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Archive for the ‘Outsourcing’ Category

It’s been a long time since I’ve written anything on supply chain contracts but a story in the Wall Street Journal caught my eye (Retailers Canceling Apparel Orders Amid Coronavirus Torments Clothes Makers, May 5). Basically it outlines how a shift in the standard contract between retailers and their Asian suppliers has come back to really bite the suppliers.

For reference, think of a retailer or brand in the west who outsources production either directly with a factory or through an agent. The factory incurs the upfront cost of sourcing materials and hiring labor in anticipation of being paid once the goods are delivered. But what happens if the market shifts between the order’s placement and delivery? Like, say, there is a pandemic and no one in North America is buying new jeans.

That’s where the shift in contracting comes in.

Letters of credit, a once-common backstop guaranteeing payment through banks, have faded away in the past decade. Under that payment system, the buyer’s bank committed to pay the supplier once the goods were shipped, ensuring factories were paid without delay or last-minute haggling.

Even in cases of force majeure—when retailers say they can’t pay owing to circumstances beyond their control—banks would generally still be obligated to pay suppliers if the goods had shipped, said Sonja Chapman, a professor of international trade at the Fashion Institute of Technology and longtime apparel-industry executive.

Retailers have moved away from letters of credit, opting instead for an open-account system—essentially an honor system—where factories trust retailers to pay after shipment. Factory owners in Bangladesh said they accepted the shift because they worried that if they didn’t go along, a competitor from India or Latin America would. They also are reluctant to speak up or take legal action because they don’t want to alienate buyers.

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What should modern manufacturing look like?

There’s a lot of ways of thinking about that but I think that few would argue that information should be exchanged digitally. In a world in which products are designed and optimized in a computer, it is hard to see why diagrams and blueprints should  have to be printed out. Except as Marketplace reports, not everyone is necessarily ready for a digital world (Legacy equipment still hinders digital manufacturing, Jan 28).

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When a firm makes something, should it also take responsibility for delivering the product? For many firms, the answer is a firm”no”. They happily hand over the logistic of schlepping products to some third party. Most firms are happy to let someone else own trucks and recruit drivers. That’s what make the story of Ashley Furniture so interesting (A Radical Supply Chain Idea: Own Your Trucking Operation, Apr 29, Wall Street Journal).

Ashley Furniture Industries Inc., the largest U.S. maker and retailer of furniture, has resisted that trend. It owns and operates about 800 trucks and delivers the vast bulk of its own products from factories to stores. “We think it is a core competency,” says Todd Wanek, chief executive of the family-owned company.

Ashley employs about 3,000 people in transport and warehouse functions in the U.S., nearly a quarter of its U.S. head count. Its distribution centers feature racks specially designed to speed loading, and its managers arrange for trucks returning after they deliver their furniture to carry loads for other companies for a fee. Its drivers, dubbed Ashley Ambassadors, are also charged with building customer relations.

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I have a sweet tooth. I am rarely too full to pass on dessert. However, an article in Washingtonian magazine suggests that restaurants (at least those in metro DC) may inadvertently be saving people like me from ourselves by offering less attractive options for dessert or even foregoing offering dessert all together (Why DC Restaurants No Longer Care About Desserts, Feb 4). The interesting part of this is that the retreat from dessert is largely driven by economic and operational concerns.

In the post-crash economy, pastry chefs are no longer seen as essential employees but as pricey appendages.

“It’s not just saving the salary,” one restaurant owner told me. “It’s saving the space, too. To have a good pastry program, you need a designated area of the kitchen, you need a place to store the ingredients. The 10,000-square-foot restaurant has become the 7,000-square-foot restaurant. Everything’s smaller now. There isn’t the space.”

More and more, the task falls to chefs and line cooks who, lacking any background in baking, have contrived to fill their menus with simple, quick-fix solutions. Puddings, custards, panna cotta (an Italian term for what is essentially Jell-O made with cream) don’t require a lot of effort or expense; all can be made in the morning and stashed in the walk-in refrigerator.

Some restaurants have given up entirely. “More restaurants than you would think” are outsourcing their sweets to independent bakers, says Mark Bucher, who owns Medium Rare, with locations in Cleveland Park and Barracks Row. Bucher’s is among them. “You give them your recipes and they’ll make them for you. That way you can still say that they’re your desserts.”

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Here is an interesting factoid for you: 24% of all the vehicles manufactured right now are built on just ten platforms. What’s more, by the end of the decade that number is expected to grow to 30%. The number comes from an Automotive News article that looks at some of the consequences of the trend (With the push for standard parts, quality is key, Aug 6).

First, why automakers are trying to move in this direction is clear. Being able to build multiple model off one basic platform saves a ton of money in product development as well as tooling and build manufacturing facilities. Further, they benefit from a bit of risk pooling; if one model is not selling particularly well, that may be offset by another that can be built at the same plant. Thus, even if a model slumps, all that expensive capacity is till being used. (See this post from last fall on how Ford is cutting its number of platforms from 15 to 9.) Globalization also plays a part in this. What kinds of vehicles sell well might vary across different continents, but if European, Asian and North American models can all be built on the same platforms, manufacturers with a global footprint can be ever more cost competitive.

But what about suppliers? With purchased components making up a significant chunk of the cost of a vehicle, car makers would like standardization there. In a perfect world, you would have the same break system on every model built on a platform, but that brings challenges.

“The requirement that we face is clearly to develop products from the outset in such a way that they can be used in all the platform derivatives without the expense of making changes,” said Sabine Woytowicz, regional quality director at Valeo in Germany.

But with mass standardization, a part with a quality problem can now be supplied to millions of vehicles. That puts a premium on quality. …

Martin Thier, director of corporate quality management at the Mahle Group, said: “When obtaining an order, we check its feasibility for both product development and manufacturing even more closely.”

It comes down to “knowing precisely what you do, what you can do and how good you are at it.”

For example, he said, there is now a more intense interest in investigating how an inconsequential error in one part would produce an effect in a different component.

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When you thing of the auto industry, you likely focus on big players like Ford, General Motors, Toyota and Mercedes. Names like Magna International and Denso may not mean a whole lot to you. But you should know those names. They likely make more of your car than you realize. “Mega suppliers” like Magna and Denso have been growing for years and in the process have been sifting the balance of power in the industry (Age of mega supplier heralds danger for carmakers, Financial Times, May 18).

There are now 16 major car manufacturers that sell more than 1m vehicles a year. But those cars are built from parts supplied by just 10 major component makers – meaning that under the individually styled bodywork, cars are sharing more parts.

Whether a driver chooses to buy a BMW, an Audi or a Mercedes-Benz five-door saloon, the chances are high that the anti-lock brakes will be built by Continental, the battery will come from Johnson Controls, and Denso will have provided the exhaust

Bosch, the world’s largest automotive supplier by revenue, reckons that at least one of its parts is built into almost every new car sold anywhere in the world – regardless of brand, market, price point or geography.

The article goes on to note that the top ten suppliers capture 60% of the revenue generated by the top 100 suppliers.

Given this situation, two questions seem relevant. First, how did automakers find themselves in this situation? Second, what are the implications for how the industry functions? (more…)

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