"One on One: An Interview with Willis D. Pugh" By Interview by Jill Schildhouse, Winter 2006, Vol. 42, No. 1, p. 2
Journal of Supply Chain Management Copyright © February 2006, by the Institute for Supply Management, Inc.
Interview by Jill Schildhouse
Jill Schildhouse, writer for Inside Supply Management®
Willis D. Pugh is the executive director for Honeywell's Aerospace sourcing organization, responsible for the mechanical commodity group's $1.5 billion spend. In this role, Pugh leads the mechanical commodity team based out of Phoenix, Arizona, and the global IPO teams located in Asia, Mexico and Eastern Europe. Pugh is a graduate of the University of Alabama School of Engineering. Upon graduation, he spent 11 years working as an industrial engineer and quality engineer for Square D - Schneider Electric before moving into the company's purchasing organization. At the time of this interview, Pugh served as vice president of the global sourcing organization for Fleetguard Inc. He was responsible for the global supply and sourcing strategy for the filtration business unit. During his time with Fleetguard, one of the tools Pugh used to better understand and manage the risk associated with sourcing and globalization around the world was a PEST analysis.
The Journal of Supply Chain Management: What is the PEST analysis?
Willis D. Pugh: The PEST analysis — which stands for Political, Economic, Socio-Cultural and Technological — helps you understand some of the challenges you are going to have in a particular country. If the government structure changes, or the country reevaluates its currency, what impact will that have on your business? What's your elasticity to those changes? What do you do to mitigate those risks as it relates to political, economic, social, and technology concerns?
We've only been using this analysis method for 2-3 years, so it's still a relatively new tool to us. We use both SWOT (Strengths, Weaknesses, Opportunities, and Threats) and PEST analyses, depending on circumstances. When thoroughly evaluating different regions and countries, PEST works very well; SWOT drills PEST down further to help us understand the risk analysis associated with a particular project within that region.
The Journal: Can you describe how you use each of the four components of the PEST analysis?
Pugh: The first thing we do from a political standpoint is understand the governmental policy in that region. And most of this is done for us by our international procurement office (IPO). These are our in-country knowledge experts. Most of them are nationals who live in those countries. Their role is to tap into — via the Web, newspaper or directly tie into their government officials — and fully understand such things about that country as the tax policy, employment laws, regulations, trade restrictions, tariffs, and political stability in addition to understanding and assessing the availability of raw materials and supplier development opportunities in their respective regions.
With economic factors, we are trying to get a feel for the year-over-year growth for that country (i.e., gross domestic product). And we look at inflation and exchange rates. We do a formal update twice a year on the status. For example, one of the things we immediately reacted to recently was the reevaluation of the Chinese currency Renminibi (RMB). Previously, RMB had been pegged to the U.S. dollar. Because of that change in currency, it will have an approximate 2.5 percent impact on any exporting you do out of China. This change prompted us to conduct a high-level sensitivity analysis to understand the financial impact this change would have on our export sourcing projects from the region.
In terms of social factors, we focus on the health consciousness of that country, population growth rates, the demographics and age distribution. For instance, in terms of GDP per capita, we project that by 2050 China will be where the United States was in 2000. That's important to us because there is a prospering and growing middle class in China. Now, when you go to China, you see more cars, iPods, and those types of things. China is beginning to open up its borders in terms of its government. Clearly they do not have a democracy like India does, but they are becoming much more open. And the 2008 Olympics in Beijing is a good sign of that. The social assessment is more subjective, based more on soft metrics, but it is tied back to the same economic factors as well.
When assessing technological factors, the analysis becomes infrastructure-based. As best we can, we try to get a factor of rate of technological change year over year in that region. How much R&D activity is being done on percent of revenue by the companies in that country? Automation is another concern. Also, look into the highway systems. The biggest thing is infrastructure relative to telecommunications and wireless Internet.
The Journal: At what stage should this analysis be conducted?
Pugh: The full PEST analysis is best done in your initial analysis phase. By doing this, you will pull the GDP data and the labor rate information for that country. You would typically do this in the earliest phase of evaluating your options around the world. Likewise, we do the formal reevaluation of all four parts semiannually. With in-country experts, if there is any immediate change in any one of those four, we have a meeting to evaluate the impact of the change in the short and long term. Also, with this cause and effect assessment, we attempt to anticipate future changes that may occur as a result of the change in question. There will always be some ad hoc things you have to react to.
The Journal: How would a company do a PEST analysis without the resources of in-country experts to do research?
Pugh: You can rely on something we didn't have 10-15 years ago: the Internet. Additionally, countries such as Mexico, Brazil, India, and China have very robust economic development centers, or chambers of commerce. They will have a package for large OEMs giving you a feel for the raw material availability in that country, the labor force, technology, number of technical schools, and so forth. This information is clearly tilted toward you making the investment in the country, but a lot of the information is relevant. They will typically share with you names and addresses of some of the companies located in that region. I would not advise using that information solely; it would be one aspect of my collective research.
The Journal: Do clear-cut answers emerge from a PEST analysis?
Pugh: Some aspects of the financials are clear-cut, such as the labor rates and other economic indices. When you get into assessing some of the more subtle risks of global sourcing, a good business team has to make some additional evaluation based on both objective and subjective data. We use a Six Sigma tool for that cause and effect analysis. So now we have this PEST analysis and we've narrowed it down. Now it's a matter of making the right decision between two or three options.
The Journal: Are there any pitfalls with the PEST analysis that you have encountered?
Pugh: Logistics management is a subset specialty area you have to address. This area isn't directly tied to PEST analysis, so you have to come back and add additional assessment relative to containerization, port accessibility in the country, how easy it is to move material to and fro within that country. While it is implied in some of the economic pieces, that's a separate area we've had to come back to and address.