Energy, Jobs, Salmon, the river and the Environment

Posted on February 20, 2011 by aviyer2010

An article in the New York Times (February 20, 2011) describes a tussle between energy and job creation and the river routes of the salmon along the Columbia river.  Companies in Montana want to bring coal by rail line to the river, then use barges to haul the coal to ports for destinations in China.  The routes will follow the salmon and requires locks to be repaired to enable this traffic.  Oil production equipment is expected to be imported back along the route.  The impact on the salmon is championed by environmental interests in the state of Washington and may require companies in Montana to build while avoiding periods when the fish use the river.  How should the impact of dams on the salmon, the environmentally friendly barge use for exports and the job creation in Montana be balanced ? The alternative transport modes for coal from Montana may well make is uncompetitive in the global arena and thus dampen business – but is that cost more reasonable ? Such discussions will become more of the norm as we balance global supply chain competitiveness and environmental concerns.

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The “value of a human life” and Supply Chain Choices

Posted on February 20, 2011 by aviyer2010

A New York Times article (February 20, 2011) describes estimates of the value of a human life across US government agencies – $ 9.1 million by the EPA, $ 7.9 million by the FDA, $ 6 million by DOT, and a number between 1 and 10 million recommended by the OMB. The impact of these estimates is the justification for specific labels on drugs by the FDA, the need for warning labels on cigarette packages with cancer victim pictures by the FDA, stronger roofs on cars by the DOT etc.  These examples suggest that design choices and associated risk is calculated by using estimates of their value – and thus may be significant. But should this choice of the value of human life be allowed to vary across US government agencies and thus have different effects across industries ? Should it also be allowed to vary across time (moving up or down) and across decisions ? How should private industry supply chains incorporate these estimates into the choices across companies ?

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Rare Earths Supply Challenges

Posted on February 19, 2011 by aviyer2010

A New York Times article (February 19,2011, B5) summarizes a report published by the American Physical Society (http://aps.org/policy/reports/popa-reports/loader.cfm?csModule=security/getfile&PageID=236337) on energy critical materials mainly rare earths (tellurium, gallium. indium, germanium, lithium). They highlight a few issues (a) these rare earths are byproducts of other mining e.g., tellurium (a 30 million volume) is a byproduct of copper ($ 80 billion industry). Thus increased tellurium is unlikely unless better extraction approaches are developed, (b) Mining for rare earths may also bring up radioactive materials such as uranium and thorium, whose concentrations are low so they end up creating environmental issues.  Projecting future demand for these materials in alternate energy devices (batteries and solar cells) suggests the need to find new sources, develop technologies and recycle.  Is there a need for government intervention to resolve the global supply problem ? Will global supply chains of companies adjust to respond using a combination of price signals, outsourcing agreements and R&D to recover and decrease use of these materials ? Is there a strategic need to subsidize these sources in an effort to attain sustainable manufacturing goals ?

 

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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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