Global supply chain specialist, Michael Hetzel, talks to Tecma about looking at the short and long term horizons.

Tecma Group of Companies:

Hello and welcome to another installation of Tecma Talk podcasts. If you are a repeat listener to these recordings, you know that Tecma Talk podcasts consist of conversations with experts that are both internal and external to the Tecma Group of companies. We talk about manufacturing in Mexico, and things that are related. Today is no different. An external expert is with us. His name is Michael Hetzel. Michael is an individual that has voluminous experience as a global supply chain specialist, and will speak to us today with respect to supply chain and its function.

Michael, how are you ?

Michael Hetzel:

I’m doing well. Thanks for having me in.

Tecma Group of Companies:

Michael, just so that the individuals that are listening to this podcast have a bit of a frame of reference from the perspective from which you speak, can you please provide us with a little bit of information about your personal and professional background?

Michael Hetzel:

I’ve spent eighteen years in manufacturing. Nine and a half of those were as the CEO of a metal stamping and injection molding company serving markets in automotive, electronics, telecom and so forth. We grew that company four hundred and eighty percent and sold it to a publicly traded company. I have spent the last thirteen years as vice president of business development for this hemisphere for a third-party quality services firm. We were providing services in thirty-eight countries. That assignment ended just this July. Along the way, I’ve also conducted a speaking practice. I make presentations to various groups, and also I publish articles on global trade, and supply chains and quality. Some of the groups include the North American Die-Casting Association, the Society of Manufacturing Engineers and others. I’ve spoken in five countries, so far, and, at this time, I am in transition and looking for my next exciting assignment in international trade.

Tecma Group of Companies:

That is a good thing for people that are listening to this Tecma Talk podcast to know, considering the fact that the experience that you have in this area is vast. For today’s discussion, we have five questions that we are going to look at. The first among them that I would like to pose to you, Michael, is: From your perspective, what are the most significant changes that are currently occurring in global supply chains?

Michael Hetzel:

Well, there are two tracks that are associated to what I am seeing in the supply chains. One track is related to the idea of short-term visibility, or the near term horizon, while the other has to do with the longer term horizon.

In the short-term, people are seeing a decrease in oil prices, which was impacting their overseas costs rather than their nearshore costs (in this market anyway). Unfortunately, in some cases, people tend to think that this is going to last forever. It’s like at one time, not long ago, they thought that high bunker charges, and so forth, were going to last forever. With respect to the longer term view, companies are adjusting their supply chains and architecture to reflect a longer term view of manufacturing their products in proximity to market. This is something that I have advocated for many years. Sometimes this means having supply chain elements that are comprised of the same inputs in several countries. In short, there is a lot of change going on. In the US market, for example, many companies are pulling back in from Asia. A couple of recent studies by AlixPartners and KPMG show that, overall, Mexico is a lower cost location to manufacture for the
US market than China is. From our experience, this is absolutely true, although Mexico has the constraint of a narrower availability of categories compared to some of the other Asian countries, particularly China. This issue can be overcome, therefore, this is where companies should be looking. There is a lot of exciting activity transpiring in supply chain architecture. Companies will benefit differently, depending on the outlook that they take.

Tecma Group of Companies:

Getting back to the concept that you mentioned regarding the two supply chain tracks that are out there, how do you expect the changes that are taking place in these two areas to over the next several years?

Michael Hetzel:

The first group that I mentioned has the shorter horizon that they plan for. They have tendency not only to chase lower cost “ex-works,”  but they also tend to “follow the crowd.” I’m going to go out on a limb here, some of your listeners are going to disagree and that’s OK because these are complex issues, but there are companies that have gone to China over the last couple of decades that belong there, and there are companies that went their because it became a fad. Unfortunately, the a lot of companies in the latter group had very poor results. Now some might say the same for Mexico, but no, not really. Nothing has occurred that is nearly the same as the China fad that has emerged since the early nineties. So, these types of companies, in my opinion, are going to keep chasing ghosts.

The companies that are viewing things from the perspective of a longer horizon have some excellent opportunities, because, to begin with, they are not going to be reevaluating, or repositioning supply chain assets every time oil prices change, or labor costs change or an exchange rate dip. Unfortunately, since the 80s and the “financialization” of the US economy, we have taken a shorter and shorter term view of these considerations with the publicly traded companies because of the Wall Street gambling operation. Private companies, to their credit, have said, “wait, let’s step back this isn’t all about quarterly earnings.” It’s about “where are we going to be in the next few years,” and “where are we going to be in the next decade?” That’s where private companies can benefit.

There are secondary influences, as well. People need to look at, for instance, Mexico and its supply chain. I can’t even keep count anymore. I think that the last time that I looked. Mexico has 44 Free Trade Agreements, or FTA’s. Consequently, if you are manufacturing there, you have the secondary benefit provided that your product has opportunities in any, or all of the countries that are covered under the terms of the FTA relationship. Asia, China, Vietnam and also India, and so forth, have a different positioning with regard to that. Taking a longer term look, and creating a longer horizon, and then incorporating that view with current reality, while making sure that that current reality is continuously updated, will put a company in a better position. Arguably, identifying the current reality for the team, and then getting out of the way, is the number one job of a CEO. I say arguably, but give it some thought.

Tecma Group of Companies:

Michael, you just spoke about how to best navigate the global supply chain in the long run. I have read some of your material, and there is a phrase that you sometimes use, and let me quote it, “to overlay supply and market structures.” Speaking from the perspective of a global supply chain expert, can you tell us what that term means?

Michael Hetzel:

Absolutely. Many companies still have silos in their organizational structure. I do some consulting work on the side. I present workshops for companies often, after they hear one of my presentations. I have been at companies at which everyone is sitting around a table, and, when they begin asking questions, I have to say, “Hey wait a minute. When was the last time that you all met?” Often, I will get an answer like, “This is our annual meeting.” I will ask them, “Are you in different buildings?” They’ll answer something to the effect of, “No, supply chain is down that hall. There’s purchasing and logistics. Marketing is down this hall. Sales is over there and engineering is over there.”

What often happens is that companies create their supply chains in isolation based upon supply chain metrics. As a result, they create their market structures in isolation as far as segmenting the market. This is how they find opportunities for their products. What I propose, and what I have done with a number of companies, is to create a matrix that allows companies to take a supply chain asset position that allows companies to see how it is related to a market or a potential market. Being able to see things in this way, rather than in isolation, greatly changes the decision-making process within the disciplines that you would now have collaborating.

So, overlaying supply chain and market structures method of preventing the existence of isolated islands of supply chain assets, and having close logistics for a major market while isolating a potentially major market from the perspective of logistics. This allows the company to be built with both items in correlation. In this manner, both disciplines are communicating in a dynamic way that allows for a more robust build.

This is where I will bring up another piece that I have written quite some years ago, and it continues to be valid. It incorporates a term called “strategic overshoot.” If you Google the term, you’ll find military references. Those are not mine. The commercial version is the one that I am proposing. What this pertains to is the tendency to decide to operate in another country, often China these days, before having made a careful analysis of the actual business and market conditions in order to rationalize the decision. In these cases, the answer to fulfilling defined goals and objectives is often much closer to home. This is an important point, when you consider that, once you overlay the supply chain asset potential and the market potential, you are going to see a different picture. It’s time to tear down the silos. This idea also applies to quality management. When you look at quality, different markets have different expectations.

Consequently, to have to reinterpret the outputs of a supply chain asset for these different markets when you have these distances that haven’t been overlayed and consolidated adds a new level of potential failure modes to your entire output structure and performance in the marketplace. This is one of the more complex issues related to your questions. Of course, all of the items in this discussion are really just a very general overview. We could devote entire days to each one of the items. My objective here is for your listeners to take this information, and to give it some thought. Also, to give it a try and to do some direct research. Forget the media. Forget trade media, popular media. Anytime you see something in one of those informational outlets that would relate to your business, make the effort to do some direct research in order to get a true picture and, then, lay it into this overlay in order to get best results.

Tecma Group of Companies:

That is excellent advice. You are absolutely right. To cover each one of the questions that we are discussing today, from the perspective of a global supply chain specialist, would fill a full day, or even more. Since we are limited to the time of this podcast, however, I would like to ask you one last question: Do you have any specific comments, that fall within the framework of what we just discussed, that would be particularly applicable to our audience’s interest in Mexico?

Michael Hetzel:

Absolutely. Mexico has been an area of high potential for quite a long time. I have a good comment, and, maybe, a not so good comment there. If you follow the track of China from its opening in the 1970s until the first free trade experiment in Shenzen in the 80s, there they were pursuing foreign direct investment (FDI) very aggressively. This was because they didn’t just need the factory, they needed the road to the factory, they needed the port facilities and so forth. If you look at the early 1990s, however, they made a number of policy revisions that caused their entrepreneurial group of citizens to just explode into a broad range of categories and sizes to allow companies to find things.

Mexico, in terms of its policies, has continued to stay focused on FDI, more so than China, which has held it back. However, Mexico and its supply chain,  has something that I personally have not seen in China. Mexico offers the opportunity for manufacturers to work with shelter companies. With a Mexican shelter company, nearly any sized company is able to harvest the benefits of Mexico. This includes, importantly, proximity to market and the free trade agreements with forty something countries, if it’s not fifty already. This happens while, at the same time, the manufacturer has full control over its own production processes. The maquiladora industry has a benefit that now extends beyond China. Now, also, Mexico is less expensive in many ways.

When it comes to a company that is looking for the best distribution of supply chain assets, as well as having done their homework and their market segmentation, and is overlaying where their market structures are going to be, I think that they are more likely to find that Mexico to be a better key operating country than China, or even the United States. This is even if the United States is their primary market.

In the work that I did in manufacturing, Mexico became a major export destination for us as we grew that company. We were also exporting to Asia and to Europe. Part of the reason for all of this had to do with following clients that were building their operations Mexico and, then again, didn’t have the range of input categories available. This continuously changes and grows.

The other thing has to do with when you look at oil prices. Some people will say, “Well, now China is cheaper again.” First of all nothing gets more valuable riding on a boat. Think about that for a moment. We give too many ocean cruises to our television sets and not enough to our workforce. Mexico eliminates all of that distance, and all of that time and logistics. It eliminates gap inventory. It eliminates obsolescence risk, and opens doors to mass customization that is really what is increasingly becoming a market demand. For me personally, not just because I am speaking to Tecma, the fact is that Mexico is the place to be. It really has moved forward. If you can’t find it there, you can make it there yourself through a Mexican shelter company, or with your own FDI.

It is convenient to this market. It has free trade agreements with other markets. It has tremendous balance and close proximity that facilitates managing quality, engineering and other aspects of the business. Also, we can’t forget language. As far as China goes, there isn’t nearly anything that is analogous to English. It is a different thinking process. However, Spanish and English are not that far apart.

We have found that the quality industry that translations that are prepared for the Mexican workforce are easier to do and are much more robust. This is a point that I could also go on about  this from the perspective of a global supply chain specialist, as  well, but I will just shorten my answer here. If I seem to be overly ebullient about Mexico, there is a good reason. I’d be happy to discuss that with any of your listeners, if they need more detail.

Tecma Group of Companies:

Michael, that is a great lead in to the last question that I typically ask folks that participate in Tecma Talk podcasts. If somebody wants to get into contact with you to discuss any or all of the points we have gone over, how would they go about doing so?

Michael Hetzel:

They can always give me a call on my cell phone. The number is 708-710-5935. They also can email me at mlhetzel@northerngalaxy.com. I would be delighted to hear from anyone. It has been a real pleasure speaking with you today to cover this topic.

Tecma Group of Companies:

The pleasure has been all ours, Michael. Good luck to you in your future endeavors.