A move from “just in time” to “just in case” supply chain designs ?

Posted on February 13, 2013 by aviyer2010

An article in the New York Times (February 12,2013) describes claims that the number of distribution centers to satisfy US demand has increased from two to seven, as retailers demand quick deliveries wile cutting their own inventories. In addition, rising truck fuel costs, increased insurance costs and weather related disruptions all decrease the supply chain benefits from inventory reduction and push the optimal configuration towards more distributed warehouses and higher overall inventories. A related shift is the movement from West Coast to East Coast ports in an effort to get goods closer to demand points. Is this shift a reflection of the low interest rates and thus low cost of carrying inventory or the rise in fuel costs and uncertainty in retail demand, or both ? Will the increased inventory locations be coupled with decreases in variety or will the deployment of inventory have to be synchronized with SKU velocity to manage costs ?

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The 340B discount drug program and supply chain leakage

Posted on February 13, 2013 by aviyer2010

An article in the New York Times (February 12, 2013) describes problems with the 340B drug program that requires pharmaceutical companies to provide 20 to 50 % discount to hospitals treating low income and uninsured patients and accounts for about $7 billion worth of drugs (including 33 % of the hospitals). But some of these clinics buy their entire volume at such discounted prices and then charge a markup to those covered by private insurance. This “leakage” of the discount is considered to be an abuse of its intent, claim pharmaceutical companies and pharmacies. But others claim that this extra income enables these hospitals to treat poor patients by covering their operating costs. Should drug discounts be tied to the patient record, thus tracking payments to the uninsured person covered ? Does the argument that the extra margins support operating costs, while not true to the intent of 340B, an acceptable argument or are such practices fraudulent ? More generally, given the leakage of promotions in retail in general, should such observed practices be considered a cost of doing business for pharmacies ?

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The cocoa global supply chain and looming issues

Posted on February 10, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 11, 2013) describes cocoa manufacturing projected shortfalls of 50,000 tons compared to demand in 2012-13, while prices dropped 74% from 2011 to 2012. Production shortfalls were provided by a global stockpile of 1.5 years of demand. Volatile prices for cocoa have caused small farmers in Ivory Coast and Ghana to shift to other crops like rubber and palm oil. But yields for cocoa have also not improved in 50 years unlike the 5 to 10 factor yield improvements for other agricultural products. Chocolate manufacturers have compensated by substituting vegetable oil for cocoa butter, shrinking bar size or adding air bubbles to chocolate to decrease their cocoa needs. How should this supply chain be righted to synchronize supply with demand ? Is the small farm production model the issue and, if so, should be be replaced by larger cooperatives that can stabilize cocoa prices ? Is the problem lack of yield improvement and, if so, how should yield improvements be implemented in this context ?

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Manufacturer’s efforts to prevent use of their drugs for lethal injections

Posted on February 10, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 11,2013) describes efforts by European manufacturers to prevent use of their drugs for lethal injections in US prisons (to enforce the death penalty). Because capital punishment is illegal across Europe, European governments, such as Italy, are requiring guarantees from drug manufacturers that products made in Europe are not used in executions worldwide. Some manufacturers are demanding that wholesalers guarantee they will not resell their drugs, but other intermediaries seemed to have enabled the supplies to continue to be used by US prisons. The Torture Goods regulation in Europe has also been used to impose export controls on sales of European products. But, given the US demand for these products as part of lethal injections, what options do European manufacturers, whose drugs are meant for disease prevention, have to prevent their products from being used ? Given the jurisdiction of European regulators, how can they assist their manufacturers with compliance ? More generally, how can a manufacturer navigate across sovereign governmental rules that may be at odds with each other, while continuing to ensure compliance ?

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Does “fast fashion” create safety problems for employees at global supplier factories ?

Posted on February 10, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 7,2013) suggests that the fast (even two week) fashion cycles at Zara, Hennes & Mauritz (H&M) create stress on suppliers in Bangladesh who need to respond rapidly or lose the business. The corresponding stress shifts to employees and, the article alleges, creates conditions that compromise safety – leading to deaths due to fires. The article claims that a 10 cent extra cost per garment can improve safety if spent on fire prevention and worker protection efforts. But will such a price increase offered to manufacturers be spent appropriately on safety ? Have retailers gone too far in their focus on matching trends and should the safety consequences be rejected by consumers ? How can consumers be educated about the tradeoff ? Should regulators at retail locations demand that retailers accept global responsibility for the consequences of their “fast fashion” supply chain choices ?

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Manufacturing in Italy – choices made by the 300 year old Richard Ginori porcelain factory

Posted on February 10, 2013 by aviyer2010

An article in the New York Times (February 9,2013) describes the travails of the Richard Ginori porcelain factory in Sesto Fiorentino, Italy and its recent bankruptcy and closure. Once a high end porcelain tableware manufacturer, the trends in Italy away from formal dining and towards lower end products with a 60 % market share garnered by Chinese suppliers, have squeezed demand for Richard Ginori’s products. The company shifted from the high end decreasing demand to the lower end larger volumes and ended up being uncompetitive. Given the high labor costs in Italy and the high labor content in their products – is this an industry that needs to move to a more globally competitive location or is there an alternative strategy to preserve the craft content in Italy to enable future innovations in the field ? Are the company’s current problems a reflection of strategic errors or an inevitable outcome of globalization ? Are consumer preferences away from fine dining and thus lower demand for their products a suggestion that the company needs to examine its capabilities and shift to other high end products through brand extensions ?

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Tracking lead batteries recycling supply chain from the US to Mexico

Posted on February 9, 2013 by aviyer2010

An article in the New York Times (February 9,2013) describes lax tracking of the recycling of lead batteries exported from the US to Mexico. In the absence of treatment of used batteries as hazardous waste, shipments into Mexico are not synchronized with receipts by qualified recyclers. Some battery recycling plants in Mexico are estimated to release 30 times the lead emissions as their US counterparts. But the battery industry claims that tighter monitoring programs will cause burdensome certification costs. Should manufacturers of batteries be held responsible for safe disposal even across global locations? Should the environmental standards for recycling of US products even at global locations be set the same as US standards ? How should the cost of the burdensome certification be weighed against the environmental benefits of safe disposal ?

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Transporting wine in bulk in plastic bags from Australia to the UK

Posted on February 9, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 7,2013) describes shipments of Australian wine in 24,000 liter plastic bags that are then packed in the UK. Saving 25 cents per bottle by shipping without the bottle enables the wine to be sold for $5 a bottle despite appreciation of the Australian dollar. Given the transport cost savings for shipment by sea in plastic bags, and the ability to compensate for currency shifts, does this suggest that packaging choice can considered to be a real option? If the price of this savings is a loss of product quality, how should the margin maintenance be traded off against its demand impact ? The article suggests that this shipment mode may only apply for low price products, but are there contexts in which sustainability benefits may justify using such approaches for higher margin products ?

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The impact of drought on corn and the beef supply chain

Posted on February 2, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 4, 2013) describes the impact of the drought on corn yields and thus the beef supply chain. Corn farmers were covered by crop insurance but produce worth billions were destroyed by the drought. The corn that did get to market fetched higher prices. Ranchers cut back herds to compensate for the 60 % rise in hay prices. Feeders – intermediaries who buy calves and fatten them, were squeezed by higher prices for cattle and higher feed prices. Beef processing plants have started cutting capacity to match the lowered cattle available to be processed. Beef prices at retail have started increasing in response. Will the higher beef prices swing the supply chain back to its original state as incentives improve across the supply chain ? Or will weather (rain) be the key to restoring the supply chain back to its earlier strength ? Are the federal crop insurance offerings slowing down or speeding up the supply chain response ?

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Tunnel trade – and the impact of demand and supply of goods on either side

Posted on February 2, 2013 by aviyer2010

An article in Bloombergbusinessweek (February 4, 2013) describes the tunnels (now numbering 500 but up to 1000 at one time) between the Gaza strip and Egypt. Transporting motorcycles, cars, contraband between the two sides enabled owners of these tunnels to charge a premium of $1000 to transport a bike from Egypt. The cost to build a tunnel, estimated at up to $ 250,000, is financed with an upfront payment and a share of the profits associated with goods transported – a revenue sharing contract. But more recent moves by Israel to open the borders has eased the availability of goods, thus lowering the incentive for tunnel trade. What does the efficiency of pricing of tunnel trade say about the predictability of embargoes as a political strategy ? The more recent moves to tax tunnel flows to fund the government in Gaza is claimed to have incented the creation of longer more complex tunnels – capital investments whose payoff is in the illegal movement and thus avoidance of taxes – what does this say about the magnitude of the taxes and projected revenues ?

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