The Global Supply Chain and the Bottleneck Archipelago

To central va...

I’m beginning to wonder if you can read.

Did you imagine from my article that I am a fan of overdone outsourcing, of closing American factories and moving manufacturing abroad, of high levels of importing?

I don’t think I’ve ever said a positive word about MBAs in any column I’ve ever written. Your anger and insults are misplaced.

In a dozen years of a weekly column, I have always called for buyers to look at the TCO (total cost of ownership) of purchases, and to recognize and respect the value of local/nearby vendors, and to properly weight the political risk, intellectual property risk, lead time risk, and transportation risk of importing components and materials.

Do you just pick on Republicans because you think it’s fun, without first considering that they might be on your side on a specific issue?

to central va...

Oh, yes, and on a separate note...

You said “...This is why we need tariffs to protect us from fools, like you.”

You make three assumptions here:
1. that I’m a fool (I just think that’s funny.)
2. that I oppose tariffs and you support them. (that’s just wrong; I like tariffs, primarily because they give us the carrot of an offer of duty-free status to make free trade agreements desirable).
3. that tariffs stop undesirable importing.

This last is the one I’ll concentrate on. As a revenue tool (since all countries must collect taxes somehow), tariffs can be a legitimate tool in the toolkit. Morally and societally, I’d rather tax imported luxuries than my citizens’ real estate or income, for example.

The problem with tariffs is that the price differences between countries are often so great that even a high tariff doesn’t always have much of an effect.

I believe we should have outright sanctions against a lot more countries. We shouldn’t be trading with China at all, for example. We had to go from four or five percent up to 30% on a lot of products, during the Trump years, in order to get many American companies to even consider re-sourcing away from China.

The piece price differential is just too great for tariffs to be the effective tool in a right-sourcing effort.

What we really need is for purchasing departments and CFOs to understand the real total cost of ownership - TCO - of their purchases, and to realize that this apparent cost savings in importing from China is actually overwhelmed by the damage it does to lead time, the cost of flying employees overseas for meetings and tests and verification builds, the risk of IP theft, and especially, the transportation cost when shipments need to be airfreighted because ocean is too slow.

It’s a culture change we need. A culture change that needs to begin in the business schools and the boardrooms.

Not every change can be effectively driven by government. Government can be a part of it (hence my compliments to President Trump for initiating those 25% punitive tariffs)... but it’s not going to do the trick on its own.

We need the American people to start being sensible at the office, and start finding new vendors closer to home.

JFD

Many of our metros should have been building new and larger intermodal yards on the outskirts of town, where available land would enable quicker growth. But no, our system is overloaded with volume, and no quick improvement is available. Perhaps worst of all, the steamship lines have been calling for expansion and modernization at our seaports for decades, and the longshoremen's unions - the ILWU and ILA - have fought it at every turn. An economy simply cannot survive if it can't predict when its shelves will be restocked. It's time to bring back manufacturing, bring back sourcing, and become an independent economy again...

My washer broke last week...(still under full warranty) ... the tech explained if the problem needed a part that was available the wait time would be about two weeks. If the part was not easily available the wait time to fix the washer could run into 'months'... I'll know soon. I'm guessing my 'part' is sitting in some container outside of Chicago - waiting to be railed to some warehouse somewhere...jit and all...

To central va:

You wrote “Labor is only 7-8% of the retail price of US manufactured goods 3% for 3rd world crap. So a small tariff really would level the playing field.”

Have you ever worked for a manufacturing company? You have absolutely no idea how decisions are made at a manufacturer.

Let me illustrate. Picture something simple, say, a washing machine. It’s made of sheet steel, powdercoat/paint, gaskets, power cord, dials, switches, timers, motor, water pump, and injection molded plastic parts.

Each of these parts has a different ratio between labor and materials. The washing machine manufacturer decides first what parts to make himself, and what parts to purchase, and then decides which of the purchased parts to buy domestically and which ones to buy internationally.

Many issues play a role in each of these decisions. the vendor’s piece price... the vendor’s lead time... the transit time and transportation cost... quality... how good we are at ordering ahead (that is, how often will we need to rush an order).

Your mention of an average labor rate in the manufacture of the finished product - which is hogwash, by the way - doesn’t play a role in this because the decision on each individual part is made independently of the others.

Every one that we outsource to a foreign country causes a loss of jobs here. So yes, it all matters...

But it’s also important to look at each individual part. A lot of these imported parts are half the price, or a quarter the price, or a tenth the price, of a similar part made in the USA.

Why? A mix of reasons... including cheap foreign labor, yes, but also including such things as illegal foreign subsidies (known to economists as ‘dumping’) and currency manipulation.

In addition, lots of crooked foreign companies will bid low on a part just so that they can get the ability to make that part - the real, legitimate approved part - for the US buyer... so that they can make twice as many (without telling their client) and sell them under their own brand as ‘knockoffs’ but at the same high quality.

Ever look at a fake Coach purse, for example, and say ‘my gosh, that looks just as good as the real one!’ well, there’s a reason for that. A lot of ‘fakes’ are made by the very same company, of the very same material, ripping off their own customer.

They don’t teach about these kinds of risks in business school, so buyers don’t realize what they’re getting into by providing their dies and molds to Chinese vendors. I think every businessman would be better off watching the Rodney Dangerfield movie, Back to School, fifty times, rather than going to business school... But anyway...

The point is, tariffs CAN sometimes make a difference, but not often. Businesses need to become independent of foreign countries for components, not because of a five or ten percent duty rate (we’ve seen that even President Trump’s 25% tariff stopped relatively few companies from sourcing from China)... but because they start seeing the big picture and regain some patriotism.

Only TCO and an understanding of history will save us.

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