Justin Fogarty's  Instablog

Innovation seems to be pouring out of the Tata Group at a very rapid clip. The Tata Nano, which relied heavily on the company’s suppliers for their cost savings and creativity, raised the proverbial innovation bar by dramatically lowering the cost of an automobile thus making them available to a larger portion of the Indian population (and perhaps the rest of the world in the future). Now the company is back in the headlines with a new, revolutionary, potentially life-saving product with huge demand. The Tata Swach is a low-cost water filter aimed at the HUGE number of people in India and worldwide who lack access to clean, safe drinking water.

I’ll let this CNBC video fill you in on the details of this low-margin, high volume (in terms of sales, not water volume) water purifier Tata want to have in 3 million Indian homes within the next 5 years.

Video here

The collaboration story thus far focuses on Tata Group companies. But I wouldn’t be surprised if the more in depth story on the life saving device (approximately 380,000 children die each year of diarrhea in India alone) actually tapped into their suppliers in order to keep costs down and innovation up. Given Tata’s success with that model in the past, it seems likely they’ve employed across much of the Tata Group, particularly when trying to achieve a game-changing design AND a low price point.

What’s the lesson here for other companies, that are striving for differentiated products at a lower cost than their competitors? Tata’s key to success seems to be … starting with a price point and product, then working backwards through the R&D process with a constant eye on the bottom line. And to get there, they rely heavily on their suppliers for innovation - in terms of specifications and process efficiencies.

Can you do the same? Are your suppliers ready, willing and able to help?

Yesterday, my colleague Pat Furey weighed in on the release of the November ISM Manufacturing numbers. His key take-aways from the data:

• PMI (Manufacturing Index) for November came in at 53.6, which still indicates that the sector is in expansion mode. This is the 4th consecutive month above 50, although the number was down slightly from October (55.7).
• The New Orders Index jumped to 60.3 (58.5) and the Inventories index dropped to 41.3 (46.9) - generally, this means that production will have to increase in the following months to close the gap between bookings and inventory levels.
• The Employment Index was down from 53.1 in October to 50.8 - while it is a positive sign that this index is still above 50, the drop is concerning and is yet another sign of relative weakness in the jobs market (further fuel to the jobless recovery theme).

And perhaps more importantly, Pat's analysis of what these November numbers mean for the broader manufacturing, employment and economic pictures:

"Overall, I see these numbers as a relatively positive sign that the recovery in the manufacturing sector is continuing. Most analysts had expected the overall index (PMI) to come in around 55, but I was expecting a number closer to 50 due to the expiration of some government incentive programs such as cash for clunkers. 53.6 still indicates that the market is expanding, so people should not over-react to the drop from October to November. Furthermore, the increase in the New Orders Index and the drop in Inventories indicates that production should increase in December. I expect that December will have another index reading in excess of 53, marking the 5th consecutive month of expansion.

The one area of concern is the employment numbers. The drop to 50.8 indicates that manufacturing managers are being extremely cautious on hiring, waiting to insure that the recovery has firmly taken hold. Again, the growth in bookings should result in an increase in production in December, which should result in an improved employment picture. Look for the employment index to tick back up in December.

The Services Sector numbers are due out on Thursday, so we will report back then. The next big piece of data we are watching for manufacturing is the Fed’s report on Industrial Production and Utilization, which is due out in a few weeks."

This post may be venturing off into “rant” territory, which is largely uncharted water for me. But an article in yesterday’s Wall Street Journal about the negative impacts that the Buy American Clause is having on some of the very businesses it’s supposed to help shows the fallacy of drafting government policy-by-marketing-slogan.

The Journal tells the story of Aquarius Technologies, a Wisconsin based company that makes sewage treatment equipment. Their industry has received billions of dollars in stimulus funds for projects around the country. Yet by their estimates, Aquarius may lose up to 25% of their total business if neighboring Ontario can no longer utilize them, due to Canadian retaliatory protectionist policies - a direct result of the Buy American Clause.

So in the end, a policy designed to help American workers may actually have the opposite impact on a subset of those workers, the companies that employ them and the towns they are from. The reason is that a complex issue, like global supply chains or interconnected commerce in border regions, isn’t easy to deal with using bumper sticker politics. “A strong dollar”, “buy American” or “tough on crime” slogans play well in short issue ads and intuitively make sense to the masses, but they miss the point when it comes to real policy.

Supply chains are longer and corporate “ownership” is muddier in the global economy. The auto industry is a perfect example, since in some cases, parts come from all over the world (especially when you consider the raw materials) to be assembled in the United States by American workers. And that’s before you even consider global “ownership” of public companies, the economic impact of the foreign auto dealership industry, or the fact that consumers are buying the cars they choose.

Bringing it back to the sewage treatment industry, it’s clear these marketing oriented policies also fail to capture the complexity and limitations in terms of capacity. For example, did policy makers realize that the Buy American Clause would slow supply chains due to raw material and production limitations when international trade is removed as an option? And did they account for the fact that this would also slow the rate at which stimulus funds enter the economy? Maybe, maybe not. But either way, it shows the complex issues surround capacity are not served well by marketing oriented policies.

Perhaps in the end, cooler heads will prevail. Oftentimes, politicians leave enough leeway in legislation to let the governing agencies interpret the regulations in a logical, efficient way. Maybe this WSJ story is timed to put more heat on the Obama administration before the G20 summit kicks off next week in Pittsburgh. Hopefully in the end we’ll get a policy that accounts for the complexity in our economy, labor markets and supply chains … even if it’s too verbose to fit on a bumper sticker.

Disclosure: No positions

Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.