Cross Border Journal

Maritime Security and Trade in the Asia-Pacific, Supply Chain Risks

With North Korea all over the news this week after its nuclear test and missle launches, as well as with South Korea's entry as a "full participant" into the U.S. Proliferation Security Initiative (PSI), it now seems like the appropriate time to continue my discussion here on maritime security and trade in the Asia-Pacific.

In this post, I would like to summarize the types of disruptions that concern supply chain managers in terms of the maritime transit of goods and within the current Asia-Pacific environment. Without citing anything specifically, and in no particular order, from my own experience I believe disruptions could include:

• Adverse weather events and natural disasters
• SARS-type pandemics
• Perpetration of theft / fraud
• Organized terrorist attacks and / or hijackings
• Regional, armed conflicts

All of the above could significantly affect ports, shipping and the people involved in a particular company's supply chain, thus causing major disruptions in the delivery of goods and services. As inferred in my previous post, the dramatically increased levels of trade between countries of the Asia-Pacific has served to reduce tensions and concerns overall on its seas and in its ports. However, as we have seen with North Korea, there are specific areas that will be identified as potential flashpoints that could quickly begin disrupting the links of Asia-Pacific trade.

Below is a diagram that points out where these flashpoints are located:

The East Sea and Yellow Sea are now going to be under close watch due to the recent actions of North Korea and because South Korea has now become a full participant in the PSI. Tensions still exist between Japan and South Korea over the Dok-do islands in the East Sea, between Japan and Russia north of Hokkaido, and between Japan and China over oil exploration and development in the Yellow Sea, but these mostly have taken a back seat to stronger economic ties and political reconciliation.

The South China Sea and Taiwan Straits are also areas of territorial tensions as witnessed by the occasional flare up between Chinese and U.S. vessels and military exercises in Taiwan and China in relation to a possible armed conflict. Fortunately, China-Taiwan relations have been warming significantly in recent months and territorial disputes in the South China Sea have mostly been made through international bodies.

The Strait of Malacca differs in that it doesn't involve territorial issues; rather it is a hotbed of piracy, fraud, theft and general crimes against the concentrated flows of trade and commerce in the area. As seen in the below graph from the "Regional Security Outlook" report made available by the Council for Security Cooperation in the Asia Pacific (CSCAP), attacks are down over the past few years as trade intensity has picked up along with new security measures:

With an increase in attacks in 2008, it will remain important for government-led security and private-sector security remain focused and innovative when dealing with these incidents. But there is no doubt that as the value of trade goes up the will to protect and secure those trade flows will also increase.

A Rant on The Failed Governorship of Michigan

You don't have to be from Michigan to know how bad the Michigan economy has become. There is little positive news emanating from Detroit outside of sports as 2/3 of U.S. auto companies have essentially become nationalized. The state unemployment rate is at 12.9% and climbing. There is a net outflow of people to other states in hopes of finding better prospects for themselves and/or their families. Taxes and union favoritism have tainted the State as unfriendly to businesses, leading the Governor of Michigan to heavily subsidize the businesses that do locate to the State. A recent article in the Detroit News says that the State owes the Department of Labor $2.2 billion in borrowed money for unemployment benefits:

"...during the second half 2008, the state started running behind and the debt ballooned.

""We have about 470,000 people who are claiming unemployment benefits," Isotalo said. At the 2008 average, that's a total of about $141 million in unemployment checks every week. "There's a lot of money going out in benefits right now."

"Michigan paid 4.8 percent interest on its debt to the U.S. labor department last year, and was ready to collect a state "solvency tax" from employers this year, until the Obama administration waived interest on the loans for this year and next. That spared employers a $40 million tax hit, but only for the moment. Under federal law, the borrowed money will have to be repaid through the Federal Unemployment Tax, state officials said, starting in 2010.

"That will cost employers about $21 per worker per year, in addition to regular state unemployment taxes that increase when companies lay off workers who collect more in benefits than employers have paid in to the state system.

"The effect, however, could be to dampen the recovery or deepen the losses to businesses still struggling to rebound, and could mean more layoffs, delayed hiring or other cutbacks for business, said Wendy Block, director of health policy and human resources for the Michigan Chamber of Commerce."

"That extra $21 is going to have to come from somewhere," she said. "The only other alternative would be to increase taxes in some other way through the system. There's really no good alternative to the future tax increase."

In business, we call this a "death spiral." Governor Granholm's administration, in the face of challenges at the U.S. auto companies and in Detroit in general, has only hastened this death spiral by not demanding transformative innovation and new practices in governorship and economic leadership. She constantly overplays her successes and underplays her failures to the point of blaming them on everyone but her own administration. By any measure, Governor Granholm has been at best mediocre and mostly an obvious failure.

So what needs to be done?  The Granholm Administration will be gone after 2010, so everything is currently be prepped for hand-off to her assistants in this failure. It is obvious Michigan needs a change in governorship, but will the majority of the electorate realize this or continue this masochistic dive to the bottom of the U.S. barrel? A recent article, titled Piecing Michigan back together, offers some ideas around three areas: leadership, entrepreneurism, and leveraging key assets.

On leadership, I agree with the authors that Detroit's new mayor offers a ray of hope:

"Until there is a decision to put Michigan on a sound fiscal footing, there will be no structural integrity to the state budget. Businesses will be reluctant to invest in Michigan because they fear more taxation will be required to support the state government's spending levels.

"There also are new leaders arriving on the scene and with such change there is always an opportunity to do great things.

"Detroit's new leadership presents such an opportunity. The region and state must rally around Mayor Dave Bing, and Detroiters need to seize the moment to tackle the tough reforms necessary for the city's revival."

On entrepreneurism, the authors write of common sense absent in Lansing:

"Michigan must be attractive to individuals willing to open new businesses and to create new jobs, not driving them away by making it more expensive to live and work here. The way to grow the state is to restructure Michigan's tax system to be more competitive with the states we most often compete with for jobs. Being an "average tax" state is not good when the states we compete with have "below average" costs. When you add in wage, benefit, energy and regulatory costs, Michigan becomes an "above average" cost state.'

They also smartly mention logistics:

"Logistics is another industry that will allow Michigan to diversify its business base, attract new investment and grow additional jobs. The Detroit region is ideally suited to capitalize on the way global commerce is conducted in today's fast-paced world. We have the transportation infrastructure -- the roads, railways, water routes, international border crossings and airports -- to become a major center of international trade. These are all great assets that we can build on to continue economic diversification of the region."

In leveraging key assets, the authors mention an exceptionally high concentration of highly skilled engineers, the excellent, world class universities and colleges, and an international border ripe for expanded trade. These are of course excellent assets to leverage and build a stronger foundation for the future upon.

The Granholm Administration has presented its vision and we have seen it play out, falling flat year after year. I believe the longer you let a bad thing go on, the more dramatic an action is required to turnaround. In my opinion, we are fast reaching such a dramatic turn of events.

Our governor may be likeable as person in the eyes of many, but her performance speaks for itself. If Governor Granholm were taking her governorship of Michigan on the show The Apprentice, Donald Trump would have booted her out with an emphatic "you're fired!" I hope the Michigan electorate realizes over the next year the need for a dramatic change in state leadership.

List of Books That Arrived Today

My wife and I just received a new order of books from the States via my parents, who have kindly become our intermediary between Amazon and Australia. The books and a few comments on why I was seeking them out below:

• Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. With this book, I wanted a better understanding of government's role in exacerbating the current financial crisis as many governments continue to point away from themselves and at corporations and business men and women as the source of the current crisis.
• Supplying War: Logistics from Wallenstein to Patton. I wanted this to satisfy my recent hunger for books on the role of logistics and supply chain in war strategy and execution.
• Blood from Stones: The Secret Financial Network of Terror. See above, but with a focus on the financial architecture in supply chains and counterterrorism.
• Great Powers: American and the World After Bush. I am a regular follower of Dr. Barnett's work and thus this is a must have that I have long been waiting for.

Three books I plan on making comments about in future posts include: 1) War and Decision, 2) The Rise and Fall of the Third Reich, and 3) True Professionalism.

I am currently reading China Diary, that of George H.W. Bush during his year in Beijing 1974-1975.

I look forward to sharing both thoughts and notes on the above books over the next few weeks.

Supply Chain IT Implementations and Hardware: Lessons Learned

In my 2.5 years with Manhattan Associates, I have had varying involvement with the hardware upon which our software is installed and implemented. So far, I believe that the major issues around hardware fall into the categories of procurement, performance and maintenance. Since procurement essentially precedes performance and maintenance, it is only common sense that the poor procurement of hardware can result in downstream performance and maintenance issues.

Hardware does not necessarily always equate with servers and data centers when implementing supply chain execution software. With warehouse management systems, for example, it is common to also have some form of picking technology, such as RF guns, voice-picking devices, pick-to-light devices, etc. as well as a variety of material handling equipment.

Hardware Procurement

On the projects I have managed or worked on so far, below are the common problems I have seen around hardware procurement:

• Indecisiveness around the overall hardware strategy--do you want to go with an in-house data center or proceed with a hosting solution (outsourced)?
• Indecisiveness around the type of platform to procure (i.e. OS upon which your application and database will run)
• Insufficient research and analysis around the true costs of a particular hardware decision in relation to the requirements to support a particular application, or set of applications
• Lack of knowledge about the operations the hardware is intended to support
• Insufficient planning around the future hardware requirements and the scalability of the short-term hardware sizing (i.e. memory and disk space capacity, chip set constraints, etc.)
• Lack of proper hardware expertise being available to participate in the procurement process
• Poor internal processes for executing hardware decisions
• Lack of planning considerations around the need to procure hardware and services from overseas sources

All of the above can have a detrimental affect on:

• project timelines,
• project costs, 
• execution quality of an implementation,
• vendor relationships, and
• the quality of downstream hardware activities.

Hardware Performance

Usually performance problems occur when the size, volume and volatility of operations is not properly researched and analyzed prior to hardware procurement. Due to the lead times involved in adding hardware capacity, the failure to size properly for operations can lead to devastating consequences after a operation has transitioned onto new applications, goes "live" and quickly ramps up to normal business transaction levels.

Hardware Maintenance

Without sufficient expertise internally to properly maintain hardware, such as needed for monitoring capacity utilization, applying patches and updates, configuring scheduled jobs and processes, fixing  and troubleshooting devices, etc., some companies are forced to deal with costly mistakes and unforeseen downtime or rely on subcontractors without proper knowledge of, or commitment to, the business.

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My opinion is that hardware doesn't have to be hard, but as my boss remarked once: "If it was easy, it would be called easyware." From working with a variety of companies and hardware scenarios on multiple projects, I can understand how companies end up underestimating either the complexity of the hardware architecture required or the complexity of the operations that must be supported, or both. As a result, I believe companies should educate their employees about the role of hardware, especially how those executing business operations can lend their expertise in determining hardware requirements. Never assume that a particular IT organization, group or individual has everything under control.