SUPPLY CHAIN Archives

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

11/04/2013by EOS Intelligence EOS Intelligence No Comments

Horse Meat Scandal That Has Nothing To Do With Horse Meat. Have We Been Fooled On Our Own Request?

In early 2013, an uninvited equine guest was found on several European beef-only plates, giving way to a series of accusations, finger-pointing and investigations. Meat adulteration scandal has now spread to allegedly involve slaughter houses, suppliers and meat-based food producers from across Europe, with names of France, Ireland, Romania, Poland, Germany and the UK popping up on the news. Regardless of the authorities’ investigation outcome, one thing stays for sure – the consumers’ trust in the meat processing industry, already not very strong, has been further shaken.

While DNA tests confirmed horse meat presence in several beef products (in some cases even 100% horse meat in supposedly 100% beef dishes), there is no certainty yet on how horse meat entered the food chain. And the problem is not just with horse meat, as pork was also found in beef-only products, with further investigation for donkey meat as well. Horse meat, as well as pork and donkey, are edible, and does not cause harm to humans per se, but the problem is big – it is consumer misinformation as well as the fact that since horse meat should not be found in beef products at all, we don’t know whether it met any safety standards. The scale and spread of the scandal may suggest that it was not a one-off case of a dishonest supplier, but rather a silent, probably not infrequent industry practice of deliberate product mislabeling.

Consumers are outraged at the ‘evil meat producers’ responsible for the malpractice. They announce their shaken trust in meat processing industry (and food industry in general). But this smells of hypocrisy on the consumer’s side as well. Majority of consumers across most markets (apart from a small health-conscious group) have long taught food producers one fundamental truth – price is the most important factor in their purchasing decisions, driving producers to take shortcuts wherever possible. While there is no justification for the malpractice and deliberate fraud, food producers and suppliers are oriented at cutting costs to deliver products at the demanded price yet still maintain margins. Same is true across other industries – we openly condemn child and underpaid labor in several Asian manufacturing centers, yet continue to demand extremely low prices on electronics, apparel, etc., knowing where and how it’s been produced (or conveniently forgetting about it at the time of purchase).

The consequences of the scandal around meat products are likely to go beyond a temporary dip in processed beef products sales. Early surveys in some of the European countries, such as UK, indicated that close to 1/3 adult consumers said they want to buy less processed meat (not only beef), indicating potentially harder times for producers across meat segments. This is likely to spike consumer interest in fish and seafood products. However, the changed meat demand dynamics might not necessarily lead to the lowering of meat prices, as more stringent safety and control procedures might allow prices to remain stable. The rapid, and in some cases unfair, finger-pointing towards suppliers from Central and Eastern Europe will continue to damage meat exports of these countries, unjustly affecting farmers and suppliers. Consequences will also include added effort by supermarket chains to rebuild the shaken trust in meat products, i.e. Tesco, Morrisons and Asda, for instance, will re-test meat products to ensure compliance and launching widespread reassurance campaigns; these will add to cost burden to the chains – costs that are eventually going to be passed onto the consumers.

It will be a difficult time for producers and suppliers found guilty of introducing horse meat to the human food chain, as under the pressure of public opinion, authorities aren’t likely to be easy on them. But meat producers who are able to be transparent and honest about their procurement and processing procedures, can actually benefit from the scandal, as more and more consumers will look beyond price and start to value quality (at least temporarily till the memory of the scandal is fresh).

So as the scandal unfolds, there are a few important questions here: Will it improve transparency of the supply chains in meat processing industry? Will it improve the quality of meat products we purchase and feed our families with? Will it force the authorities across Europe to improve control measures? Will it enforce correct labeling of products? And finally, will it make us, consumers, permanently shift our focus from price only to quality-oriented purchases? If the answer to these questions is ‘yes’, perhaps there is a silver lining to this scandal after all.

13/02/2013by EOS Intelligence EOS Intelligence No Comments

Production Re-shoring – a Great Idea That Won’t Materialize?

After years of shifting American production capabilities to China as the primary low-cost location, the trend might be somewhat changing. As costs increase in this previously cheap destination, American executives have started to question whether it still makes economic sense to spend more and more on Chinese labour and transport the products back half across the world to the final customer.

With estimations that Chinese wages double every four years, it is clear that the cost benefit of off-shoring to China is narrowing and the country might start losing its competitive edge. It has been, and will continue to be, a very slow process, and we will surely hear stories of another industry giant opening another production facility in this ‘global manufacturing centre’. Yet, the concept of re-shoring, i.e. shifting manufacturing capabilities, once off-shored in search for decreased costs, back to the USA, has been the story of several American producers for the past couple of years. While reasons vary, cost element is probably a key deciding factor, as cited to be the reason behind the re-location of some of the capabilities by Apple or General Electric.

But it is not only the cost that is forcing companies to think of bringing manufacturing capabilities back home. There is a range of reasons indicated as strong factors that should force American manufacturers to consider re-shoring:

Slowly, but gradually the cost benefit of off-shored production will narrow, given the faster rise in labour costs in locations such as China
Shipping costs associated with long-distance logistics are also increasing, e.g. shipping rates, cutbacks in logistics infrastructure, are estimated to have caused an average hike of 70% in shipping costs between 2007-2011
Quality inconsistency issues, both real and perceived, continue to resurface in Asia-manufactured products – flawed production lots, inaccurate specifications, as well as end customers’ continued scepticism towards the ‘made in China’ label
Production is increasingly executed in small lots to ensure responsiveness to fluctuations in demand volume and structure, customization requests, and to mitigate the risk of reduced liquidity with cash trapped in inventory
Supply chains are found to be more and more vulnerable to disruptions caused by ‘beyond control’ factors, from natural disasters (earthquakes, tsunamis in Asian locations) to political disruptions affecting smooth and timely shipping
Weaker dollar requires US-based companies to spend more bucks on the same foreign-based production and transportation services
While economic result matters most, producers also consider the customers patriotic interest to buy products that are ‘local’ to them – in terms of appeal as well as the production location, which can be an extra public relations benefit for the company re-shoring its manufacturing jobs back to the USA.

While reasons are varied and not mutually exclusive, there is still a question whether re-shoring is actually a strong trend, and whether jobs will return to the USA. The question cannot be ignored – if re-shoring turned out to be a persisting trend, it could be a well-needed kick to this crisis-shaken American economy.

Not long ago, in mid-2012, Forbes published an article, in which it asked whether re-shoring is actually a trend or more of a trickle. A simple survey conducted amongst MFG.com members, an online marketplace space for the manufacturing industry, proved that re-shoring can be a real trend, as a number of American executives indicated new contracts being awarded to them – contracts that had previously been off-shored. The re-shoring trend seems to be further confirmed by the frequently quoted 2010 Accenture report, which indicated that around 60% of manufacturing executives surveyed considered re-shoring their manufacturing and supply capabilities. The trend could be additionally supported by tax incentives proposed by Barack Obama for companies re-shoring back to the USA, as well as drives such as The Reshoring Initiative, founded by Harry Moser in 2010, aiming at promoting the concept amongst American businesses and tracking the phenomenon. According to Moser, re-shoring brought some 50,000 jobs back to the USA during the period of 2010-2012.

But, with all these points being legitimate reasons for American companies to re-think their off-shoring, perhaps the big believers in the return of the ‘Made in the USA’ era, should curb their enthusiasm just yet. It is quite unlikely that low-cost producers will return to the American soil for good – on a scale large enough to have a positive impact on American economy.

First of all, China will still hold enough advantage over the next couple of years – an unbeatable advantage of a large pool of workers available for $2 an hour wage, which, even if increases, will still be far lower than in the USA. And it is not only about the cost, but also about the relatively high elasticity of low-cost Chinese labour supply (in terms of wage accepted and workers volumes available), which even at its lower productivity, makes it still more economical to stick to factories based in China, than re-shoring on big scale to the US market. The public relations dimension of bringing back jobs has to be approached realistically too, keeping in mind that much higher productivity of American workers means that for each 4-5 Chinese jobs being cut, American market would gain probably not more than 1, making the job creation benefit much more modest than hoped for. And even if, over long term, the increasing labour cost squeezes the cost benefit tight enough to make the producers leave China, it is highly unlikely that they will turn to American workers as first priority. There are more economical options available across Asia and other geographies (perhaps at higher cost than in China but still well below American levels). We might see some of these manufacturing jobs fly to India, Bangladesh, and the emerging African continent.

It seems that this big re-shoring move might be just wishful thinking, which will translate to a few jobs brought back to the USA, in numbers not significant enough to actually make much difference.

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