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I attended Stanford University's third annual conference on socially and environmentally responsible (SER) supply chains last Thursday, May 21.  The conference has doubled in size every year since 2006 and promises to be larger next year.  A full day of presentations and panels from executives at leading companies such as Cisco, Intel, Safeway, Disney, HP, Verite, and more made for a multitude of perspectives and approaches to the topic of sustainability in supply chains. 

A few general observations from the conference:

• The realm of social and environmental responsibility in supply chains is still very nascent.  It seems each company, industry, and the business world as a whole is still establishing definitions for what it means to be socially and environmentally responsible.  This dialogue, of course, is very important and will likely set the stage for a future platform to act from. 
• It seems greater success can be had when companies address issues of social and environmental responsibility in their supply chains from an industry approach.  This leads to a greater probability of standardization and leverage in the supply chain, which in turn, based upon presenters' comments, seems to foster faster and more widespread change in the supply chain as a whole.  Some critical factors for success gleaned from many of the presentations, despite the industry of a given company, are the following:
  • The involvement and commitment of top, C-level, management
  • The combination of efforts across companies within a given company
  • Honest and free communication within companies and with competitors (a very scary and challenging proposition for many companies)
  • A sharing of best practices and communication amongst shared suppliers within the industry (meaning--get your suppliers to talk and share with each other to benefit everyone as a whole)
  • Outside and independent verification to create transparency and accountability

A few other interesting takeaways:

• Cooperation amongst several companies within an industry to acheive industrywide social and environmental responsibility seemed to be easier to accomplish in B2B industries, and industries that did not generally "face" consumers or receive consumer and/or watchdog scrutiny.  Those companies that had more of a B2C orientation viewed supply chain SER as more of a competitive differentiator, and thus were less inclined to share information and resources with others. 
• I expect the conference will double in size and notoriety next year.  This is an issue the business world has only begun to explore.  I found myself wanting more nitty gritty dialogue from the conference, but as companies move down the path from the general questions of definition and the surface levels of implementation, I am sure the dialogue and topic will become much more comprehensive, heated, and fruitful.

 By Ashton Udall

We're preparing to sit down with a new potential client and the management of the factory which we've sourced for their project tomorrow afternoon.  Every time we work on a sourcing project, we're faced with the question of how close do we bring the vendors to the customers.  Many outsourcing service providers fear they'll be left out in the cold in a situation like this.  But we've found it to be very helpful, in fact, necessary to always allow our customers the opportunity to meet the manufacturer that will be producing their products.  The value to us in keeping everyone arms length from each other is smaller than one might think (the value essentially being mitigating the risk of being cut out of the process prematurely), and it costs us, and raises risk levels, in several ways.

• Honesty and straight-dealing: It may be impossible to quantify the value, but bringing everyone into the communication loop may be one of the most important aspects of all parties knowing each other.  It sets a tone.  Communication and information can flow more freely.  Less time and energy is spent on Prisoner's Dilemma thinking--trying to figure out how to come out ahead of the other guy in all situations, and more time is spent collaborating to figure out how to resolve problems and innovate. 

I recently had an interesting conversation with a former senior exec of sourcing and manufacturing at Nike and Disney about transparency in their supply chains and working with vendors to improve their labor and environmental practices.  At a time when these companies faced serious risk in consumer backlash because of the exposure of poor working conditions at factories, Nike, for example, took a hard look at their manufacturing base and changed course to focus on working more intimately with fewer suppliers.  According to this gentleman, everyone opened their books, saw what each other was making, understood that everyone needed to make money for the system to work, and collaborated on resolving issues that challenged any party in the supply chain, because they could all be honest about the causes and effects of what was taking place.  Nike is now known to be well out in front of the 8 ball when it comes to dealing with corporate social responsibility issues in its supply chain.  Issues do and will continue to come up for them, but they are in a much better place to resolve these problems at factories.  The same cannot be said for many other companies out there. 

• Understanding the manufacturing process: When sourcing a new manufacturer for a product, particularly when a new product is being developed, it's always helpful when a client has toured the manufacturing facility where the product is going to be made.  Understanding the engineering of the production plan, seeing the machines that are used, how materials are stored, how quality control is accomplished, all offer a client the opportunity to better understand why certain issues are coming up and what can be done to resolve them.  This is particularly helpful in the product design and new product development process, when the ability of a manufacturer to include certain product features, use specific materials, or provide these things at a specific cost, is challenged by what is actually feasible in the manufacturing and sourcing process.  An understanding of the manufacturing process and capabilities allows all parties involved to quickly move beyond trying to understand why something is an issue, to resolving the issue. 

• Knowing the key players: In any organization, you will find that there are some people that really move things forward, and some that don't.  Whether this is because they wield formal authority or soft power in the organization, they get up and get to work earlier than the next guy, or they aren't afraid to pick up the phone and talk to people, you want to know who are the people that really drive progress and solutions for your project in the organization.  When the S hits the fan--you want to be able to reach these people.

Not all customers have the opportunity to travel to the factory location, particularly if it's overseas.  It's our job to be the feet on the street, whether in China, Vietnam, Mexico, the Midwest, or southern California.  But, we encourage customers to come see the manufacturing plant and meet key players in the contract manufacturing organization if they have the opportunity and motivation.  Organizations relying on keeping people, and parties in the process, at arms length when designing or developing new products, sourcing new manufacturers, and managing the supply chain as a whole, do so because they lack the ability to provide strong value in other capacities.  There are many ways to add value to the sourcing process.  This is one simple way to make a big impact.

As the phrase goes, "when the tide goes out, you find out who has been swimming naked" many businesses are painfully finding out whether their offshore manufacturing sources are without bathing suits.  Some companies have turned much greater attention to the managing of their costs and risks in the supply chain in recent years, and a few have found competitive advantage in doing so.  Now, it's becoming a necessary means of survival. 

Panjiva, a company which data mines US Customs data along with other sources to develop insight into manufacturing and trade trends, notes in this blog post that "From January 2009 to February 2009, in just a single month, the number of global manufacturers shipping to the U.S. dropped 10%, from ~131K to ~118K."  Furthermore, Panjiva reports that:

• Along similar lines, the percentage of significant global manufacturers on Panjiva’s Watch List has grown to 29%.
• The percentage of significant U.S. buyers doing business with Watch List manufacturers now stands at 40%.

Many SMEs do not have the resources to build risk models to assess risk in the supply base and to create and implement expensive risk management plans.  However, even without sophisticated quantitative methods, the principles can be applied.  Thinking through various events that can occur, the likelihood of these events, and the impact they can have, can be a useful exercise for an SME to undertake.  In good times, many won't delve too deeply into creating contingency plans.  Of course, in challenging times, it's the companies that did set this up who eat the market share of those who are too busy scrambling to save the company.

Given the economic environment, a few risk infused events that are more likely to occur on the supply side might be price increases, MOQ increases, or quality fade--stemming out of a situation in which a supplier, or even a 2nd tier supplier, is hitting the skids business-wise and needs to find a way to get more cash with the customers and orders they still have.  They may be looking at monthly survival. 

A lower probability event that may have a high impact may be your supplier going under and completely disappearing.  Worst case scenario: they disappear with your money.  Or, perhaps they don't respond to your emails and phone calls next time you are ready to place an order.  This won't give you much time to source another supplier, develop their manufacturing processes to meet your specifications, and pick up where the last one left off.

How can we create a decisive advantage in managing these risk factors?  Create greater visibility in your supply chain and expand your portfolio of options.  Visibility is  information--thus extract more information from your suppliers and about your suppliers.  The easiest way greater transparency can be had is with a more open, trusting dialogue.  These kinds of things are much easier to do face-to-face, particularly in countries like China.  But use third party information to help create a comprehensive picture.  Consider having factory and company financial audits performed.  Information from local banks used by your suppliers, government agencies, and other sources can give you an idea of the financial status of your factory.  Another useful source is the company Panjiva, mentioned above.  Panjiva offers reports on the importation data for thousands of suppliers that allow one to learn about fluctuations in a suppliers shipments to the U.S., their other product lines, and other customers.  In this case, knowledge is power and with it, you obtain a much better view into your suppliers current situation and their impetus for trying to renegotiate terms. 

Also, are you single sourced on key products and components?  Source second and third suppliers for your products.  Alternative sourcing options gives you leverage with knowledge of general pricing and terms available in the market, as well allows you a stronger negotiating position by not feeling entirely dependent on one supplier.  

Summer's around the corner...if you don't already have a bathing suit, now is the time to start shopping.

Did you hear?  The world economy is facing tough times.  No--not another blog post or news story about the economy throwing up all over...everything.  Obviously, businesses across the globe are facing challenges on both the demand and supply sides.  Below, I've put together four suggestions for actions you can take now, to make sure your business does not get burned on the supply side, particularly if you have manufacturing sources offshore. 

Good practices for the short-term in a recessionary world economy:

• Do a cost audit of your current supplier(s) and consider new suppliers.  Prices negotiated 6 months ago may be uncompetitive now.  Manufacturers are hungrier.  Some, if not many, of their costs of production have dropped.  Many of these cost reductions are driven by falling world demand (which we hope, and I believe, is a short-term phenomenon).  Cost saving opportunities and their causes will vary from supplier to supplier, so reviewing price at your existing factories as well as looking at new sources, may yield an opportunity for short-term cost savings that could help your bottom line now.  When demand picks up, it will be on your supplier(s) to raise the issue of rising costs with you.  But, there is always a lag time between increasing costs and rising prices, so don't fail to capitlize on current conditions.

• Monitor the financial health of your sources.  Factories, both domestic and offshore, are facing very tough times and many are closing shop.  Generally, when this is happening, their isn't much incentive for factory owners/managers to let their customers know, "hey, we may not be around in a few months".  While "credit checks" in low-cost country sources (LCCS) are generally not typical of what we might consider a credit check in the U.S. (i.e. running a credit check through Dunn & Bradstreet),  informational audits that can be performed through 3rd party information gathering, and can aid your assessment of your supplier(s) financial health and risk.  There are companies that perform these services in popular LCCS' like China, India, Mexico, etc., and you can generally get an idea of a factory's current credit situation and perhaps some current financial information.  This could give you the heads up you need to start securing second and third sources of supply, in case your primary source suddenly stops responding to your emails and phone calls, and their website disappears.  Performing these kinds of audits are not too expensive, $US500 to a few thousand dollars, and may save you your business in the long run.

• Continue monitoring your quality control, and if you haven't been doing so very well thus far, START NOW!  Don't become a quality disaster/recall headline or a product liability defendant.  When times get tough, suppliers look for ways to lower costs and maintain margins.  Many may feel inclined to let the quality of materials or workmanship slip to save a few cents on your next order.  If there is ever a time to continue your quality control program or implement a quality control program, it is when companies supporting you are potentially hurting. 

• Don't treat your suppliers as the enemy.  An honest conversation may open up new opportunities for mutual gain.  When times get tough, people often begin looking for easy scapegoats and targets.  It may be tempting to push unreasonable demands and threaten even your best suppliers.  None of the recommendations above are intended as a suggestion to get absurdly tough on the vendors supporting you.  Be diligent, negotiate well, and expect results. Approach the need for businesses to survive during these challenging times from the perspective of "how can we work together to mutually survive and eventually flourish?"  Gaining transparency in the supply chain ("transparency"-- basically sharing information) is a best practice in good and bad economic conditions.  Being forthright and reasonable with your suppliers will not only earn you their respect and appreciation, but may open opportunities for new ways to reduce costs, improve efficiency and/or quality, and present new business opportunities.  This is such an easy, but often overlooked method of dealing with supply chain challenges, and it might begin with a simple and honest conversation. 

I thought this recent post on Richard Brubaker's All Roads Lead to China was timely given my last post on the fish-switching.  Rich's story is short and sweet:

This evening while hosting a dinner party, one of my guests noticed something funny about his beer (a Corona).  simply put, he said “this isn’t beer”.

After a few people took their skeptical sips, we hauled out the rest of the bottles in the refrigerator to make the side by side comparison.

Which, as you will notice, showed us that we had in fact a bad batch of beer on our hands.

1) The color of the real (bottle on left) vs. the fake  (bottles on right) show distinct color differences
2) Look at the different levels on the fake ones
3) Bottle caps on real bottle curve in where the bottle cap ridges point out

so, for those of you tipping back a bottle of Corona, be careful.  I cannot say that there was melamin in the beer, but lord only knows what was really in that bottle.

You can't pop a bottle open in a store for a QC swig, but fortunately, you can walk through a factory and QC your goods prior to shipping them.  Simple enough...

Well, not really...

I'm currently on another sourcing trip in China.  I'm headed to Vietnam in a week.  My first week in China has been very busy and has provided a lot of food for thought on the manufacturing shake-up that is taking place in China right now.  Is it really a shake-up?  Yes and no.  It's not as if all hell's breaking loose over here.  But, almost every supplier I have met with has groaned about increasing material, energy, and labor costs, as well as the impact of the currency exchange rates.   Many of these things are not unique to China.  Nevertheless, it's never fun to report increases in costs to your customers--and they certainly don't enjoy it.   

One of the tough spots Chinese suppliers find themselves in, is it's not atypical for foreign businesses sourcing in China to consistently apply pressure to lower costs.  Hence the erosion of quality in materials and product--or the practice of quality fade by suppliers to preserve their margins.  In addition to constant cost pressure from many customers, there is often pressure to improve working conditions for laborers and decrease negative impacts on the environment. 

What foreign buyers often miss or conveniently ignore, is the fact that improving labor and environmental conditions costs money.  The burden of these improvements are typically placed on the supplier.  Finally, China has enacted labor laws that should improve the average factory worker's security.  Thus, as we are seeing now, costs are beginning to rise, and the most inefficient, energy intensive, high-labor, low value operations are either shutting down or moving elsewhere.  This is really neither good or bad.  It is good, because, like many have asked for, working conditions will begin to improve in China. 

But what will many businesses do?  Many will begin to look elsewhere for lower cost labor.  Currently, there is no "next-China" on the horizon.  Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa.  Many of these destinations may make sense currently and will likely become more prominent in the future.  But China is far from being dislocated as the epicenter of manufacturing soon.  Remember, it's not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination.  This will not be easy, as demonstrated by the extreme case of...Madagascar.

The most exotic destination I've heard of a company moving to, to date, is Madagascar.  That's right--the exclusive home of the Dwarf Lemur and the Aye-Aye.  One of my supplier's other customers has actually set up a source in Madagascar to assemble product.   Contrary to intuition regarding a supply chain like this, the company claims they are saving money.  While I find it hard to believe, I know very little about their situation.  I do know that supply chain flexibility and responsiveness must not be critical to the business model.  Keep in mind that Madagascar has little to none in the way of a manufacturing base.  This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar.  They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China. 

Wonders never cease...

In 2007, there was increasing chatter in manufacturing, sourcing, purchasing, and related circles regarding various forces in China causing price inflation.  The Chinese government's move to discontinue export rebate taxes last summer in certain categories and industries was one of the first signs of the Central government's desire to curb manufacturers' role in the over-heated economy.  A weakening dollar and U.S. recession would soon come into play, as well as increasing labor costs and changing labor laws impacting China's eastern manufacturing hubs.  There was even talk of many Chinese manufacturers closing up shop after this Chinese New Year holiday and the snow storms preventing mass numbers of workers from coming back to their jobs.  The chatter filtered over into blogs, and now I have friends and associates sending me newspaper articles that talk of companies looking to move more deeply into China's interior, or source product from other countries altogether.

Almost a year ago, I did a series of posts entitled Offshore Sourcing: An Ever-Shifting Landscape, in which I discussed U.S. apparel companies who had moved their supply chains into Vietnam from China and got into hot water when threatened by a potential rift in trade regulations between the U.S. and Vietnam.   In the world of low-cost chasing companies, there's no doubt that many execs will read stories like this in the SF Chronicle and ring up their purchasing manager immediately and ask what they're doing about getting into Vietnam, India, Bangledesh, etc. 

I'd like to offer a few points to consider when thinking about the future of manufacturing in China, building supply chains in emerging low-cost destinations, and moving production from one destination to another:

• Reactionary strategies will most likely get you into trouble.  Don't be like the guy who ran out and put his home on the real estate market when he 'heard' that the real estate market in the U.S. was in trouble.  Generally speaking, careful consideration of your own company's needs, your manufacturer's circumstances, and your competitive positioning in the marketplace will dictate far more in terms of where you should be sourcing, rather than what is being said to take place on a macroeconomic scale in your source country (unless massive civil unrest is taking place, a violent coup, or Starbucks is beginning to appear on every corner). 
• As the sourcing landscape can be "ever-shifting", nobody (at least, I haven't met anyone with the gift of sourcing-clairvoyance yet) is quite sure of what exactly this all means yet.  Some suggest that supply lines will simply extend deeper into China to take advantage of the huge pool of low-cost labor that still resides there.  Others, emphasize that China will inevitably move up the value chain and low-cost manufacturing will indeed flee to lower-cost sources.  There are arguments for and against both.  It's likely that a combination of both of these trends, along with some that no one is in a position to see, will emerge in the near future.  The only trend I would venture to say is imminent, is the ubiquity of Starbucks.
• This will impact industries, and companies of different sizes. very differently.  Apparel is much more likely to move from country to country.  Consumer electronics manufacturing is much less likely.  Corporations looking to stay on the good side of Wallstreet from quarter to quarter may be much more likely to see what lines of supply they can move in order to keep costs down.  Smaller companies may be better able to absorb increases in cost through a long-term strategy of seeking out ways to improve the value of their relationship with their current suppliers. 
• Don't fall into some false hope that the challenges associated with manufacturing in China will be less prevalent in other low-cost countries.  Experience has shown the opposite to be true.
• Following on the last point, if you do plan to expand your supply chain into a  new country, take the appropriate steps in developing new suppliers and give your company time to troubleshoot and refine the relationship and process before relying heavily on then new source.

The bottomline is careful consideration of the circumstances of your company,  your supply chain, and industry will be far more important in determining where to source from in the short-term.  Understanding these issues will present a far better perspective to make decisions from regarding when and if to expand your supply chain into other countries when the macroeconomic writing is indeed on the wall. 

A survey completed by SmartCube, a firm that specializes in business research, indicates that despite the press and outlash regarding the recent China-quality debacles, the vast majority of U.S. companies aren't considering changing their supply chains, and certainly aren't considering picking up from China and moving elsewhere.

After the bad news about Mattel, toothpaste, and pet food, many China detractors speculated that companies in the U.S. would begin rethinking their quality control and supply chains, and perhaps even consider other countries to avoid the issues that they believed to be unique to China.  The SmartCube blog reports that:

In fact, the majority of manufacturers surveyed are confident their supply chains are more than adequately secure to ensure the safety of their products. Indeed, nearly 80% of respondents (all of whom were manufacturers who currently manufactured their products in China) reported that they felt no need to review their supply chain activities in the wake of the well-publicized toy and toothpaste recalls. Further, these global manufacturers believe that the recent recall issues, while serious, are aberrations and not symptomatic of some more fundamental issue inherent within Chinese manufacturing. They appear to be on solid ground, as Mattel itself has apologized for initially putting the blame on its Chinese suppliers.

Some interesting takeaways from the survey include:

• "Among the 22% of respondents that did say they would review their supply chain activities, more than one-third said they would make changes to the supplier evaluation process during selection or they would assign a person to look over quality adherence at the supplier location."
• "About 30% would send quality inspectors overseas to the production plants."
• This is noteworthy because these are not quick-fix solutions; these respondents are considering deploying significant resources to achieve greater product quality.
• We were not surprised to see that none of the survey respondents indicated that they would stop outsourcing manufacturing altogether.

Whether companies have indicated that they will be making supply chain changes or not, I think most companies and individuals working with Chinese manufacturers will have quality closer to the forefront of their minds.  This might result in anything from small corrective actions and a greater meticulousness, to qualifying suppliers more thoroughly or "making a list and checking it twice" (sorry..listening to Christmas music). 

In terms of companies relocating their supply chains, that's nonsense.  It's not easy to pick up and move factories, let alone countries.  It eats up time, money, and in the end, China is not unique with respect to the quality issues that arise in manufacturing.  Those who are sure we can escape the quality issues of manufacturing in China by simply moving to another country may be using this map to base their opinions.

It would be nice to review the findings of the study in more detail, but like Dan Harris of ChinaLawBlog, who posted on the study, I can't seem to find them.  Assuming SmartCube does their job well, it will be business as usual in factories in China. 

Want to see how millions of everyday products all around you, including the one your are typing on, are made in China?

I've been sitting on quite a bit of video footage of Chinese factories from recent trips over there and thought I'd put some up to give people a quick peek into some of the people, places, and processes that often take place.  This video focuses on the process of plastic injection molding and mold building.  Plastic injection molding is used to create millions of everyday products.

The video is shot at a few different locations in the Dongguan area of southern China.  The factories shown range from "good" to "excellent" in the way of organization, cleanliness, quality of product, technical abilities, etc. 

A quick overview of what's depicted in this video, in sequential order:

• Injection mold planning taking place in CAD designs
• Mold building shop, including very large and small injection molds as well as the polishing/texturing process
• A few processes used to create molds, including CNC machining and EDS machines
• Plastic injection molding machines, in which the tools are loaded and used to shoot off large volumes of parts
• Product painting, assembly, and packaging

There is no speaking in this video--but video seems to convey a great deal regardless.  I have included some lively music ("Roll it Up", by Crystal Method) to keep you entertained, so dance or move if needed. Forgive me if the handheld video quality makes you feel like you are watching Tom Hanks storm Normandy beach in Saving Private Ryan.  I need to invest in a tripod.  Or have one manufactured... 

Enjoy.

So much to chew on lately in the blogosphere and media regarding China's quality, prices, liability, etc.  There is a lot of noise out there regarding "who" is to blame and "why".

Paul Midler, of TheChinaGame blog, recently wrote a post entitled The New Bugaboo: Low Prices. Midler presents some good counter-arguments to those out there that claim US businesses' chase for low prices is the true culprit in these quality fiascos. Midler's general points are:

A) US companies cannot fully control their suppliers.  Chinese suppliers, just like any person, are in control of their own actions and decisions.  Consider the analogy he uses:

Consider yourself in this situation: You ask someone to run to the store to buy you a candy bar, and you give him more cash than necessary. Keep the change, you tell him. The guy gets to the store and decides to shoplift the candy bar instead of paying for it. Are you responsible for this person’s unethical actions?

B) Putting the blame on the abstract cause of "price pressures" to excuse Chinese suppliers' failure to live up to certain standards in environment, labor, and quality criteria simply passes the buck in terms of responsibility.

C) Simply paying the suppliers more money to solve these problems is a ridiculous notion.  If actually implemented, many Chinese suppliers would be laughing all the way to the bank with no intention of actually improving conditions to the level that we'd like.  Unless we were of course to pay more next year, right?  Paul offers another good analogy:

First, if you give more money to a supplier who has behaved unethically, isn’t that sending him the wrong message? What would these people say about a CFO caught embezzling corporate funds? “Well, he must have taken the money because he needed it. Let’s give the guy a raise and see if the problem clears up on its own.”

I agree with Mr. Midler.  Price is the reason companies approach low-cost countries, like China, with manufacturing in the first place.  It isn't the Sichuan hotpot dinner (although I do find myself wandering out to restaurants specifically for this reason).  Simply paying more for a given product will probably do nothing to fix the issue.  Consider this little anecdote I wrote a while ago about surgeons masks being offered at a factory I toured in Shenzhen.  U.S. companies wanted surgeons masks available to factory workers.  The factory begrudgingly purchased them.  Half the workers didn't want to wear them. 

In another case, an associate of mine with a U.S. automotive tool sourcing company a few years back, got burned when he offered laptop computers to some employees.  Being new to China and a bit naive, he thought he would give laptop computers to three employees in their newly formed Changzhou office.  Supposedly, the workers would be delighted and their productivity would improve.  The employees were gone, laptops in tow, in a matter of a few weeks. 

These are only two, small anecdotes.  But they demonstrate a point. It goes far beyond simply offering a piece of equipment, clothing, or raising the price.