Sunday, 30 September 2012

Will technology reshape global supply chains?

There are many forces at work in the global supply chain which are already beginning to reshape global logistics but one which has yet to have any impact is, arguably, changes in productive technology that could undermine the prime reason behind offshoring production to far flung countries ---lower costs, particularly labour rates.

Hitherto, the main reasons forcing a rethink on global supply chains have been concerns over rising costs, both at the production level and in distribution, poor quality, prolonged time to market, wholesale intellectual property theft and natural calamities. The last of these can be disastrous in a world economy geared to JIT (just-in-time) deliveries. There are also political risks but fortunately these have not had any impact so far. They may also be augmented by environmental concerns which lead to some form of taxes because offshoring has boosted carbon emissions. Despite all these risks, global corporations have not been dissuaded from offshoring to cheap labour countries on a significant scale because the law of comparative costs is still in their favour.

That law, however, could be turned against cheap labour countries by advances in technology which will give high wage economies the edge. Already, in some respects, America is cheaper than China in the production stakes and that gap is narrowing. But that trend could be galvanised through the application of robotics that will replace many low wage menial factory tasks.

An interesting example is Rethink Robotics' Baxter robot that can learn any menial assembly line task. It, and doubtless others like it to come, can increase the productivity of US manufacturers and so help them keep business that would otherwise move overseas. Mounted on a gurney, its two arms, five cameras and sonar sensor that detects motion through 360 deg around it, and enough intelligence to learn tasks within an hour, Baxter can work safely beside humans at remarkably low cost owing in part to its low price tag of US$22,000. Based on three years of an 8-hour shift, that is the equivalent of $4 an hour, almost half the minimum wage in Britain. According to Rodney Brooks, Baxter's brainchild, "We are spending hundreds of billions of dollars doing this kind of work in China and we want companies to spend that here, in a way that lets American workers be more productive." Baxter's upgrades will also be free to enable more complex tasks like two-handed manipulation, and early next year the company will release a set of programming instructions so users can create their own tasks and attachments for the machines.

Plausible though this scenario may be, and while it could have some initial impact, it could cause more problems in the long run of a political nature. Cheap labour economies will develop their own capable robotics when they see that their cheap labour no longer makes the law of comparative costs work in their favour. Production costs are important but these can be changed as market forces dictate. What cannot be changed, however is the exposure to natural and political risks and sharp changes in fuel costs and wage rates. Given that universally applied robotics will not give any one country a competitive edge, the more likely scenario to unfold is a trend towards regional manufacturing, with many companies wanting to produce their products as close as possible to their customers. This will have manifold advantages, like minimising the natural and political risks of stretched global supply chains, enhancing the environment, and lowering distribution costs. Given China's and other Asian countries' social problems of burgeoning populations and their growing aspirations, it is to be hoped that any changes in international trade patterns will be managed skilfully to avoid major social upheaval.

Wednesday, 26 September 2012

China and Japan's chauvinism threatens global logistics

Once again the global supply chain geared to JIT (just-in-time) deliveries shows just how Asia is a high risk trade partner without a robust recovery plan to sidestep disruption to supplies for western importers. This blog has repeatedly warned of the folly from placing too many eggs in one supply chain basket. The Japanese tsunami in 2011 and the Thailand floods showed just how nature alone can cripple global supply chains. As if that were not enough we now have the political risks surrounding the disputed, uninhabited islands known as Senkaku to the Japanese and Diaoyu to the Chinese in the East China Sea. Readers should not be surprised that Asian politics is threatening the global supply chains. In my blog of April 25, 2011, headed: "Japan's earthquake must force JIT supply changes," I warned: "Nature, it should be said, is not the only threat to the supply chain. There are also significant political risks."

Japanese factories produce about 40% of the world's electronic components, and in some cases is the only source of supply for items like parts for jet engines. China's Guangdong province provides 80% of the world's basic electronic components and is the largest source of rare earths, so essential for electronic devices. This shows how vulnerable the world is to any political upheaval in this region.

Japan and China, the second and third largest economies with an estimated £218 billion trade relationship, have been a 21st century success story but that success could be seriously set back by the current dispute over typhoon-lashed, uninhabited islands.

Inflamed feelings in both China and Japan, whipped up by a jingoistic media with Government connivance, has already caused considerable economic damage. Japanese businesses in China have been ransacked and closed down. Japanese car makers in China have ceased production following calls for a Chinese boycott of their cars, leading to estimated losses of £154 million so far. The Organisation for Economic Cooperation and Development is so worried by the flare up that they believe it is making the world economy more fragile than at any time since the 2008 financial crisis.

It is difficult to discern what is really behind the flare up over five small islands. Historically, China has the stronger claim that stretches back to imperial times, long before Japan forcibly annexed the islands in 1895. Geographically, the islands are also much nearer China (about 150 miles) compared with over 600 miles to mainland Japan. There are believed to be valuable natural resources like gas but if this is the motive for militaristic passions then is should not be difficult for both governments to reach agreement on development of the islands' surrounding resources by mutual consent and share the revenues equally.

America could help here by hinting to Japan that it will not honour the US-Japan security treaty if Japan is attacked by China around the disputed islands and only come to its aid if mainland Japan is threatened. America right now needs a Pacific war entanglement like a dose of the plague. Its economy is in an unholy mess built on an appetite for unsustainable debt, fanned by rampant banking greed and military spending supporting world-wide bases and numerous military entanglements.

As always, trade is the hand-maiden of prosperity and the surest guarantor of peace. Both Asia and the world have too much tied up in trade interdependence for that to be jeopardised over a few barren rocks. And Japan, in particular, should recall the words of General MacArthur at the dawn of the Atomic Age when taking the Japanese surrender in Tokyo Bay: "It must be of the spirit if the flesh is to survive."

Sunday, 16 September 2012

Logistics skills training neglect costs billions

Logistics skills training has a poor image in the United Kingdom even though Britain ranks highly in the world league for logistics efficiency so why is an industry worth £74 billion a year employing one in twelve of the workforce regarded almost with disdain and what does it mean for the rest of the world?

In my blog: "Lousy logistics wastes billions" (May 5, 2010) I referred to the waste caused by inappropriate materials handling hardware and software in the supply chain. Globally, the annual waste undeniably runs into billions of  pounds and is typified by the wrong type of forklifts for the job, ignorance of slick warehouse management systems (WMS) with good stock forecasting programs and lack of double-deck lorries which could reduce the £25 billion a year losses caused by road congestion. And that is only a just a few of the problems. But nowhere did I mention how the right kind of logistics skills training could transform logistics efficiency even more which is so necessary to slash the waste.

At a London press conference on September 12, the Skills for Logistics (SfL), tasked by the UK Government to tackle the skills and productivity needs of employers in the logistics sector, the issue of training neglect was laid bare. Mike Jacksons, CEO of SfL, remarked that " over years training has been dire but it's improving. Too often you get people making buying decisions that are nothing like as good as they should be." As if to emphasise that, Paul Brooks, director of Unipart Logistics, added: "The operations managers are generally poor procurers of skills development. This gives a clue to why the right logistics hardware and software are not being used as much as they should be.

The logistics industry image is still perceived to be poor and so cited by SfL as one of four barriers to better development. Many, if not most, jobs are only four hours a day, three days a week, "so what we have to offer here is full time jobs," says Mr Jackson. Many jobs also involve night work or work in cold temperatures. At entry level the financial rewards are also unimpressive.

While there should be incentives to encourage promotion within all ranks it seems there is inadequate support to taking on new, logistics-savvy recruits at graduate level. These recruits might be young and 'wet behind the ears' but they are likely, through their holistic logistics training, to effect change within a company more quickly. Any such changes which improve the bottom line would mean more in the pot to share among all logistics employees and so cement their loyalty.

Just how much skills matter can be gauged by one company's experience. Gist is a sizeable UK logistics services provider employing 5,000 on 53 sites in the UK and mainland Europe. By taking logistics skills training to heart it has seen a 6% improvement in fuel consumption, 33% fall in employee accidents and a 35% cut in low grade vehicle damage. There has been a 20% fall in employer liability claims, a 22% rise in productivity, a 26% cut in absenteeism and a 36% fall in labour turnover. These savings far exceed the extra costs for training and given Britain's high position in the global logistics efficiency stakes the scope for savings elsewhere in the world is probably immense. Adequate logistics skills training is a win, win, win situation. It makes the logistics service providers more profitable, it keeps their customers' costs from rising uncomfortably fast and it helps the environment in so many ways.