Posted by: malstott | September 12, 2012

The Secret Order of Supply Chain Chaos

In all chaos there is a cosmos, in all disorder a secret order. Carl Jung

On March 11, 2011 the Great East Japan earthquake, magnitude 9.0 kicked up a wall of water 133 feet tall that hit Miyak0 in the Iwate prefecture. This tsunami traveled 6 miles inland leaving destruction and death in its path. The Fukushima Daiichi Nuclear Power Plant experienced a level 7 meltdown. The ports and airports and roads and factories shut down in northern Japan. This was the worst earthquake in Japan’s recorded history and damages are estimated at over $30B. Chemicals, semiconductor and automotive manufacturing happened to be concentrated there thus crippling several industries with one big natural act.

In the fall of the same year the record rains in Thailand coupled with the mismanagement of the water flow out of key industrial regions caused flooding north of Bangkok. Damages were estimated at over $3B. Key global disk drive manufacturers happened to be concentrated there thus impacting the electronics industry for almost a year.

In 2011 and 2012 the labor rates in Southeast China increased an average of 17% per year.  With the RMB strengthening against the dollar at a steady rate (7.3 RMB per dollar in 2007 and 6.3 RMB per dollar in 2012) we spend more dollars to buy that RMB worth of labor.

A barrel of oil has increased from $55ish per barrel in 2007 to $95ish now. Logistics costs have therefore increased at a similar rate.

Yes, there has always been change but the rate of change in the world is increasing. It is not simply right to follow the old norms. It is not simply right to outsource to China. It is not simply right to outsource. The defaults that used to rule the day (and plenty of momentum still exists) are no longer good enough. Now it is important to know the inputs and outputs and to understand the trade-offs prior to making a decision. While I’ve not seen a perfect model out there, there are helpers available through most contract manufacturers. It is in their best interest to steer you to the right geographies ahead of you looking into it on your own. If you decide that Vietnam is the place to put your next product and your CM doesn’t have a plant there that is an open door for re-quotes and loss of business. Can you trust the models your partners offer? I say no, not fully.

Here are a few of the questions to ask when deciding how to design (or re-design) your global supply chain:

  1. What is the value of a shorter lead time?
  2. What is the cost of your product and therefore what are the inventory implications of your SC design decisions?
  3. What are the tolerances of your product? Can you pull it off from a distance?
  4. Are you selling to any government agencies with restrictions on origin of manufacturing?
  5. What are the tax implications?
  6. How smooth are your new product ramps? Can you do that from a distance? What is the cost in travel and time?
  7. Are their advertising advantages to building in one area or another? (e.g. made in Japan makes a big difference in the Japanese market)
  8. Can you reduce your packaging costs with a shorter logistics path?
  9. What is the expertise of the local supply base? What is their productivity? Are your current partners manufacturing their already?
  10. Is it important to keep some manufacturing expertise in-house or close by for that “next bench” learning and design improvement?

Some of these questions are answered using models but final decisions should be made using structured decision-making methodologies. I recommend a must/want sort coupled with a weighting process. While it won’t be precise it should yield the right discussion based on analytical input.

As the quote at the top infers, chaos leads us to opportunity. The last few years have been non-stop chaos but this can lead us to reconsider default answers. There is a secret order to the chaos given the right approach.

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