This is the time of year when many blogs, industry analysts and media reporters comment on their outlooks and predictions for the upcoming year.  In my previous Part One post, I shared for Supply Chain Matters readers the first three of my five 2009 predictions for global supply chains. In this post, I will share the remaining two predictions.

Prediction 4: A changed offshore and near-shoring strategy framework- During 2008, many manufacturers began to re-look at their individual sourcing strategies for materials and production needs.  There were many motivators, not the least of which was the unprecedented hikes in energy prices that caused transportation costs to skyrocket.  Other concerns on the minds of sourcing professionals were the high rates of wage inflation as well as currency exchange rate in China.  As we embark on 2009, energy prices have taken a dramatic downturn, but this phenomenon may be short lived when economies eventually turn around.  More important, I believe, is a rationalization of sourcing to either growing an emerging market or source to a more predictable product cost area.

Right now, about the only geographic regions that show some growth for 2009 are the so-called BRIC countries (Brazil, Russia, India, and China).  While growth may be in single digits compared to previous double-digit rates, it is nonetheless growth.  Recent news that Procter &Gamble and others are investing in supply chain infrastructure to support growth in these regions is evidence that longer-term growth strategies lie in these markets.  On the other hand, the U.S. and Europe are very large markets, and although these markets are currently demonstrating dramatic declines in demand, the year 2009 will provide ample opportunity to re-visit near-shoring sourcing alternatives.  While Mexico and Eastern Europe will continue to be attractive near-shoring alternatives, high unemployment and political forces in the U.S. and Europe will cause some manufacturers to re-consider their near-shoring strategies.

Prediction 5: Singular leadership for the global supply chain- If you consider the sum total of my 2009 predictions, than you must also consider the need for manufacturers and retailers being forced to deal with the stark realities that more wide-scope decisions involving organizational restructuring, consolidated planning and operations execution, and budget cutbacks will more than likely require the need for one manager to assume leadership for the entire value-chain.  My view is that supply chains in 2009 will become much more centrally managed. 

The overall manager will be the most adept in a broad understanding of holistic supply chain business processes, risk management and the scope of information required to make timely and informed decisions.  The skill level will, in my perspective, be broad and encompass product, business, technology and functional scope of strategy, and day-today execution.  This person will clearly grasp the big-picture, be able to manage overall change among cross-company organizations, and understand that functional lines in supply chain will not cut it in this current crisis ridden environment.  This manager had previous titles of operations, materials, manufacturing, procurement or information technology, both more importantly, can lead in crisis and rapid change.

So you have my five predictions for 2009.  I will revisit these projections midway in the coming year to ascertain what might have changed.  In any case, stand by for another year of challenge.

Bob Ferrari

I trust that all of our Supply Chain Matters readers are having a restful holiday season.  The year 2008 was a challenging year for many in supply chain, and 2009 will add more to the overall stress levels, so it’s best to be prepared and be ready. 

This is the time of year when many blogs, industry analysts and media reporters comment on their outlooks and predictions for the upcoming year, and I hope to provide background commentary on the most interesting ones.  But before all of that begins, I want to share my five 2009 predictions for global supply chains in two posts.  In this first post, I highlight the first three predictions.

Prediction 1: Expect global supply chain flexibility to be radically reduced- Readers of this blog will recall my recent observations of the massive backflush underway in global supply chains.  The severe recession in the U.S. has rapidly spread across global regions, and many industries have dramatically cut-back on inventory levels and production capacity.  As we enter 2009, lead times for all forms of materials will inevitably increase, since a lot of past capacity has been idled, especially in the first quarter.  The implication is that your company’s ability to service and maintain key customers will rely heavily on timely demand-sensing to detect early changes in product demand, as well as superior planning and execution to fulfill orders on a timely basis.  More than ever in the past, global-wide supply chain visibility to sense changes in supply or demand patterns will be critical.  Sales and Operations Planning (S&OP) teams will need to be extra diligent in factoring decreased supply chain flexibilities toward achieving 2009 revenue goals.

Prediction 2: Significant structural shifts in both supply chain demand and supply relationships- This past holiday season has dealt a severe blow to many retailers, as depicted in holiday sales declines in the double-digit ranges.  Some retail industry observers have dire predictions on the potential amount of retailers that will file for bankruptcy or will permanently disappear.  Wholesalers remain financially fragile.  Some in markets such as building construction and durable goods have experienced significant cutbacks in demand.  Online retailers such as  Amazon.com have however shown some strength in sales during the current recession. When all the dust settles, I believe there will be a structural shift in supply chain relationships, with the mega-retailer survivors such as Wal-Mart assuming even more bargaining power in buy-sell relationships, inventory collaboration, or other programs.  Some manufacturers may find very limited channel outlets for their products, which will in-turn cause structural shifts.  Sales and marketing teams will have to re-double efforts to maintain channel outlets for products and insure cash flow for businesses.

On the supply side, industries such as automotive and heavy discrete or consumer durables are destined to experience significant supplier failures.  While certain key suppliers may be afforded assistance by large manufacturers, other tiered suppliers will either face restructuring or just fade away.  Governments will continually be asked to financially assist their key strategic industries such as automobiles, but the real key to survival lies in maintaining a robust supplier network within that region.  I believe that strategic sourcing and procurement professionals will face a continuous challenge to just maintain existing supply agreements, and may well have to also consider structural change in the way suppliers are selected and managed. More than ever, in 2009, maintaining strong supplier relationships will be a key to navigating severe disruption.

Prediction 3: Supply chain risk management continues to be a key 2009 competency- This past year alone, stories of product safety, product contamination, and higher occurrences of natural disasters, terrorism and other risks constantly challenged supply chain organizations.  The U.S. outbreak of salmonella supposedly linked to tomatoes, later ascribed to peppers, caused major financial loses for U.S. tomato growers.  The major earthquake in China’s Chengdu and Sichan provinces tested high tech and other companies risk preparedness plans. Hurricane Ike striking the heart of the U.S. energy and petrochemical related supply chain caused significant supply interruptions which took weeks to correct. A litany of product recalls continued to involve the most fundamental of consumer health and safety related value-chains, which culminated in the tragic milk scandal involving China’s dairy-related supply chains.  All of these incidents provided sobering reminders in 2008 of the reality of supply chain risk management being a constant given for our functional world.

The year 2009 will add more factors to the risk equation, most important of which will be financial risks and the structural supply chain instabilities noted in our previous prediction.  Global recession can also lead to increased levels of terrorism or political instability, and supply chain specialists should not forget the impacts of high energy prices on transportation movements and global logistics.  I believe that these combined risk forces are bound to continue in 2009, and companies will need to allocate resources toward identifying and responding to supply chain risk.

Bob Ferrari

I would like to extend to all of the readers of Supply Chain Matters my warm wishes for the upcoming holiday season, with peace and joy for the coming New Year.  Thank you so much for your loyal readership and continued interest.

I will be taking some personal time off for the holidays.  My wife and I will be spending the holidays with our oldest daughter, who just happens to be getting married during the New Year’s weekend.  Dad will be very pleased and proud to walk her down the aisle.

During this period, Supply Chain Matters will be publishing on a very limited basis.

Happy Holidays…Feliz Navidad….Buon Natale…Joyeuses Fetes…Frohe Weihnachten…歡樂假期 

Bob Ferrari

An article in this morning’s Boston Globe caught my attention.  A recent government audit identified the fact that the U.S. Navy has at least $7.5 billion worth of excess spare parts stored in government warehouses.  Yes, that number reads “billion”, or the equivalent of half of the bailout money being requested by the U.S. Big Three Automotive companies. The article indicates specific examples, and notes that the Navy has nearly 2 million more aircraft parts than its own parts demand forecasts deem necessary, while storing more than 10 million ship parts designated as excess. Also noted was that last year the Navy had 85,700 “unique items” in its spare parts inventory, valued at $1.9 billion, for which there is no projected demand.

The Navy, like other military agencies, has come a long way in the understanding of world-class supply chain and inventory management techniques.  I have often run into military logistics officers at supply chain professional conferences such as CSCMP and SCOR.  Military logistics officers have degrees from the finest universities focusing on supply chain management disciplines. 

Investment in modern technology should also be a non-issue.  In 1999, the Navy chose SAP to power its Navy Enterprise Resource Planning Program, and according to an SAP brochure, has been working toward agency-wide convergence and standardized processes.  An initial investment in advanced service parts planning came with the selection of MCA Solutions, as a sub-contractor to CACI International, Inc. in 2006, supposedly to help the Navy modernize its inventory control system for, you guessed it, the F/A 18 fleet.

Auditors apparently claim several factors contributed to the unnecessary purchases, including inefficiency in inventory management and a limited ability to accurately forecast equipment needs.  While that may well be the obvious no-brainer conclusion, I suspect that given the evidence above, there is more to this than meets the eye.  If these modern systems are in place, where is the breakdown?  Which Navy entity isn’t listening to its skilled leadership?  Is it strategy, tactical planning, out-of-control procurement, or just inertia? Rather than speculate any further, I’ll defer to those with more inside knowledge of how all of this came about.  Perhaps specific individuals with this inside  knowledge would like to add additional background comments to this post.

In the meantime, perhaps the Navy would entertain a massive recycling program to recover some of its obvious excess parts. Interested in a radar system for your pleasure boat???

Bob Ferrari

If any of you have ever participated in a writing for impact class, the first tenet often taught is to always begin an article or paper with an eye-catching statement that can grab the readers interest.  I came across an article related to Procter & Gamble featured in the Business Courier of Cincinnati which had an opening sentence that absolutely drew my attention.  “Procter & Gamble Co. is undergoing the most aggressive expansion in its history, with plans to build 19 production plants over the next four years, almost all in emerging markets.” Wow!  Not only was this the first truly positive business article I’ve seen these past weeks, but it absolutely reinforces the belief that while severe recession brings caution, it should not stop any company’s strategic supply chain thinking. 

The P&G investment plans are a recognition that this company’s long-term growth lies in emerging markets, and that supply chain investments in emerging markets  infrastructure lay the groundwork for supporting this growth.  The quote from P&G’s global product supply officer, Keith Harrison, is worthy of reflection.  “What we’re really creating is a roadmap.  What speed we’re driving down that road is a different question.  But at some point P&G will be a $120 billion company. When we are a $120 billion company, I want to know what kind of supply network I’m going to have in place.” 

This is bold thinking and savvy planning, worthy of a world class company such as P&G. 

Readers should also take note that P&G couples a supply chain risk management initiative in support of this expansion.  The article notes that P&G already has people on the ground paving the way for risk identification, mitigation, or business recovery planning.

In my mind, a company such as P&G should always be on your radar screen as a benchmark for world-class supply chain management.

Bob Ferrari