mean for supply chains?  Will new markets emerge that price and move energy?  Where will supply chain investments be possible that are net contributors to the energy system, and also synergistic with core operations?

 

Healthcare

The big spend:  The scale of mess in our national healthcare system dwarfs even energy and infrastructure in terms of money needed.  Up front overhaul costs for new information systems, upgrades and expansions of hospital and other care giving facilities as well as establishment of payment systems outside the unsuccessful private insurance industry will mean many billions in project work.  Who wins this business and how?  Looking ahead, healthcare, more so than energy and infrastructure, will demand massive ongoing spending.  Who can offer enough efficacy with efficiency to establish lasting positions of power in the ultimate system and how do they prove their merits now to secure these positions?

 

The new network:  How different will the ultimate system of healthcare be?  Will big private drug or grocery retail participate and if so how?  Will patients/consumers buy more online and if so, how will deliveries happen?  What role will be played by public health providers?  Will preventive medicine or holistic care emerge and if so, what products and services will thrive?  How personalized will medicine become and what degree of custom delivery will the supply chain need to provide?  How will medical science be impacted by the emergence of “downstream data” akin to the Wal-Mart’s effect on consumer product industries?

 

The new rules:  If universal healthcare makes even a partial impact on

US 

policy, how will government regulations expand to handle new accountabilities?  Given dramatically deeper digital health records, what privacy and/or ownership issues arise around patient outcomes?  What regulatory burden can be expected for new drugs, devices, and other innovations?  How will dispensation rules evolve if retail becomes an important part of the healthcare value chain? 

 

Education

The big spend:  Although probably significantly smaller than the amounts spent on energy, healthcare and infrastructure Obama has been vocal about the need to improve education in the

US

The highest leverage investment potential in this realm revolves around better exploitation of information technology.  Upgrades to communications networks, archiving systems, interactive learning and testing all offer potential to accelerate and democratize learning.  Where and how will these investments be made?  What software and/or content will be needed here and how will hardware evolve to accommodate it?

 The new network:  A US education system evolved enough to deeply exploit the efficiencies of the digital supply chain means new business opportunities for consumer companies of many kinds.  How will companies be allowed to use this platform to influence consumers, especially children?  What content or media services could piggy back on this education network and will these help school districts offset costs?  Will the network extend to the home and what will this make possible?

 

The new rules:  Digital education systems will have multiple constituents governing their use.  What will school administrators allow?  Will federal standards apply and if so, how?  Will independent or consumer based watchdog groups emerge and how will they affect exploitation of this consumer channel?

 

Defense

The big spend:  National defense is always a big spend, but with shifting geopolitical threats the new administration is preparing to change our basic strategy.  In part this includes wider diplomacy with hostile regimes, and in part it means preparedness for new types of military threat.  What weaponry accompanies these new strategies?  Does it mean more or less consortium-type defense contracting?  Will provisioning military personnel change and if so how?  Are there changes in the balance of spending between armaments and information technology and if so, who wins?

 

The new network:  What will the new military look like and how will its ongoing support requirements change?  What new levels of technical proficiency will be expected of soldiers and staff and how will this be maintained?  Where and how will US military operations overseas need support from private suppliers and how will this be maintained?

 

The new rules:  Are changes in military strategy likely to change rules for procurement and contract compliance?  Will smaller companies be more or less able to compete for military contracts?  What rules will govern use of foreign companies further up the supply chain?

 

Conclusion

The election of Barack Obama, coincident as it was with the worst financial and economic crisis in the US since the 1930’s, means change on a large scale is expected and desired by most Americans.  The administration is pushing faster and more successfully than many observers had thought possible to instantiate this change.  If trends continue, the implications for business in general and supply chain strategy in particular are far greater than just a few new regulations.  Change across the five dimensions outlined above could be multiplicative with new dynamics in infrastructure affecting defense and energy or new forces in healthcare affecting education, and vice-versa.  Business as usual is unlikely to keep many companies competitive in this new world.

My Exploding Brain and the Growth Platform that only Apple Gets

OK.  I write lots of impassioned stuff about the need to master the content economy and the mega-growth platform of intellectual property.  Today my brain nearly exploded as I read the New York Times pages B2 and B3.  On B2 Treasury secretary Tim Geithner is quoted saying:

"Never before in modern times has so much of the world been simultaneously hit by a confluence of economic and financial turmoil such as we are now living through"

It is the epic shift promised in Naisbitt's Megatrends back in 1982, but now the earth is finally cracking.  The UAW meanwhile guts what is left of Detroit by looting the quake damaged house of Chrysler instead of preparing anyone for the real struggle to come.

Over on page B3 however the sun shines brightly on Apple. So brightly in fact, that its reflected moonglow is enough to hoist the old Ma Bell (now AT&T) out of a terminal land-line decline.  The App Store has just sold its 1 BILLIONTH download, and analyst A.M. Saconaghi at Sanford Bernstein cited as most impressive of all the company's 36.4% gross margin for the quarter.

The quote that caught my eye on page B3 was Apple COO Tim Cook (a supply chain guy from way back) dismissing netbooks:

"When I look at what is being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, very small screens, and just not a consumer experience that we would put the Mac brand on, quite frankly".

For those who believe in demand driven supply networks as AMR has researched it for the past five+ years this single quote says it all - sourcing strategies, design strategies, branding and content strategies, all hooked to the engine of consumer experience.  Stop focusing on what your industry can't do and ask yourself, how should our demand driven supply network change to harness the engine of consumer experience?  Harley-Davidson does it well enough that people literally tattoo the brand on their bodies.  Procter & Gamble does it with human biology and the promise of youth.  BASF does it with chemistry that improves the finish of a snowbaord.

The exact wrong way is what Chrysler is doing - fighting over who gets screwed worst.

Consolidation and Death: Where is Supply Chain Collaboration?

A decade ago the idea of collaboration was emerging as a breakthrough approach to efficiency beyond the factory.  The B2B air in the internet bubble came from notions like "Collaborative Commerce" coined by Gartner which implied that electronic connectivity would miraculously spur cooperation between businesses.  We thought it might be a bit more complicated, as the chart below shows. 

What we have since seen is that cooperation takes alot more than just setting up EDI, reverse auctions, or visualization.  It takes trust, which apparently is still in short supply.

Consider the following:

AMR is putting together an event at our spring conference in Scottsdale that will bring manufacturers together with retailers for a "knowledge cafe" to get supply chain folks from both sides to meet, greet, and learn to help each other.  Despite the efforts of one of our most influential analysts, Lora Cecere, and recruiting by information service giant IRI, we're finding retailers reluctant to come fearing they'll give more than they get.

On Tuesday an innocuous article in the Financial Times included the quote "Consolidation among suppliers will accelerate significantly" from the head of purchasing at BMW.  Others in the article included Continental, Siemens, and Daimler all of whom are cutting supplier bases by up to 50%.  The rest of the article is pretty much summarized in the title "Germany's large industrials wield axe to supply chains".  Is this the legacy of e-procurement? 

Just yesterday I spent five hours with Yossi Sheffi and some of the bright minds at MIT's Center for Transportation and Logistics wrestling supply network strategy questions with one of the world's most respected manufacturers (name withheld).  One key takeaway for me was the hard reality that retailers' readiness to jointly work with suppliers for mutual gain is limited both by willingness and competence.  We can build it, but will they come?

The question to supply chain strategists is this: when will we stop fighting over the pie and learn to make it bigger?  Sadly, it seems the gospel of our economic life remains competition rather than cooperation.  Everyone knows that huge gains can be made in efficiency if true and complete information were available up and down the supply chain.  Yet, we don't do it. 

The chart above was drawn nine years ago in anticipation of breakthrough productivity gains across the economy driven by bilateral relationships (meaning win-win) between trading partners.  2010 is almost upon us and we seem to still be on the flat part of the curve.  If there is to be a breakthrough it will take some leadership from sourcing people willing to pay more for something better rather than less for the same old thing.  Until we see that, consolidation and death will dominate the news.

Reminder - Supply Chain Top 25 voting is now underway.  Voters can still register at http://www.amrresearch.com/SupplyChainTop25/default.aspx

US Auto Must Fail To Survive

We're getting back on track with our Chain Reaction newsletter and blog postings. And the economic news is giving us a lot to talk about from all sectors. In the new newsletter, hitting your inboxes this morning (subscribe here), we discuss the auto industry’s request for a $25B handout and how the Senate decision to pass was the right move. Bailing out the US auto industry won’t solve what ails Detroit. Forget about whether the misguided management or atavistic autoworkers union deserves it, the problem is that it won't help the United States get better. Read the full story here.

Inflation versus Unemployment: Choose your Poison

I’ve written a lot lately about the dangers of inflation and received a lot of feedback. Our CFO Bob Blakeley and I regularly talk about the issue as well as the greater economy. This morning he sent me this news item about a steep fall in consumer prices:

 

NEWS ALERT from The Wall Street Journal Nov. 19, 2008 U.S. consumer prices took the biggest plunge in 61 years during October, pulled down by a sinking economy that evidence suggests is sending inflation into retreat. The consumer price index dropped 1.0% on a seasonally adjusted basis compared with the previous month. The core CPI, which excludes food and energy, fell by 0.1% in October, the largest decline since December 1982. Home construction took its fourth tumble in a row during October, falling 4.5% to a seasonally adjusted 791,000 annual rate, after falling a revised 3.0% in September. (more of the story available here)

 

Bob asked what I thought this might mean to my inflation predictions, also confessing he’d take my double-digit inflation prophecy if it meant consumers were spending and confidence was higher.

 

I agree on the later part and but don’t think we’ve seen the end of inflation. As I told him, for now, inflation is in check, but it’s because we are in free fall. You watch, there will be no way to avoid inflation when we print $1T new dollars without commensurately increasing output. I’m also betting our low oil prices are temporary and that oil will settle around $100 a barrel once OPEC cuts production back and inventories burn down. 

 

There is a way to avoid inflation however: massive unemployment, a factor that’s sadly possible. Bob agreed about the unemployment. He predicts it will creep up toward 10% by mid-year instead of the more optimistic predictions of 8% by the end of 2009. I buy that, but I don't think even that is enough to avoid double-digit inflation. Global unemployment rates in the 20% range would do it and I think that's possible. 

 

On the oil front, Bob pointed out that OPEC, against conventional wisdom, met this week and is not going to be cutting production to raise prices in the near term. It doesn’t make sense from a purely profit point of view, but I think OPEC has better economists than we give it credit for. The OPEC nations can’t handle a depression any more than we can but they could trigger it with $150 oil. They will ease for now, keep us addicted, and squeeze when we begin to get better. 

What do you think? How bad will it get before it gets better? Is massive unemployment or double-digit inflation the better option?

Double-Digit Inflation Now a Reality

We have been warning of double digit inflation and it has finally coming true. Even the drinks on US flights have gone from $5 to $6, a 20% hike. They know we're expecting inflation so they give it to us. This is how spirals get started. Just last week, P&G followed Dow's lead announcing a 16% hike in prices for its products. Are the politicos in Washington going to let this fester while they worry about the election only to find that interest rates need to be jacked way up to crush it? I hate to say it, but I fear we are in for a very tight-money fed this Christmas.

Reader Feedback: China Syndrome is NOT Imminent

Ian Hines, senior director of supply chain strategy and planning at Wrigley Germany, wrote this very fair response to our recent column on the imminent collapse of China. Mr. Hines offers this retort:

China Meltdown was an interesting article and enjoyable reading but from my perspective I think you could be wide of the mark. Personally, I am far more optimistic about China. The West might expect or secretly even hope for an outcome such as you describe but I don’t expect it to happen.

 

My take is that the article presents a very Western view of a culture that one has to experience to even start to understand. From my time in China, my view is that the Chinese think differently and have very different expectations than we might think.

 

I could take issue with many of your comments but let’s start with statistics:

 

Statistics

 

• I’m not sure that quoting a 2005 report on running two sets of books contributes to your argument that workers are not protected. Life in China is very different than the West; there is less protection and no litigation but it all works.

• I’m also not sure that the 2004 Gini ratio is a sign of impending doom. It is of course true that Chinese people’s living standards vary and that they benefit from economic development differently. But the key point is that living standards for most people are improving. This year, the government is implementing a new labor contract law, which will help the lowest paid.

 

Tiananmen cocktail

 

Your argument here relies on the three assumptions that:

 

• People are overworked
• There are, or will be, unmet expectations
• Increasing awareness will generate discontent

 

Personally I do not fully subscribe to any of the three assumptions, I also don’t believe (or see) that there is a danger of an impending labor backlash.

 

Near-shoring

 

Regarding your comments on near-shoring, there is some noise right now and, of course, the US is again considering Mexico. BCG recently wrote a report titled “Mexico’s evolving sweetspot in the globalization landscape”. They argued that there are four criteria some or all of which need to be met for Mexico to be advantaged:

• a.               Significant logistics costs
• b.               Stringent responsiveness requirements
• c.               Large labor component (benefiting Mexico over the US)
• d.               Strong managerial involvement

 Many products do not drive any of these criteria.

 

The reality is that there are still good reasons for sourcing from China and good reasons for a “China plus One” strategy.

 

Oil prices will impact that but notwithstanding current inflationary pressures Vietnam labor rates, for example, are just 40% of those in China. Furthermore, the current round of global inflation will increase Western salaries by more in absolute terms than we will experience in Asia making China more, not less, competitive.

 

Another view

 

Perhaps it is more interesting to think of China in a different way:

 

• China recently suffered a terrible earthquake and 90 million-plus people died. A Chinese survey found that more than 98% of the people were satisfied with the Government’s quick action. Compare this to the US government performance after the New Orleans debacle. The key point is the Chinese people have confidence that their government is doing better and better for the people and the country.
• Traditional Chinese culture focuses on harmony and the current society is one of the most harmonized in Chinese history. Also, contrary to Western opinion people are free to express their opinion ... totally different from 6/4/1989 and Tiananmen Square.
• Chinese people do not believe the Western way (and particularly the US way) is the only way to manage a country. The current global economic crisis was triggered by the US sub-prime crisis, which in turn was caused by US consumer greed. Such an event could not have happened in China.
• However, China is becoming more democratic, particularly compared to 10 years ago.
• Do the Chinese suffer a lot and have pain in their lives? My experience of living in China is that they have lot more fun than suffering!

Conclusion

 

It is easy to stand on the sidelines and predict the imminent collapse of a distant land; those predictions were being made in 1976 during the worst of times for modern China but they did not come true. The Chinese star is still rising; my belief is that this will continue for many years to come. For most of world history, China has been a leading nation. The Chinese people are smart, industrious, patient, and collective. China itself is open to the outside world. If there is a concern it is that as China becomes wealthier, she may be too heavily influenced by Western cultures and lose some of her natural resilience. --Ian Hines.

Mr. Hines gives us something to think about. What do you think?