Cross Border Journal

Recovery in Global Trade Rests on Solid Supply Chain Architectures

Anyone who has worked with across borders will tell you how difficult it can be to maintain supplier and customer relationships from one end of the supply chain to the other. The resources required to do so are often taken for granted, even in a growing economic environment. But in a recession, these resources become even more constrained as many businesses recoil and dig in for a tough stretch of lower revenues, tighter or non-existent margins, and over-worked staff.

As consumers who overspent the past few years restructure their lives and finances, so are the businesses and organizations that benefited from that spending restructuring. Most businesess, depending on their individual situation, will have already reviewed, and made decisions about, how to focus and deploy their supply chain architecture over the next few months and even years based on the sudden changes in the global economy since the incredible downturn experienced just over one year ago.

When reviewing supply chain architectures that stretch across borders, there are a variety of measures that businesses, large and small, will take to survive:

• exit a particular market, or number of markets, entirely
• re-allocate and re-focus resources from one part of a region to another
• maintain existing architecture, but at a reduced scale

As someone who works in the highly competitive supply chain software industry, I have seen the exact mix above in both competitors and internally. For those of us who work as part of a company's supply chain overseas, the impact is felt immediately. The question is: are these decisions part of a larger strategy or simply non-strategic reactions that executives feel are required to avert disaster? The strongest companies will ensure that their actions fit within a well-thought strategy rather than fitting a strategy to their actions in retrospect.

The key to a solid recovery in global trade overall will be in maintaining and strengthening the trade links established by businesses, organizations and governments over the past decade as the global economy surged. These three entities should understand this in taking stock of the global supply chain architecture in place before making strategic decisions.

Cross-border supply chain links undoubtedly require the most sophisticated operations and resources towards building a solid foundation for future growth and economic benefit. Dissolving or endangering links with various markets may result in short-term benefits but actually reveals inherent weaknesses in strategy and policy that existed when the global economy was strong.

Below I review the six supply chain architectures and emphasize which ones are key to maintaining important supply chain strategies and programs across borders:

Human Architecture: People on the ground, on the seas, and in the air drive supply chains that extend across borders. Depending on which aspect of the supply chain is being managed, their role and importance can vary; but they are the glue that holds your supply chain together as it traverses borders into differing cultural, economic, security and political environments. As a result, a business, organization, or government must understand that staff cuts, if necessary, should occur across an extended supply chain, but should never "break" a chain in the sense that those who provide the glue between HQ and a market are lost, even if it means repatriating staff from overseas or overland.

When outsourcing is highly utilized, or viewed as a potential alternative to in-house human resources, in cross-border supply chains, the challenge requires a more sophisticated response in ensuring that your partners adopt an approach similar to what I described above. This goes into the strength of your relational architecture, which is discussed further down below.

Physical Architecture: Depending on your industry, the investment in this architecture can vary widely and it may be either strategic--value-adding R&D type facilities, logistics hubs, sales offices, etc--or non-strategic--outsourced, low-end manufacturing or back-office services. The less interchangeable your physical investments are with other locations within and outside a particular market, the more likely it has strategic value within an organization. Exiting out of an investment that is of obvious strategic value should not be done lightly and is best executed as part of a well-coordinated regional and possibly global strategy that leaves relationships and reputation with suppliers and customers largely un-damaged.

Financial Architecture: When the Global Financial Crisis hit economies around the world, those companies who had invested in nimble, responsive supply chains cut back considerably on the goods and services feeding their worst hit markets. Bob Ferrari has written extensively on this scale-back, "The Great Backflush," at his Supply Chain Matters blog. This reduced a large amount of working capital in supply chains around the world, and as cost-cutting mode swept into entire industries, a parallel increase in the risk of capital lending clouded banks everywhere. The resulting fallout has been noticed ever since in the markets and regions where businesses, organizations and governments were weakest in terms of the capabilities in securing and maintaining supply chain investments. Proper growth strategies combined with non-damaging cost-cutting tactics will be the touchstone of companies that rebound, remain resilient and position themselves well for future competitiveness.

Informational Architecture: If a company didn't have the proper supply chain visibility prior to responding to the Global Financial Crisis, they will likely have been burned enough to realize the importance of investing in the right technology, such as business intelligence and supply chain execution systems, or in asking their supply chain partners to do so. With reduced budgets for capital expenditures, supply chain managers will need to place even more scrutiny on their list of projects and reconsider the value added to their supply chain's capabilities in providing visibility and greater forecasting and responsiveness to changes in various operating environments.

Relational Architecture: One of the truer tests of a high-performing supply chain is in the strength and resilience of its supply chain relationships in the face of adversity and challenge. Depending on the importance of the goods and services provided, supply chain partners are at brought in as close collaborators at one extreme and kept to a distant, transaction-based relationship at another extreme. Obviously, in major crises, any new or modified strategy should seek to direct the most energy in maintaining and leveraging the former versus the latter, as the latter is likely more interchangeable with potential partners elsewhere. Burning bridges with partners in strategic positions in a particular market or region could unnecessarily limit options in the future when a crisis has well passed.

Innovation Architecture: Regardless of the economic challenges and uncertainties at hand, they are never an excuse to drop the activities that drive and produce innovation with an organization. If anything, such challenges highlight the need for even more investment in the resources and tools to generate new and innovative practices and solutions to the ever changing list of problems faced by an organization as part of the global economy. As with investments in technology, supply chain managers must be adept in illustrating the expected, tangible value from an investment in research and development programs.

Recent Trade News and Commentary

Recent news suggests that the global, private economy, in general, is still in the mode of reducing costs and doing more with less. Based on data related to the movement of global trade, there is little evidence that significant growth will occur with a broad base in the near future. There will always be pockets of growth in various regions or markets, but likely with uncertainty clouding the sustainability of such growth.

In the article "Rough Seas Slow to Calm for Container Shippers," the Wall Street Journal provides some numbers around the current state of ocean shipping, and by extension global trade:

"Since the second half of 2008, the shipping industry has experienced a spectacular downturn as charter rates collapsed alongside the rest of the global economy. Container-shipping rates even dropped to zero in January on the Asia-to-Europe route as brokers waived fees and charged only for fuel costs...

"Even though there are signs trade is picking up, depressed ship prices and relatively low rates are likely to prevent container-shipping companies from feeling the full effects of the recovery. "Not only does the industry have to maintain its services, it has to make payments to the bank, and at the same time there are new shipbuilding commitments which have to be financed and require even more capital to be injected by investors," said Theodore Petropoulos, managing director of Petrofin, a financial-services company specializing in the industry.

"While shipping companies that transport raw commodities saw rates rebound in the first half of 2009 as a result of demand from China, containers filled with manufactured goods experienced no such reprieve...Mr. Petropoulos said that in addition to cash-flow problems caused by the collapse in demand for services, container-shipping companies have experienced drops in the values of their ships."

Reduced revenue, reduced value in assets, increased strain on margin, and limited credit options make for an ugly view of balance sheets.

In a blog post also in the Wall Street Journal, takes a look at different regions of the world and asks, "Trade Turnaround: Can it Last?" First stop is Germany:

In Germany, particularly reliant on exports, there is widespread concern among companies that the emerging recovery is dependent on government economic stimulus policies that are due to run out next year in many countries. That could mean the export recovery slows or stagnates. Data out Friday showed German exports fractionally down from a strong July, but other indicators including new foreign orders point to rising exports in September and beyond, says Andreas Rees, economist at Unicredit in Munich. "German companies lost an awful lot of exports, but they’re steadily making up the lost ground," says Mr. Rees. However, he says: "It’s almost inevitable that we’ll have a setback at some point in 2010."

Economists point to some positive data in the lack of demand that has prevailed so far in the leading market regions of Europe, Japan and U.S.:

"...for a genuine trade recovery to happen, economists say a robust renewal in trade will have to come from Europe, the U.S. and Japan, whose economies together make up much of the world’s demand for goods.  An analysis of trade data by Goldman Sachs found that Taiwan in recent months has seen increased month-on-month demand for its goods — especially semiconductors — from Europe and the U.S.  September Taiwan exports to Europe were up 6.8%, seasonally adjusted, the fourth month in a row. Exports to the U.S. was up 6.9% after a 2.2% drop in August."

But others remain uncovinced:

"Some analysts are skeptical that the recovery in trade will be sustainable once businesses restock depleted inventories and the oomph of fiscal and monetary stimulus fades. Most investors will first be shocked by the sharp pick-up in Chinese exports heading later into this year and early next year, but then surprised by how quick the momentum will disappear,” Vincent Chan, head of research for China at Credit Suisse wrote in a recent note."

My belief is that once consumers and businesses retrench and feel comfortable in their financial position and also operational position, they will begin to make investments beyond simply the extent of their daily needs. But I just have the sense that, over the next 2-3 years, most will remain conservative relative to the previous ten years of spending decisions, and it is a mistake for governments to attempt to implement spending-oriented stimulus policies that aim to replace the drop in private sector spending, rather than help lay a strong foundation for future growth. Steve DeAngelis, at the Enterprise Resilience Management blog, touches on the problems associated with government policies that are implemented with little knowledge of how sophisticated and integrated cross-border supply chains have become in today's global economy.

At the Panjiva Blog, which tracks global trade trends, the most recent data suggests that trade flows into the U.S. have plateaued versus the growth earlier in the year. At the time, it is likely that businesses were re-stocking after supply chain inventories were quickly reduced in response to equally precipitous drops in demand. The Panjiva team comments on the latest data:

"The word from Panjiva’s research team: global trade activity declined in September.  Specifically, from August to September, there was a 5% decline in the number of global manufacturers shipping to the U.S. market. Similarly, there was a 4% decline in the number of U.S. companies receiving waterborne shipments from global manufacturers.

These declines are the steepest we’ve seen since February, when global trade hit bottom, and would seem to confirm that American businesses have modest expectations for the coming holiday shopping season.

Pessimists will take note that it was last year’s August-September decline that marked the beginning of global trade’s six-month decline.  However, we probably won’t see a repeat of last year’s global trade free-fall unless we get another macro shock to the financial system.

As mentioned above, I believe global supply chains are much more efficient and responsive than ever before, especially with the businesses and organizations that are at the top of each industry. As the economy continually grew over the past few years, there were few real tests across the global economy to see just how responsive supply chains would be under the stress of a dramatic downturn. I would dare to say they have in general performed pretty well, which is why there is a considerable number of companies in the S&P 500 able to report profits and drive stock prices upwards while the overall economy remains weak (more agile supply chains means the ability to quickly cut costs in the face of falling revenues).

Unfortunately, this is short-lived in the sense that cost cutting will provide diminishing returns before eventually damaging a business or organization in fundamental ways. But the overall effect has resulted in a significant number of lost jobs over a shorter time frame and those businesses and employees unable to respond just as quickly will be burnt badly and likely to face closure or unemployment until a more sustained level of growth is achieved over a longer period. As a result, companies inexperienced in managing the downward slope of the Global Financial Crisis will need to ensure that in making cuts they don't "cut in to the bone."

Bob Ferrari discusses this point in a post centered on supply chain professionals and companies trying to do more with less and I can't agree more with his arguments. Understanding and investing in a solid supply chain human architecture should be the first priority of any business or organization at this time, and will result in key advantages as economies around the world and across borders recover.

Two Tales of Chinese Investment Overseas

As Chinese businesses become increasingly assertive in evaluating and executing investments overseas, they are learning lessons critical to managing supply chains across borders. These lessons highlight not only the existing weaknesses of Chinese supply chains but also their growing strengths, and serve to illustrate the very real need for China's supply chain managers to understand how global trade, security, regulation, and development intersect in their areas of operations.

Two recent articles in the Wall Street Journal and New York Times provide excellent examples of this dynamic, both focused on aspects of China's intense effort to invest in and develop commodity resources overseas. The first, by the WSJ's Alex Wilson, is titled "As Commodity Prices Rebound, Australia Limits Foreign Investors" and reports on Australia's effort to slow the pace of Chinese investment in Australian companies in the mining industry.

Chinese businesses focused on the import and development of the various commodities that feed into its high-growth, manufacturing engine have taken advantage of the Global Financial Crisis to execute deals with overseas suppliers in multiple countries. They have done so by making wholesale acquisitions or by injecting significant amounts of cash in companies that were short of revenue and hungry for sources of capital to simply remain in business, or continue with the capital-intensive investments so common in the mining industry. This has been a boon for Australia's mining-rich economy, sitting in China's immediate backyard.

As the WSJ article mentions, Australia's quick rebound in the resources sector has resulted in a greater confidence within the mining industry and government alike that they can take a stronger stance on China's increasing appetite for investment with reduced risk to the economy:

"A strong rebound in commodity prices and thawing debt markets this year have led to a recovery in the Australian resources sector, with fewer distressed miners seeking foreign cash to shore up their balance sheets or to fund projects.

"This has emboldened Australian regulators to take a tougher stance against foreign investment that has been entering the country.

"Australia's resources industry needs foreign investment to develop new projects, however, and the government is keen not to shun interest. The government has been able to firmly enforce its preference for foreign investors to take minority stakes rather than opt for a takeover."

The article goes on to show how Chinese investors have initially reacted to the increased scrutiny by the Australia government on various deals:

"Market participants say this has been the government message behind the scenes for some time, and Chinese investors now seem to have acknowledged it by tailoring deals over the past year to meet the government's preference for stakes in Australian miners to under 50%.

"But recently China pitched a number of deals above the 50% mark, and one investment banker said FIRB's comments may be Australia's attempt to send a message to China that it won't approve any more of these deals.

""They have been saying it privately to the Chinese and the Chinese keep bringing [deals that require more than a 50% stake], so maybe they have decided now to make it public to try to convince them not to do it," said the banker.

"For Chinese investors, the FIRB's comments provide some clarity on a foreign-investment-review process that has been criticized by some for its uncertainty and lack of transparency."

I believe the above hints at the sophistication Chinese business investors are developing in making overseas investments, probing markets for the best deal until regulation becomes additionally restrictive, and then looking for the best deals within the new legal framework. The absence of rash decisions or a highly reactive backlash provides a sense of how integrated and sensitive Chinese supply chains have become in the globalized economy. This will only serve to drive further progress in supply chain relations and innovation. 

The second article, by Timothy Williams, is titled "China Oil Deal is New Source of Strife Among Iraqis" and reports on China's struggle in moving forward with its Iraqi oil field development while maintaining peace with local Iraqi communities:

"When China’s biggest oil company signed the first post-invasion oil field development contract in Iraq last year, the deal was seen as a test of Iraq’s willingness to open an industry that had previously prohibited foreign investment.

"One year later, the China National Petroleum Corporation has struck oil at the Ahdab field in Wasit Province, southeast of Baghdad. And while the relationship between the company and the Iraqi government has gone smoothly, the presence of a foreign company with vast resources drilling for oil in this poor, rural corner of Iraq has awakened a wave of discontent here.

""We get nothing directly from the Chinese company, and we are suffering," said Mahmoud Abdul Ridha, head of the Wasit provincial council, whose budget has been cut in half by Baghdad in the past year because of lower international oil prices. "There is an unemployment crisis. We need roads, schools, water treatment plants. We need everything.""

This experience for China is not new; it has been facing similar reaction in Africa, as often highlighted by Dr. Tom Barnett, and who's comments brought me to this article. Whereas China is operating in a mature market with well established rules in Australia, Iraq's market is in the very early stages of developing rules at a national and local level that help it deal with foreign direct investment by countries and businesses with varying degrees of experience. China may be able to keep much to itself in totalitarian regimes such as Iran and Sudan, but it as an Iraqi puts it below, investing in a young democracy has its implications:

"The result has been a local-rights movement — extraordinary in a country where political dissent has historically carried the risk of death — that in the past few months has begun demanding that at least $1 of each barrel of oil produced at the Ahdab field be used to improve access to clean water, health services, schools, paved roads and other needs in the province, which is among Iraq’s poorest.

""No one would have dared to ask for such a thing during Saddam’s regime; if he did, he would definitely be executed," said Ghassan Ali, a 43-year-old farmer who lives near the oil field. "But now we are a democratic country, so we have the right to ask for our rights like any other province in Iraq.""

"The basis of the complaints here is that, aside from the hiring of a few hundred residents as laborers and security guards at salaries of less than $600 a month, the Ahdab field — a roughly $3 billion development project — has provided no local benefit."

The response by the Chinese is representative of how its understanding of global supply chain management remains immature across industries and markets, suffering a lack of holistic thinking and ability to see the direct links between investment success and the success of surrounding communities:

"China National Petroleum says it needs relatively few workers because it is still in the exploration phase of its 23-year project at the Ahdab field. Oil production is not scheduled to begin for two and a half years.

"Now, the field’s 100 or so Chinese workers rarely leave their spartan compound for fear of being kidnapped, the company said, even though the Iraqi government recently deployed extra security to the area.

"More trouble could be on the way next spring when 1,000 Chinese workers arrive to build a central processing plant.

"Mr. Han said hiring Iraqis to do the job was out of the question. “We don’t have enough time to train local people to do that work," he said."

With this perspective, the Chinese make their work at the nexus of cross border trade unnecessarily difficult in the short-term and with increasingly negative effects downstream in the long-term as local tension is brushed aside and ignored.

Over time, Chinese businesses will internalize lessons learned from one market, deploy them where applicable in another, and develop the skills and talent required to tailor their investment decisions and execution for a wide range of operational environments. Cross border professionals need to ensure that the natural flow of globalization and corresponding rule sets will gradually work to hold the Chinese and other nations accountable for their actions across borders and in communities like those of the miners in Australia and farmers in Iraq. 

Nomura Struggles to Absorb the Remnants of Lehman Japan

Prior to beginning its descent from being a top, global investment bank and turning into a casualty of the global financial crisis, Lehman Brothers Japan was a mainstay in the top floors of Mori Tower (left), set in the heart of Roppongi Hills. My wife interned with them from June to August of 2007 and a good friend of mine worked with the company until shortly thereafter. Having met a few other interns at that time, it was noticeable that Lehman Japan gladly brought in people who were not only from overseas, but who also did not speak fluent Japanese. I eventually learned that around 50% of the Lehman Japan office staff were non-Japanese, often working as my wife did on projects affecting concerns outside of Japan. Thus, the company forged a very foreign face in a country where many firms lean towards more localization in order to adapt to Japan’s various idiosyncrasies.

In this sense, Lehman Japan acted as more of an investment banking hub for the Asia-Pacific region, and beyond. This structure and operating environment is in stark contrast to a firm such as Nomura, which is traditionally much more domestically focused, both from a business accounts perspective and cultural perspective. As a result, it is no surprise that Nomura has had considerable struggles in absorbing the remnants of Lehman Japan that it acquired last September—they were, at the time of the acquisition by Nomura, like oil and water. Reading the story of these struggles in the post-acquisition integration of the two firms reminds me of my own experience working for a Japanese company that had no previous experience integrating an experienced foreigner into its operations. As the Wall Street Journal article linked above states, “…cross-border acquisitions are difficult to manage, especially in finance, where the key assets are people.”

With my previous employer, a Japanese warehousing and transportation provider, the process in bringing me on board and the resulting situation followed a similar path:

• Higher level Japanese execs more interested in strategy and with broader experience, advocate a change to diversify the business
• At the operational level, the new employees (in this case, Lehman Japan employees) are run through the same training and on-boarding process—which in Japan can often be implicit
• Mid-level managers take one of two tracks—force the employee to fit to the Japanese model of behaviour or isolate the employee from the existing organizational chart as much as possible through stand-alone activities and tasks
• The employees, in reaction, take one of two tracks—challenge and reject the Japanese standard or accept it completely
• Eventually the employee either leaves or defers to the Japanese system of hierarchy and emphasis on seniority and collective harmony

I often sensed the same frustrations as noted in the WSJ article—slower approval processes, preference for incremental changes, and reluctance to trust experience over internal seniority in the case of both myself and interim Japanese middle managers hired from outside the company. I remember one week testing a hypothesis that if I didn’t say anything to my managers for even 2-3 days, they would happily go about their business without asking anything of me. This turned out to be correct.

In the end, I left the company only after about 1.5 years—and I expect many Lehman Japan employees to leave Nomura during the same time period for similar reasons. Like with my previous company, the integration of Lehman Japan will be a great experience from which Nomura can learn many lessons, but only if they choose to do so rather than simply dismiss those employees who leave as “not right” or a “poor fit” for Nomura.  As Nomura expands further in the U.S. and other regions, these lessons will be a key to its growth and the diversification of its business away from the confines of Japan.

When An Industry Virtually Disappears From Beneath Your Feet

On September 29th, I wrote about the difference between career sustainability and career resilience. Essentially, I described sustainability as strength in one's field combined with a solid understanding of subjects in that field's immediate periphery--think production engineer and quality control engineer.

With the recent financial crisis, the field of mortgage-backed security (MBS) trading and investment (as an aspect of structered finance) has virtually disappeared relative to the height it once attained. Where some other investment fields may have now considerably slowed down, we have only to look at Lehman Brothers to illustrate how quickly the MBS field unraveled. As a result, most people's career paths in this field became unsustainable and they had to be moved to other departments or let go from companies completely. Now these professionals will be tested for their resilience in how they move on and survive.

In "Tired, Hungry and Yearning for Jobs", the China Solved Blog has recently heard more from these "refugees of Wall Street" inquiring about China and illustrates the limits of their resilience:

"This is the beginning of a very one-sided love affair, if you ask me. I don’t know what Wall St. refugees think is waiting for them in China — particularly the ones who speak fluent Trader-ese and no Chinese. Unless they are willing to work 100% commission cold-calling cynical expat managers about offshore investing miracles, there are going to be few takers for their highly specialized talents. Aren’t the Chinese interested in learning about the securities business? Yes and no. Wall Street-style finance wasn’t too highly respected in China last year — and now it’s akin to a war crime. Chinese bankers aren’t chomping at the bit to learn how to repeat western mistakes.

"Lots of these people will never get past the planning stages of their China adventure. Others will decide early that they won’t be able to transfer their skills. Many of the younger ones, disenchanted with their old industry or willing to take the time to build up their China CV, will follow in the footsteps of those that came before them. Many will end up teaching English and studying Chinese. The lucky ones will get to sit in the same room with professionals in their field and will doubtlessly try to parlay their new ‘guanxi’ connections into lucrative careers. Most will be teaching kids the finer points of grammar and pronunciation."

It is my belief that those in the financial industry who have had what I termed a "Level 3" approach to their careers will be most successful:

Level 3 people are characterized by higher degrees of adaptability--they learn quicker and are comfortable working with many different subjects. Behind this is the ability to quickly identify patterns, relationships, and general commonalities across multiple fields and concepts. Because of this, they work well across borders, across cultures, across languages, etc.--they are cross-functional, horizontal thinkers that can dig deeper into a subject when required, and within a globalized context.

As the China Solved Blog illustrates, making the shift to this Level 3 approach may mean working outside of your Level 2 comfort zone by breaking your mold and taking action towards doing something completely new and different from your previous profession--such as filling a role available in an unfamiliar field or environment, perhaps in a different country--until more suitable opportunities can be found or created. The more today's workforces are exposed to globalization and its competitive and innovative forces, the more common this dynamic will become. The current financial crisis is a signal to build your resilience rather than retreat into seeking the protections of the past.

Supply Chain Technology Investments--Is now the time to hold back?

From talking with business friends and reading articles online, many companies are already starting to second-guess investment decisions on the table, or put these investments on hold completely, due to market uncertainty and economic forecasts that are becoming increasingly pessimistic by the day.

More specifically, technology investments that include supply chain technology will be impacted. Companies may postpone an anticipated upgrade, elect to execute temporary work-arounds, pull RFQs or RFPs from the market, or even cut-off existing projects until a later date. Of course, these are mostly short-term, reactionary measures designed to allow a wait-and-see approach during a time of extreme volatility. But these actions may be required if companies improperly calculated and assessed market risk while building up their businesses the past few years.

In July, Bob at Supply Chain Matters wrote a post titled, "Investing in Supply Chain Technology during Uncertain Times", and, while working off of a report from SC Digest, comments on three approaches companies should follow:

• Look for initiatives that can deliver a short-term ROI, and self-fund later stages of the project.   I have been long been counseling clients to do this very thing, regardless of the economic environment. A self-funding project is the easiest way to prove to senior management that the technology has value, and that mega-dollar spending is not the end result.
• Look beyond the immediate challenges into the big-picture, and ascertain how the pieces will really fit together to deliver total process capability.  In today’s vastly more complex world of supply chain complexity and risk, the big-picture for most companies should focus on highly refined sensing and response processes.  Manufacturers and retailers must be able to ascertain what exceptions are occurring in the supply chain at any given point in time, and couple tools with supply chain wide capabilities to rapidly respond and resolve unplanned events or exceptions.
• Don’t start with newer, more risky technology investments but rather look for proven technology that has stood the test of reliability, value, and scalability.  Amen to this recommendation! I would further add that this is not a blanket condemnation of a stand alone or best-of-breed application, since there are certain best-of-breed applications that have clearly proven themselves in reliability, scalability and value. The same could be stated for certain supply chain applications offered by the major ERP players.  The test is reliability and consistency of value.

I think all of the above are valid points. What isn't mentioned is that all of these suggestions have positive implications for long-term as well as short-term strategy and it is that balance that companies should be striving for so that they are prepared to take advantage of the next significant growth period in the economy.

Continuing with this theme, the TEC Blog asks "Should you cut back or freeze IT spending in a recession?" While they state the obvious in that the answer depends on each comany's own situation, they provide some good points as to why continuing to invest during a recession is an advantage:

• By investing in software solutions like business intelligence (BI), and business performance management (BPM), that allow you to make better, faster business decisions and squeeze more profit from your existing operations, you can get a leg up on your competitors at a time when they’re cutting back on their own IT development.
• By deploying collaboration and remote meeting solutions, you can reduce travel costs without having to sacrifice creativity and team synergy.
• By opting for hosted solutions and cloud computing with their vastly lower capital investment requirements, you can capitalize on cost-effective ways of helping your business become more efficient, while positioning it to emerge stronger and more profitable when the good economic times return.
• You can cut a better deal with software vendors in a recession, a time when they’re especially hungry for your business.
• With many companies—some undoubtedly your competitors—letting go of IT staff, there’s an opportunity to scoop up some excellent talent that simply wouldn’t be available if the economy was good. And probably at a discount, at that.

But what can happen if you cut or freeze key technology investments? The TEC Blog cites CIO with this:

"Just this past spring cio.com published their five reasons not to cut back on IT spending in a recession. The bottom line was pretty clear: under-investing in IT can lead to poor customer service, lost business, and a lack of productivity—all things you would never want to see happen to your business (but, I imagine, you wouldn’t mind seeing happen to your competitors, so who you would you rather see cut back on IT spending, you or them?)."

Notice how a lot of what is said above relates to your company's positioning in the marketplace relative to competitors. As I have discussed previously, this is the external business intelligence challenge facing supply chain management--not just know what is happening in your supply chain but also knowing what your competitors are doing about their supply chains.

Of course, we aren't just speculating that companies will be making decisions to drop or hold IT investments--the performance of supply chain technology vendors is already indicating that the market is softening. In the article "Logistics software firms hit by world economic woes", America Shipper Online writes:

"The downward spiral of the world economic situation is slowing the purchase of logistics software leading to disappointing performances and sluggish forecasts for several leading software manufacturers.

"Silicon Valley’s Oracle saw a major slide in its stock earlier this week, following warnings from analysts to expect a global downturn in software and hardware sales.

"Officials from Germany-based software giant SAP cited the evolving world financial crises as the reason for lower than anticipated preliminary third quarter results. "The market developments of the past several weeks have been dramatic and worrying to many businesses. These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter," said Henning Kagermann, SAP co-chief executive officer."

The measures SAP is now taking are probably first-line-of-action type moves that most companies will do or at least consider as immediately achievable:

"SAP told employees Thursday that it was implementing cost-cutting programs, including a hiring freeze, according to an internal e-mail obtained by German newspaper Rhein-Neckar-Zeitung. Additional steps, including cuts in travel expenses, will also be implemented. The e-mail indicated the moves were precautionary, in light of the worsening world financial situation."

The impact will be sector-wide:

"The SAP news follows closely on reports of weaker than expected financial results from U.S. software firm Manhattan Associates and U.K.-based Kewill Systems. Atlanta-based Manhattan Associates said the firm’s second quarter consolidated revenue increased 1 percent to $90.5 million, compared to the same period last year. While services revenue grew by 12 percent to $62.3 million, the firm’s license revenue dropped 17 percent to $19.4 million. Kewill, in announcing its 2007-2008 fiscal year results, said the firm would see "a substantially weaker financial performance in the Americas than in Europe." Kewill's overall revenue increased to $88.1 million, or 22 percent, compared with 2006-2007. While European revenue grew 32 percent to $51.7 million, the firm’s Americas revenue saw a smaller 6 percent increase to $32.5 million."

In this environment competition for open contracts will increase and so, as I have discussed previously, knowing your customer and your customer's competitive landscape better than the competition while executing creative and savvy sales techniques will likely win the day. At the end of the day, internal cost-cutting won't improve your pipeline.

Supply Chain Solutions Matter in Upturns and Downturns (Updated)

Whether a company is going through a downturn due to a sluggish economy or through an upturn due to a growing economy, solutions will always be required to attain or sustain a high performance supply chain. Because a company's pain points may differ between a downturn and an upturn, it is essential that a supply chain solutions provider understand within which context they are approaching a customer and what pain points to focus on.

Because of the current uncertainties haunting the US economy, and by extension the global economy, most executives will be focused now on how to make adjustments while facing a downturn and will apply more scrutiny to how spend dollars are distributed. Supply chain project managers within the company must be in synch with executive decisions or, even better, try to influence them for the better of the firm. In a post from June, the Technology Evaluation Centers Blog described ways for project managers to be proactive in this regard:

"The need for a project manager (PM) to be "business savvy", especially during a recession, is critical.  The PM will have to become a crusader, a salesperson, and an influencer to fight for projects that enhance productivity and quality, or that shorten cycle times, or that have a shorter project life cycle to generate return on investment (ROI). When the economic cycle turns upward again—as it inevitably does—having invested in the improvement of quality and cycle time, within both manufacturing and product distribution, may result in a higher market share for a product. Once management has examined business processes as a way to bring about improvements, other areas of an organization’s infrastructure can be open for examination as well. The methodology that supports project management can be used in areas such as product design, by examining all aspects of a product’s features and benefits. This may result in improvements to product features unlike any of the competition’s product offerings, thus generating higher revenues for the organization."

Although the blog focuses on goods production, many of the same principles can be applied to services delivery. Executives will ask, "What is the bottom line I can bring the business down to without jeopardizing quality and innovation?" The key is for the firm to think strategically when it cuts back, as all resources, including human resources, are not equal. This should be part of an overall lean strategy that is implemented during good and bad times. My previous company, Denso, was very good at estimating the appropriate ratio of temporary/full-time works in its labor force. In slower periods, it could cut back on temporary workers and shift a percentage of full-time office workers to the production floor, or vice versa. The idea is that a lean strategy is not created and implemented when a downturn occurs, but continuously tweaked and prepared for during upturns as a way of reducing overall risk.

UPDATE: The WSJ has a nice article on Toyota's challenges in this current downturn and how it is handling its workforce being idled by lower production volumes. Titled "Toyota Keeps Idled Workers Busy Honing Their Skills", the article illustrates with specific examples what I was describing above in Denso's workforce management strategy:

"At GM, Ford and Chrysler, workers effectively are paid for not working when their assembly lines are idle, under terms of union contracts. If a plant is shut temporarily, as some were this summer, workers receive most of their pay but don't have to show up. A few attend company-paid classes to learn new assembly skills.

"At its Princeton plant, by contrast, Toyota is using the down time to hone its workers' quality-control and productivity skills. The company has pledged never to lay off any of its full-time employees, who are nonunion."

When I was at Denso, it also made the same pledge of never laying off any of its full-time employees. If the ratio of full-time and part-time employees is managed well, companies can keep the number of idle full-time employees to a minimum during slower economic cycles. But with the current dramatic downturn as the backdrop, the degree of idle workers is definitely going to be more than estimated. Both Toyota and Toyota employees reap the benefits to this philosophy:

"Jim Lentz, president of Toyota Motor Sales, the company's U.S. sales unit, said the company believes keeping employees on the payroll and using the time to improve their capabilities is the best move in the long run. "It would have been crazy for us to lose people for 90 days and [then] to rehire and retrain people and hope that we have a smooth ramp-up coming back in," Mr. Lentz said."

As for the employees:

"In Princeton, senior plant manager Norm Bafunno said he can already see the benefits of the training. Mr. Bafunno cites a Teflon ring designed by an assembly worker during the down time that helps prevent paint damage when employees install an electrical switch on the edge of a vehicle's door. In the past, the drill used to install the switch could slip and damage the paint, affecting two or three vehicles each shift. These vehicles would fail quality inspection and have to go through another process to buff the scratches, hurting the plant's overall efficiency numbers.

"Coming up with tweaks like this is known at Japanese companies as kaizen, meaning continuous improvement. This is what management hopes to extract from the months of down-time training: better quality and productivity when production resumes.

"Throughout the factory, workers sit in classrooms, repaint hazard areas bright yellow, lift weights, complete dexterity drills and get steeped in Toyota's corporate philosophy.

"Near one idle line, assembly worker Bob Mason sat with four others employees around a table looking at a flip chart with PowerPoint printouts on it. The employees went through a problem-solving module based on a technique in Toyota's production system. "This was a really good idea," Mr. Mason said of the training sessions. "Once you get out on the line, I don't want to say we veer off, but we veer off. This has really brought everyone back to square one."

"Mr. Mason, a 40-year-old former firefighter, added: "One of the major things that everyone is grateful for is that they thought enough of us to keep us here.""

When discussing what it means to be a resilient company, the above is why Toyota is the best at what it does and why it will suffer less in downturns and benefit more during upturns, the marking of a resilient business.

The TEC Blog ends the post with the following list of tips for project managers during downturns:

1. Innovate to promote knowledge exchange by encouraging team-building and collaborative efforts through relationships with coworkers and vendors.
2. Generate competition among internal teams working toward to continous improvements.
3. Don’t cut back on meetings. Meetings for brainstorming and to fire up team members’ creativity are more important than ever when companies downsize.
4. Build new teams. Business pullbacks are excellent times to pursue new ideas and projects and to get them on the drawing board.
5. Don’t insulate team members by cutting travel. Get them out in the world and exposed to new thinking. Send teams to trade shows and webinars, and encourage networking through associations, all to review costs with an eye toward eliminating unnecessary expenditures.
6. Introduce new technologies, such as business intelligence (BI) and enterprise resource planning (ERP), which will generate savings and add analytical visibility.

As many know, lean means a lot more than simply working with less. I am not a lean expert, but supply chain managers in goods firms and project implementation managers in services firms should have the foresight to develop a lean strategy far in advance of any downturn. At the same time, supply chain solutions providers should understand whether their customers have a strategy, and if so, what that strategy is to better shape their solutions to the customers' business.

During the first few months I worked for the Japanese 3PL, which had a large beverage customer for 50% of their business, the business unit dedicated to this customer had been running fat over the summer months and assumed a normal transition into Fall and Winter. However, Fall came much earlier and with cooler weather than expected, and cold beverage sales dropped dramatically and ahead of forecasts. Having had no alternative strategies in place to develop new business outside of this one customer, capacity in warehousing and transportation became highly underutilized and budgets dove into the red. The initial instinct was to cut what could be cut immediately, attempt some efficient driving practices and urge managers to develop new business. But managers were hired under the idea of mostly maintaining business relationships with current customers and basically did not have the skills required for business development under such pressures. Of course, when your largest division faces such trouble, it places strain on the successful business units--maybe key resources are pulled to the struggling unit, or idle resources moved to the successful units.

Proposals pitching supply chain solutions must take many of these issues into account and should be uncovered via a rigorous due diligence process.

Economic Slowdown a Key Test for Supply Chains

Up until the second half of this year, the global economy has been relatively strong, even in the face of high oil prices. As a result, most of the investment in supply chains the past few years has been in the context of continuing growth and highly accessible credit markets. In the face of slowing growth and tightening credit markets, have companies positioned their supply chains to respond?

I first mentioned this issue in a post on the current financial crisis and its supply chain impacts, and followed up with a post on why supply chain solutions must be implemented with both upturns and downturns in mind. In the end, this quickly changing environment will clearly illustrate which supply chains are most resilient. Companies will appear in the news and become case studies for both their failures and successes.

I was hoping some other supply chain blogs would take up this topic and I am happy to report that the Supply Chain Matters blog has posted 'Supply Chain Management Challenges in the Post-Financial Crisis Era'. Essentially, the post focuses on two areas to be more concerned about than usual: 1) Flexibility and strength of your supplier network, and 2) Ability to finance inventories--or, what you could also call the ability to manage working capital, which  "...involves managing inventories, accounts receivable and payable and cash."

The post attempts to end on a positive note, suggesting this will be an opportunity for many companies to re-tune their supply chains towards becoming more resilient to future crises:

"A longstanding frustration for our community has been an observation that senior management, reacting to relentless Wall Street pressures for short-term results, has lacked the patience and discipline to provide longer-term support for the more difficult supply chain transformation initiatives, such as global expansion, overall agility in processes, and better, more informed decision-making. Previous hastily formed decisions to source supply and production in lower cost regions of the globe, without factoring the impact of localized wage inflation, or high energy and transportation costs, may have fallen prey to this mentality.   Perhaps this new era of post financial crisis that reinforces stability and consistency will bring a more balanced tolerance for allocating more realistic expectations to initiate structural change."

This new environment will definitely test many of the assumptions supply chain executives have made the past few years. As I mentioned before, it will also affect supply chain investment decisions. Thus supply chain technology vendors should also be able to provide solutions that recognize the new realities while maintaining those solutions that are required over the long-term, regardless of upturns or downturns.

Careers: Sustainability vs Resilience

Given recent turmoil in the financial industry, and the resulting losses in jobs for many in banking and directly related fields, it is natural for people observing these unprecedented events to bring their own jobs into focus: Are my job and business secure in this environment? What do I do if they are not?

I believe there are three levels of approach to a career, and each one has a certain degree of susceptibility to the type of dramatic event we have seen occur over the past two weeks in the financial sector:

Level 1: You focus on doing what you do well, improving and deepening existing skills

Level 2: While attaining Level 1, you also understand how your job relates to other aspects of your company's business and industry, working to strengthen your position in this context

Level 3: While attaining the first two levels, you understand how your company's business relates to the world and global competition, working to strengthen your position in this context

If you are in Level 1, you are part of the most vulnerable/interchangeable group in today's rapidly globalizing world. If you are part of Level 2, you have likely attained some sustainability in your field or industry and will survive the normal business cycle of upturns and downturns. If you are part of Level 3, you will be resilient enough to survive even the complete elimination of your industry or field--for example, when computers replaced typewriters, cars replaced buggies, etc.

Level 3 people are characterized by higher degrees of adaptability--they learn quicker and are comfortable working with many different subjects. Behind this is the ability to quickly identify patterns, relationships, and general commonalities across multiple fields and concepts. Because of this, they work well across borders, across cultures, across languages, etc.--they are cross-functional, horizontal thinkers that can dig deeper into a subject when required, and within a globalized context.

Supply chain management integrates so many disciplines and is extended across so many borders in today's global economy, it naturally attracts Level 3 people as an ideal profession for utilizing their skills. From an HR perspective, it is also a natural profession for developing and in-sourcing this talent from the ranks of successful Level 2 employees.

As an individual, it is important to objectively understand what level you are at and then pursue ways of building on your capabilities. Level 1 may be exactly where you want to be, but it is important to understand the implications when faced with the kind of adversity that exists in a globalized world. Unfortunately, many of us at this level figure things out only after a plant has shut down, a product goes obsolete, or our job is shifted to a country where it is done cheaper and faster and at similar quality levels.

The State of Innovation in the US

At the Enterprise Resilience Blog, Steve has a great post, titled 'Another Slowdown to Worry About -- Innovation?', commenting on the state of innovation in the United States. For me, the key graph is at the end:

"Most analysts agree that the nations that provide the best education for their children and young adults will have the best chance of prospering in the future. Many countries, however, educate and test in ways that do not emphasize and reward critical thinking. One of the reasons that American universities remain the best in the world is that critical thinking is at the heart of higher education. We need to stress those same kinds of critical thinking skills in elementary and secondary schools. Students that learn to think critically also learn to think innovatively. Complement that approach with programs that interest students in science, math, and technology and you have a winning formula for securing our children's future."

I have experienced the critical thinking deficit at universities outside of the US in Japan and Korea, so I completely agree with Steve's comments. What foreign countries do well in primary education, they often do well to waste in secondary education by not cultivating the critical thinking that forces students to tie everything together, building upon existing innovations and launching the next generation of innovative ideas, practices, and methodologies.

Lastly, I would say Steve's suggestions would serve to further strengthen the overall resilience of the United States.

The Financial Markets and Supply Chain Impacts

With all the turmoil in the financial markets and the severe consolidation of the investment banking industry, it is worth looking at just how this could impact both goods-oriented and services-oriented supply chains. As I have discussed and reviewed before, supply chains can be described in terms of the below architectures:

Physical--the actual movements and flows within and between firms, transportation, service mobilization, delivery movement, storage, and inventories.

Informational--the processes and electronic systems, data movement triggers, access to key information, capture and use of data, enabling processes, and market intelligence.

Financial--the flows of cash between organizations, incurrence of expenses, and use of investments for the entire chain/network, settlements, A/R and A/P processes and systems.

Relational--the appropriate linkage between a supplier, the organization and its customers for maximum benefit; includes internal supply matter relationships throughout the organization.

Innovational--the means by which a firm identifies, prioritizes, and brings new product/service innovation to market.

Focusing on the 'financial architecture' of supply chains, basically the biggest worry is operational financing and the degree to which firms have to raise cash via bank loans or through issuing investment vehicles such as corporate shares or corporate bonds. The following could put additional pressure on financing supply chain operations:

• Higher cost of borrowing (higher interest rates on loans)
• Reduction in availability of borrowing options
• Reduction in demand of corporate shares and/or bonds
• Decline in value of investments on the balance sheet, such as securities

Tighter cash flow and reduced margins could lead many businesses to delay existing payments due, increasing the balance of accounts receivables for many firms and placing additional pressure on the need to raise cash to finance operations. At the same time, businesses will place greater scrutiny over which internal investments go forward as the overall cash pool shrinks.

Supply chain IT vendors, for example, will need to ensure their current customers maintain payment terms as it relates to on-going projects. Simultaneously, the vendor sales team will need to be equally diligent in anticipating any changes in corporate investment cycles.

While ratcheting up their understanding of a potential customer's business, vendors must be able to rationalize for that customer why a particular solution deserves scarce investment dollars in an uncertain economic environment. Does the solution serve to drive down the total cost of operations, thus reducing financing pressures? Does the solution serve to make the potential customer more adaptable, more resilient and better able to face future market volatility? This bigger picture needs to be illustrated for businesses before drilling down further. A WMS solution may be great for a particular business' distribution center, but perhaps they should be discussing a supply chain IT solution that facilitates eliminating that DC altogether.