The New China – The New Global Meltdown?

Last year, China overtook the US as the world’s largest economic powers measured by PPP — Purchasing Power Parity. This may have received little attention, as most people focus on GDP — Gross Domestic Product — where the US still has a commanding lead, but since PPP measures the relative value of different currencies, this is a significant metric.

As a result, this places China at the centre of the global economy as any economic decline in China will send ripples around the world. As one of the biggest consumers of natural resource, the success of many global economies depends on the success of China and its need for natural resources.

And this decline may be coming. As per this recent article over on Business Spectator that asked what can we expect from China in 2014, not only has the country lost some of its lustre as of late, but this tarnish on the silver has not escaped the watchful eye of the World Bank, whose chief Economist went on record last month stating that the global economy is running on a single engine … the American one. This does not make for a rosy outlook for the world.

So why the loss of lustre after almost three decades of growth? Simply put, with rapid growth in an economy comes rapid growth in the growing pains associated with rapid growth, which typically include burgeoning local and national government(s) (as cities, provinces, and federal overseers struggle to keep up with growth), excess industrial capacity (once the tipping point where there is enough capacity to meet demand is reached), and a stagnant real estate sector (once the majority of the market that can afford their own homes have them). China has all of these problems. But that’s not the reason that China is loosing its lustre, as many other countries, including the US, have these problems. The real reason is shadow banking.

There is a significant amount of local government and corporate debt in China as these local governments and corporations have borrowed heavily from both the banking and shadow banking sectors to finance their growth. How significant? Standard & Poor’s estimates that total outstanding corporate debt in China was around $14.2 Trillion US at the end of 2013, compared to $13.1 Trillion US debt held by American corporations at the same time. And while exact numbers are not known, local government debt has increased an average of 20% over the last three years and the total government debt level in China is estimated as about 54% of China’s GDP — and that’s just the official debt. The real debt level could be higher when you consider shadow banking and private lenders.

Now, this is a lot of debt, but as the level of government debt is not yet at the level of US national debt or UK national debt which exceeds GDP, it’s not alarming — yet. But it’s enough to cause the World Bank and International Monetary Fund to think twice about China’s rating and if China decides that it’s time to reign in and get the debt under control and significantly curbs spending across the board, a lot of economies that are currently being boosted by China’s spending spree are going to take a big hit.

This will be good and bad news for your Supply Management activities, depending upon where you are in the supply chain. If a company loses a major China supplier, the power shifts back to the buyer and there will be good deals to be negotiated. However, if you lose a major China client and your demand declines, so does your bargaining power and the power shifts back to the supply base. And then there’s the currency hedging to think about. Is the expected drop in currency exchange good or bad for you? (For more about this issue, refer back to our currency damnation post.)

Provider Damnation #69: 3PL Firms

Today we tackle our first provider damnation — Third Party Logistic (3PL) firms. These firms, or providers, provide logistics services for part or all of the organization’s supply chain management functions. Unlike trucking companies, ocean cargo companies, or air freight companies which simply manage trucks, ships, and aeroplanes, 3PL firms specialize in integrated operations and manage both multi-modal transportation (where the goods are trucked from the plant to the dock, shipped on a cargo carrier to a foreign port, loaded onto a truck for the local warehouse, and then loaded on another truck to the local airport when expedited air freight is needed) and warehousing on behalf of the client (that might need goods from multiple suppliers simultaneously cross-docked and shipped to local warehouses and storefronts across the country from a central warehouse).

For many under-staffed, under-supported, and under-platformed logistics departments, 3PLs are a blessing because, without enough staff to analyze options or modern technology platforms to crunch the numbers, 3PLs offer the organization an instant cost savings, a substantial time savings (because they do all the work), flexibility (as they can adapt to new regions and new demands quickly), and focus (allowing the logistics department to just worry about the warehouse and local distribution / shelf restocking).

These advantages are there for a reason, to cloud the disadvantages that 3PLs also bring — because they are a true double edged sword that, depending on the angle you see it from, shines as bright as the sun or drowns you in the darkest night of the abyss.

In exchange for cost savings obtained by the 3PL, the organization gets IT headaches. In exchange for flexibility, the organization gets a loss of visibility. And in exchange for focus, the organization gets a complete loss of control.

The 3PL is going to use their own TMS (Transportation Management System) to manage your organization’s freight, and this is going to contain the data your organization needs to complete import/export and global trade documents, the data Finance needs to confirm the invoices, the data Accounts Payable needs to match the goods receipts to the invoices, and the data Sourcing/Procurement needs to analyze the total spend. And if you think they are going to have an out-of-the-box import into any of your systems, think again. Unless you use one of the three systems they decided to support, it is CSV or XML dump and good luck Mr. and Mrs. Client.

The 3PL is going to manage the carriers it uses, the lanes they take, the cross-docks they use, and so on. Your visibility, especially if you don’t have a tight integration, might be limited to ship date, status, expected delivery date. Not very good in today’s world where you might need to know where that critical shipment is at all times.

Finally, the 3PL is going to contract the carriers it uses, and if they suck, well, too bad for you until the contract is up. You might get a carrier that, instead of showing up an hour after your warehouse loading dock opens, as per the contract, consistently shows up an hour before it closes that uses refrigerated trucks that only cool to 5C above mandated transport temperature and that occasionally “forgets” to lock the back leading to inventory regularly going missing, resulting in a lot of claims to the 3PL and/or your insurance company. Remember, if you give the 3PL the authority to negotiate contracts on your behalf which can’t be terminated until the carrier is insolvent, your organization is, simply put, screwed.

Consumer Damnation #71: Government

In today’s post we’re taking on the first of the consumer damnations — the government. Everyone wants them as a customer because, as the saying goes, once you’re in, you’re in and it’s impossible to get thrown out unless you do something really, really egregious because the process to replace you is so long, arduous, and painstaking that no one wants to do it, especially since management will likely change half-way through the process anyway and put all projects on hold until a new assessment is done. Salesmen love government contracts because they can sell once and then sit back and rake in their commission year-after-year as the evergreen renewals keep coming in.

But, as a Procurement professional, you don’t have it so rosy. Not only can government customers be very demanding, and require you to work extensively with Engineering, Manufacturing, IT, and the Supply Chain to design custom solutions to meet their needs, but they can be quick to pass on the blame to your company even if it’s not your fault. (You didn’t specifically say that we couldn’t put low-grade transparencies with a low melting point through this high-output, high-temperature laser printer that specifically said only 50 lb or better paper stock in the trays.) And if they get caught knowingly outsourcing to China, when they preach “Buy American”, they’re going to blame you and redirect the public outcry your way even though they told you “lowest cost, American or not”. And if it comes to pass that there was child labour or unsafe working conditions two tiers down in your supply chain that you didn’t know about because your supplier used unapproved raw material suppliers, they’ll be the first to throw you under the bus, the plane, and the cargo ship they threaten to use to ship what’s left of your corpse back to China when they are done with you.

Plus, now many government agencies mandate that you provide bill of material data, shipping manifests, country of origin determinations, quality inspections, and other information with every product that you provide the government so they can meet their accountability mandates. It used to be you just shipped the product. Now you have to ship the product and, in some cases, a literal CD’s worth of information — even though they don’t need 90% of it to fulfill their mandates and answer the questions they need to answer. (Your organization needs all of it to maintain import / export / product / regulatory / security compliance across the supply chain, but most parties you sell to only need a small subset of that data.)

And if that’s not enough, if the government runs out of budget and can’t get agreement to run a deficit, there can be an indefinite spending freeze while the situation is resolved. And, unlike the private sector where you have the right to suspend delivery of goods and services until payment resumes, if your organization is providing goods considered necessary for essential services, your organization can be (legally) ordered to continue providing those goods and services during the spending freeze (as your organization will be paid when the freeze is over as a provider of essential goods and services). If the spending freeze drags on for months, this can put your organization in dire financial straits, and additional stress to reduce costs below the baseline established during the sourcing phase will be put on Procurement.

Governments can be your organization’s best and worst customer and Supply Management’s biggest point of leverage and largest risk (as the volumes required can often allow the organization to negotiate great deals but the reputational and legal liability as a result of a single mis-step in the supply chain can be exceedingly costly).

However, in this rather stagnant economy, for many companies, it’s a damned if you do (get Government as a customer) and damned if you don’t (have Government as a customer). Have fun!

Geo-Political Risk


Today’s guest post is from Nick Ford, Director of Customer Service & Delivery, EMEA, Xchanging (which also owns MM4 and Spikes Cavell and which has built up a fairly extensive S2P suite over the past couple of years).

The news is dominated by geopolitical events from around the world — the spread of Ebola, the conflict in Syria, the unrest in Ferguson, ISIS and just about anything that happens in North Korea. Most people will read a few articles, watch the evening news, form an opinion, feel mad, feel glad, feel nothing. Some people will take action. They will be driven to help where they can by donating their voice, their time or their money. Then there are the people who have to leave their emotions, their political affiliations and their prejudices at the door and when disaster strikes, they have to think about business.

As procurement spreads across more and more geographical boundaries, organisations are being exposed to more and more geopolitical risk. In order to ensure the safety of their company, CPOs and Procurement Directors must proactively consider the implications of these events on the running of their businesses. They need to take into account where they are doing business, where their suppliers are doing business and where their manufacturers are located. What is the volatility of that location? What is the political stability, the currency stability and the stability of the work force within that location? How does that affect your business? Some more progressive organisations are taking this further down the supply chain and looking at where their suppliers’ suppliers are doing business.

How–to Measure Geopolitical Risk

Historically, supplier risk has ignored location factors and has instead been focused almost entirely on financial performance. This made risk a very binary exercise but the deeper and broader you go into operational risk the less it becomes about numbers and absolute answers. To truly understand a supplier’s risk profile, you must undergo stress testing and what–if scenario planning. What if war broke out in a region in which you operate? What if, suddenly, a fire broke out in a supplier’s factory and destroyed everything? Where would you transfer that work to, and quickly? What impact would that have on your lead times or your payments? What impact would that have on your customer contracts? You could come up with any number of scenarios and run them through your supply chain operating model to see what impact they could potentially have on your delivery to your customers. Once you understand what impact these events could have, you can start to defend against them.

How Geopolitical Risk Has Changed

Due to technology and access to the internet, the world is becoming a much smaller place. World news is immediate. You’re able to monitor events and changes automatically. Organisations now have an abundance of information available to them. There’s always been political unrest and risk in certain regions but now there is a far better understanding as to what’s changing on a daily basis which allows CPOs to begin to proactively safeguard against them.

The Cost of Geopolitical Risk

Reducing geopolitical risk is about supply chain analysis, disaster recovery, your ability to move to a different supply chain supply environment and how quickly you can do that should a situation arise. The other aspect of geopolitical risk to consider is the cost. From a risk perspective, in the short-term, it costs more to work with a supplier out of China than it does to buy from someone down the road. In most companies, there’s not enough emphasis placed on the increased organisational risks that occur when working with some of these low-cost suppliers. The harm done to the business should something go wrong could be irreparable. The Ebola outbreak, for instance, could have a huge negative impact on Western organisations if they are no longer allowed to import from affected countries or if new trade restrictions, regulations, or possible quarantines are implemented. When selecting suppliers, procurement teams need to take a total cost of ownership approach.

The Cost of Managing Geopolitical Risk

A total cost of ownership approach looks beyond the direct price and takes into account all of the indirect costs of using a supplier, risk and risk management included. For example, based on your risk profiling, you may want to use a double supply scenario to cover areas where you think the geographical or political risks are high. Organisations currently importing from Ebola affected sub-Saharan African may take this approach. That of course, will add to the cost of the good or service. It’s the procurement team’s job then to convince the board that although it may cost a little more, at the end of the day, it lowers the risk profile of the organisation

Supplier risks haven’t changed in the past 10 years — as far as I know there’s always been risk of war, disease or disaster — but the increase of global supply chains have left companies more exposed. Thankfully, there has also been an increase of available information to help prepare and defend against these risks. Strategic CPOs and Procurement Directors know that the best offence is a strong defence and are thus making risk management and disaster recovery a priority — even if it costs a bit more. You get what you pay for.

Supplier Risk: The Tip of the Iceberg


Today’s guest post is from Nick Ford, Director of Customer Service & Delivery, EMEA, Xchanging (which also owns MM4 and Spikes Cavell and which has built up a fairly extensive S2P suite over the past couple of years).

Titanic, the ship not the film, has more in common with your business than you probably realise. Both are massive entities, run by people with years of experience, moving full steam ahead, in a sea of risk, assuming that they’ll be able to see and manoeuvre around any danger that presents itself. The problem, with both your business and Titanic, is the unseen danger — the risks below the surface. Titanic, as we all know, was taken down by an iceberg — sliced open along the hull by the ice beneath the surface of the ocean. If your business isn’t careful, the same thing could happen. I’m talking about supplier risk.

Supplier risk is an iceberg. The tip of the iceberg, that visible 10%, is the financial risk. A supplier’s financial performance is well documented and publicly available. It’s easy to understand their financial position, to monitor their reports and turnover and make an assessment on their viability. Traditionally, this has been the primary way organisations have measured supplier risk but it’s not the whole picture. Underneath the surface lies an absolute plethora of ‘other’ risks that need to be monitored and measured — just like an iceberg — and, just like and iceberg they have the potential to sink your business.

There are three main categories of supplier risk: financial, supply chain and corporate social responsibility — and then there are multiple tiers within each of those categories, across multiple dimensions. It’s those multiple levels, as you move further and further down the supply chain, where the bulk of risk sits. When you consider executive changes, geographical risks, political risks, disaster planning, and stress testing, to name just a few factors, you begin to see supplier risk as an enormous subject.

What some of the more progressive organisations are doing now, is looking at the next 4 or 5 levels of supplier risk. They’re doing this via a structured process in order to understand what their true supplier risk profiles are and to be able to measure and monitor them on a quarterly basis. Procurement should be about managing risk proactively rather than just protecting the suppliers and services that come into your organisation.

Currently, however, most organisations aren’t doing a sufficient amount of supplier risk management, they’re just doing the basics. What’s happening in procurement departments is they are doing what is appropriate to the risk appetite of the organisation. If there’s a very strong appetite within the organisation to manage operational risk, then you’ll tend to find that risk is also higher up the agenda for the CPO or Procurement Director. It’s very high on the agenda in financial services and the oil and gas industry for example, less so in retail and manufacturing. Supplier risk management is reactive at the moment, but I think that will change over the next 5-10 years. It has to.

Along with increased appetite for risk, I think there will be a lot more investment in technology in this area over the next 5-10 years. There’s been a lot of investment in the area of supplier relationship management over the past few years. Going forward, I can see those tools extending dramatically into the risk area. There will be a proliferation of supply risk management tools that come onto the market which bring together the more basic areas of risk, like financial performance and revenue, with all of these other, deeper areas of risk, creating a dashboard that allows you to see your complete risk position — the whole iceberg — at any point in time. Currently, outside of the oil and gas sector, there isn’t really a demand for this type of tool but as risk moves up the procurement agenda, CPOs will reach a point where they’ll need this level of in-depth supplier visibility.

You can find very good data now on the financial risk of suppliers. Executive changes, stock holding changes and financial performance, are all public knowledge and very binary — you either have it or you don’t. The tip of the iceberg is pretty much under control for most procurement departments. When you move below the surface and begin to look at the more strategic and proactive areas of supplier risk, that’s where organisations are currently leaving themselves open to damage. Effective risk management requires creativity. It means stress-testing your supply chain, assessing your suppliers’ suppliers, executing scenario and what-if planning. Unfortunately, it will probably take a few disasters to truly move risk higher up the corporate agenda — it took the sinking of the Titanic to make supplying enough lifeboats for everyone on board law — but if procurement wants to be seen as a strategic function, they’ll need to start addressing the rest of the iceberg.