China cost advantage for manufacturing to disappear by 2015 ?

Posted on June 8, 2011 by aviyer2010

A report by the Boston Consulting Group (BCG) summarized in Supply Chain Digest (June 6, 2011) describes wage growth in China of 17 % a year (vs 3 % in the US) , increasing appreciation of the Yuan and labor productivity increase of 10 % resulting in a labor cost level in China that will be about 69 % of US costs by 2015. At that level, parts of the US will be the least cost manufacturing location in the developed world. But Mexico may also benefit from such cost appreciation in China. Should companies rethink their China locations now in preparation for such continued cost increases ? Are these reasons beyond cost, such as specific capability and quality or demand destination that would continue to justify China as a manufacturing location ?

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Heavy Equipment monitoring and Energy Savings

Posted on June 1, 2011 by aviyer2010

An article in the Wall Street Journal (June 1, 2011) describes the use of electronic monitoring of heavy equipment (bulldozers, dump trucks etc) to decrease costs.  One contractor claims that his excavators were idling 48 % of the time in use as against an average of 35 % across contractors. Brining the idling in line with the average is estimated to generate savings in fuel, depreciation and operating costs of $ 50 K to $ 100 K per year.   The revenues associated with electronic tracking of fleets is estimated to be $ 2 billion a year.  Manufacturers like Caterpillar claim that such on line tracking can be used to adjust designs of fuel tanks and plan for parts demand.  Should such online tracking and associated savings be monitored by the user or the manufacturer ?  Should the use be “paid” for the data by the manufacturer or is the manufacturer aggregation of average performance across customers the useful data for the user ? Can insurance companies use this data to write better policies for users ?

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Adjusting Apparel features to balance margins with appeal

Posted on May 31, 2011 by aviyer2010

An article in BloombergBusinessweek (May 30, 2011 page 18) describes efforts by designers to balance the needs of designers, who want clothes to be appealing, with manufacturers who want to produce them and maintain margins. This tug-of-war has become even mpre intense as consumers shy away from high prices and commodity prices surge.  Dropping coin  pockets to save a nickel, changing buttoms from shell to imitation pearl, dropping watch pockets, eliminating cuffs and pleats, changing pocket materials – all of these choices are now actively investigated to maintain margins.  How should this balance be managed to maintain brand appeal ? Will adjusting global supply chain sourcing enable margins to be maintained albeit with earlier design commitments ? Would a Zara like quick redesign to reflect market demand be even more appealing in such an environment ?

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Uncoordinated Decisions by the US Energy department and supply chain impact

Posted on May 31, 2011 by aviyer2010

A New York Times article (May 28, 2011) describes one department selling the helium-3 gas as fast as the other department worked to build up stocks, thus creating a shortfall.  The gas is helium-3 that is cited as a “byproduct of the US nuclear weapons program”, as the number of weapons declined, so did the gas produced.  This decline in inventory was kept a secret. Thus, while the gas generation was declining, another division was sponsoring technology that used this gas to detect nuclear weapons smuggling.  The result is a potential shortage in helium-3 thus causing a scramble for new supplies.  Should the focus be to permit sharing of such information, despite the security risks that the information pose ? Should newer technologies be sponsored that use gases other than helium-3, albeit at a higher cost ? Or is the culprit the apparently naive demand estimation method used i.e., counting the telephone logs of requests for material ?

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Publishing vaccine prices paid across the UN system and impact

Posted on May 31, 2011 by aviyer2010

An article in the New York Times (May 27,2011) describes a decision by the United Nations Children’s Fund to list prices paid for vaccines on its website. The goal is to permit price transparency and thus, perhaps, to lower prices paid by all agencies for children’s vaccines.  But to the extent that suppliers work with available budgets would it make sense to permit such price variation, so that supplier costs are covered across all procurements ? Could prices rise for everyone as a result ? Or is the level of global competition not sufficiently high to permit price pressures on suppliers, with price publicity a feasible tool to induce competition ?

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Japan’s Tsunami and global supply chain resilience

Posted on May 31, 2011 by aviyer2010

An article in the International Herald Tribune (May 30, 2011) describes the resilience of companies like STM Microelectronics, that has managed to maintain their global supply chain smoother than expected. A survey of supply chain managers analyzed by the Gartner group suggests that China, US and Germany are top global supply chain countries with Japan being more focused on Japanese companies more dominant in Japanese OEM supply chains.  Will such focused involvement with local OEMs and concentration in electronics and automotive make it easier for Japanese companies to recover ? Will an increased focus on diversified supply chain locations require Japanese suppliers to globalize themselves ? Is the resilience of the global supply chains a lesson in good communications and trust, the role of technology in enabling monitoring and adaptiveness or both ?

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China’s electricity rates and global supply chain impact

Posted on May 26, 2011 by aviyer2010

An article in the International Herald Tribune (25 May 2011) describes the fact that China’s central government has forced lower electricity prices to maintain export competitiveness. But utilities have responded with lower production, thus increasing production costs for factories. A push to lower coal prices charged by coal miners, an input for many electricity producers has caused supply of poorer quality sulphur rich coal and consequent penalties for electricity producers from environmental authorities. A push to use diesel generators by factories will increase their costs, but this is countered by a ban on diesel exports. The pressure on electricity demand in turn comes from generous terms provided to inland rural consumers to buy air conditioners and refrigerators, thus boosting demand but creating unintended consequences. Will all these factors decrease the cost competitiveness of Chinese manufacturers ? Should we expect the environment to suffer as a result ? Or will it end up boosting alternate energy sources in china and provide the cheapest source of green power based manufacturing ?

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Toyota’s quality focus and slow response ?

Posted on May 26, 2011 by aviyer2010

A recent report, written by respected outsiders, but commissioned by Toyota, claims that the attributes of stability and predictability, that create quality products, may be to blame for the slow response to customer complaints regarding brake pads or sudden unintended acceleration (SUA).  Toyota treats complaints as everyone’s problem, but seemed to react defensively to complaints. A chapter in a Japanese edition of the book “Toyota Supply Chain Management” (Iyer,Seshadri and Vasher, McGraw Hill Japan 2011) suggests that the company should extend its supply chain to include the end customer and leverage information technology to permit quick flows if feedback upstream. Others suggest a need to separate quality from responsibility to respond to customers. What changes should Toyota make to permit a more responsive posture to customer feedback ? Does the US government report regarding SUA absolving the company of most technical issues suggest that it’s quality processes need not be tampered with ? Were most of Toyota’s problems the result of US government overreaction and ownership of General Motors at that time ?

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Volkswagen’s considers building the Audi in it’s US plant

Posted on May 26, 2011 by aviyer2010

An article in the Wall Street Journal (May 25, 2011) states that  US production enabled VW to drop prices for the Jetta by $ 8,000 thus enabling it to compete with Honda and Hyundai’s cars in the category.  In addition, current auto worker salaries are 50% lower than those at older Toyota plants, at $14.50/hour.  All this, plus a weak dollar, suggests that US manufacturing of VW cars may be an festive way to grow sales in the US market using domestic cost advantage.  Given the fickleness of exchange rates, should capacity decisions be justified by such concerns ? Will US manufacturing and associated claims provide a demand side benefit from customers, or will it just depend on lower prices ? How will competitors in th US react to VW’s decision ?

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Power cuts in China and manufacturing impact

Posted on May 19, 2011 by aviyer2010

A Wall Street Journal article (18 May 2011) describes electricity rationing in Taizhou, China, which required some factories to halt production one day a week in March, two days a week in April and three days a week in May. The impact is use of generators, powered by diesel, which are more polluting than electricity generation sources and increase costs.  These power cuts are in anticipation of demands for air conditioning, lower rainfall levels and faster growth in demand.  Should one conclude that the cost of manufacturing in China will rise to cover these constraints in power availability ? Will lead times for orders have to increase to accommodate production capacity constraints ? Do all these factors suggest a need to rethink the cost advantage of outsourced manufacturing ?

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