$ 8 billion in fines but still suppliers

Posted on March 6, 2012 by aviyer2010

An article in USA Today (March 7, 2012) describes the $ 8 billion in fines paid by pharmaceutical companies accused of defrauding Medicare and Medicaid, but with no impact on their supplier status – thanks to them being sole suppliers for many drugs. The “corporate integrity agreements” with government does not impact their supplier status because of their patented drugs which are essential for Medicare patients.  Does their patented drug portfolio reduce the impact of the fines in preventing egregious behavior ? Given patent protection for their drugs, are there other schemes that could impact continued profits for such firms while maintaining required supply ? Should the penalties have been even higher than those imposed, to compensate for the continued supplier status – and the ability to cover the fines with increased product margins ?

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Sustainable chemicals sourcing at P and G

Posted on February 9, 2012 by aviyer2010

An article in the website Sustainable Brands (http://www.sustainablebrands.com/news_and_views/articles/procter-gamble-developing-sustainable-chemicals-biofuel-company) describes Proctor & Gamble’s use of Zeachem, a cellulosic biorefinery manufacturer that uses raw material from poplar and agricultural residues and uses natural bacteria that produce no Co2 during fermentation. The consumer goods company has targeted use of such suppliers with a goal of 100 % renewable sourcing of packaging and chemicals.  Given such independent steps by consumer products manufacturers, is there a role for regulatory mandates regarding emissions in such industries ? Is the driving factor consumer preferences and thus demand protection by these brands ? Will decisions by such large brands act as an externality in spurring more sustainable practices across other industries that do not have a similar consumer demand pull ?

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Mexico’s gain at China’s rising cost expense ?

Posted on February 6, 2012 by aviyer2010

An article in the Wall Street Journal (Feb 6, 2012) describes data that trains and trucks carried 9 % more freight last year from Mexico to the US, while container traffic from Asia dropped 0.2 %. As we have heard before, labor costs will continue to rise in China as the working age population shrinks, raw material costs and energy costs in China are rising to nonsubsidized levels and transport costs are increasing, and the yuan has appreciated 30 % in the past few years, thus providing an opportunity to bring manufacturing closer to the US.  Will concerns about security in Mexico dampen the current enthusiasm to move production to Mexico ?  What changes in the maquiladora region will reassure US consumers that environmental and workplace concerns are being addressed in Mexico ? Does Mexico have a strong enough engineering base to support a significant growth in manufacturing or will that be a constraint ?

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Regulating copper in brake pads at the state level

Posted on February 6, 2012 by aviyer2010

An article in the New York Times (Feb 3, 2012) describes a proposal that requires that automobile brake pads decrease the copper content to less than 5 % by 2021 in Washington and less than 0.5 % by 2025 in California.  The copper releases during braking is said to release metal dust that harms aquatic life.   But if individual states create product standards, how will manufacturers guarantee compliance for products produced and sold across the US ? Will the toughest standards become national standards to preserve supply chain flexibility ? How should similar concerns about mercury (in automobile switches) and lead (used in automobile wheel balancing) be converted into regulatory changes ?

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Manufacturer “bonus depreciation” rules and impact

Posted on February 6, 2012 by aviyer2010

An article in the New York Times (Feb 3, 2012) describes the “bonus depreciation” rule that permits capital investments to be treated as costs for the current year and thus subsidizes equipment purchases.  The impact is to incentivize capital investments while sacrificing taxes, with the potential taxes recovered over time.  The example of a logistics company investing $ 225 million in trucks, thus spurring growth in manufacturing, is one such impact. Will manufacturers demand this subsidy as a continued tax break, and will such incentives be beneficial overall across the US manufacturing supply chain ? Given US law changes, would such competitive benefits continue to persist if other competing economies follow suit ? How should companies sharing a supply chain coordinate to leverage the benefits of such rules, given that they are available temporarily ?

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Asian container flow to the East Coast, Panama canal width and Long Beach

Posted on February 6, 2012 by aviyer2010

An article in the Economist (Jan 28, 2012) describes the impact of increased Panama Canal width to handle large ships and the consequent container shipments to the East Coast being sent directly to East Coast ports, rather than being shipped to Long Beach or Los Angeles and sent by train to the east Coast. But even though shipments directly to the East Coast will be cheaper, some Long Beach authorities claim the longer more expensive shipments through Long Beach can be faster by one week.  Should time sensitive flows from Asia to the US continue to take the more expensive faster routs through Long Beach ? Should unloading capacity and rate be speeded up in the East Coast to make it cheaper and faster to ship Asian containers directly ? Will Californian ports, whose shipments by truck from the port to the rail yard create the bulk of the ports’s  air pollution, be better off with a lower shipment volume and lower pollution levels ?

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Commodity Prices change direction and supply chain impact

Posted on February 5, 2012 by aviyer2010

An article in the Wall Street Journal (Feb 1, 2012) describes price declines through the end of December 2011, with fears of European recessionary trends, but price rises though Jan 2012. Copper and corn saw price increases of 15% and 10 % following price decreases of 12 %.  How should procurement managers adjust their strategies to react to such price shifts ? Should supplier pricing be adjusted to reflect current commodity prices or should OEMs take control of raw material procurement to consolidate purchases across suppliers ? How should suppliers be incented to use the right level of financial instruments to stablize procurement costs ?

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Regulating Lithium Battery shipments as cargo and associated costs

Posted on February 5, 2012 by aviyer2010

An article in the Wall Street Journal (Jan 31, 2012) describes a change in regulations by the FAA that barred transport of lithium batteries by air, without appropriate packaging, following a fire and associated crash of a UPS plane carrying such cargo in Dubai.  The reason is that Lithium battery fires spread quickly and can thus be destructive. This rule meant higher costs and possible supply disrutpions to manufacturers to comply with regulations and documentation.  But, thanks to industry pressure, a recent Congressional rule change recommends that regulators must produce reports that show that lithium batteries had a substantial role in the fires before such regulations remain.  How should industry competitiveness and associated costs be balanced with transportation risks in developing regulations ? Given that better packaging reduces transport risks, should customers be educated about these costs, and the need to absorb them, or should taxes collected by states to cover these costs ?

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Private Equity role in turning around manufacturing firms

Posted on February 5, 2012 by aviyer2010

A Wall Street Journal article (Feb 2, 2012) by Armand Lauzon Jr describes his experience as a private equity company representative with manufacturing firms. Firth Rixson was a metals forging company that he led, and that doubled revenues, improved profitability, added new facilities and became a market leader. John Maneely Corp, a steel pipe and tube manufacturer, improved manufacturing processes, created incentive programs for their union employees and became the largest manufacturer in its sector. How do private equity firms manage the turnaround of manufacturing firms, given their plans to extract a significant return on their risky investments  ? Are the examples presented in this article the rule or the execption ? How are global supply chains leveraged to deliver the desired improvements in a short interval ?

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Climate change risks and disclosure rules

Posted on February 5, 2012 by aviyer2010

An article in the New York Times (Feb 1, 2012) describes a requirement by California to require insurance companies to report on their plans to mitigate the impact of climate change. The data shows that by June 2011, the insurance claims associated with natural disasters had exceeded that in all of 2010.  Given that supply chains are impacted by these same disasters – should suppliers also be required to disclose their climate change induced risks to buyers ? What steps should supply chain managers take to manage the impact of the global supply chain risk associated with such disasters ? Should OEMs develop some in house capability to maintain supply, even if at a higher cost point, or should they increase their buffer stocks to mitigate the impact of such risks ?

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