Jerking Knees – An Oral History
Several aeons ago, when Traffic Managers were just beginning to rise up out of the primordial ooze with thoughts of morphing into Logisticians, or worse, Supply Chain Managers, an epidemic of Just-In-Time swept across the planet.
Made possible only by the plentiful availability of inexpensive fuel, JIT was a compelling concept. Knees jerked, nearly in unison, and even people who had no idea what JIT was claimed to be doing it.
Other manufacturing and distribution programs, many acronymically challenging, came and went, and the constant jerking of knees led to a corporate form of premature rheumatoid arthritis.
In a breakthrough that employed thousands of consultants and validated the suspicions of CFO’s around the world, off-shoring – generally to the Pacific Rim, but always to low-labor-cost producing countries – began a downhill run that turned into an avalanche. Despite premature RA, knees jerked once again, and executives strained themselves attempting to either leap onto – or out of the way of – the Asian off-shoring bandwagon.
Of, course, that movement, too, was predicated on the ability to move vast quantities of goods incredible distances with low cost fuel. We hesitate to use the term “movement.” Unless it is understood that in the executive suite, a movement is more like a fad with legs.
A Funny Thing Happened On The Way To The Forbidden City
As the movement continued to grow, the price of crude oil began to move; actually, it began to gallop. When it flirted with $150 a barrel, the wild-eyed lunatics who had prophesied $200 were suddenly hailed as seers. No one snickered anymore when $500 was floated as a possibility, or even more frightening, unavailability at any price was seriously analyzed.
The concern was not limited to North America. The proportion of manufacturing diverted to Asian off-shoring has been reported to be greater in Europe than in the US.
Knees jerked again, but not in unison, and in different directions. That cracking sound we heard was that of knees striking jaws, such was the severity of collective reactions.
Overnight, it became permissible to talk about the foundational things that were wrong with long-distance off-shoring. They’d always been weaknesses, but low unit cost to produce had a way of blinding the eyes to reality. That, and the egos of those executives who’d made hasty decisions to go to China, or wherever.
It was no longer necessary to whisper about inadequate and unreliable infrastructures, corrupt officials, inefficient local governmental structures, vulnerability of intellectual property, currency manipulation, escalating priorities for local consuming markets, the consumption demands of a growing middle class, or off-shoring from the off-shore location to yet another geography.
In the abstract, bringing the work “home” – and soon – was an attractive response to the escalating cost of transporting goods from Asia to domestic ports, and to the added expense of getting product from a port into a rational distribution network.
But, the solutions are not as simple as firing up the furnaces in the ol’ home town. The furnace might have been sold for scrap. The skilled workforce has likely retired, or left for other jobs. The suppliers might have folded between then and now. Where – and in what condition – are the molds, forms, patterns, and dies needed?
So, many times, other options get considered. But which ones are right? Can the local capability be rebuilt? Is finding a nearly-as-low-cost producer – only not quite so far away – an answer? How about shifting to another US location? Or, better yet, could near-shoring to Mexico or the Caribbean make the proposition work? Or, are there third parties somewhere in North America who could take on the job?
Net result – the return of manufacturing to the US has been slow and fragmentary. More of a hope than a reality, no matter how strong the desire to do so, complicated by difficulty in determining which alternative is the right one, given a range of unknowns and uncertainty.
Ebb Tide?
Many thought we were surely saved when crude oil prices quickly retreated to the $40 level. The pressure’s off! Imagine Lee Corso cautioning “Not so fast, my friend!” Or, Johnny Carson exclaiming, “Wrong again, petroleum breath!”
It’s sometimes difficult to interpret these prices and their impacts on a short-term basis. Rises and falls don’t immediately translate to movement in gasoline prices at the pump. There are demand and refining capacity issues that cloud a cause-and-effect analysis. Diesel is even trickier, analysis complicated by capacity and by global demand, which results in some export of US-produced diesel fuel.
$40 a barrel looks wonderful when compared with $150, but it’s still higher than when most of the financially-driven decisions to go to China (or somewhere else equally far away) were made. So, just maybe, the deal that worked at $24 is no longer so hot at $40. Brent crude, for example, was under $20 as late as 1999.
So, the same questions perhaps moderated in degree, rise up again at $40. Near-shore? In-source? Outsource? Relocate?
And, The Answer Is . . .
There isn’t any answer, at least not a one-size-fits-all solution derived from a standard template. Everyone’s circumstances are different. Maybe the deal still works at $40, even if not as well as at $24. Maybe the transition is simply too lengthy and too costly to be able to count on payback in a reasonable time. Maybe there’s no one else – individually or organizationally – that can produce in the required quantity and at the necessary quality.
Several years ago, CBS newsman Dan Rather was accosted by a man demanding to know, “What’s the frequency, Kenneth?” The poor soul was deranged (the questioner, not Rather). Likewise, any expectation of an easy, clear answer is a deranged notion.
It Gets Worse
Here’s the real problem. There’s no assurance that crude prices will stay relatively low. They could jump up to previous highs – or higher – with no warning, and for no particular reason. So, today’s right answer becomes tomorrow’s financial albatross. And, a solution predicated on $150 oil may look like a self-inflicted wound when prices are lower.
The crux of the issue is that prices – driven by demand, speculation, and frivolous machinations by producers – are likely to continue to yo-yo. So, what’s the sensible course? The certainty of a solution that looks superficially bad, or the uncertainty of a solution that’s sometimes excellent and sometimes horrendous?
What’s your tolerance for cost uncertainty – and your management’s? What customer and service impacts are probable in an uncertain sourcing and transport world? And, how might those uncertainties affect customer loyalty and retention?
Tugging On The Supply Chain
We tend to think of these issues in terms of manufacturing, and so they are. But, they are also much greater than that in scope and impact. And, as supply chain managers, we are going to be tagged with much of the responsibility for how they are handled.
Today’s dilemma hits the sourcing function squarely between the eyes. Where to go. If, when and how to come back. And, where to come back to, if at all. All, with cost consequences that can make the benefits of years of supplier cost reduction initiatives disappear overnight.
Then, there’s transportation. Not simply the cost element, but with mode and load size issues, as well. That doesn’t even begin to consider the transport time and cost implications of marine transport from Asia versus the Caribbean Basin. Or the need to get product from point of entry (either water or land) into a rational distribution network. Both of these add cost – and time - factors that didn’t exist before moving production out of the country.
Comes next the critical question of whether – or not – distribution centers are both correctly placed and correctly sized to handle whatever the latest solution is. With that comes a set of decisions regarding capital requirements to meet new demands – or a re-evaluation of the role of Logistics Service Providers in the new model (along with their ability to change as fast as the next solution emerges).
Does all that make you wonder what a supply chain manager’s life might be like if we were less at the mercy of factors and actions way beyond our immediate control?
Bruce Strahan is a Partners in The Progress Group, Inc., an international supply chain and logistics consulting firm headquartered in Atlanta. He lead the Supply Chain and Manufacturing practice groups for TPG. Bruce did his graduate work at Georgia Tech, and was previously a Manager in Coopers & Lybrand’s SysteCon division. He may be reached at
770-804-9920 or bstrahan@theprogressgroup.com
|
