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2012

 

Last week, a Twitter alert from Steve Keifer, Vice President of Global Marketing at GXS made reference to a New York Times published article, China Confronts Mounting Piles of Unsold Goods (paid online subscription or free metered view). Supply Chain Matters also alerts Community members to this article because of the important implications to global supply chain sales and operations planning (S&OP) strategies in the coming months.

 

The Times article reports that a potentially severe inventory overhang is occurring across many of China’s manufacturing industries. According to the Times, the severity of this inventory problem has been apparently masked by the previous government reported data in order to prop up confidence in China’s economy. It cites situations where Chinese suppliers and end-item manufacturers have refused to cut back production while demand for goods has been steadily declining. Many cross-industry products are mentioned in the Times, and particular mention is made of the automotive sector, a known bellwether of a vibrant economy.  It describes situations where auto dealers have run out of physical space to store unsold autos even as OEM manufacturers continue to insist on shipping product. Reinforcing evidence comes from the most recent HSBC Purchasing Managers’ Index (PMI) which indicates that China’s output dropped to a nine-month low in August, but also pointed to increased idle capacity and building inventory.

 

This situation should be a concern for S&OP teams managing either their firm’s product demand fulfillment within China or outsourced activities involving suppliers, because it is an indication of an environment that currently will mask the real data to protect other interests. In our view, it also points to lack of fundamental supply chain inventory management and other principles that can only lead to more severe problems in the not too distant future.  A glut of inventory and the consequent building of idle excess capacity across many industry sectors can often lead to desperate measures which harm the market. They further imply a harder landing for China’s economy, and that could well involve other supply chains. 

 

Traditional business media has provided reminders of China’s previous hard landing of late 2008, when export orders collapsed and thousands of smaller factories were forced into bankruptcy. S&OP teams may recall that this situation led to a collapse of export orders into China as well as a scrambling to find alternative qualified suppliers.  More importantly though, another major cutback of direct labor workers could provide a shock to China’s consumer markets.

 

Our advice to S&OP and supply chain planning teams is to pay much closer attention to the numbers and data coming from China. Closely monitor inventory data and push-back with any indication of irregularity or inconsistency. Augment data with on-the-ground observations and experienced insights. We all know that an inventory glut for one company is challenge enough, but when it involves many companies and many industries, it is a prelude to much broader implications not only to the China supply chain, but across global dimensions as well.

 

Bob Ferrari

 

Two recent research reports better catch the attention of supply chain management and corporate operational risk leaders. Then again, the predictions may already be known, but not absorbed by senior management. The potential for a major supply chain disruption exists in many existing and emerging supply chain geographic concentration areas, including in all likelihood, your supply chain.

 

A posting appearing on the Environmental Leader LLC web site makes reference to recent studies and charts produced by global risk analysis firm Maplecroft. The analysis indicates that the countries of: “Bangladesh, the Philippines, Myanmar, India and Vietnam are among 10 countries where supply chains are at greatest risk from natural hazards such as flooding, earthquakes and tropical cyclones.” That quote captured our Supply Chain Matters attention for two significant reasons.  First, these countries have been often referenced as being emerging candidates for current and next era of low cost manufacturing for certain industry supply chains, or an important industry sourcing hub. In the case of the Philippines, it serves as a concentration for semiconductor packaging, test and assembly activity as well as a building concentration of external customer support centers. Second, unusually severe monsoon driven rains in the past several weeks have caused severe flooding conditions in these countries, the most severe of which has been the Manila area.  Severe flooding conditions inundated that city forcing the evacuation of thousands, along with interruptions in transportation and business activity. The risk is thus in the moment, and ongoing.

 

Maplecroft also names the countries of Japan, China, Taiwan and Mexico as having the highest economic exposure to natural hazards in economic terms.  No need to reiterate how crucial these individual countries are as supply and production concentrations among industry supply chains, particularly China.  When this author conducts workshops or provides consulting in supply chain risk management, I can often get total attention of an audience by posing one question: As devastating as the 2011 floods were in Thailand, what if a similar flooding event occurred in China?

 

While on that specific topic of China, a posting this week on Epoch Times, makes reference to a study published by the Journal of the International Society for the Prevention and Mitigation of Natural Hazards (obviously have wide letter head). That study identifies Shanghai, the largest city in China, and indeed in the world, as the most vulnerable global area to major coastal flooding, surpassing cities such as Bangkok, Dhaka and Manila.  The researchers in this study expanded their assessment criteria beyond the hydrologic factors for flood surges, to include “the effect it actually has on communities and businesses and how much a major flood disrupts economic activity.” The supply chain community knows the critical importance that the greater Shanghai area has both as a center for automotive, industrial, heavy equipment and other types of manufacturing along with serving as the host region for the busiest inland and export container port in the world.

 

A Response to Supply Chain Risk Management in 2012 I have urged manufacturers, service providers and their associated supply chain teams to have active supply chain risk identification and mitigation process frameworks augmented by robust response management capabilities.  Whether you agree or disagree with any one study or methodology, the mounting evidence and occurrence of a supply chain disruption is becoming rather profound. Once again, insure your organization has a plan.

 

Bob Ferrari

 

Like it or not, the power of the Internet has moved us as a society into a more social-media dominated focus of views, insights and perspectives.  Consumers turn to individualized reviews or impressions of products from other consumers to help make a buying decision for a product.  Technology providers utilize social media based marketing practices to create added interest in their products, or in the case of Apple and others, added hype. Political campaigns and news media leverage polling to either sway voters or predict election outcomes. It may seem that “voices” surround all issues and it may sometimes be difficult to understand what the most meaningful trends and opinions turn out to be.

 

The practice of supply chain management is unfortunately not immune to the effects of these trends, both positive, and not so positive.  Supply chain teams remain in need of meaningful external benchmarks and associated indications of best practices. They help in challenging inward focused thinking, keeping organizational perspectives focused on best-in-class capabilities for their industry and as a means of setting appropriate stretch goals.  If this author provides any sampling, my email inbox is constantly peppered with survey participation requests.  These surveys come from industry analyst firms, business media, academic institutions, technology providers and others.  There is unfortunately no limit to surveys and the conclusions drawn from such surveys. It is, however, very important for teams to be very diligent on interpreting the design parameters of such surveys, the sampling population, along with the depth of the conclusions and/or recommendations.

 

Let’s point to some succinct examples. 

 

Perhaps you have noticed some recent quantitative surveys that continue to indicate responses that seem to indicate that increasing demand forecast accuracy is the prominent tactic for improving supply chain responsiveness.  Yet, Community readers will hear numerous industry speakers and read commentaries from thought leaders and executives from best-in-class companies who continue to conclude that efforts directed at becoming a more demand and response management driven supply chain have provided a far more productive use of organizational direction-setting. The forecast will never be accurate, period!

 

In the increasingly important area of global supply chain risk identification, mitigation and supplier innovation, recent surveys indicate responses pointing toward increased supply chain visibility or supplier based collaboration as dominant practices.  Then again, take the time to tune-in to organizations that have gained significant rewards and benefits toward establishing supply chain resiliency, and the roadmap is far more granular and action-oriented.

 

We offer succinct examples. On the Procurement Leaders site, Sammy Rashed, Global Head of Productivity and Sourcing at Novartis, identifies five specific initiative areas where procurement teams can expand the “breadth and depth” of contribution to supply chain resiliency. In a recent Supply Chain Digest Newsletter, Pier Luigi Sigismondi, Chief Supply Chain Officer at Unilever, outlines that organization's “Partner to Win” program, currently involving 30 strategic suppliers. He points out how he is moving the Unilever supplier network away from a previous lowest cost, opportunistic transactional “procurement of the past” perspective to one where suppliers are encouraged toward “co-creating” innovations in product and processes that can impact both the top and bottom line. At Supply Chain Matters this week, we had the opportunity to catch-up with Mickey North Rizza the highly visible and respected sourcing and procurement industry analyst at AMR Research, now Gartner, who recently joined a sourcing and procurement provider. Our discussion reflected on Making a Bigger Impact in Times of Business Challenge, namely that a highly uncertain and potentially volatile business environment requires more strategic management skills and acumen, and the ability to have supply chain capabilities support both your company’s top and bottom-line objectives as opposed to a singular focus on cost reduction.

 

The takeaway from this commentary is that while the Internet and social media allows for an increased personal voice and more means to sample opinion, teams need to remain very discerning in separating group or biased thinking techniques vs. discernible views from well recognized experts, as well as those organizations that have embarked on the journey toward process and practice improvements, and have the important learning that matters.

 

Bob Ferrari

 

On the Gartner blogging site, various supply chain analysts such as Matt Davis pen blog commentary. Matt is a very talented industry analyst and I have enjoyed participating with Matt in past industry analyst panel discussions.  Matt recently posted a commentary titled: Supply Chain Risk Management in 2012, which makes some observations that I tend to disagree with. 

 

Matt’s premise seems to be that the term “Black Swan Events” , large scale, unpredictable disruptions in global supply chains is perhaps overhyped in business media and supply chain circles.  He notes that globalization and the Internet have extended supply chains to far reaches of the globe, and thus added more vulnerability to global events. This author agrees.

 

The term “Black Swan” was described in a New York Times bestseller book by Naissim Nicholas Taleb titled “The Black Swan”.  In that book, Taleb described a “black swan” as an event, positive or negative, that is deemed improbable yet causes massive consequences to either society or businesses.  Thus, you could classify the term as one of a threshold event that leads to significant change.

 

What I do take issue to in Matt’s blog commentary is the statement: “I don’t think there are more black swan risk events than there were in the past, we can just see them now.”  I suppose the implication is that technology and a 24 hour news cycle via the Internet has added more visibility to events that often occur.  That is not the message that senior executives need to hear. I believe that it takes away from the fundamental evidence that indeed, something is happening in the frequency of highly unusual climate and natural disaster patterns, which is causing what experts previously described as “one hundred year milestones” to suddenly be much more frequent and much more impactful to supply chains.

 

Some select examples:

 

  • The 2011 massive tsunami that impacted northern Japan

 

  • The monsoon floods in Thailand

 

  • The incredible 2011-2012 winter storms that impacted Europe along with past volcanic eruption in Iceland that forced a halt to air traffic.

 

  • The shattering of records and economic destruction caused by increased tornados and now severe drought conditions in the U.S. Midwest.

 

The list can certainly be longer, and the point is obvious.  Something unusual and unprecedented is happening across the globe and the frequency is accelerating.  Whether we term it “black swan” or any other term, the point is that these events are causing major consequences of human, economic, corporate balance sheet and risk protection consequences. Readers can scam multiple blog commentaries posted in this community for any further evidence.

 

For supply chain management, the real message regarding supply chain risk management in 2012 should be that today, every supply chain needs to have a supply chain risk mitigation and management plan. No exceptions!

 

That plan should consist of some analysis as well as needs for any revised strategy.  The analysis reflects a message that every supply chain needs to be analyzed for potential vulnerabilities.  Case in point, 30 percent of the global supply chain capability in hard disk drive manufacturing was clustered in Thailand.  Certain companies found the majority of their supply of certain components eliminated by the Japan tsunami, requiring months of recovery and herculean efforts by supply chain teams. The suspension of air traffic in Europe pointed to the importance of back-up transportation or alternate air hubs. Analysis also leads to the ability to identify specific components in the entire bill of materials that are most vulnerable to revenue achievement as well as the ability to practice scenario-based planning techniques.  Analysis leads to the data that drives revised strategy in sourcing and risk mitigation so that a supply chain has some basis of resiliency.

 

As these events continue to occur, teams should be able to immediately identify if the situation presents moderate risk and initiate a pre-defined mitigation and response plan. The message to senior management is that occurrences of major climatic and natural disaster events are rising, and are not one-time events, and that the supply chain has to have some form of risk identification and mitigation planning.

 

Bob Ferrari

 

In a previous Latest Indices Point to Increased Challenges for S&OP, Supply Chain Planning and Procurement Teams in early July, we highlighted impressions from the reported June indices reflecting on global supply chain activities. The impact of the ongoing European financial crisis and a slowing of China’s economy accounted for significant drops in key supply chain related indices for June, and considerable notes of caution were surfaced. We cautioned supply chain planning, procurement and sales and operations planning (S&OP) teams to pay close attention to these indices in the coming months since the 2008-2009 global recession provided stark lessons on how quickly the global can change in a matter of weeks and months.

 

As we move into August, financial media is again featuring headlines reflecting growing global headwinds. Media slants headlines to garner more readers, supply chain sales and operations planning teams, on the other hand, need to ascertain the on the ground realities.

 

Today’s Financial Times features a headline article (paid subscription or free metered view) commenting on the latest purchasing manager indices from key Asian countries.  It features a quote from Chinese premier Wen Jiabao, warning against underestimating the risks posed by the current global economy and that “downward pressure is still relatively big”. The article also features a trending chart of U.S., China and Eurozone PMI indices since 2008 and it is striking to view the finite differences of the last few months to that of the 2008-2009 contraction.  The differences are in major geographies, with the U.S. showing more resiliency, at least through July.

 

A second FT article on the same topic points to an ongoing period of inventory adjustment.  As manufacturers, retailers and global logistics providers wind down their reporting of June-ending results, a very uncertain outlook seems to be developing, depending on specific industry, tiered presence in the industry supply chain, and geographic region. Yesterday, the Institute of Supply Management (ISM) released July PMI data for the U.S., and it was noteworthy to read the selective quotes from various industry segments.  While global activities are clearly contracting, some industries, and some regions such as the U.S., reflect counter activity. As we concluded in our early July commentary, planning the global supply chain for the remainder of 2012 and 2013 will be somewhat challenging and will require high levels of analytical precision along with various planning scenarios.

 

A snapshot of the latest July data provides noteworthy trend. First, Europe is clearly moving toward a recessionary period.  The Markit Eurozone PMI Index was down for the 11th straight month falling to 44.0, from 45.1 in June.  The Eurozone manufacturing growth engines of France and Germany are contracting at a rapid pace and the U.K is showing clear signs of contraction as well. New orders reflect a continuing downward trend.  While teams need to make their own conclusion, it seems apparent that one significant sector of the global economy is clearly contracting, and the fallout is impacting other global regions such as China and South Korea.

 

China’s official manufacturing PMI index fell only one tenth of a percentage point in July, from 50.2 in June to 50.1 in July. Output, new orders and backlog however trended lower indicating the effects of reduced business activity.  South Korea experienced its sharpest fall in exports this year and Taiwan also reported its first contraction.  Since August represents the beginning of supply planning for the upcoming 2012 holiday buying season, all eyes must be turned toward the mood of individual country consumers.

 

In the U.S., the ISM Manufacturing PMI for July was up a tenth of a point, recording 49.8 in July compared with 49.7 in June, indicating some leveling off in the past three months. New orders and production indices were slightly up, while order backlog was down by one and half points. What should be of most concern to planning teams is that inventories are once again growing, with a significant five point increase in just one month. Prices are also on the rise.

 

Again, it is our view that now is not the time for generalized or historic based planning. Rather, analytical rigor, consensus and scenario based planning methods are most appropriate.  S&OP teams should keep a clear focus on what’s happening in individualized geographic markets, tapping local, on the ground field teams for frequent information updates and be prepared for planning the supply chain according to individualized regions. Precision inventory planning is essential.

 

The coming months will again be yet another test of the resiliency and response capabilities of individual supply chains.

 

Bob Ferrari