Chain of Thought

Eliminate Fear Factories in Your Supply Chain

U.S. Homeland Security Secretary Janet Napolitano was in Brazil last week talking supply chain partnership with the American Chamber of Commerce in Sao Paulo. “As our countries and societies become more connected and dependent upon shared systems of transportation, commerce and communications,” she said, “we must work together to address shared threats. We continue to collaborate with our international partners to strengthen aviation security and the global supply chain, and facilitate legal travel and trade, which are critical to our economy.”

One of those shared supply chain threats is fear. We've just come out of a painful recession and companies are now hypersensitive to signs that we might be in for a double-dip. This is making it hard for business people to be optimistic. The year started off with a few months of rising economic indicators but now it appears we're in the summer doldrums.

MH&L just posted a news report on a survey done by the National Association for Business Economics to assess attitudes about business conditions and the near-term outlook. Here's what got me: more than half of the survey respondents reported unchanged sales and unchanged profit margins. During the recession that might have been seen as a positive. But now that our appetites for growth have been stimulated by a good start to 2012, all of a sudden a flat June created fear in the minds of many executives. Here's what else got me: 39% of the survey respondents reported rising sales and 29% reported rising profit margins. The NABE said this is much lower than the 60% of panelists reporting rising sales in the April survey and the 40% reporting rising profit margins.

Does this suggest worsening economic conditions for all? I'm a glass-half-full guy, so I see the fact that more than half of the respondents to this survey reported stability during a period of economic volatility is a positive. Alan Beaulieu, president of ITR Economics, likens our reactions to tough times to our sensitivity to a toothache. The one you have now is always worse than the last three you had. But it's not as bad as the next one, I might add.

So the fact that our Homeland Security Secretary is traveling the world as a supply chain cheerleader should be a real shot of novacaine for U.S. businesses. Still, there are things the managers of those businesses can do to lessen their own sensitivity to pain.

One of them is to be smart about sourcing. Beaulieu told me that nearsourcing should be part of that formula. Not the entire formula, but one element. In fact the formula he sees as rising in potency for those companies that have been heavily reliant on China for low-cost products and materials is China plus one plus one.

“We'll find Latin American sources providing more of what we need,” he told me—which also told me this may be why Napolitano is trying to open that door wider. So, that formula could mean China plus one other place in Asia and some other place outside the region. If you haven't already done so, Beaulieu suggests building a supply chain in which you can shift your sourcing emphasis as you need to instead of scrambling at the last minute. Right now China is starting to lose its luster.

“Labor costs and annual factory wages are up 18.8% year over year,” he told me. “Environmental costs are up, taxes are up, and people who are sourcing strictly from China will be surprised one day to find that competitors sourcing from Taiwan, Vietnam or even the former Yugoslavia are beating their prices.”

Beaulieu says his firm is expecting commodity prices to rise next year, so now would be a good time to take another look at your sourcing strategy. You may eventually conclude, while watching those numbers, that stocking up on certain items will be a good idea in the third or fourth quarters. That's good thinking because it'll be based on your own research rather than a reaction to agliophobia. If you're not sure what that is, look it up. It'll be good research practice.

Related Editorial:

Sales and Profit Margins Flatten in Second Quarter

Retailers Applaud Effort to Close eCommerce Tax Loophole

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