Two Hundred and Twenty Five Years Ago Today

The first United States census was authorized. The census is important to the United States not just because it gives us a much more accurate count of how many residents and citizens there are (as opposed to interim projections) but because the resulting counts are used to set the number of members from each state in the House of Representatives and, by extension, in the Electoral College.

It also influences how more than $400 Billion per year in federal and state funding is allocated with respect to neighbourhood improvement projects, public health programs, education programs, and transportation. So, while it might be annoying to have to answer those questions every ten years and reaffirm your Pastafarianism or Jediism, it is necessary.

We’re on a “Highway to Hell”

A Procurement Damnation Interlude

Livin’ easy
Spendin’ free
Season ticket on a one way ride
Askin’ nothin’
Leave them be
Takin’ everythin’ in their stride
Don’t need reason
Don’t need rhyme
Ain’t nothin’ that they’d rather do
Goin’ down
Party time
Their friends are gonna be there too

We’re on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell

No stop signs
Speed limit
Nobody ever slowed ‘em down
Like a wheel
Gonna spin it
Nobody ever messed ‘em around
Hey Satan
Payin’ my dues
Playin’ in Procurement’s band
Hey mumma
Look at me
I’m on the way to the promised land

We’re on the highway to hell
Highway to hell
I’m on the highway to hell
Highway to hell
Don’t stop me

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell
(highway to hell) I’m on the highway to hell
(highway to hell) highway to hell
(highway to hell) highway to hell
(highway to hell)
And I’m goin’ down
All the way
I’m on the highway to hell

Just like AC/DC.

 

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!