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This author had the opportunity to both attend and participate in the 2012 Kinexions Customer Conference hosted by Kinaxis in Scottsdale Arizona. 


The Supply Chain Matters blog featured a series of commentaries regarding our impressions of the conference which existing or prospective customers of Kinaxis might benefit. Supply Chain Expert Community readers can double-click Supply Chain Matters Coverage of the 2012 Kinexions Conference- Summary Observations to access commentaries.




Bob Ferrari


As major global companies continue to report September-ending quarterly earnings, the warning signs for global supply chains, as well as their implications, are becoming more and more evident.  Investors and equity markets are also taking notice as a litany of what is being perceived as disappointing earnings downbeat forecasts continues.


Snapshots of certain key players across various tiers of global supply chains provide a consistency in warning signs.  In the chemicals sector, both DuPont and Dow Corning have reported troubling news related to top-line revenue momentum. DuPont swung to a net-loss noting that revenues in Asia-Pacific and Europe have declined.  Dow Corning’s CEO noted significant impacts for Dow regarding the existing economic model in Europe, and predicted a “remake of the European model”. Dow further announced the closing of 20 manufacturing plants along with a 5 percent reduction in its global workforce, seeking to save $500 million by 2014.


Industrial and construction equipment manufacturer Caterpillar indicated that it was not expecting rapid growth in the coming months.  It predicted slightly better world growth in 2013, a modest improvement in the U.S., China and the rest of the developing world. In its reporting, The Wall Street Journal pointed to equipment manufacturers acknowledging that customer orders are being canceled or put on-hold amid a climate of high uncertainty over pending governmental economic policies. The CEO of United Technologies forecasted a continued slow recovery within the U.S. with Europe remaining a significant challenge. The CEO of Parker Hannifin indicated that his firm experienced a wave of canceled or delayed orders in the month of September from customers in construction and mining equipment. The environment was described as a flat-lining, waiting for something to happen.


Diversified manufacturer 3M reported quarterly earnings below expectations and lowered its full year outlook.  General Electric’s CEO has noted cautious optimism regarding the world economy in his travels among various audiences.


In the transport sector, shares of stocks among transportation companies are experiencing a discernible decline amid warning signs as to structural changes in global shipping patterns and economic activity.  As of late September, the Dow Jones Transportation Average was down 1.2 percent year-to-date but experienced a 5.9 percent drop in mid-September alone. FedEx has previously reported disappointing quarterly results and cut its global growth forecasts for both 2012 and 2013. It has since announced a $1.7 billion cost reduction initiative directed at the company’s priority air business segment. UPS in its earnings announcement this week noted a slowing of global trade and changing market dynamics. The company also expressed some uncertainty around the magnitude of the upcoming Q4 holiday shopping season. It will be interesting to note any significant shipment volume declines as the major railroads and ocean shipping companies subsequently report their earnings and operating results.


Many recent surveys reflecting supply chain management organization and business priorities have noted a shift from previous year’s priorities on cost reduction to supporting top-line revenue growth or enhanced customer services. That was a good sign, reflecting that supply chain teams could move beyond crippling cost cuts and invest in long-delayed new capabilities in added productivity, responsiveness, improved early-warning and agility.  However, the latest round of earnings reports among significant tiers of global supply chains are providing stronger signs that supply chain business priorities will once again be prioritized on driving further cost reductions from the overall supply chain. That in our view will have significant longer-term consequences and will add to the existing vulnerability of supply chains in assuring consistent product quality, resilience to a significant unplanned disruption or timely seizing upon a market opportunity.


Regardless, supply chain management and broader sales and operations planning (S&OP) teams should expect continued challenges in planning and executing their 2013 operating plans.  They should seek as much insightful information as they can garner. Accurately predicting product demand, meeting higher service requirements from customers and assuring consistent supply will remain a significant challenge in the quarters to come.  Costs will once again be placed under the looking glass and since previous years of supply chain cost reduction have eliminated the obvious, there will be added pressures to challenge prevailing thinking and shift value-added cost to other supply chain tiers or service providers.


The current signs of continued economic uncertainty and consequent declines in export markets fueling previous top-line revenue growth should be a clear warning sign to supply chain management teams to be prepared to shift priorities and expect added challenges for removing inefficiency and cost.


Bob Ferrari



© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.


In previous Supply Chain Expert Community commentary, we have called attention to the fact that today’s deployment of certain global-based supply chains have added new risks for disruption caused by natural disasters.  Recent research studies sponsored by insurance interests identified 10 countriesWhere Does Global Supply Chain Risk Exist? such as flooding, earthquakes and tropical cyclones. Advisory firm Maplecroft identified the countries of Japan, China, Taiwan and Mexico as having the highest economic exposure to natural hazards in economic terms. In fact, Supply Chain Matters alerted our readers in August to unusually difficult flooding events that were impacting low-cost manufacturing areas in China and other Asian countries. A series of devastating flooding events further impacted the Manila region in early August.


Perhaps i n the past few months, your value-chain was impacted by the effects of these natural disasters.


There is yet another quantification of economic risk in these important manufacturing regions. Global reinsurance intermediary Aon Benfield compiles a monthly Global Catastrophe Recap report.  The most recent September 2012 report quantified nearly $7.5 billion in economic damages across major manufacturing regions in Asia, with the majority of loss occurring in China. A six day stretch of catastrophic flooding in early September was reported to have caused more than $4.9 billion in losses alone.


August was not any better. Aon logged an overall total of nearly $8 billion in losses among incidents in China, the Philippines, Taiwan, Pakistan and Vietnam. The summer monsoon season thus delivered in excess of $16 billion in economic losses.


The implications of this continuous stream of quantified data are again reinforcement for increased risk of disruption within certain low cost manufacturing regions. Increased incidents and insurance payouts will fuel higher business interruption and loss insurance rates within these specific regions. That could add additional cost factors to a sourcing decision, and strategic sourcing and business risk teams will need to take particular note of this trending. A recent The Wall Street Journal report on the first anniversary of the 2011 floods that impacted Thailand noted how companies such as Nidec Corp., Omron Corp., Western Digital have since permanently moved certain of their production requirements to other Asian countries to offset risk. The same can be stated for certain Japanese based automotive component suppliers.


More importantly, is the need for supply chain and product management teams to have a supply chain risk identification and mitigation plan that can effectively support a response to these increasing value-chain disruptions.


Bob Ferrari



Lenovo has announced that it will start- up a U.S. personal computer production line in Whitsett, North Carolina, near Greensboro.  Lenovo anticipates that this production capability will commence in early 2013 and will create 115 new manufacturing jobs.  Plans call for the assembly of Think-branded notebook and desktop PCs, along with tablets and engineering workstations.


Our readers will probably note that the size of this facility is not really large, compared to contract manufacturing facilities in China that rival the population of cities. The fact that the facility will be deployed as an adjunct to an existing distribution center further implies a smaller-scale assembly-type of operation geared to unique customer needs of the U.S. market. A Wall Street Journal article noting the announcement was quick to point out Lenovo statements that implied that this move was more than just symbolic.  The announcement also comes at the high point of the U.S. presidential election season, which has its own resonance when any global company announces an expanded U.S. presence. We as a supply chain community are best equipped to assess the longer-term implications to high tech and consumer electronics supply chains in the U.S.


The Supply Chain Matters blog has featured some recent commentaries regarding Lenovo’s existing business and global supply chain strategies, and thus we were not all that surprised by this announcement.  The industry implications, however, are worthy of some speculation and commentary.

Lenovo desires to continue to grow market share in the U.S., and with a brand associated with China, it must overcome certain inherent buyer perceptions.  A U.S. manufacturing presence, however small, sends a statement of commitment to the U.S. market and the needs of U.S. customers. Lenovo continues to demonstrate that very strategy in other countries, including Latin America. Because Lenovo’s hybrid supply chain capability is deployed as a leveraged combination of both in-house and external contract manufacturing operations, a U.S. production presence has the potential to provide Lenovo yet another edge in a more timely response to U.S. market needs.


We wonder if this announcement sends another statement, especially to the global supply chain teams of competitors Apple, Dell and HP.  Manufacturing strategies involving China are now under the looking glass. Given the current high visibility issues related to labor unrest and involving responsible supplier social responsibility strategies, the Time to Factor the New Realities for Low Cost Manufacturing and Supplier Social Responsibility concerning high volume manufacturing within China. An associated challenge resides within global based ocean and air transportation industry players awash with excess capacity, attempting to offset current high fixed costs by announcing considerably higher shipping rates for 2013. 


Supply Chain Matters thus proposes the following question to high tech and consumer electronics related supply chains: Are the business and economic factors related to low cost manufacturing strategies concerning China in need of a review?


Let’s be clear, China continues to represent an enormous consumer market, and there will always be a need for a significant value-chain presence to support that market. However, the economics for fulfilling needs in other global markets are changing, and a looming economic downturn implies more sensitized views from consumers as to where their electronic devices originated. Global supply chains must therefore move toward a more demand-focused orientation.


The takeaway of our commentary is to not dismiss Lenovo’s announcement as just symbolic. The factors related to global sourcing have reached a new complexity.


What’s the view among your supply chain and product teams? As the focus turns toward 2013 strategies, insuring the value-chain is focused toward more demand-focused supply chain fulfillment capabilities will be important.


Bob Ferrari