The Global Supply Chain and Risk Management

Stuart Rosenberg

• Publisher: Business Expert Press
• Year: 2018
• Print ISBN: 9781631579585
• eBook ISBN: 9781631579592
• Topic: Business
• Subtopic: Operations
• Index: Business

The heightened intensity of global competition has increased the necessity of manufacturing and distribution organizations to continuously improve production, product quality, cost, and delivery. Supply chain professionals must be knowledgeable about the relevance of supply chain concepts—adapt supply chain to customer needs, customize logistics networks, align demand planning across the entire supply chain, and differentiate products close to customers.The goal of The Global Supply Chain and Risk Management is to assist in meeting these challenges as to the education of many supply chain practitioners, the implementation of formal supply chain contingency and control systems and the continued edification in recent global developments for all those working in the field. It is written for two groups, those who are preparing for a career in supply chain and for those seeking to improve their proficiency. The book will teach the best practices, high-tech and analytical solutions for the entire global supply chain—customer service to inventory planning to transportation to warehousing.

PART I

The Supply Chain and Financial Implications

Most companies gauge their success through a series of financial metrics which are reported, internally and externally, on a monthly or quarterly basis. These metrics are the following: net income, return on investment, and earnings per share. Financial performance metrics are valuable as they demonstrate the economic outcome of business decisions.

We must understand that supply chain managers make decisions and use a firm’s resources that will undoubtedly have an impact on the financial outcomes of a company. In order to accomplish this in an efficient manner, supply chain decisions must be linked to the financial goals and allied to the company metrics.

By creating the links between the work being performed and the financial outcomes, the organizations’ supply chain will gain visibility and make evident the impact of supply chain decisions on the firm’s financial well-being. Thus, the financial statements—income statement, balance sheet, statement of cash flow, and statement of stockholders equity—must ask and answer two questions. What supply chain issues affect the company’s finances? How do these supply chain issues affect the company’s financial outcomes?

The Decline of U.S. Manufacturing and the Rise of Income Inequality

Please do not misunderstand the intent here. This is not nay saying or pessimism, but we have had our heads in the sand way too long and this is the result of that denial.

On January 28, 2015, the U.S. Census Bureau reported that some 20 percent or 16 million of U.S. children receive food stamps. This is roughly a doubling since 2007 when 9 million children, or one in eight, received this form of assistance. Further reports indicate that the overall number of U.S. food stamp recipients have reached close to 50 million (matter of public record).

We need to ask the following question: Is this just another income redistribution instrument in the Federal toolbox or does this really reflect a more alarming feature of the overall U.S. economic picture?

In order to get a better handle on this issue, this article will sort out this issue from the end of World War II to the present. We will need to look into what really goes on in our domestic economy.

1947–1953: The Post War Years

The wheels of U.S. manufacturing were churning ahead with full speed, and the sectors share of U.S. GDP rose from around 25.5 percent in 1948 to 27.6 percent in 1953.

The initial post-war years manufacturing’s share of U.S. GDP was rising, and the income equality improving in leaps and bounds. The United States had come out of the war with a very efficient and diverse manufacturing sector. The United States was the source of industrial export to a war-torn Europe, and its might and prestige was without bounds.

In a June 5, 1947, speech to the graduating class at Harvard University, Secretary of State George C Marshall issued a call for a comprehensive program to rebuild Europe. This program, later known as the Marshall Plan (officially the European Recovery Program, or ERP), was an American initiative to help rebuild the mostly ruined European economies after World War II. Most of the help was in the form of machinery and infrastructural implements.

1954 to 1967: The Eisenhower–Kennedy–Johnson Years

Better times were awaiting the U.S. population, as the middle class and the manufacturing sector expanded, although only in total terms. In comparative conditions, the effect of the Marshall Plan had begun to take hold, and German manufacturing was on the rise, particularly TVs, a newcomer on the European scene, and automobiles gradually took over the European markets.

The socio-economic scene in the United States was one of optimism and belief in the future. Carl Perkins and Elvis Presley were, for the most part, only worried about their “Blue Suede Shoes.”

The Cold War was now in full bloom, and the Iron Curtain had fallen along the central European borders. Worrying signs of unrest in the world at-large would soon move the public attention from personal apparel to war. An armistice had been reached in 1953 on the Korean conflict.

Almost 40,000 Americans died in action in Korea, and more than 100,000 were wounded. Consequently, the U.S. population was in no mood for another major war.

1968 to 1975: The Vietnam, Middle-East, and the Oil Shock Years

Unfortunately, another and more devastating wars and more international unrest were on the horizon. When the French left Vietnam after the First Indochina War (1946–1954), the United States stepped in to assist the noncommunist cold war proxy fight. This engagement lasted from 1955 to 1975, although American military advisors had been there since 1950. At the end, the total cost in human life had reached 58,000.

During the same period, the world oil supply was endangered by the Middle-East conflict. As a reaction to the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) decided in 1973 to instigate an oil embargo on the western nations that sided with Israel. The embargo ended in 1974. The result of this embargo was that global crude oil prices rose significantly (from $3/bbl. prior to the embargo to around $12/bbl. after).

The impact of the global economies was immediate and severe, as the economic structures adjusted to the fourfold hike in energy costs. Structural change takes time and implies both permanent and interim unemployment for a large segment of the impacted economies.

Although well-endowed with hydrocarbons, the oil embargo caught the United States, to a large extent, off guard. Not only did the gas lines at the gas stations become long and tedious, but the various oil consuming industries also were suffering. Fortunately, a valuable lesson was learned through this experience: utilize national resources and build up reserves.

1976 to 2014: The Relentless Outsourcing Years

As the economic tumults subsided during the late 1970s and 1980s, new international trade agreements, both through GATT and bilateral trade agreements were finalized. Additionally, the United States managed to get free trade agreements with 20 countries.

Currently the United States is in negotiations on a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement and the Transatlantic Trade and Investment Partnership (T-TIP) with the European Union. The objective here is the shaping of high-standard, broad-based regional pacts.

On top of this, the United States has bilateral investment treaty (BIT) program that helps: to protect private investment, to develop market-oriented policies in partner countries, and to promote U.S. exports. The BIT program’s basic aims are to protect investment abroad in countries where investor rights are not already protected through existing agreements (such as modern treaties of friendship, commerce, and navigation, or free trade agreements); to encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory way; and to support the development of international law standards consistent with these objectives.

One might think these would be powerful tools to enhance the ability of U.S. manufacturing to penetrate most of the world markets for exports. The U.S. manufacturing industries have continued downward and, by 2014, these industries’ share of contribution to the U.S. GDP stood at around 12 percent, down from around 21 percent when manufacturing outsourcing started in earnest.

The income and wealth distribution index (the GINI coefficient) has by 2014 reached Third World levels, and there is no improvement insight.

Simultaneously, however, the United States participated in the various UNCTAD trade rounds and the more hemispherical NAFTA negotiations. Some political actors heard sucking sounds, but came with no suggestions on how to moderate or restructure the outsourcing phenomenon. There is, however, a strong suspicion that our free trade agreements provided political cover for U.S. companies, particularly the larger corporations, to move production to countries with adequate human skill sets, an economic environment that has lower taxes; and a free trade agreement with the United States.

With corporate offices in the United States and the production facilities flying a “flag of convenience,” the quarterly reports and bonuses for the leadership started to improve.

Improved bottom lines should, of course, always be the goal of well-managed businesses, but the flight of labor-intensive industries has a vicious downward spiral attached to it. And, unless new needs and wants are created or discovered in the economy, the purchasing power of the remaining population will deteriorate over time.

The Paper Economy Versus Manufacturing

No, this is not a reference to the Paper & Pulp Industry, though it could be considering how much paper money was floating.

The textbook definition of free-market capitalism states that the sole function of business is to create shareholder value and that the free market can regulate itself. Well, we have seen that definition becomes obsolete over the last 30 to 40 years. At present the definition is basically “the only purpose of business is to create shareholder value calculated by short-term results with little regulation.”

Needless to say this is no longer the capitalism described by Adam Smith. Instead, it is what I will call “financialization.” Simply put this is the “growing profitability of the finance sector at the expense of the rest of the economy and the dwindling regulation of its rules and returns.”

As New Deal regulations were slowly dismantled, financial sector growth accelerated along with high risk-taking and speculation. One of the immense problems caused by finance rising and manufacturing sinking is that a low-employment industry replaced a high-employment industry.

At it’s peak, in the middle of the twentieth century, manufacturing generated 40 percent of all profits and created 20 percent of the nation’s job. Today finance controls 40 percent of the nation’s profits with 5 percent of the jobs.

The focus of the economy is no longer on making things but making “false” profits: money from paper.

In the past, Wall Street was comprised of banks that financed manufacturing’s capital investment and R&D, which made America great. However, today this “paper” money economy has led to Wall Street being the banker of most corporations, which has given them control over key portions of the economy, especially manufacturing. Wall Street has become the master of manufacturing, demanding short-term profits rather than funding the strategies that lead to long-term growth. Wall Street’s demand for short-term profits forced most manufacturers to slim down their organizations and eliminate the functions that did not show a quick ROI (Return on Investment).

Wall Street, freed from its New Deal regulations, loaded companies up with debt, cut R&D, raided pension funds, slashed wages and benefits, and decimated good paying jobs in the United States while shipping many abroad. The lobbyists for the financial industry were able to remove all of the laws and regulations created during the New Deal. This allowed Wall Street to use many new quick-buck methods such as derivatives to make money from money and have all of their gambling protected by American taxpayers. Allowing finance to gamble with depositor’s money was a terrible decision that led to the crash of 2008 and will lead to another crash in the future unless they can be stopped.

Stripping down of companies to their core competencies has been forced on most of the large publicly held corporations to some degree. But in stripping them down, many critical functions have been lost. For example, apprentice-type training has been lost in many American corporations because it is long-term training and doesn’t have a good enough short-term ROI.

Basic research of new technologies have also been dropped because they are seen by the shareholders as being peripheral to the core competencies.

The growth of this new economy also harkens another important question. If innovation is the critical strategy that will keep America in the race and its position as global leader, how can it happen without long-term financial support? This is a very strategic question because most innovation comes from the R&D and new technologies created by manufacturers.

Wall Street has the upper hand and continues to focus on short-term profits, rather than investing in manufacturing and the country’s infrastructure. It is hard to see how American manufacturing will be able to compete with the rest of the world like we did in the 20th century. The sickness destroying America’s economic well-being is financial planning. The primary symptom is the loss of U.S. manufacturing. Manufacturing is the basis of military and economic power.

The movement of American manufacturing to mostly third world nations endangers us. If we are going to have a chance at reversing the decline of manufacturing or developing a strategy of innovation that will keep the United States competitive, the current direction of the financial industry must b...

Table of contents

• Cover
• Half-title Page
• Title Page
• Copyright
• Contents
• Introduction
• Part I The Supply Chain and Financial Implications
• Part II Global Disruption
• Part III Inventory Management
• Part IV Supply Chain and Continuous Improvement
• Epilogue: Supply Chain Risk Management—The Future Scope
• Glossary
• About the Author
• Index
• Backcover