Green IT is a Red Herring

For all the noise we hear about green IT you'd think the whole climate change problem is just a few sustainable data centers away from resolution.  Google "Green IT" and get over 6 million hits - Google "Green Manufacturing" and you get only 209,000 hits.  Is Green IT really 30 times more relevant to saving the planet than green manufacturing?  Hardly, considering that Industrial greenhouse gas emissions are worth 27.3% of total in the US right now while the totality of computing and communications adds up to maybe 3%.  And this is in a country which has essentially outsourced all of our dirtiest work to China, Mexico and other developing countries. 

How much help is green IT when the Chinese are burning brown coal to fire steel, glass and cement production?  Virtually not at all.

And consider the underlying drivers of green IT.  Microelectronics technology is all about reducing the power consumption of chips because it makes for longer battery life in portable devices and less heat generation to give us even faster processing with the big stuff.  Not much need for a "save the planet" itch to keep the tech industry chasing energy efficiency.

So why all the hype about green IT?  Is it because the IT sector lives for (and on) hype?  I think so.  The big tech vendors have big marketing arms and they certainly know how to spot and foster a wave of excitement in the marketplace.  It feels like a win-win.  Reduce energy consumption (which we were doing anyway) and take credit for keeping sea levels in check!  Irresistable.  And yet,nonsense.

I wouldn't care if the topic didn't confuse the bigger issue which is getting at sustainability in the global supply chain.  Plants and distribution networks generate the big emissions - between them accounting for over 60% of the US total and far more in the rest of the world.  I will feel alot better when Green Manufacturing has 30 times the buzz of Green IT.

Playing Hot Potato with Carbon in the Global Supply Chain

Hilary Clinton's visit to India included a sturdy rebuff from Environment Minister Jairam Ramesh on the idea of accepting specific targets for carbon emissions.  His point, which sure sounds fair from the perspective of a developing nation working its way up the food chain, is that emissions, especially per capita are much lower in India than in the west.  Why should countries like India, China and Brazil be restrained from playing the same cards we did during our conquest of the west?  Sort of like loggers in the Amazon calling double standard when tree huggers from California or England press to save the rainforest.

The issue supply chain people need to think about is how all this will play out in a global sourcing and manufacturing strategy.  India recoils at the idea of carbon tarriffs slapped onto goods shipped from Indian factories to western markets.  And that's largely for low energy intensive stuff like textiles and light manufacturing.  Think how the Chinese will react to this with all their booming steel mills.  Realistically though, this is may be an effective means of pricing carbon emissions in a way that invokes market pressure to make change happen.  So, do you go ahead with that plant expansion in China?  Depends how long they can hold out against the diplomatic pressure.

The same type of guessing game applies to supplier development initiatives.  Just as some big western brands got burned by sweatshop labor upstream in their supply chains, so too could they pay in profits for a sudden shift in attitudes about embedded carbon in stuff made halfway around the world in dirty plants.  We surveyed over 300 companies on the topic of embedded carbon recently and found that by 2010 the top environmental initiative is greenhouse gas emissions.  While I love the sentiment here, I think most folks have no idea how hard this will be.  Done wrong, this could easily mean pushing the mess further up the supply chain where prying eyes can't easily see it.  Kind of like a big dirty game of hot potato.

The lesson most supply chain people have already learned about global sourcing and manufacturing is that true cost competitiveness comes not from cutting corners or gaming the system but from designing in robustness from the start.  Whack a supplier unfairly for short term concessions and they either go out of business leaving you hanging, or whack you back when they can.  Skirt regulations by moving to a friendly jurisdiction and you risk a consumer backlash or political graft.  Hide the truth and be scandalized when it comes out. 

Carbon emissions (and plenty of other environmental impacts) are soon to be priced in to the final offer presented to consumers.  India, China and Brazil may resist targets and tarriffs but the problem won't go away.  Supply chain strategists can game the timing of these new embedded costs, but they can't avoid them forever. 

Unlike a hot potato which eventually cools down, this problem is only getting hotter.  Don't get caught holding it.

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

Sun and IBM Breaking Up: Who Wins?

The news today about IBM and Sun possibly going separate ways leaves a door open for others to dodge what could have been a pretty blockbuster combination.  I remember back in late 90's how cool Java was and what it meant for Sun.  Unfortunately, the heavily engineer-driven culture at Sun kept what could have been a dominant computing pioneer from realizing its potential.  IBM, meanwhile learned the lesson of having business process and financial discipline govern ideas to make sure they are realized.  Sun still has some brilliant engineers and IBM certainly has a handle on how to build an integrated global supply chain.  The coolness of Java, plus a $3B+ R&D organization, and a hub of talent in the vital San Francisco bay area makes Sun a plum for someone like IBM.

If the breakup holds who wins?  How about Hewlett Packard.  Not only is H-P a titan on the scale of IBM (actually bigger), it is also great at running an integrated global supply chain (see Tony Prophet of H-P explain what they do at our upcoming conference) and positioned to do alot with Java and the R&D pool by applying it to a huge range of consumer and business computing applications.  A similar argument can easily be made for Cisco Systems.

If cooler heads prevail the IBM-Sun combo will go ahead.  There wasn't much keeping the two sides apart over the weekend and the logic of the deal for IBM includes a lot of potential benefit for IBM customers looking for better systems links - a solid stream of profit opportunity that Big Blue has to like.

Auto Response: Your Comments on the Automotive Industry Bailout

Whoa! Lots of comments from yesterday’s newsletter column (“U.S. Auto Must Fail To Survive”—subscribe to a preview account to access the entire article). We had more in agreement than opposition, but the opposition points deserve a response, many of them are well-founded.

 

The problem with unions

 

First off, I am not universally anti-union. I started my career thinking I’d be in labor relations, even getting a masters degree in the subject. Unions, especially if you go back to the early days, may well have saved capitalism from itself by allowing people without access to capital to make a decent living. The problem is that unions are, by their very nature, political bodies. They are about votes and membership numbers; as a result, they resist change, especially when it involves replacing human labor with machinery, even when the economics are overwhelming. The UAW just took it all too far. Too much power, too much politics, too many jobs—the jobs bank for instance? Most people in the rest of the country think this is an insane idea. More outrageous is the lack of foresight the UAW demonstrated by continuing to fight with management over a shrinking pie when everyone could see the writing on the wall. Caterpillar had to fight through this problem 20 years ago and is now doing fine. Even Johnson Controls, which directly serves Detroit, has managed to find a new way to thrive. Why can’t the rest of Detroit do the same?

 

One other thought, a comment chided me for bringing up the baseball bat story saying one bad apple doesn’t spoil the whole bunch. True, but I still have seared in my memory the “swinging for the fences” comment one witness made about the incident. The reason I included this story is the symbolic power of the image: fighting to protect jobs is the wrong way to think about it. No one has a right to a job. In the long run you keep your job by being worth more than what you are paid. If the UAW had focused on that and helped its members stay ahead of the changing global supply chain instead of “protecting jobs” we might not be having this conversation now.

 

Management’s failures

 

Second is management. Some comments said to give management a break, that they’re doing their best. They may be doing their best but it’s not very good. I drive a Ford Explorer and a Jeep Cherokee, both are great cars. Drivers in the US need pickups and SUVs for work and carpools much more than drivers in Europe or Asia. But we also need small cars for solo commuting and city driving. That’s why Toyota is the world’s largest automaker now: it makes BOTH successfully. And last January, the Prius passed the Explorer in sales.

 

I know SUVs and trucks made a ton of money for a long time, but this oil price problem was no surprise. All OPEC has to do is cut production and our prices go back up fast. Why couldn’t have management prepared better for this? Oh by the way, the scoundrels on Wall Street who copped all those millions while teeing up the current disaster deserve even worse than the auto execs. There is plenty of blame to go around.

 

The British Leyland Lesson

 

Third, the government subsidy issue. Yes, I buy that Europeans subsidize their industries more than we do, and that this can give some an unfair advantage, but the problem with subsidies is that companies never seem to be able to break the habit once they get going.

 

The best parallel is probably British Leyland, which failed despite a $16B bailout from the British government. The company still went under, it just took longer. Look into that case and you see why the union deserves a lot of the blame. The similarities with Detroit are scary.

 

As GM Goes, So Goes the Nation

 

Last, and most interesting, were points made about the overall economic impact. One commentator said the jobs multiplier for auto is 10 versus two for banking. I know that the complete supply chain goes way back and that the risk to the economy is real. But still, GM, Ford, and Chrysler are not the whole industry and their operations certainly could continue under bankruptcy—difficult, yes, but will it sink the US economy? I doubt it.

 

Also, on the banking question, many seem to feel that since we bailed out Wall Street its only fair to do so for Detroit. No one feels sorry for the bankers it’s just that the multiplier effect from banks is a lot less a matter of direct jobs than of liquidity and, therefore, overall economic activity. There will be plenty of industries and companies that want a bailout as we struggle through this mess. The question is whether $25B does more good in Detroit than somewhere else.

 

Keep the comments coming. We’d love to hear your responses.

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.

Shock to the System: Can the Volt recharge the US Auto Industry?

GM rolled out the production model of the Chevy Volt, this week.

GM rolled out the production model of the Chevy Volt this week

We had questioned whether GM and US manufacturing were ever going to get how the economy has moved from being based on things, to being based on ideas, what we call the "Content Economy." As we wrote in the new Chain Reaction newsletter (subscribe here), the Volt may be proof that GM gets it. In fact, GM is now talking about incorporating the platform the Volt is built on, called the E-Flex, into a whole line of its products. We hold out hope

An Electrically Charged Laptop Challenge

We recently met with Hewlett-Packard executives to discuss their sustainability and green initiatives. Hard to argue that HP has gone above and beyond the call of duty in this realm, and it’s made it a corporate mission to do more. So my collegues Stephen Stokes, CJ Whelage, and I laid out a challenge for the HP team, and extend it to all laptop manufacturers. And here it is:

 

Take a new step in thinking about energy efficiency for notebook computers and develop a 12-volt notebook instead of the industry standard 16- to 20-volt varieties.

 

In doing so, HP and other laptop makers would let consumers, in part, take advantage of the extra electricity generated in various vehicles, allow the use of notebooks on long journeys, and open up access to mobile and fixed computing to a greater cross-section of the developing world where reliable electricity infrastructure is rarely in place.

 

Can you imagine a world where notebooks are handed out with car charger adapters? Consider the following:

 

Currently, global sales of notebooks exceed desktop sales and are currently running at around 97 million units annually. Assuming a three-year notebook lifetime and a conservative 20% market growth retrospectively, this implies an installed base of roughly 236 million units. With the typical average power usage levels of 20 watts, and an average daily usage rate of 8 hours, we estimate annual global power usage of notebook to be of the order of 10.4 terawatt hours (that 10.4 million-million watt hours). On average, residential U.S. power rates are 10 cents per kilowatt hour, that’s more than $1B worth of power, power that would have resulted in almost 6 million tons of CO2e (carbon dioxide emissions) being emitted into the atmosphere.

 

 

 

Now, picture this: If 30% of all notebook users used the existing free energy available from automotive recharging for 60% of their notebook electricity demand, annual savings could top more than 1.8 trillion watts of energy. That’s enough to support the annual electricity consumption of more than 175,000 U.S. households and a reduction in GHG emissions of more than a million tons of CO2e (see Figure 1).

 

In a world looking over longer timescales to expand the fleet of electrical and other hybrid cars, this free energy may not be around forever. But we predict it can significantly dent consumer product energy usage and the resulting greenhouse gas emissions, globally, in the decadal timescales over which HP’s plan is draped. During that time, the notebook market will continue to flourish.

 

HP seemed keen to take this challenge seriously and we look forward to seeing what they can do with it. What do you think? Any other notebook manufacturers up for the challenge? Let us know.

Africa Still Rising

Last week, I had the pleasure of closing SAPICS’ 30th anniversary conference in Sun City, South Africa. What I saw and heard there renewed my faith that the African continent promises growth opportunities that are still badly underestimated by the outside world. Back in December, I wrote a bullish piece on Africa as an emerging business hot spot. The madness in Zimbabwe and Kenya earlier this year, however, drew out the perennial cries that the continent is somehow beyond redemption and maybe we were falling into the same trap of false hope that bedeviled Afrophiles for hundreds of years. Sorry, but I’m still optimistic, and 1,293 attendees from Africa and the wider world at the SAPICS event make me more confident than ever that this time it is different. I wrote up why in this article for our sister publication (complimentary subscription here) and blog, First Thing Monday. You can read what some are doing to help build tomorrow’s supply chains in Africa, today here: “Africa Opportunity: Building Supply Chain Foundations.”

Taming Complexity

I recently saw a demonstration of Oco’s product sets for business intelligence (BI) and was impressed. What stood out was the power of simplicity the Waltham, Massachusetts-based software-as-a-service (SaaS) vendor had managed to capture. From its easy user interface (UI) to the logic of how and why it might help companies manage their supply chains better, Oco took me from zero to 60 in seconds.  Read my full account here.

Supply Chain Leadership – Four New AMR Research Awards

Since first publishing the AMR Research Supply Chain Top 25 in 2004, we continue to hear feedback every year about how to refine the rankings. Our main mission has always been to highlight examples of supply chain leadership and, in so doing, to elevate the importance of the profession. In 2008 for the first time, we explicitly recognized four examples of leadership in supply chain that demonstrated specific areas of practice. Our methodology for selection was a traditional nomination and committee selection process whereby all AMR Research staff were invited to nominate companies and selections were made by our research leadership.

 

Here’s a look at some of these winners.

 

Technology Use in the Global Supply Chain

 

Colgate-Palmolive was nominated, along with about a dozen other companies, and cited specifically for outstanding achievement in managing supply chain processes on a single global ERP platform. The extraordinary performance that brought Colgate-Palmolive to the top of the nominee group was in part, demonstrated discipline in stating and sticking to an SAP strategy for most of the essential business processes underpinning the supply chain. The other part of the story was Colgate’s consistently strong operating and financial performance against the highest metrics of supply chain excellence.

 

Leadership in Corporate Social Responsibility in the Global Supply Chain

 

Unilever emerged as our chosen recipient for its longstanding tradition of approaching supply chain with concern for the unique market conditions in each country in which it operates. This tradition was described by leading management thinker CK Prahalad in his book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

 

We also had the pleasure of interviewing Pankaj Gupta of Hindustan Unilever, whose “Vitality” initiative encompasses training and small business development support for thousands of people downstream in the supply chain.

 

Leadership in Environmental Sustainability in the Global Supply Chain

 

As a huge global player in the chemical industry, Dow Chemical was an early leader of the Responsible Care initiative that sought to limit health and safety problems arising from chemical handling. More recently, Dow has taken aggressive steps redesign its supply chain for better visibility and collaboration along the chemicals manufacturing and distribution network to minimize risks of hazardous material spills and to reduce energy consumption.

 

Excellence in Small(er) Packages

 

Finally, in response to frequent requests that we find a way to include smaller companies among those considered for the Top 25 we created a special category to recognize supply chain leadership among small to mid-sized companies. This year’s winner was ViaSat, a manufacturer of satellite systems that has enjoyed robust growth with the surge in wireless communications. ViaSat stood out for its innovative approach to demand-driven principles in an engineering intensive supply chain. Learning from companies in the Top 25, ViaSat has been able to support rapid growth and position the company for further geographic expansion.

 

Looking ahead we want to find as many examples of leadership across these dimensions as we can. The business press is always on the lookout for such stories and we know the supply chain professional community appreciates lessons learned from fellow practitioners. For 2009 we will accept nominations for these four awards from any and all sources. Our specific selection process will be defined over the next six months and we would appreciate suggestions.

China Changing High Tech Standards

Our High-Tech industry analyst, CJ Wehlage, sent this article on Foxconn from the China Tech News, saying this is “a good example of the difference between national law and local law. Foxconn’s tax rates will probably change under this new ruling, unless they restructure as noted below.” 

 

Lots of smart people took issue with my China Syndrome article a while back, but the fact remains that many supply chains have a lot eggs in this basket and I’m not so sure we really understand the rules of the game yet.

 

“Foxconn Not A High-tech Enterprise Under China's New Standard?”

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?

 

 

Ouch!

We’re going to continue to bang the drum: Double-digit inflation is on the horizon (Dow is now looking to raise prices up to 25% across the board). The business case for sustainability in supply chain keeps getting stronger as does the argument that globalization is coming home. This also reminds me of a decidedly un-fun segment on Squawk Box a while back when our research on the challenges facing chemical production in the US showed a big problem for American manufacturing. As Becky Quick so pithily put it, “we’re hosed”. That video is no longer available, but here’s another recent discussion we had with CNBC about this issue.

 

We’ve also heard from some of you about the topic. One reader in the software industry said the consensus at a recent conference was prices would have to go up, even in the software industry. Another reader responded simply, “Ouch”.

China Gets Real on Fuel

China’s economic management is again adding fuel to the fire of US inflation. For years the artificially low Yuan exchange rate has kept consumer prices low and falling in sectors like apparel, electronics, furniture and toys. As the Chinese have gradually moved closer to market exchange rates our deflationary experience with this kind of consumer products is starting to look like a mirage. Now the same dynamic is happening in oil. Government controlled pricing has kept this vital input cost down and now with an 18% increase overnight, we’ll see price boosts start flowing downstream to the local strip mall. 

 

US consumer price inflation has stubbornly hung around the low single digits in official statistics, but, as we have said repeatedly for the last two months, this is a false signal.  

 

The truth is all of our manufacturing and retail clients are getting ready to pass along price increases because they have to. This latest move by China’s government should remove any doubt that, recession or not, inflation is the biggest threat facing the economy today. Let us know your thoughts.

Stopping the Inflationary Tide

Lots of talk about the inflation/recession balancing act circles around topics like the credit crisis and the Fed’s role in forestalling economic slowdown. But, as Peter Coy recently pointed out in BusinessWeek the real driver of price increases—business’ pricing decisions—is largely invisible to policy makers. Not so for AMR Research, where we see the tug of war between operational efficiency and input price increases first hand, as we warned just last month in “Inflation Reaction.” Now our predictions are coming true. Here’s what we see: Food and fuel may get left out of “core inflation” allowing the Bureau of Labor Statistics to report 2.3% inflation on its home page, but these inputs are blowing the bank on manufacturing and retail’s ability to offer everyday low prices.

In this week’s newsletter (subscribe here), we look at how inflation is affecting the supply chain, the long-term affects, and call on the Fed to act now to halt it. Let us know your thoughts.

 

Inflation Reaction

This week's newsletter (subscribe here) addresses inflation and how bad it really is. Is itworse than we think? The answer might be yes. Here's a brief excerpt from this week's commentary:

Inflation, as reported by the Bureau of Labor Statistics, doesn’t sound too bad right now, with the Non-Seasonally Adjusted Consumer Price Index, excluding food and energy, up only 2.4% over the past year. Lots of things we buy continue to go down in price, including new cars and trucks (down 1.1%), computers (down 12%), and televisions (down 18.3%). And, as I have argued myself, the dramatically more agile global supply chain seems ready to readjust more quickly than ever before to shifts in the underlying balance of supply and demand.

But such macroeconomic truths may offer cold comfort to many real-world businesses and consumers. This may be especially true here in the United States, given what may be pent-up demand for a meaningful adjustment in our consumption patterns.

Consider another set of facts: the Institute of Supply Management, in its most recent Report on Business for Manufacturing (May 1, 2008 ), offered data showing producer prices are overwhelmingly up for American manufacturers. The data itself is scarier than the words convey, showing a huge preponderance of price increases across all commodity categories. The numbers for the past four months are 76, 75.5, 83.5 and 84.5, which is notable because everything else in the report tracks in the 40s and 50s. The underlying inflationary pressure on manufacturers is massive.

Auto Turnaround?

The Wall Street Journal has a report out that some of the major auto part suppliers are starting to see a turnaround in their business with Visteon and TRW joining a growing list of part suppliers reporting improved earnings.  Much of this improved financial outlook has come from closing plants and streamlining operations. As we've said before, the only way the auto industry is going to survive is if it is much more demand-driven, which means much more flexible manufacturing. The sooner unions and manufacturers come to this realization, the faster the industry can recover.

 

 

 

 

 

 

 

 

 

Unions are the Problem, Not NAFTA

We're sure to get a lot of mail with this week's Chain Reaction, where we take on unions. The premise: Unions are stuck in the past and they, not trade deals like NAFTA, are responsible are largely responsible for holding American manufacturing back.

Here's the premise: total manufacturing employment in the United States in 2007 is only 15.3 million according to the Bureau of Labor Statistics. This is down from 15.6 million in 2006 and well below the 18.9 million working on manufacturing as recently as 2000. Where does it all end? At zero, that’s where.

Zero means no more manufacturing work at all in the smoky, dangerous, boring factories of 20th-century America. 21st-century manufacturing is about an automated, integrated manufacturing process. In time, this will include the whole world as manufacturing automation takes over one nasty manual task after another, first in the United States, then China, and eventually everywhere.

 

Robots, yes robots; factory running, automated robotics are the future of manufacturing. It's time our factories looked a lot less like this:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and more like this:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For a look at where the new jobs will be and more on this subject, be sure to see this week's commentary by subscribing using the link to the right.

Blood in the Streets? Buy Real Estate

Risk is always top of mind for supply chain professionals. So for this week's Chain Reaction newsletter I examined this issue a bit closer. The title is a roughly paraphrased quip that goes back to the days of ancient Rome, but has much relevance today.

I got the idea for this week's topic as I was flying back across the Atlantic and reflecting upon a week’s worth of discussions in Europe. The hottest questions were certainly those resulting from our recent newsletter questioning whether risks in China are reaching unacceptable levels. Feedback on the column was about four to one in agreement that risks are cresting and that new locations need to be found. One of the most counterintuitive new ideas is North Korea, which is maintaining a special trade-friendly zone just across the border from South Korea with purpose-built dormitories surrounding newly opened factories. Low labor costs are obviously a big part of the draw, but questions, reasonably enough, surround the risks associated with a famously totalitarian government and operations in one of the hottest potential war zones on earth. Fair questions indeed, but worth a lot of money to get answered. But what about the Middle East, Africa, increasingly volitale South America, or the ever frightening Russian market, notorious for big organized crime and serious geopolitical saber-rattling? Many companies, like Wrigley, P&G, and Pepsi, are doing quiet well in these markets. For more on how, see this week's column.

China's BPO Play

A few weeks ago in the Chain Reaction newsletter, we talked about the possible collapse of China, highlighting many of the problems of this still emerging economy. Our Phil Fersht now has a fascinating look at China’s attempts to enter the business process outsourcing market, going up against India, Inc. and others. What are its chances? Phil doesn’t think very good.

GM vs. Apple: What ’s Really Wrong and Really Right With U.S. Manufacturing

The most profitable thing to come out of Detroit in the past 10 years is Eminem. Such is the sad state of U.S. manufacturing, which makes us ask, “Is manufacturing dead in the United States?”

The answer is yes if by U.S. manufacturing you’re envisioning the classic, Rockwell-esque image of men in coveralls punching the time clock at the local factory. Unfortunately, this is where Detroit is still stuck, and why unemployment in Michigan is the highest in the country.

The promises politicians like Mitt Romney have made ignore economic reality. Nostalgia-driven business strategy does not work. If Silicon Valley had reacted to Japanese competition back in the 1970s the way Detroit did, you might be able to buy a house in Los Altos for $250,000 today.

What’s really happening has more to do with Apple than General Motors. Apple has mastered the core discipline of the post-industrial business environment: make money on ideas rather than metal or plastic. It’s these types of issues we hope to explore in this new column, to be published every other week. Our goal is to carve a path forward for today’s operations executives, offering our hard-hitting opinions on what works, what doesn’t, and where we all need to go to survive in the next century. So far, Silicon Valley gets it, and Detroit doesn’t. I discuss how in the recent Chain Reaction newsletter, "GM Versus Apple: What’s Really Wrong and Really Right With U.S. Manufacturing."