If you were at all searching for a good bellwether of what’s really going on in the global economy these days, all you need to do is trace down the various supply chains of key industries.  I myself tend to watch the petrochemical, chemical, and semiconductor sectors, since they are the first stop in the raw materials supply for many other industry products..

Last week, global chemicals provider BASF indicated that it would temporarily halt or slow production of 180 of its worldwide plants, to reduce output as much as 25%.  BASF indicated that demand in the automotive, construction and textile industries has declined sharply in recent months, necessitating this need to reduce overcapcity.  BASF will re-review its business in January to ascertain whether conditions warrant any return to full production.  What really caught my eye was a quote from a German financial analyst who follows BASF. “There is currently no demand for chemical products. The customer base is almost nonexistent in the fourth quarter because of inventory drawdown.”

Andrew Liveris, the CEO of another global giant Dow Chemical,  in a telephone interview with business network CNBC stated that his company is likely to announce a restructuring of operations before the end of 2008. He further indicated that a protracted global recession could extend to 2010, and that a price increase on commodity chemicals instituted in the middle of the year has been lost, while price increases on specialty chemicals are still holding. Dow is now forecasting overall shipment volumes to be down 10 to 20 percent for the next few quarters. Rohm and Haas, which is in the process of being acquired by Dow Chemical, also reduced its installed capacity in paints and coatings by 30% this past summer, as a result of declining demand.

Last week as well, a Semiconductor Industry Association (SIA) press release of its annual forecast of global semiconductor sales indicated that September provided the first sign of a slowdown, and that sales for the current quarter, traditionally a strong quarter for microelectronics, are forecasted to decline by 5.9 percent. SIA, which by my observation has always tended to be conservative,  projects 2009 output to decline by 5.6 percent overall. 

The evidence of a global cutback in automotive, construction, textile and high tech supply chains is now in, and output levels are being reduced  While automotive and construction-related are dramatic, the high tech industry is a bit more optimistic.  Let’s all keep our eyes on the final results of the upcoming holiday shopping period.  January may well be another watershed event for further, perhaps permanent, reductions in capacity.

How is your company or organization forecasting 2009 and 2010 demand?  Share your comments for the education of all our readers.

Bob Ferrari

A lot has been written and commented by the mainstream media and Internet bloggers relative to the impending crisis among the big three U.S. automotive companies (Chrysler, Ford, and General Motors) and their current pleas for government assistance.  There are lots of opinions relative to whether these companies should be allowed to either succumb to the natural forces of the market or be given cash to live another day.  I personally believe that the cost of outright failure would be too severe for the U.S. economy to adsorb right now, but I also strongly believe that before these companies are provided any form of assistance there needs to be a complete new thinking and culture of management leadership. Too much traditional thinking and my-boy preservation exists at the cost of global competitiveness, especially in the area of supply chain strategy alignment.

Over on the 21^st Century Supply Chain blog, Randy Littleson called attention to an MSN Money blog entry penned by financial commentator Andrew Horowitz entitled A Plan to fix the U.S. auto industry.  Andrew’s posting is interesting in that it speaks in part to supply chain management’s role in solving some structural problems related to these companies. I especially liked his first observation which points out that these industry players continue to believe that the way to sell cars is to stuff dealers with lots of finished automobiles so buyers can immediately take them off the lot. 

This notion has always perplexed me since so many other companies, both automotive and otherwise, have proven that a lean inventory strategy supported by robust demand sensing and just-in-time production capabilities can accomplish the same purpose without that entire expensive inventory.  Randy Littleson points out in his commentary that Toyota has revolutionized the industry with their relentless focus on lean manufacturing methods, grounded by “pull vs. push” manufacturing flows.  The Internet has radically changed the way many of us research and select our automotive purchases, but this hasn’t translated itself to the big-three’s finished goods inventory strategy.

We could literally add many more paragraphs commenting on Detroit’s, especially Chrysler’s insistence on a supplier management strategy driven by price vs. true collaboration and partnership.  Here again, the Japanese, Korean, and even the German automakers have all made the transition.  An article on FT.com points out that some of Europe’s largest companies, including BMW, Daimler, and Volkswagen are taking extraordinary measures to help out suppliers weakened by the current credit crisis.

Andrew Horowitz stated the following.  “These are times that require new ideas and a brave new management that will embrace a global marketing theater.”  Let’s add another requirement that this new management include innovative supply chain management strategy that will enhance global competitiveness.   No money comes without new management, especially savvy supply chain management.

Bob Ferrari

I don’t know about each of you, but if your inbox is similar to mine, you’re probably inundated with a vast array of marketing generated emails instilling all sorts of prescriptions for surviving what may well be a very protracted recessionary period in the U.S. and other countries.  Technology prescriptions come in many types, some very valid,  Many supply chain and IT technology companies have a stake in insuring deal pipelines are larger, since sales cycles are assumed to be very lengthy. Industry Analysts are also in their marketing suits, trying to insure that prescriptions for surviving the recession contain enough technology mentions that reflect the business of their most influential current, or fleeting clients.  I really do not want to pass judgment on any of these constituencies, since they all have a job to do, as well as a stake in the longer-term outcomes of a prolonged recession.

The message I really want to communicate is that surviving any crisis implies a cool head, innovative thinking, and a strong sense of practicality.  Years ago, I completed a well-organized formal training program on organizational change management.  Two takeaways from that training continually remain in my management toolbox.  The first harkens to the Chinese proverb and character symbol of the term crisis.  If you have at all seen the Chinese character for crisis, it communicates both the symbol for “danger”, as well as the symbol of “opportunity”.  Crisis, therefore, is a time for diligence to danger, but also a potential opportunity.  The second takeaway was that any effective or significant change cannot take place until participants have a common frame of reference.  Frame of reference would include a compatible set of ideas, beliefs, or feelings.  People are more likely to acclimate effectively to change if they can either help in the design of that change or, in some way, contribute to designing the future process.

Let’s apply both of these principles toward the anticipated supply chain management changes that are being brought on by a highly challenged economic climate. First, it goes without stating that supply chain management capabilities have become a key differentiator for many companies in multitudes of industries.  But in times of economic challenge, CFO’s will often have no choice but to look to the supply chain for its share of potential cost savings.  Any and all opportunities to either save or postpone costs should obviously be uncovered.  I would recommend that you context this activity not as a response to a crisis, but as a response to competitive opportunity.  As we survey the current global supply chain landscape, we find energy prices are down dramatically from July levels.  Some commodity prices are now decreasing due to moderated demand or absence of speculation.  Ocean container shipping rates have dropped precipitously. Previous ramp-ups of contract or offshore manufacturing capacity may lead to over or idle capacity. Are any of these opportunities for your business?

 How can you make your supply chain activities more efficient, as well as more responsive? What initiatives has the organization previously postponed due to time or resources, but have compelling impact in light of the above?  Some examples:

• Really get total supply chain network inventory costs identified and more in control
• Determining what total “landed” materials and/or production sourcing costs really amount to from certain outsourcing geographies and revisit global sourcing vs., near-shoring alternatives.
• Understand where current logistics and transportation costs are occurring, and how these can change under various economic, vendor, or cost of energy scenarios
• Determine where significant supply chain risk exposure currently lies, and can the organization afford to neglect that risk.  Can your company afford to sustain a major incident of product counterfeiting or product safety? Will a major loss of creditability have an impact on retaining key customers?
• In what will surely be uncertain times, do you have abilities to do what-if analysis or scenario-type planning?

The other change principle applies to people, those that have to contribute to the various value-added activities  that make-up your supply chain.  If you know you are going to have to make tough decisions regarding reduction in headcounts, do it sooner rather than later.  Those that will be impacted can at least make plans for transition and new beginnings, and those that survive can make plans for how to continue in much leaner, perhaps significantly altered job roles and responsibilities.  Before you put me in the category of “heartless’, having survived, as well as being victim to, layoffs in the past, my experience is that it can be better for both impacted groups to know what has to be done. This insures that dignity is maintained among those impacted as well as survivors.

The category of people and change surely has to include your key suppliers, since they are also an extension of your supply chain.  How equipped are your suppliers to survive hard times?  Are you inclined to aide or assist them through troubled times?

These are just a few thoughts to generate some discussion on the topic of prescriptions for difficult times.  What’s your view? How is your organization approaching these principles?

You are welcomed to add your thoughts in the Comments section below.

Bob Ferrari

Some good and not so good news on the Boeing front.  First is the good news. Boeing and its engineers announced on Friday that they have reached a tentative agreement to a new four year labor contract, the final hurdle in resolving the ongoing labor stoppage at Boeing.  Boeing can now move forward in resuming its production operations which have been idled since September.  As noted in my last update on this topic, among typical wage and benefit issues, this labor stoppage had stumbling blocks related to supply chain outsourcing and work practice implications,.

In the not so good news category, an article by James Wallace featured on the Seattle Post-Intelligencer site on Friday now reveals that other supply chain problems have now compounded themselves over this strike period.  This article points out that:

The first new 747-8 Intercontinental will be up to a year late in delivery. Boeing cited several factors including “supply chain delays driven primarily by design changes to the airplane, limited availability of engineering resources inside Boeing, and recent Machinists strike”. The S-PI article points out that since there is an industry-wide shortage of qualified aerospace engineers that Boeing had been attempting to utilize engineers from its design bureau in Russia for the 747-8 program, resulting in needs for design rework.

Boeing’s 737, the most popular aircraft for volume production is now experiencing an unrelated problem related to fasteners that secure the numerous nutplates on the fuselage and engines of that aircraft.  Sub-contractor Spirit AeroSystems that was shipping assembled 737 fuselages discovered that one of its suppliers had for some time, not been applying a required cadmium coating on the nutplates in question.

On Boeing’s highly visible 787 Dreamliner aircraft, another potentially serious issue has been uncovered related to an estimated 3 percent of the fasteners being incorrectly installed by one of Boeing’s global partners.

We have previously noted in this blog column that many challenges remain for Boeing and its suppliers to be able to return to normal levels of output and delivery after this almost 10 week disruption.  Boeing will have little choice but to practice higher levels of supplier, sub-contractor as well as union collaboration and innovation to overcome these continual supply chain hurdles.

Bob Ferrari

I recommend my Supply Chain Matters readers to take-in a long but very insightful blog posting related to Chinese supplier business practices, penned by consultant David Dayton on his Silk Road International Blog.  This gutsy post is written primarily to Mr. Dayton’s China and Asia-based readers, and the theme is “don’t lie to foreigners, it’s just not worth it”. He goes out of his way to point out that to his audience to not view  his observations or quotes as racist, but rather as an insight into business in China provided by Chinese business people.  David points out the major differences in doing business in the West vs. the East, and that China’s business culture points to very identifiable ethical differences in doing business with Westerners. He astutely points out that “telling the truth has been historically dangerous in China, and with recent intense competition, its seen as economically dangerous as well”. Here is the link to this posting.

You will note that this blog posting points to six deep ethical differences between Chinese suppliers and western buyers:

1. The Chinese supplier wants to know first and foremost who you are to determine first and foremost if they are going to be paid on a timely basis.

2. Westerners forget that the West has, in general, been pretty nasty to the Chinese for hundreds of years. The Chinese do not forget

3. Business is about getting you, the buyer, to sign agreements and pay deposits. Promising the moon and figuring out how to get it to you comes later.

4. Chinese suppliers have their own interest in mind first and foremost, and noone knows what’s around the corner 3, 6, or 12 months from now.  The resultant attitude is “get it now while the getting is good”.

5. The current world economic crisis implies a growing sense of desperation in China.

6. There is a completely different sense of what is right and what is wrong. While Western culture is guilt-based, driven by a spirit of laws and doing the right thing, China is shame-based, meaning that getting caught and the resultant public humiliation is the definition of what can be considered wrong.

Whether you agree or take issue with these observations, I found them quite insightful, especially in the light of the increased incidents of  product contamination related to China’s numerous supply chains.  David’s final two takeaways are worthy of consideration:

Train and invest in your Chinese suppliers and lift them to the level that you and other international suppliers really expect

Do your due-diligence in China, and don’t abandon all standards and safeguards. If there really is more risk in doing business in China, than increase your due-diligence and quality audits.

An interesting and insightful read to say the least.

Bob Ferrari