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In the past, it was not very often that we would have the opportunity to view on the front page of the Wall Street Journal an article that directly concerns developments in global supply chain strategy  That was before the onslaught of the global recession. Now we find supply chain related stories often on the front page.



Today’s U.S. edition of the Journal has the front-page headline, ’Bullwhip’ Hits Firms As Growth Snaps Back.”  (paid subscription required) The article cites events occurring within the supply chain of global heavy equipment manufacturer Caterpillar Inc. as a reflection of a large inventory replenishment cycle currently underway and the inherent risks it can cause.  It also raises two important and rather pertinent questions. Will the current inventory replenishment cycle cause the “bullwhip effect” to again amplify through the various tiers of the supply chain?  Will suppliers have the ability to scale-up activities to meet this new demand given the rather fragile financial and operational state that suppliers currently find themselves?



This article is a must-read for our supply chain community and cudos to Journal reporter Tmothy Aeppel for a well written article.



I’ve often commented on the Supply Chain Matters blog that the overall level of inventories is at unprecedented low levels across the globe.  The WSJ article cites the overall reduction as $207 billion since the financial crisis began, and further notes that the pendulum began to swing in October and November, when total inventories began to grow. This data adds further quantifiable evidence that an inventory replenishment cycle is currently underway.  What comes beyond the current cycle is the open question.



My biggest concern therefore remains on the second question, namely, how will suppliers know when demand has moved to a more sustained growth cycle and, when that occurs, what capabilities and/or resources will suppliers have to scale-up in a timely manner to stay ahead of such demand.



The WSJ article addresses these concerns through the example of Caterpillar Inc. and its outreach to its supplier network.  Caterpillar CEO Jim Owens has a PhD in economics, and that has pertinence to his understanding of “bullwhip” phenomenon in suplly chain networks. The company has prepared a number of potential business scenarios regarding business activity in 2010, ranging from conservative to optimistic. In its latest fourth-quarter earnings announcement, the company’s current guidance for 2010 sales growth has a range of 10% to 25%. With these scenarios in hand, it dispatched two procurement executives to hold meetings with 500 of the company’s major suppliers, representing 80% of all component purchases. The messages delivered seemed straightforward: Explain that inventory buys would begin and that even if end-item demand were conservatively flat in 2010, an unlikely projection at this point, Caterpillar would boost production in its factories by 10%-15%, along with the need for re-stocking dealer parts inventories.  Caterpillar’s estimates that this baseline scenario alone would cause output from all of its suppliers to rise 30%-40% from current levels.  In essence Caterpillar’s messages will help suppliers to assess the bottom threshold of buying activity expected in 2010.



To help financially strapped suppliers with added resources, Caterpillar also instituted a program that allows suppliers to factor their Caterpillar accounts receivable at favorable interest rates, thereby accelerating payment at five days rather than an average 60 days from time of invoice.  Readers may recall our commentary related to major retailers such as Wal-Mart and Kohls also launching similar supplier financial assistance programs directed at key suppliers.



The article also notes how Caterpillar has proactively supplemented supplier relationships in other initiatives, namely:

·   Creating a three month “freeze period” during the transition period, where orders will not be changed, allowing suppliers the ability to do firmer financial and resource planning

·   Revamping end-item selling strategy away from predominately large customer customization, and instead introducing four “lanes” of customer buying options, ranging from a company configured in-stock lane containing most frequently ordered customer options, up to “lane four” custom configured with highest lead time.

·   The existence of an ongoing supply risk-assessment team that meets weekly, assigning overall risk ratings to suppliers.



We should applaud Caterpillar for its proactive supplier outreach activities as well as its sensitivities to helping suppliers overcome the effects or false starts related to “bullwhip”.



In my view, if enough companies of the global scope and outreach demonstrated by Caterpillar institute such comprehensive supplier outreach programs, than industry supply chains will be able to more adequately scale and meet product demand needs.  If on the other hand, large OEM’s continue to treat suppliers as pawns in multiple games of chess, than the effects of “bullwhip” will be even more far reaching. 



Procurement and supply chain teams need to be thinking more like Caterpillar.



Congratulations and a thumbs-up to Caterpillar for their outreach, and to the Journal for its front-page recognition that supply chains and suppliers do matter.



Community members- are your procurement teams proactively reaching out to suppliers? 



Do you have proactive programs to help buffer any “bullwhip effects” in 2010?




Bob Ferrari

The latest economic report issued from the World Bank warns that while the worst of the financial crisis may be over, the global recovery remains fragile, with the risk of a double-dip slowdown. 



The report predicts that Global GDP will grow 2.7 percent in 2010, much better than the 2.2 percent decline noted in 2009. Prospects for the developing countries is much better, with a prediction of 5.2 percent growth in 2010, and 5.8 percent growth in 2011, up from the 1.2 percent growth experienced in 2009.  World trade volumes fell by a staggering 14.4 percent in 2009, but are projected to expand by 4.3 percent this year, and 6.2 percent in 2011.



The significant takeaway however is that uncertainty continues to cloud the outlook, with business and consumer confidence, and the timing of the withdrawal of government economic stimulus all being an open question mark for sustaining a worldwide economic recovery.



To no surprise, East Asia, and in particular China, have led in the rebound of economy.  China had 6.8 percent GDP growth in 2009, and is projected to have 8.1 percent GDP growth in 2010. The report notes that continuing excess capacity in manufacturing and only moderate increases in world trade growth will restrain GDP growth from accelerating much faster.  I might add that last week China’s financial leaders imposed more restrictions on bank lending in an attempt to cool-down lending excesses. On the not so positive end, the report notes that developing Europe and Central Asia were hardest hit by the crisis, with GDP falling an estimated 6.2 percent in 2009. Latin America however, weathered the crisis much better than in the past. 



Other noteworthy predictions that should concern global supply chain professionals are the predictions that oil prices are expected to remain broadly stable in 2010, averaging about $76 a barrel, and that commodity prices should rise three percent on average. The report further notes that it may take several more years before individual economies recoup the losses already endured.



The bottom-line remains, as we noted in our 2010 prediction, that business recovery will remain slow and sporadic and that supply chain planners will need to have a sharp focus on individual regions and countries, to sense and respond to any significant changes in demand or supply.  U.S. based companies doing business internationally will especially remain challenged throughout 2010 and beyond.



How is your firm or supply chain organization positioning for 2010?



Bob Ferrari

An article in today’s Theory and Practice column of the Wall Street Journal, Strategic Plans Lose Favor, (subscription may be required) reinforces what many of our community already know, that these extraordinary economic times have forced many companies to cast-off or radically modify their strategic planning processes in favor of the ability to shift business direction on the fly.



The article cites companies such as Office Depot Inc., Spartan Motors, Inc., and J.C. Penny Co. as convinced that the ability to adequately respond to business changes on the fly has become a far more important capability than the existence of a rigid multi-year strategic plan. Plans are reviewed every month, along with the development of various scenarios, to help companies respond to either sudden changes in customer or industry demand. For Office Depot, sales and marketing noted that cash-strapped consumers no longer wanted to buy pens or printer paper in big packages, with the change helping to spur sales.  In the Spartan example, the CEO observes that a previous rigid one-year strategic planning process, coupled with a three year financial plan, reviewed on a quarterly basis, was deemed inflexible in the current business environment. The Spartan CEO notes that this manufacturer did not respond quickly enough to shifting demand, and may have missed the opportunity to acquire another related manufacturer, if he relied on the previous more rigid planning process. This new notion is termed “just-in-time” decision making



Management theory aside, my sense is that in the area of supply chain planning and resource deployment, decision making processes are now blended, and tied much more directly to events.  The traditional practices of rigid MPS/MRP driven production planning processes which can take days or weeks to complete, will no be able to keep-up with current needs for more business agility.  Some argue that even S&OP processes that are grounded in these sequential planning methods must change to accommodate the need for faster, more-informed or scenario-based  decision-making.



In this new era, there is a need to rethink supply chain planning and business fulfillment processes. Up to date knowledge related to capacity, inventory and resources must always be at-hand, reflecting near real-time status.  Sourcing and procurement professionals will need to have spend, supplier and landed-cost data readily at-hand, with the ability to respond to various alternative sourcing scenarios. Bottom-line, “just-in-time” of whatever term associated with this new era of decision-making will continue to test more traditional supply chain planning, decision and associated skill-related processes?



What your view? Have has your organization felt these changes?  Are your resource and decision-making processes coping?



Bob Ferrari


Recent developments regarding inventory and capacity in the semiconductor industry have rather interesting connotations for this and other related industries.   The significance is important for two important reasons.  First, semiconductors are the lowest tier of many high tech, consumer electronic, and lately automotive component supply chains.  Decline or growth in production or capacity is an important sign of what will ripple up the value-chain.  Second, trends occurring in the lowest tiers of supply chain have implication for what those at the far-end of supply chain, the component buyers, planners and brand owners can expect to encounter as they plan for 2010 supply chain needs.




Two important stories appeared almost simultaneously this week.  Taiwan Semiconductor Manufacturing (TSMC), one of the world’s largest chip foundry producers, is rushing to build new capacity to meet surging demand.  An article featured in The Industry Standard notes that TSMC is speeding up plans for new Fab lines as demand for chips used in electronics surges. The conclusion noted is that aggressive building plans in an environment of rising demand indicate that recovery in the global technology industry continues to strengthen.  That is certainly good news for the industry, but we need to dwell a bit on other industry-related news.




Another article featured in Electronic Design News boasts that semiconductor inventories are in good shape, a key to 2010 recovery.  Analysts at iSuppli note that overall inventory levels are at very healthy levels, and proper inventory management will be a key to a 2010 growth recovery.  By iSuppli’s calculations, inventory levels at semiconductor makers declined to 66.4 days, or 15% from 74.6 days for the same period in 2008. Inventory at distributors was reported as 36.9 days at the end of Q3, down 15% from the 43.4 days in Q3-2008.  The article conclusion is that tight control of  overall inventories throughout the electronics supply chain bodes well for the industry.  Here is the most important quote for our community to focus on: “This means that any increase in demand for such end products is likely to translate directly into rising semiconductor sales, …”




As I try to connect these two developments, I see the potential for other conclusions.  TSMC’s aggressive expansion is noted as being motivated by needs for smaller and faster multiple function chips needed in computing, video and music playing devices.  New breakthrough technology translates to the need for newer innovation in products. Now couple the two developments: industry demand has precipitated the need to build additional chip capacity for both TSMC and competitor GlobalFoundries, and that overall inventory levels up the chain are at their lowest levels.  The conclusion that I come to is a different.  My sense is that increases in end–item product demand, especially new product demand, will equate to a need to ramp-up capacity and adequate inventory.  This will likely translate into more headaches for planners and product management teams as they try to take advantage of opportunities to expand top-line revenue growth opportunities.




I would sure like to hear the comments and observations from those of you in the electronics supply chain community who are on the ground, closest to the action..  But from my lens, keep those seat belts fastened and prepare for moderate turbulence.




Bob Ferrari

A mere two months ago, there were statements in the industry press declaring that the heyday of Nintendo’s success with the Wii game console was over.  At the time, I penned a commentary on the Supply Chain Matters blog noting that our community should not be quick to jump to such a conclusion. A number of evidence points were cited in the declaration of death.  They included the fact that Wii sales had already plunged 43 percent through September, that competitors such as Microsoft and Sony were aggressively cutting prices to take advantage of the upcoming holiday season, and a final question was whether the Wii had outlived its product lifecycle, given the fact that gamers were turning more to online outlets. Among the takeaways that I noted in that November commentary was that a resurgence in game software sales, or a price cut prior to the holidays could change the outcome, I further noted that regardless, Nintendo’s supply chain and product marketing teams had to play a key role in responding to whatever market shifts occur, be they negative or positive.


Holy cow, what a difference a few months can make.


Matt Peckham noted on his PCWorld blog this week that the most recent retail sales data compiled by NPD Group for December console related sales indicates that the video game industry experienced its biggest sales month ever, besting last December by 4%  Of most interest, the Wii nearly doubled its volumes of December 2008.  In December of 2008, Nintendo sold 2.15 million units, while this December, they recorded a whopping 3.81 million in unit sales.  As Matt notes, “so much for rumors of the console’s demise.” 


A review of game software sales for December indicates that the top three titles were all Wii, which no doubt contributed to December’s success. Amazingly, five of the top ten selling games belonged to the Wii.  While overall sales for 2009 were down by 8 percent, the December surge no doubt saved the industry, and perhaps Nintendo from a dismal year.



The important lessons in this particular story are that events can change rather quickly and in such a short period of time.  If Nintendo’s planners and supply chain operations teams were accepting the doom and gloom of November, they would have surely squandered a golden opportunity to salvage a dismal year.  More importantly, in this new era of post-recession recovery, especially in consumer electronics and high tech, change comes rather quickly, and sometimes dramatically.  Organizations need to be prepared to respond to these changes. Nintendo’s supply chain teams obviously responded.


A final note comes from this author.  In 2010, I resolve to no longer accept the predictions of pundits regarding product failure and success at face value.



Bob Ferrari

Just before 2009 came to a close, I penned on the Supply Chain Matters blog our five 2010 predictions for global supply chains in 2010.  Since that time, you have probably had the opportunity, as have I, to hear and read 2010 predictions from other industry analyst, media and blog commentators. 




The one thing I’ve noted is lots of consensus that 2010 will present another significant year of business and supply chain process challenges. While some note that the bottom has been reached and recovery is well underway, most of the predictions point to caution and the notion to be prepared for various challenges or potential scenarios in the coming year. 




Inventory and capacity remains highly constrained on a global basis and the effects may well become highly visible during 2010. The overall scaling-up process, if and when it comes, will surely require many more efforts than in previous economic cycles.



While the Institute for Supply Management (ISM) PMI Index of U.S. activity continued to trend upward in December, inventory levels remained contracting and problematic.  The report noted a nine month trend of inventory contraction, and that the entire production chain has become extremely lean and risk averse. Similarly, a recent Financial Times article noted that European supply chains are still holding very low stocks of inventories because of lingering doubts by senior executives on the durability of an economic recovery in 2010.  New orders are being placed on short notice, with the presumption that suppliers will be able to respond in a matter of days or two weeks maximum.



Among Asia-based predictions, there is a notion that previous drastic reductions in costs have removed all safety buffers, making supplier and contract manufacturer oriented supply chains more susceptible to any significant changes in product demand or lead times. Already, I’m hearing reports that customers are shocked at hearing dramatic changes in product lead times that were previously very predictive.




To compound the environment further, large cash reserves among global based manufacturers may precipitate increased merger and acquisition activity as firms attempt to gain an industry or geographic market advantage in their particular industries to take maximum advantage of the upcoming recovery.  Increased M&A equates to even more supply chain network consolidations, and more time needing to be allocated to rationalization of processes and information systems.



Thus the consensus for 2010 points to being prepared, and more importantly present a year where responsiveness and agility may trump cost reduction as an overriding supply chain capability.  Building resource plans based on historic demand and supply patterns will unfortunately no longer insure agility.  Instead, the need for plans to be more forward-oriented, sensing customer demand needs in advance, adding increased scenario-based response alternatives to unplanned changes in either demand or supply.  The need for more predictive analytical capabilities in managing inventory and capacity across all tiers of the supply chain is also evident and should lead to increased interest in these technologies.




Being prepared and being agile is where it’s at in 2010.



It is time to hear from you.  Is your company or organization experiencing the need for more agility and responsiveness or is the executive suite demanding more cost reduction? How is your organization coping or what plans do you have to insure more agility in 2010?



Bob Ferrari

An Introduction

Posted by Jan 17, 2010

Hello Everyone,


My name is Bob Ferrari, Executive Editor of the Supply Chain Matters  It is truly a pleasure to be part of the Kinaxis Supply Chain Expert Community.


Over the coming weeks, I will be providing both unique and shared commentary on developments in global supply chains, business processes and information technology.  Our philosophy at Supply Chain Matters is to highlight where supply chain processes have provided value for businesses, where there is learning to be gained, or where our community needs to continue to work.  Our comments will be candid and we invite all of you in the community to share in the discussion for the benefit of all.


I'm looking forward to a great relationship with the Kinaxis Community.


Bob Ferrari