I’m sure that you’re drowning in the much bandied about term - Credit crisis or Credit crunch or liquidity crisis or the like. And I’ve come across some explanations of what event or series of events underlie this crisis. For a very good explanation of the problem and the failed bailout by the current Treasury Secretary Paulson, I refer you to this site - Understanding Tax.

As I pointed out in the previous post - Are you ready for the Supply Chain Shock?, a credit crisis is not a laughing matter and a serious credit crisis will send numerous shocks through the numerous supply chains of the world. The author of the article also points that out,

You might think of short-term money as the lubricant that keeps the world’s economic engine turning over smoothly. If there’s no lubricant,the engine freezes. No paydays, no goods on the shelves. Seriously.

So what is the purpose of the bailout bill? Let’s be clear about the probable scope of the current crisis - it’s not going away tomorrow if the bill is somehow passed in the House.

Note that Mr. Paulson’s proposal was not intended to solve the teaser-rate mortgage problem, either now or in the future. In the transactions that created the teaser-rate mortgages in the first place,both parties made bad decisions - the lender and the borrower. Mr.Paulson’s proposal was not intended to help either. One of its unavoidable side effects, however, was to relieve lenders of the consequences of their bad decisions, while leaving borrowers to suffer the consequences of theirs. This made it politically less palatable.
In addition, at least $500 billion more of teaser-rate mortgages are scheduled to reset over the next several years. In all likelihood, they too will go into default and become toxic waste. Nothing in Mr.Paulson’s original proposal was intended to do anything about this next$500 billion installment - or, indeed, to prevent lenders from making more teaser-rate mortgages in the future.
Similarly, Mr. Paulson’s proposal was not intended as a general Wall Street bail- out, although to some extent it would have had that effect.Note that the outstanding overhang of credit default swaps alone is estimated to be between $45 and $60 trillion - three to four times the size of our annual gross domestic product. The requested $700 billion, although the single biggest appropriation request in U.S.history, was miniscule when compared with the toxic waste problem as a whole. Mr. Paulson’s proposed solution was to cost just 1% of the size of the problem and was aimed only at a small part of that problem. (It is unnerving to realize that the U.S. government - the “beast” we have been starving for so long - may now lack the borrowing capacity to solve the problem as a whole. We need to get our financial house in order.)
All Mr. Paulson’s proposal aimed to do was to put lubricant back into the engine, to get short-term money flowing again to prevent our economic engine from freezing up. Now that the proposal has gone down to defeat, we can only hope that Mr. Paulson was wrong.

As one can imagine, we’re probably in the first half period of the mortgage rates resets which implies that this is going to be a long drawn out affair. No better time than now to prepare yourself for it.

Update: A news article today will give you a heads up of things to follow - Bank Limits Fund Access by Colleges, Inciting Fears.

In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.

Tags: Supply Chain Shock, What is the Credit Crisis, Bailout plan, Effect of Credit crisis on Supply Chains

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My apologies for the dip in blogging frequency but I was delightfully detained by the birth of my daughter - Mikayla Sara Abraham last Monday. What an interesting world she inherits in but a week’s time?

If you’re glued to the Dow/Nasdaq/S&P 500, let me ask you whether you’re equally glued to your supply chain cockpit i.e. if you have one? Regardless, if there is going to be a Supply Chain shock that is a consequence of tightened credit requirements, what is your plan, your firm’s plan for dealing with the fallout? Since offshoring and outsourcing have created a manufacturing base overseas, the impact of tightening credit requirements will not only be felt stateside but at all points along that financial supply chain.

If there is a shock that has been building up in your supply chain - for example, a supplier that might be facing a hard time raising money for his/her continuing operations for whatever reason - then you can be sure that this shock will be transmitted into you material flow supply chain at some point in the future. What if a supplier just closed shop because he couldn’t pay his payroll any longer and they were a single source supplier? Time to get busy finding another source before that become a real problem, you’d think? But perhaps your firm is the problem for your suppliers and your own delays in making good on payments to suppliers squeezes their cash flow sending them into a downward spiral - internal improvements would need to be made after assessing which of your suppliers might benefit the most in this regard. In some cases, your firm might even need to step in as a guarantor in the relationship between a supplier and the credit facility - be it local or global. This is a time for building close relationships with every facet of your supply chain that has the potential to cause serious disruptions within.

Also, since the transportation lead time is for most firms (I mean those that have gone the outsourcing route) a fixed quantity right now - given that one has to factor the average shipping, drayage etc on average and one cannot really change this without forking out more in transportation costs and given that one has to hold the larger inventory over this additional lead time, any improvements to driving down the magnitude of this inventory as well as improving inventory turns should free up working capital for continuing operations.

While oil is the physical commodity that greases the global supply chain and you might not have liked the era of soaring oil prices and how it affected your margins if you were not able to pass on the costs to consumers, credit is the real handshake that enables the global supply chain - the current credit squeeze makes the handshaking that goes on everyday (that needs to continue to go on into the future) a little less forthcoming. Anything that you can do to free up working capital in your firm such as speeding up material to cash conversion can only help but more importantly planning for it now (or hopefully, some months ago) will give you an edge no matter which way this ill-wind blows.

Update: If you wanted a recent news article that describes the relationship between credit markets and continuing business operations - Banks in miser mode send borrowing rates soaring.

Tags: SCM, Credit squeeze and the Supply Chain, Credit squeeze, Improving cash flow, Supply Chain shocks

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1. It doesn’t scale very well - multiple statements and overlapping tool-spaces lead to conflicts that must be resolved and accounted for. Otherwise, you’d default to FIFO (First in, first out) or some other simple rule.
2. Is it the best solution available? Is it a really good solution, good solution, solution, workable solution, bad solution, very bad solution?

The first rule, on activities, states that “all work shall be highly specified as to the content, sequence, timing, and outcome.” At the fab we studied, maintenance technicians were supposed to clean the etch chamber from top to bottom, but we observed that sometimes they did it from bottom to top. That order wouldn’t have been so bad if it had been followed consistently, because the behavior would have become a new set point around which further improvements could be based. But in fact, the method of cleaning changed unpredictably. There was so much random variability in the work that nothing could be learned from the results.

The next rule states that “every customer-supplier connection must be direct, and there must be an unambiguous yes-or-no way to send requests and receive responses.” This rule was violated when, for example, a worker-we’ll call her Jane-operated a deposition-process machine that received wafers supplied by another worker, whom we’ll call Bill. That arrangement made Jane Bill’s “customer.” In a properly ordered system, he’d send her wafers when-and only when-they were needed. In practice, he sometimes had no wafers when she needed them, and at other times he encumbered her with wafers she could not use. Jane then had to throw those excess wafers onto the costly pile of inventory.

One of the benefits of having an MES is that the sequence of processing steps are specified for each product/wafer/lot and this is one of the basic building blocks of a fab - data wise. So there is a pre-defined idea of a customer-supplier relationship. However, the above system that is alluded to i.e. "he’d send her wafers when-and only when-they were needed" raises the ideal of predictable flow which implies that lots waiting around to be processed at a particular step has all but been eliminated. While some might package a scheduler with some sort of a flow controller, I believe that the proper situation for a flow controller (or WIP balancer) is atop a real- time scheduler such as FPO - the principal task of such a flow controller/regulator being speeding-up/down, starting, stopping the flow of WIP.

The third rule states that “the pathway for every product and service must be simple and direct.” This rule was violated when a cassette of wafers showed up at a bay equipped with 10 identical process tools, any one of which could be used to process the cassette. But which tool were the workers supposed to use? No one could say offhand because the path was not simple and direct, and the critical decision was left to the operator on the floor.

Resolving such problems is one of FPO’s strengths simply because at the end of each iteration, an "optimal" solution/schedule is created that takes into account the near-current state of the fab, state of the tools, lots, steps and processing times. So as in the above problem, when a cassette of wafers showed up at a bay with 10 (or 3 or identical(/differently configured tools) that are all able to process the wafers, then the lot is recommended to run on one and only one process tool that can run that lot. An operator intervenes when there is some unforeseen issue or some other event but the decision making is largely (if not wholly) under the aegis of this first generation scheduler.

The fourth rule states that “any improvement must be made in accordance with the scientific method under the guidance of a teacher, at the lowest possible level in the organization.” One worker found a better way to get a customer the material he needed. He helped the customer pull the material from his supplier instead of having the supplier push it to the customer, as had been done before. The worker had to analyze the current state of things, document it, and formulate a hypothesis that included an experiment with an expected outcome that could be measured and compared with the actual outcome. Such problem solving engages everyone and creates an army of scientists engaged in continual improvement and organizational learning.

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In praise of mavericks is a short piece by Col. Michael Wyly (Ret.) that can be found at the Armed Forces Journal. The byline reads -

A true professional will strive to do something, not be someone

The colonel’s principal interest is in a single word - professional, in brief terms - the development of the profession and the professional.

It was during the European Renaissance that the professional class emerged and defined itself. It was during the Renaissance that the birthright nobility began to give way to a society led by persons respected for their merits - for what they did instead of who they were. Each profession had standards for entry, they professed something, and their study of it was daily, continual and life- long.They served their society. Medicine, law, the clergy and military leadership became during the 15th and 16th centuries - and still stand as - the classically defined professions.

A profession must be applied for and joined after being accepted,and its moral standards are as important as its philosophy.

So it follows that I ask myself this same question - What is my profession? What professional am I? And the surest answer is that I am not in any profession - of many professions but not in any one. And I don’t find that as troubling as I normally might. Or should I?

Some of the Secretary of Defense’s remarks invoke another Air Force Colonel John Boyd, the OODA loop etc. It has been a long standing desire on my part to study the OODA loop and possible adaptations to what I do everyday. Or maybe the OODA loop itself is the desire.

After they graduate and leave Maxwell, Gates warned the students: “You, too, will eventually face Boyd’s proverbial fork in the road. You will have to choose: to be someone or to do something.”

I knew Boyd as a colleague, a mentor and the most loyal personal friend. His contributions to the strength of our country ranged from airplane design through tactics and strategy air and ground, and the ethics of leadership.

I’m sure you’ve heard of the F-16. You should hear about Col. Robert Boyd too. Taking the following which is purely in the realm of military strategy and tactics and adapting it to the notion of business strategy sounds interesting…

Boyd essentially proved that the true target of a military offensive was the mind of the enemy; that it was more important to stun him with a massive series of psychological blows, deprive him of accurate information about the reality of the situation, and only let him react to circumstances that were never accurate to begin with and/or which have already changed. Campaigns conducted this way result in ineffectual resistance and induce more losses to the enemy through surrender rather than through actual battlefield casualties.

Now which business strategy course/book that you’ve read recently advises you to deliberately deprive your competition of accurate information about the reality of the situation?

The fork in the road looms ever large…

Tags: John Boyd, OODA, The true Professional?, Defense Sec. Robert Gates

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JDA is all set to acquire i2 Technologies for approximately USD $346 million - the huger for scale is relentless, it seems but whether or not it succeeds is a different matter altogether.

“By acquiring i2 we double our addressable market in manufacturing to include discrete manufacturing, complementing our current market leadership in process manufacturing and strengthening our retail and transportation management presence. A major player in the supply chain space for more than 20 years, i2’s world-class customers and employees are the perfect match for JDA. With the experience gained from the successful acquisition of Manugistics in 2006, the addition of i2 is comparatively an incremental and logical step for JDA,” commented Brewer. “We are confident in our abilities to execute and deliver on projected synergies creating significant incremental shareholder value.”

Not everyone is so optimistic about this deal though,

Bob Parker,vice president of Manufacturing Insights, said in an interview that the deal gives JDA added scale when going up against the duopoly of ERP titans SAP and Oracle, but he cautioned that Manufacturing Insights is not particularly optimistic that JDA, based on its experience with Manugistics, is going to invest significantly enough to satisfy the i2 install base.

“The i2 user base, which has been very loyal and i2 has delivered a lot of value to them over the years, were willing to be patient while i2 sorted things out, and I think there was an expectation that at the end of the process there needed to be a vision for new investment and things needed going forward,” said Parker. “But I am just not convinced that JDA is the right company. We have advised our clients to have are placement plan in place [if needed] that they can execute. It is nota panic situation, but the long-term plans of shippers need to look at alternatives from either their ERP provider or some of the specialists that serve the needs of their industry.”

Which way she blows - that we shall have to wait and see. T’is the season of mergers and acquisitions!!

Tags: Another acquisition in SCM space, i2 Technologies, JDA, ERP, TMS - Transportation Management

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