Operational Hedging vs Currency Hedging

Posted on February 19, 2011 by aviyer2010

An article in the Wall Street Journal (February 19, 2011) describes the move towards operational hedging – by shifting production across a global network of plants rather than pay for currency hedging. The article lists Nissan, Autoliv (seatbelt and airbag manufacturer), Becton Dickinson as companies that have decided to do NO currency hedging but to rely on their operational hedging capabilities. The reasons listed are (a) Increased cost to buy currency hedges, (b) Difficulty in explaining hedging costs to investors and (c) A preference for passing on volatility to shareholders and letting them hedge their portfolios.  Does the logic used by these companies suggest that currency hedging choices will vary by industry ? Is an outsourced global supply chain inherently more flexible and therefore able to absorb currency risks ?

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Grocery Co-ops of small stores competing with Supermarkets

Posted on February 18, 2011 by aviyer2010

The Economist (January 29, 2011, pg 64) describes how a collection of small stores are uniting as a co-op to develop customer loyalty cards, negotiate with branded manufacturers and offer electronic discounts to preferred customers.  The article comments on the fact that large supermarkets like Tesco use customer information to recreate a connection to the customer.  But small stores already have this connection, so their use of information is to get even closer, electronically, to the customer.  The success of these small shops suggests that information systems may not provide an advantage for large supermarkets – the same tools may make the smaller shops more competitive.  Which of these models will win out in the long run – small shops located closer to customer locations or large supermarkets ? Will the economies of scale that large shops take advantage of be compensated by flexible distributors who can play that role for co-ops ?

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Adjusting Runway designs to new material cost realities

Posted on February 17, 2011 by aviyer2010

A Wall Street Journal article (February 17, 2011, D1) describes changes in runway designs to accommodate the rising prices of cotton, silk etc.  One designer describes changes in material (leather to crinkled satin), length of the dress, number of bows etc that the article cites as decreasing prices from $ 798 to $ 398.  Other designers are purchasing local fabrics to avoid transport costs, or shipping by sea instead of air, or switching from cashmere to blended yarns.  This issue is particularly significant given the long lead times between design and production (up to 1 year).  In addition, consumer pressure on retail prices is also requiring redesign.  Can we expect retail demand to be maintained as these delivered designs deviate from runway samples ? Will the benefits of designs created  closer to the season cause an increase in manufacturing closer to demand locations ?

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Differential inspection of generic manufacturing facilities

Posted on February 16, 2011 by aviyer2010

An article in the Wall Street Journal (February 16, 2011, B1-3) describes the fact that FDA inspection of US pharmaceutical manufacturing facilities is usually once every two years but foreign plants are inspected less frequently, with 64 % of the foreign facilities never inspected.  Plant inspection is key because sales of generics require FDA approval of the plant’s manufacturing processes. Generic drug manufacturers are not charged user fees and thus wait over 2.5 years for approval, prevented them from reacting when patents run out. Should the FDA charge user fees and speed up inspection of plants both US based and global ? Will these fees increase patient costs or will it lower the costs because generic drugs will be available sooner rather than later ? Finally, given current inspection regimes, is there an incentive for domestic production of these generic drugs ?

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Political Risk and Global Supply Chain Impact

Posted on February 16, 2011 by aviyer2010

An article in the Economist (Schumpeter, February 12, 2011, pg 75) describes the impact of political risk on the supply chain. It starts with the abrupt impact of the changes in Egypt on the company that controlled 67 % of steel production in Egypt and the consequent impact on a supply chain that used that steel. The article summarizes three approaches to manager risk (a) Diversify operations – with the example of Chrysler that made 50 % of the components for a car in Peru and thus escaped nationalization, (b) Develop deep local roots – with the example of Shell that trained most of Nigeria’s oil industry regulators or (c) Share risks with other firms, NGOs or government entities.  Notice that (a) and (c) require the global supply chain to be more spread out and split amongst owners.  Is such a spread out strategy the best way to manage the impact of political risk on a global supply chain ? Would a contained strategy that builds a supply chain with independent modules permit a better supply chain in response to unfolding risk ?

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Speeding up Medical Device Review and possible Quality Impact

Posted on February 16, 2011 by aviyer2010

A Wall Street Journal article (15 February 2011) describes a study of medical devices that received quick approval – if the device to be similar to others in the market and is intended for low to moderate risk patients.  The study found that of the devices that failed in use, 70 % of the devices had received quick approval.  The associated question is whether the speeded up approval process (which decreases approval fees from $ 800,000 to $ 20,000) potentially creates failure risks.  In other words, is there a basic review time that cannot be decreased except for a drop in quality of approvals ? Given the current (early 2011) US administration’s focus on decreasing regulations, s there a danger of increasing risk ? Could the quality issues that showed up during use have been eliminated with a more thorough review, with consequent higher costs and lead times, and thus higher customer prices ?

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Neiman Marcus Assortment changes and potential impact

Posted on February 16, 2011 by aviyer2010

A Wall Street Journal article (15 February 2011) describes the past strategy at Neiman Marcus and changes to respond to the 30 % sales drop in December 2008.   The article describes that 50 % of its sales were generated by 100,000 customers who spent more than $ 12,000 a year.  But in its new strategy, the retailer plans to add to its customer base by “expanding its assortment at the entry-level end, expanding its off-price stores and introducing limited-time online sales”.  Will will such an adjustment in variety, and its consequent focus on two different customer bases, impact the retailers supply chain ? Would it have been better to split the store into separate entities (like the Gap and its Old Navy option) ?

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Trans-Pacific Partnership (TPP) and Global Supply Chain Impact

Posted on February 15, 2011 by aviyer2010

An article in the International Herald Tribune (14 February 2011) describes the TPP – which involves the Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam (and possibly Japan).  The article describes the possible impact of such a pact on Japan – a 0.5 % growth rate.  An interesting question is how the collection of countries, spatially distributed and diverse in their capabilities, as well as their GDPs, may impact each other.  How might the global supply chain be impacted by the signing of the TPP ? Will it enable manufacturing to be moved from China to some of the countries in the TPP ? Should Japan join, knowing that that would require opening up its agricultural markets ?

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Commodity price increases, margin impact and choices

Posted on February 15, 2011 by aviyer2010

A Wall Street Journal article (14 February 2011) describes the impact of commodity price increases have driven down average operating margins – by $ 500 million for Kraft and $ 1 billion for Proctor & Gamble.  The focus on productivity increases and overhead reduction during the recession generated profits even during a weak economy. But raw material price increases, which have not been passed on in the form of higher prices, will require increased overhead to manage the global supply chain to deliver improved performance.  Will managing the impact of commodity prices require a quick expansion of management ranks and thus overhead ? Will subsidized commodities available for suppliers for some countries (e.g., China) suggest a need to outsource more production ?

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US Manufacturing decreases and possible Innovation Impact

Posted on February 14, 2011 by aviyer2010

A New York Times article (February 12, 2011) describes the drop in employment in US manufacturing – from 11.6 million in 1979 to 8.1 million in 2010, and worries about the consequent impact on innovation.  Some experts suggest that manufacturing spurs innovation – and that the increased in the imported fraction of components in US manufactured products from 17 % in 1997 to 25 % in 2010 will diminish product designs developed by US Engineers.  Susan Houseman from the W.E.Upjohn Insitute is quoted as saying “The big debate today is whether we can continue to be competitive in R&D when we are not making the stuff we innovate”.  Is the decline in US manufacturing a cause for concern for US product innovation ? Can the information regarding products and their performance enable innovation without the experience of manufacturing ?  If US companies own plants abroad as part of a global supply chain, would US innovation still be impacted ?

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