Security Printing and Imaging : Outsourcing

A Weapon to be Used Against Us?

StevenSimske — Mon, 23 Mar 2009 03:43:00 GMT

A former UK colleague of mine once asked me, "How much confidence do you have in my programming abilities?" Well, he was a pretty good programmer, so I said, "Plenty."

"Good," he replied, "because my code is helping to fly this [British Airways] plane."

Do we have the same confidence in our military airplanes? According to this Business Week article, we may have no reason to:

http://www.businessweek.com/magazine/content/08_41/b4103034193886.htm

"Fake microchips flow from unruly bazaars in rural China to dubious kitchen-table brokers in the U.S. and into complex weapons. Senior Pentagon officials publicly play down the danger, but government documents, as well as interviews with insiders, suggest possible connections between phony parts and breakdowns."

So, the first threat is the normal counterfeit threat--sub-par parts threaten sub-par performance: "...a chip falsely identified as having been made by Xicor, now a unit of Intersil in Milpitas, Calif., was discovered in the flight computer of an F-15 fighter jet at Robins Air Force Base in Warner Robins, Ga. People familiar with the situation say technicians were repairing the F-15 at the time. Special Agent Terry Mosher of the Air Force Office of Special Investigations confirms that the 409th Supply Chain Management Squadron eventually found four counterfeit Xicor chips."

The article points out instances in which counterfeit parts may have led to plane crashes (this may be true of several civilian airplane crashes, by the way). The article also notes...

Robert P. Ernst, who heads research into counterfeit parts for the Naval Air Systems Command's Aging Aircraft Program...says the Hakimuddin episode helped him realize how blind the military has been: 'We don't know how big the counterfeit problem is, and, to me, that is irresponsible.' Now he's trying to get others in the bureaucracy to confront what he considers to be a crisis: 'The risk of counterfeiting is so high, and the cost to our weapon systems is so great, that we need to take action.' Glenn Benninger, a senior civilian engineer at the Naval Surface Warfare Center in Crane, Ind., concurs: 'Counterfeiting has literally exploded over the last few years, but not a lot of people have been paying attention.'

That is a threat to personal safety. National safety, however, is the responsibility of the military. When the chips used for a nation's military equipment comes from a country with a sometimes tetchy relationship (e.g. China), the temptation to put "backdoors" in the instructions on the chip must be high. Does it make sense to trust these chips?

Even some of the outsourced don't think so...

Hong Kong Fair's Jiang, the alleged supplier of counterfeit chips to BAE, argues that if the U.S. military wants guaranteed high-quality chips, it should purchase them directly from the original manufacturers or their official franchisees. "Why do you come to China to buy it? You know that these things in China are cheap," Jiang says. "Why are they cheap? They have problems with quality."

I do not claim that all things built in China are poorly built. But, in general, as elsewhere, you get what you pay for. If you're purchasing from/outsourcing from China to be cheap, well then, cheap is what you're going to get.

Having established that quality is an issue, in the case of military equipment it may not even be the main issue. The possible breach of national security is yet another strike against the outsourcing of production to a non-invested party. In this case, perhaps even a party with a vested interest against you. As I've posted in past blogs, outsourcing is not by default a bad idea--but outsourcing only makes sense when the outsourced parties are partners in the plans forward. The outsourcing of military hardware seems, then, merely the most striking example in a continuum of bad decisions.

As for my programming friend, I was really grateful for his vested interest in the successful functioning of the British Airways plane when our plane had to suddenly pull back into the air traffic over London when another plane had failed to clear its landing runway. Vested interest comes from equal partnership. All outsourcing should strive to create a true partnership.

Cheers,

Steve

(Thanks to Martina Trucco for the link)

Many Manufacturers Moving to Mexico

StevenSimske — Sun, 14 Dec 2008 22:24:00 GMT

A recent BusinessWeek article highlights the more cautious approach many manufacturers are taking with regards to China. The biggest single issue appears to be intellectual property theft, although product quality and other issues (cost of fuel, logistics of extending your supply chain halfway across the world, etc.) certainly play a role, as discussed here in past blog postings.

"China ranked highest in 9 of the 15 risk factors. Rising labor costs are still an important factor for businesses, with 35% citing China as the leading source of concern. Other risk categories where China ranked highest included regulatory compliance, commodity price volatility, supply-chain security breaches, and information technology problems."

businessweek.com/bwdaily/dnflash/content/nov2008/db20081126_315336.htm

"...quality concerns are among the chief reasons U.S. manufacturers are scaling back plans to source more goods from China. Instead, U.S. companies are looking harder at Mexico and other locales closer to home when exploring where to put new capacity."

I have seen this shift in many of the product lines I work with over the past couple of years. Mexico (see http://www.lmtruck.com/articles/petemplate.aspx?storyid=280, for example, to see how Mexico specifically "benefits" from higher fuel costs: "Moving to regional distribution means inventory can be reduced...because firms can take advantage of next-day delivery and cross-docking services to keep goods moving.") and Brazil now factor highly in any US-external manufacturing partnership.

Does this mean the Mexican or Brazilian governments do a better job of protecting intellectual property rights? In some cases, perhaps so, but overall it is likely due to the nature of their manufacturing industries compared to that of China's. Smaller, arguably more centralized (and certainly occupying far less territory), and more closely associated with "western" customs, Brazil and Mexico nevertheless, combined, have a population approximately that of the U.S Meaning, if these developing nations were to become "developed", their middle classes might match China's (or India's) in size. Mexico and Brazil are also much more energy independent than China (the US still imports roughly as much oil from Mexico as it does from Saudi Arabia).

My argument has been, consistently, to make sure that any overseas manufacturers are integrated into your company--not simply "the cheapest option". Without showing loyalty, you can expect none in return.

US firms, in general, may have a culture more similar to Mexico and Brazil than to China. Being able to schedule meetings during normal business hours is, frankly, a big plus for me personally. Overall, there is no reason to believe manufacturers are going to bail out of China en masse--more than likely, the days of highly discounted overseas manufacturing are over, and businesses will be looking at many countries--including China as one option--before deciding on the location for partnership.

[Thanks to Greg Merten for the link!]

Cheers,

Steve

NY Times article covers topics discussed here in July

StevenSimske — Sun, 03 Aug 2008 19:46:00 GMT

My blogs of July 5 and 6 were concerned with how the price of oil may be the tipping point for a turn from unchecked outsourcing. The NY Times ran an article today covering the same topic.

Shipping costs start to crimp globalization: http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html?partner=rssnyt&emc=rss. The article uses the same example of furniture production, and cites security and global warming as key concerns as well. It does not mention the Unflat Earth, but this may be because Friedman writes for the NY Times.

Regardless, this shift from globalization to localization, inevitable with the arrival of Peak Oil (it may already have occurred) will weigh heavily on supply chains in the years to come. How will this impact your business? The need for security will not diminish--there are likely, in fact, to be even more locations in your value chain, since instead of mass manufacturing in the cheapest-bidded global locale, products will have to be produced in multiple places. Tying security directly to the production--manufacturing, printing, inspection and registry creation--will only be more important under this new reality.

-Steve

Counterfeiters Beware--What Comes Around Goes Around?

StevenSimske — Sat, 26 Jul 2008 06:34:00 GMT

A four year sentence for selling counterfeit pharmaceuticals? The pharmaceuticals were worth $400,000, so the sentence is more draconian than many for counterfeiting. However, there are extenuating circumstances.

Outsourcing-Pharma.Com (http://www.outsourcing-pharma.com/news/ng.asp?n=86605-viagra-pfizer-counterfeit) reports that Ivad Dogmosh sold fake Viagra, but "[t]he antibiotic metronidazole was detected in the pills, which has side effects including seizures, fever and bloody diarrhea. In addition metronidazole interacts with alcohol, which can result in nausea, flushing or headaches." Viagra is the most often counterfeited pharmaceutical on the planet, which is saying a lot--fake pharma is reasonably estimated as a $75 billion/year industry.

However, this story may have an ironic twist (I'm speculating here, but hear me out). Based on the severity of the sentence, it is likely that Ivad was penalized more harshly because of the metronidazole. I can picture him at the trial, declaring "But, Mrs. Judge, I swear I never intended to put metronidazole in the pills. I meant for them to be sugar tablets". Which implies that Ivad was not in control of his supply chain. He may have gone too far in his outsourcing, and scored the dye, expedient or other ingredient from (gasp!) a disreputable sort. Imagine that, Ivad was both the perpetrator and victim of counterfeiting.

What kind of a world do we live in when a counterfeiter can't even trust his supply chain!?

-Steve

The Price of Oil, Part 2

StevenSimske — Sun, 06 Jul 2008 19:49:00 GMT

Yesterday's blog focused on three reasons--the most important of which for this blog is counterfeiting and related fraud--why outsourcing to disengaged, unaffiliated third parties may be disastrous to your brand long-term. Today's brief addendum is to outline how to counter this, and how outsourcing as part of your strategy best makes sense. Future blogs will dive into these topics in more depth.

1. Counterfeiting can be countered only by a well-defined eco-system in which deterrents, processes, information and people all play a part. A previous entry on this blog (www.communities.hp.com/online/blogs/securityprinting/archive/2008/05/12/HPPost6337.aspx) addressed how to PRACTICE good anti-counterfeiting techniques.

2. The earth is not flat...yet. If you want to have engaged partners around the world, you have to work to even the playing field. Eventually, healthcare, environmental, auditing, compliance and other factors involved in selecting a spot to design, manufacture and assemble products will be more uniform. The world will be, truly, more flat. However, until that date, respectful citizens of the planet will work to improve the working conditions and environmental impact of doing business everywhere. Even if only out of self-interest, this strategy makes sense.

3. The price of transportation of goods. Years ago, Toyota and other Japanese car makers were targets of media criticism because they are "foreign owned". However, Toyota and others are now manufacturing in the USA, offsetting much of the transportation costs and providing jobs for locals. Toyota still has work to do, if one believes the blogosphere, but at least on the surface they are following the maxim of "engage your potential customers in the development of your brand."

The latter point deserves some comment. If you outsource to a manufacturing locale where people would prefer buying generics or knockoffs to purchasing your own product, you need to rethink your outsourcing strategy. Engaging all your employees is, in general, a better long-term strategy. And long-term thinking is just what many businesses need to re-learn.

The Price of Oil May Swing the Outsourcing Pendulum

StevenSimske — Sat, 05 Jul 2008 07:35:00 GMT

I once met the Dalai Lama. I was in Bangalore (now Bengaluru) for work and he walked into the hotel lobby where I was meeting with some colleagues. I got out of my chair and turned around to leave for another meeting, when he and his entourage were walking in. As I nearly ran him over, I suddenly realized who he was. I blurted, "You're the Dalai Lama!" right as I realized it. He looked at me, serenely, with a hint of a smile, and replied, "Yes, I am" and continued walking past.

Sometimes, all one can do when in awe is simply state the obvious.

Which leads to the subject of my blog today. How can one but be in awe of the "unexpected" consequences of globalization-as-outsourcing? I have commented on this subject several times in past blogs, but today I'd like to gather some of these thoughts into one place. When computing the value of outsourcing, this is the short list of items that are conveniently left out/ignored altogether by the powers who are pushing for globalization and outsourcing:

1. Counterfeiting, product diversion and factory overruns. As flagship topic for this blog, it is hardly surprising what the #1 ignored consequence of Byzantine supply chains, increased use of middlemen for assembly, warehousing and transport is. But it still boggles my mind to think how large a problem is continually unbooked in the cost column of the supposed "Flat Earth". More than $1 Trillion (1 million $million!) dollars of counterfeit, diversion, factory overrun, product/package reuse, warranty fraud, smuggling and salting, and still no one in "polite society" pins this cost on so-called globalization or the "Flat Earth"? It's the Emperor's New Clothes on a much grander scale--except I'm calling it as it is today. Supply chains are totally exposed. Cover up, companies, or consider yourself dethroned.

2. Evasion of the local laws. Sure, every large company claims they're simply "staying competitive" with their competition as they try to squeeze the last penny out of their costs. The truth is, most of this cost is due to finding out how the Unflat Earth (the real one, which still has countries, with different laws and rules and requirements in them) works and using it to advantage. Can you find a country with no health care costs? Great, put your assembly line there. Can you find a country with relaxed environmental laws? Excellent place for any pollutant-producing manufacturing operations. Companies aren't necessarily choosing where to place their employees based on a Flat Earth--that's just spray-on gloss to hide the Unflatness they're actually exploiting.

3. Green/energy. This one actually may be the one that swings the outsourcing pendulum. With fuel costs soaring as China (with the combined population of Europe, US/Canada and Japan) modernizes and learns to squander its carboniferous capital with the best of them, it suddenly looks a lot less intelligent to cut down trees in North Carolina, pack them on a sea-going behemoth, unload them in China, convert them into tables and chairs, and ship them back on the same behemoth to sell in North Carolina. This double-shipping cycle happens now. But, guess what? The factory that used to make furniture in North Carolina just might save money by building the furniture locally and saving the fuel costs. Yes, the workers might make $40,000/year more, but the price of oil is so high (and the value of the US dollar so low) that the furniture manufacturer may decide it makes sense to make sure the people who you want to sell to can actually buy something. (I won't go into the environmental/green benefits right now, but in the spirit of the 4th of July, will simply say that these green truths are self-evident).

I am oversimplifying here, of course, for effect. Not all outsourcing/globalization has these consequences. And, as I've stated before, a truly flat earth, unlimited by the actual unflatness described above, might make for a much nicer planet overall. The fact remains, nevertheless, that the current state of how products are produced naturally leads to counterfeiting, to the taking advantage of unflatness in the guise of flatness, and to the overuse of fossil fuels. I believe, however, that this will change when brand owners understand the tremendous threat to profitably, reputation, safety and sustainability these three phenomena--counterfeiting, unflatness and energy overuse--cause.

So, when you see counterfeiting, the revenge of the unflat earth, or the double-shipping phenomena, don't feel embarrassed to simply state the obvious. In the presence of such an awe-inspiring event, it is OK to simply say, "Hey, you're the logical consequence of outsourcing!"

-Steve

p.s., in discussing "costs", there is a recent trend in HP that I find amusing. Recently, it has become fashionable to use the word "spend" as a noun. As in "HP has too much spend in I.T." Or, as in "HP has too much spend in travel". Or, as in "HP has too much spend in spinning its spending as spend, and its spend spinning is spent." I looked it up--there are many definitions for "spend" on dictionary.com, and not one of them a noun (http://dictionary.reference.com/browse/spend). Is "spend" this year's "leverage" or "synergy" or "disruptive technology"? Only time, and the jargon police, will know for sure.

Tomatoes that terrorize--or the recall to recall

StevenSimske — Sat, 21 Jun 2008 06:15:00 GMT

There are three topics that, as part of the HP community blog team, we are not to discuss on our blog: religion, politics and the ingredients in a hot dog. The topic I discuss tonight is a close fourth. So, I will try to be a little delicate here.

The recent tomato recall (http://www.fda.gov/oc/opacom/hottopics/tomatoes.html) may end up being as severe to the tomato industry as the cod moratorium has been to the Newfoundland fishing industry. Based on the cost of present goods and the infrastructure depreciation, etc., a year's loss of sales translates into roughly 10% lost value in an entire industry. Meaning that no tomato sales this year, and the tomato industry is worth 90% of what it was worth before this year...for a long, long time. Was that 10% factored into the "streamlined" supply chain the tomato--like any other agricultural--industry uses to reduce costs, provide just-in-time inventory, and devalue tomato picking? Of course not. Like counterfeiting, massive recalls are simply not modeled by the proponents of the just-in-time, multi-input, massive throughput supply chains that describe virtually every product type on the planet today.

We all know the stories about how many different cattle you're eating when you eat a burger (again, I must not talk about the hot dogs)--it's in the dozens. But do we know how many different raw material providers are involved in the production of a pharmaceutical? Of a tea bag? Of an automobile? Dozens, hundreds, thousands? The more there are, the harder it is to audit each and every element of the product provenance. So many have given up trying. Close your eyes, pretend it won't happen to you, and when it does, well, pull everything off the shelves--TOTAL RECALL. Aside from the incredible waste of such a recall, the lauded efficiencies of scale under non-recall situations simply don't ring true either.

For the food industry, one need look no further than Pollan's excellent book, the Omnivore's Dilemma (http://www.michaelpollan.com/omnivore.php), to see how "supply chain efficiency" has resulted in tragic inefficiency (fossil fuels are converted into corn syrup that converts us into obese diabetics). An Amazon.com (Bunny Crumpacker's) review of it (http://www.amazon.com/Omnivores-Dilemma-Natural-History-Meals/dp/1594200823) notes ominously:

"Each bushel of industrial corn grown, Pollan notes, uses the equivalent of up to a third of a gallon of oil. Some of the oil products evaporate and acidify rain; some seep into the water table; some wash into rivers, affecting drinking water and poisoning marine ecosystems. The industrial logic also means vast farms that grow only corn. When the price of corn drops, the solution, the farmer hopes, is to plant more corn for next year. The paradoxical result? While farmers earn less, there's an over-supply of cheap corn, and that means finding ever more ways to use it up."

All this to have a just-in-time inventory? When gas hits $10/gallon (and it will...soon) will it still be worth it? It costs nearly $1000/day to run a farm tractor already (just ask a farmer). Why have we allowed this to happen?

So, add recalls to the lengthening list of why outsourcing to unaffiliated parties is a recipe for disaster. Here is the potentially delicate subject. I am not against all out-sourcing, and a true Flat Earth is not a bad thing. But we all know that the earth looks flat from space (the earth is size-proportionately smoother than a cue ball), but up close it has all these inconvenient hills, dales, valleys, vales, arroyos, lifts, canyons and rifts. It's messy in the details. Nothing is flat, not even Friedman's cerebral cortex (sorry, too easy a joke there, but Friedman seems to think that people with the manufacturing jobs somehow won't learn how to design and be creative--a huge oversight, in my opinion). If you outsource to people you're intentionally hiring to save costs, you have opposing motivations. You want them to cost less, they don't care if you succeed. You think they're cheaper than employees, they think you're too overstretched to look too closely.

In short, you're asking them to try to cheat you. Guess what? In many cases, they're happy to oblige. And it serves you right. Outsourcing to disenfranchised third parties is a very short-term strategy that has been deployed for medium-to-long-term already. Take a cup of cluelessness, add a dash of denial, and you've got a supply chain that doesn't hold to inspection.

Which brings us back to those terrorizing tomatoes. What went wrong? Sure, Sam and Ella, that dynamic duo, reared their ugly heads. The problem was, no one knew where their necks were. The supply chain is simply too convoluted, with too many on and off ramps, that trying to do a partial recall is simply not worth the effort.

Time to reclaim the supply chain. It's not just about counterfeiting. It's about knowing what you're actually getting.

-Steve