In a previous November note, Prescriptions for Difficult Times, I provided my thoughts regarding methods to survive what may be a very protracted recessionary global period.  The essence of my observations were to context obvious needs to preserve cash and cut supply chain costs not solely as a response to a crisis, but more toward a response to a competitive opportunity.  Since penning this commentary, I’ve run across two other articles that warrant your attention. 

A McKinsey Quarterly article entitled Freeing up cash from operations, written by Alexander Niemeyer and Bruce Simpson, highlights typical mistakes companies tend to make when they broadly slash costs during downturns. The analysts point out that during previous recessions, the dissolution of lean performance or Six Sigma groups were common, and that blanket cuts were made in operational overheads. These cuts hindered supply chain executives ability to not only manage day-to-day operations, but to position their companies for required further performance improvements that would enable their companies to emerge from the recession in a more competitive manner.  The authors recommend that companies take a creative but balanced view of where to cut in company operations.  Converting excess inventory to cash is an obvious opportunity, as well as scrutinizing planned capital spending. On the blog 21^st Century Supply Chain, Trevor Miles points out a key caveat that inventory targets must be “right sized” from an operational perspective, and that the inventory reduction target cannot simply be a dictate from the “C” suite. Trevor astutely observes that two of the biggest contributors to excess inventories are a lack of supply chain wide visibility and overall latency in business processes, both of which are related.

Over on Supply Chain Digest, Jim Womack, the founder of Lean practices and the Lean Enterprise Institute similarly offers his suggestions in the current severe recessionary period.  Mr. Womack describes the current recession in the lean term of “mega-mura”, a variation event that implies large and lengthy shifts in total demand by external customers across the economy. While I may disagree with the Wormack premise that widespread adoption of lean methods may have a dampening effect to the current recession, he does offer some interesting ideas for incorporating lean thinking in addressing cost reduction or containment.  In addition to also reinforcing the notion of converting inventory to cash, other ideas include creating company-wide bonuses for all employees, predicated on profitability.   Mr. Womack also advocates avoiding blanket cost-cutting. He points to other suggestions of taking back work from suppliers that are not going to part of the core supply chain going forward, or scrutinizing every key product value-stream to ascertain how it can be offered more efficiently.

In the final analysis, it is you, your management, and your supply chain colleagues who have the best collective knowledge as to what and where to cut to insure ongoing competitiveness.  The one common principle that many external consultants seem to agree on is to avoid indiscriminate blanket cutting in favor of a balanced and more thoughtful approach as to what the end-state needs to be.  Recessions, however severe, do come to an end, and companies best positioned for accelerated recovery tend to be the winners.

Bob Ferrari

I am pleased to announce that Alexander Hamilton Financial Technologies has asked me to conduct a two day training workshop on the critical topic of Global Supply Chain Risk Management. This workshop will be conducted on two different dates, January 26-27, 2009 in Saddle Brook New Jersey, and February 18-19 in Schaumberg Illinois. I designed this workshop to appeal to a broader audience, especially functional managers who may reside in Finance, Product Management, Marketing, or others who are concerned about their company’s exposure to supply chain risk management.  There will also be appropriate content for supply chain professionals including Procurement, Planning, and Operations professionals.  You can view all of the course details and registration information at the following link.

A manufacturing, retail or service supply chain is only as strong as its weakest link, and exposure to global supply chain risks can become the weakness that brings an organization to its knees. These risks are increasing as a result of the growing length of supply chains that aim to meet customer demand stretching from developed markets to newly emerging markets. The increased occurrences of natural disasters, operational glitches, uncertain safety standards, economic factors and security issues have added to these risks. A lack of consistent regulatory and supplier controls has led to customer illness and injury, product recalls in sensitive product categories such as food, drug, toys and others, and has created risks to the credibility and efficacy of global supply chains. If you click on the topic of supply chain risk mangement under the Categories section to the right, you will find over 40 entries where I have commented  on risk events, and thier implications to businesses.

I realize that in these very challenging times, attendance at workshops may be very difficult to justify, but this is such an important topic that we decided to move forward in scheduling.  A supply chain disruption has the potential to have severe consequences to the bottom line, or even the brand.  We purposely selected cities with high concentration of interested companies and where attendees can more cost efficiently travel to the workshop by automobile.  If there is added interest, we can also extend the scheduling to other dates in 2009. Please join me on either of these dates for a lively and valuable session that will benefit you and your company.

Bob Ferrari

I have penned previous posts commenting on what I termed as the “Great 2009 Backflush”, namely that global supply chains are rapidly ratcheting down output.  I purposely butchered a lean manufacturing term, since this rapid scaling back seems to be occurring at “just-in-time” or demand-driven speeds.

Additional evidence now comes from the latest headlines in the financial news today. October industrial output in Europe sank dramatically, forcing European companies to scale-back production.  Carmakers have especially been hit hard and have announced extended closings over the Christmas holidays. Another report indicates that U.S. sales at the wholesale level declined 4.1 percent in October, and that inventories had plunged by 1.1 percent, the largest inventory cutback since 2001. 

Before running off to the nearest pub to absorb yet more negative news, you need to dig a little deeper into the numbers, since financial journalists tend too often to generalize.  

Let’s focus on the U.S. side. You can note as I did, that the wholesale sales decline was about evenly split among durable goods and non-durable goods.  A visit to the U.S. Department of Commerce web site to review manufacturing inventories, the next step down the supply chain, will provide more succinct evidence of what may be occurring right now.  October inventories of manufactured durable goods (autos, machinery, equipment, etc.) increased $1.5B, reflecting their highest levels since 1992.  Any visit to an automobile assembly factory will provide ample evidence of this situation.  I suspect that the work stoppage at Boeing these past few months may have also contributed to the problem in this sector. On the other hand, inventories of non-durable goods actually decreased by $4.7B or 2.1%, driven primarily by petroleum and coal reductions. 

In my view, two forces may be in play.  First, the natural forces of a credit-driven, severe global recession are reflected most in the rapid decline of demand for durable goods.  That would be a no-brainer.  The other force at play may be the effect of price incentives.  The price of a barrel of oil is at its lowest point in months, commodity prices have tanked, retailers and wholesalers are doing everything in their power to sell the inventories they have. 

My premise is that 2009 will present distinct challenges for manufacturers, depending on your industry sector.  Durable goods output and inventories will remain the greatest challenge to overcome in terms of recovery. Structural problems in the global economy have to run their course. Non-durable goods inventories and demand seem to be responding to price incentives.  That should be a motivator for Sales and Operations Planning (S&OP) teams to strategize in 2009. 

A final note, when non-durable inventories do work themselves down, be prepared for longer lead-times and material shortages, since global capacity has been cut-back dramatically.  Supply chain wide visibility will be a crucial to navigate dramatically changing conditions in demand or supply.

What are you observing in your sector?  Are price incentives really working, or has senior management looked negatively on this strategy because of needs to generate more cash?

 Bob Ferrari

In a previous posting, I expressed my own view that the cost of outright failure would be too severe for the U.S. economy to absorb, but also that any financial assistance needs to come with a complete new thinking in leadership for future competitiveness.

An interesting article published in the International Herald Tribune portal by Chang-Rang Kim, a Reuters business reporter points out that executives of the top automakers in Asia would themselves not welcome the collapse of one, or even all three of their U.S. competitors.  The why is primarily related to potential cascading effects involving the web of a multitiered automotive supply chain. The article points to perceptive financial and industry analysts commentary that reflect that as many as 90 percent of current U.S. auto suppliers supply multiple globally based customers, which implies that a shutdown of any major customer would carry an additional risk of disrupting production for other Asian and European carmakers.  ‘Even as they sold assets and pleaded for a government bailout themselves, GM, Ford and Chrysler recently loaned a combined $60 million to Metaldyne, a maker of metal-based components, because the alternative of letting the Michigan-based supplier fail would have meant certain car models would not be built.”  

I’ve pointed to the above referenced article because it provides further evidence of why outright bankruptcy would only exacerbate the current problems of the big three.  The future of any of the big three U.S. automakers lies both in world-class, competitive products, but also in a vibrant supplier network that can drive higher levels of innovation and time-to-market.  As was pointed out, many of these U.S. based suppliers cater to more than one global brand owner, and thus already have exposure to needs for product innovation, world-class reliability and quality standards.  A rapid collapse would only force Asian and other global competitors to fall back on other foreign suppliers, or find alternative means of production.

Supply Chain Matters U.S. based readers should especially note the quote attributed to Tatsuo Yoshida, an analyst with UBS Securities.  “….. At the end of the day, Japanese, European and Korean carmakers are going to eat away at the Big Three market share, whether it takes three years or five years. A soft landing would make the path to that a much smoother one”.  If the U.S. government and the big three automakers need a motivation for direction, than let this quote serve as that rallying point.  Which one of the big-three can get their act together in three years?  The answer not only lies with Ford, GM, or Chrysler, but also their supply chain partners.

Bob Ferrari

Yesterday, European supermarkets were ordered to remove Irish-based bacon, ham and sausages after an announcement that Irish pork products had been potentially tainted with dioxin. The discovery of dioxins at 80 to 200 times the recognized safety limit had triggered this recall. While reportedly only 10 percent of Ireland’s pig meat was affected, it was apparently processed and mixed in with other meat, resulting in a supply chain compounded contamination.

Similar to previous food recalls in the U.S. and other global regions, Irish farmers and pork producers were extremely concerned with the impacts of this recall, especially in light of the upcoming holiday season in Europe, as well as ongoing consumer perceptions.  Exposure to dioxins at high levels can be linked to increased evidence of cancer, but is not an apparent immediate cause of human sickness.  None the less, previous headlines of tainted milk or drugs from China have sensitized many consumers.

As with other major recalls, producers and consumers will have to monitor the efforts of public-health and regulatory authorities as they continue in their efforts to purge Europe and other pork supply chains of the alleged contaminated pork and pork by-products.  If previous recalls of this type serve as an indicator, this purging could take weeks to complete.  Meanwhile, negative perceptions will have to be overcome.

Bob Ferrari