The Wall Street Journal often has some thought-provoking articles. Occasionally some are truly lean-oriented, but most of the time they may slightly touch a lean concept. Monday’s Journal had several such articles, none of which warranted a full post commentary, so the following is a bit of a mish-mash all at once.
First off, on the front page is an article titled Ship Shortage Pushes Up Prices of Raw Materials. How long have we been preaching about understanding the total cost of offshoring and outsourcing? Labor savings, which are questionable to begin with, can only go so far.
The average price of renting a ship to carry raw materials from Brazil to China has nearly tripled to $180,000 a day from $65,000 a year ago. In some cases, ocean shipping can be more expensive than the cargo itself. Iron ore, for example, costs about $60 a ton, but ship owners typically are charging about $88 a ton to transport it from Brazil to Asia.
And as the article goes on to point out, the shortage of ships is pushing up prices across the board… including the delivery of finished product. I won’t go into the potential quality, cash tied up in WIP, and other costs associated with having loads of product floating on the high seas. What was your total landed cost… and potential liability… again?
It’s amazing how markets can trump regulations any day. With gas prices shooting skyward, SUV’s are suddenly out of favor and automakers are focusing on smaller cars. Companies with efficient and nimble design programs are moving quickly, and those that continue to be focused on the glories of trucks might be in trouble. Although small vehicles as a whole pose a challenge.
The industry’s shift poses a challenge that no car maker has managed yet to meet: how to make decent profits. Trucks and SUVs earn 10% to 20% margins, which for many popular models can mean $2,500 to $5,000 profit per vehicle. Even the best-selling small cars like Honda Motor Co.’s Fit and Toyota’s Yaris subcompact earn margins for manufacturers of just 2% to 3% — about $300 per car. In emerging markets, the cars are sold with fewer profit-boosting features, so car makers earn even less.
But a 20% margin on a vehicle that doesn’t sell creates… hmmm… not much cash. Amazing how accounting works.
It’s always a good idea to have a good understanding of what your organization is good at. Occasionally we try to branch out a bit to hit a broader market or new opportunity, but most of us try to move slowly and deliberately. And those that take wild swings… well, occasionally they hit an opportunistic home run, but often than not they wake up wondering what the heck they were thinking.
Aluminum giant Alcoa is getting out of the plastic-wrap and some automotive businesses. Newmont Mining, the world’s second-largest gold producer by output, plans to jettison its merchant-banking unit. And Anglo American, the No. 2 mining company by output, has put its Tarmac road-surfacing unit on the block. Economists call it respecialization. Companies call it focusing on core assets, and it comes and goes in cycles.
But tell that to Japanese brewers like Kirin, who are thinking about brancing out into pharmaceuticals. There’s an interesting side point to this phenomena however:
Kirin’s latest move underscores a fundamental difference in the way Japanese brewers are approaching their future compared with their Western counterparts. Because buying a company within the same industry often requires layoffs and closures, Japanese companies tend to avoid mergers. That has enticed Japan’s four big beer makers to seek ways to diversify into far-flung areas, from baby food to flowers.
I like that thought process. Or perhaps it’s the thought of beer-flavored cold medicine.
And finally, albeit not from the Wall Street Journal, is a lesson on branding. If you had a global brand recognized for excellence, power, and beauty, what other product would you partner with to promote the brand? Presumably something known for excellence, power, and beauty? Tell that to Ferrari, who has partnered with Segway to co-brand one of their two-wheeled contraptions. Granted, it’s a cool machine, but one that hasn’t come close to living up to expectations. Does the Ferrari Segway go faster? Nope. The only change is that it’s red with a Ferrari coat of arms.
Vroom! Sometimes you just have to wonder.