The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

Business media is now sensing product demand trends that many supply chain demand planning teams have already sensed- that demand across various tiers of global supply chains is slumping further.  An ongoing lack of confidence and uncertainty that has been resonating across consumer-facing businesses is cascading into various tiers of industry value-chains.  Many large global manufacturers have invested on a large scale in the growth of emerging markets, in many cases having well over half of total revenues emulating from these regions. The open question is the now whether demand from the emerging market economies is now shifting more toward the negative magnitude and whether the manufacturing economies of the U.S. and Europe have already slid into recession.

Last week, the Financial Times noted that two of the largest manufacturers, Cummins and 3M have cut their full-year outlooks, warning of declining demand in both the developed world and emerging markets.  Cummins cited a sharp drop in product demand from emerging markets, and speculated that the U.S. and much of Europe may already be at recessionary levels.

This weekend, the Wall Street Journal featured a headline article noting that global appliance sales have tumbled, with both U.S. based Whirlpool and European based Electrolux feeling the effects of continued eroding of consumer confidence with reluctance to spend on big ticket items. Buying activity has been limited to pure replacement of broken, non-repairable appliances.  Whirlpool is moving ahead with a major restructuring plan that involves consolidation of existing U.S. and North American production facilities and reductions in staffing.

In the chemicals and basic materials sector, BASF recently reported continued revenue and earnings growth, but also indicated that its customers are planning more cautiously, are reducing inventories, and have partially delayed orders in expectation of falling prices.  Dow Chemical reported robust revenues and earnings driven by a record 20 percent sales growth from emerging economies but once again pointed to soft demand in the U.S. and Europe. Dow chairmen/CEO Andrew Liveris noted: “The new reality is that the world is operating as a two-speed global economy…with the developing world strong, and the developed regions showing slow-to-no growth.”

The largest global semiconductor foundry provider TSMC reported a 4.5 percent decline in Q3 revenues over the previous quarter, and noted that the outlook for global economic conditions continues to weaken and is reflected in the lack of strength in Q4 wafer demand. The only exception was continued robust growth in communication related chips destined for smartphone markets.

Another, perhaps more troubling aspect of weakening demand stems from two ongoing events.  The first is the continued financial sovereign debt crisis, which despite last week’s more optimistic announcements, could permeate the economic climate for many more months to come.  The U>S. politic climate has also turned more pessimistic with no defined policy to address widespread unemployment and lack of substantial growth.

The other is the continued shocks and supply chain disruptions to important growth-oriented value-chains such as automotive, high tech, alternative energy and consumer electronics.  The latest and ongoing shocks are the consequences of the devastating floods impacting Thailand, which will cascade across other supply chain segments, and the likely continuance of severe weather and natural disaster events over the coming winter months.

For supply chain management professionals, the orientation must continue to be focused on agility and responsiveness to whatever changes may occur in the coming months, while insuring the strategic agility is maintained in upside/downside capacity, and critical inventory investments are maintained for components of high business disruption risk. Demand planning cannot stem just from past history or casual forecasting, but rather a sensing of current and planned product across all tiers of the industry value-chain. Scenario based planning is again the best prescription for assessing impacts to resources and capacity.

Finally, the incidents of Japan and Thailand have once again brought home the reality that surgical, risk-focused inventory planning and management trump across the board inventory cuts.

How is your supply chain organization navigating in the current environment?

Bob Ferrari

© The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

The following Supply Chain Matters guest posting has been provided by Mark Wells, a principal at End-to-End Analytics.

Online Wall Street Journal Photo

“Supply Chain Matters” readers are painfully aware of yet another serious supply chain disruption, this time from tragically severe flooding in Thailand.  According to recent reports featured on the Wall Street Journal Online site (paid subscription or metered view may be required) Ford, Toyota and Michelin have cut back operations.  Ford says that lost production could reach 30,000 vehicles.  Forty percent of hard drives for personal computers ship from Thailand  and Western Digital makes sixty percent of its disk drives in that country.  More disruptions to value networks are surfacing as I write as a result of this catastrophe.

While the human cost of these disasters is devastating and defies valuation, the cost to businesses whose value networks include operations or suppliers in Thailand will not only be measurable, it will also be significant.

At a recent IBF Conference in San Francisco John Brown, Director, Risk Management, Supply Chain Development at The Coca-Cola Company (TCCC) recently made the point that while you cannot simulate the infinite list of events that might disrupt your supply chain, you can simulate most of the effects.  For example, if you have a significant portion of your value network in a country or region, you need to anticipate a loss of supply and have a contingency plan on what to do when that happens.  Then, as Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management, Cisco Systems, has emphasized in multiple presentations, it is important to train your organization on exactly what procedures to follow in the event of a disruptive effect.

Firms who are leaders in planning to be resilient in the face of disruptions evaluate at least single level effects, create contingency plans for each, and then train key personnel on how they will operate under those contingency plans.  It’s difficult to take the time do training when there is no visible disruption, but that experience will become invaluable when trouble strikes unexpectedly.

Natural disasters are not the only source of disruption, but they are significant and difficult to anticipate.  When a natural disaster, civil disruption, or similar event resulting in a serious downgrade to your value network transpires, you need the capability to quickly simulate the how flow of materiel, information and cash can be facilitated with portion of the value network seriously degraded.  Beyond simply having the technical ability to simulate, you need the talent and insight to ensure that the inputs and assumptions upon which you base the model are valid and that the conclusions you draw from the results are reasonable and feasible.

Economic risks can compound the effects of these natural disasters in the form of rising and or uncertain commodity prices as well as fluctuations in currency exchange rates.  Skilled data scientists can build econometric models that enable you to predictively analyze commodity prices and foreign exchange rates, not only to arbitrage risk today, but also so that you will know immediately what strategic procurement actions to take in the case of a disruption.  Dow Chemical, for example, has created an advanced analytics group that focuses on (among other things) predicting prices of key manufacturing inputs.

It was Ben Franklin who said, “By failing to prepare, you are preparing to fail.”    Preparation for a disruption to your value network through planning and practice will always seem like overkill before the disruption.  During the disruption, however, previous preparation will demonstrate the wisdom of your investment in planning and practice and help to maintain the value of your enterprise.

Other reading on the topic include recent posts in this blog, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility,” by Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario (June 2005) and The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage  by Yossi Sheffi, MIT Press 2005.

Arnold Mark Wells is currently a principal at End-to-End Analytics.  He blogs weekly at Friday Forethought.

It is Friday as we pen this posting and there has been no shortage of major supply chain related news this week, including the continuing human and physical effects of the monsoon flooding occurring in Thailand.  The final icing however was last night’s announcement from Hewlett Packard that reverses the company’s prior decision, two months ago, to explore options for spinoff its B2C PC division.

The open question for Supply Chain Matters now focuses on how much collateral damage has been caused in terms of both consumer and supplier perceptions, and what needs to come next?

Business media has been adding all sorts of spin to the decision, including lots of blame directed at former ousted CEO Leo Apotheker, or the first bold decision undertaken by new CEO Meg Whitman.  The positive aspect to the reversal announcement was Whitman’s admission that HP “confused the market pretty dramatically.” We would add HP’s extended supply chain to that admission. We also reject that it was Meg Whitman’s boldness that led to this resolution, since she was a member of the HP’s board when the prior decision was publicly announced. It was rather a statement of the obvious.

According to an article published by select writers of the San Jose Mercury News, HP CFO Cathie Lesjak pegged the cost of spinning out the PC division to be $1.5 billion, which included costs to launch as a separate entity and create a new global brand.  Of course, that statement alone begs the question of why this analysis was not conducted earlier, before going public with an announcement.  A syndicated Associated Press article reporting  on the reversal decision noted the following: “The company said that its evaluation of the business unit revealed a deep integration across key operations, such as its supply chain and procurement. Ultimately, the review found that the cost to recreate these operations in a standalone company outweigh any benefits of selling the PC unit.”  Most all of our readers would have already known that the study would have pointed to these realities. In previous commentary, we opined that either a clear supply chain leadership voice was not present at the decision table, or other voices were drowning out the facts of the compelling dependencies that HP’s value-chain has on its hardware product offerings.

Now to the question of what comes next, beyond the repairing of a badly bruised HP reputation.

There are analysts advocating that HP needs to streamline and reduce its PC product offerings and provide clearer, more compelling choices for consumers and small businesses.  HP cannot ignore the compelling wave toward tablet and mobile computing, and has already botched a jewel in having acquired the Palm webOS operating system. Others note that the strategic analysis of options for PSG needs to now move into another direction. Supply Chain Matters concurs with all of these.

The next option may lie in what IBM elected to do so many years ago, namely transfer supply chain operational, branding and service responsibilities for PSG to a major contract manufacturer, one that has the capability to assume such a global role, while also supporting the supply chain strategy and efficiency needs for HP’s servers and other hardware products.  Lenovo is what it is today because of that IBM decision. The question is which manufacturer has the capability, resources and willingness to take on the HP opportunity?

In our view, the next best decision for Meg Whitman is to appoint an HP Chief Supply Chain Officer, reporting directly to Ms. Whitman. He or she should be tasked with the responsibility to evaluate the strategic options and logical next step for HP’s procurement and supply chain strategies and capabilities that can best support strategic product direction.  That person should also have an open mind in that in the end, the task ahead may be to outsource PSG.

Bob Ferrari

©The Ferrari Consulting and Research Group LLC, and Supply Chain Matters- All Rights Reserved

The Supply Chain Matters Quarterly Newsletter is a reader supplement to this blog.  The newsletter provides for a broader analysis of our daily and weekly commentaries, with an emphasis on this past quarters events and their implications for global supply chain business process and information technology needs.

The Q3-2011 newsletter was distributed today, so please check your email inbox to access and read your copy.  Reader feedback is always appreciated.

Commentary themes included in our latest newsletter are reflections concerning a quarter of non-stop supply chain developments brought about by a highly uncertain global economy, multiple specific industry supply chains showing clear signs of stress, and continued incidents of unplanned disruption.

If you did not receive your copy, or would like to be added to our newsletter distribution list, please send an email with Newsletter Request on the Subject line, and include the following information:

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Bob Ferrari- Executive Editor

Yesterday, Boeing reported Q3-2011 revenues and earnings, but the real headline concerned a long awaited update on the company’s 787 Dreamliner and other commercial aircraft delivery schedules. Readers will recall that in late August, Boeing finally achieved its long overdue initial milestone for the 787, formal flight certification and first customer delivery.

While the Q3 financial headline was a rather respectable 31 percent increase in Q3 profits, far exceeding Street expectations, the grilling for Boeing executives during the earnings briefing concerned long-term outlook and commercial aircraft production volumes.  Boeing executives communicated production volumes that combine 787 and 747-8 deliveries, making it rather difficult for analysts to differentiate each.  In our July posting which reflected on Boeing’s Q2-2011 earnings report, we noted commentary from Flightblogger which speculated that Boeing’s new lumping of combined numbers just adds to additional speculation as to other stress points in the supply chain. At yesterday’s briefing, the number cited was 15-20 new deliveries of both 787 and 747-8 aircraft for this fiscal year.  Last quarter, that number was cited as a combined 25-30 aircraft this year, and thus a slowing has occurred for some obvious operational or design change reasons.  Another open question has been whether the devastating earthquake and tsunami that struck northern Japan had any previous supply impacts.

What was communicated is that Boeing management is observing “improvements to the quality, productivity and overall condition to the assembly within the production system.” Noted was that 787 production configuration has been finalized, and production volumes are about to transition to a rate of 2.5 airplanes, vs. a prior 2 airplanes per month. Production and delivery of 787’s is being planned to ramp to 10 aircraft per month by the end of 2013. First delivery out of Boeing’s planned second final assembly facility in Charlestown South Carolina was reported to be on-track for next year.

Boeing re-iterated that firm backlog for the 787 remains at 821 units, with an additional 200 contracted delivery options. Also noted was that initial gross margins on 787 program itself is now tracking to “low single digits”, which takes into account the cumulative impact of delays, tooling, and non-recurring costs. Boeing CFO James Bell estimated that the program would reach breakeven by 2021.  Read that statement once again- the 787 program will not reach breakeven for at least 10 years, with current numbers.

Of other interest for the Supply Chain Matters reading audience is that Boeing estimates that the addressable market for the 787 class of aircraft will be 5000 aircraft over the next 20 years.  The first 1100 aircraft represents approximately 10 years of that segment, which leads to the implication that the remaining 3900 aircraft will be produced and delivered in the latter 10 years of the program.  One could speculate that since current order volumes have plateaued, these numbers might be overly optimistic. In any case,  they represent quite a high volume milestone for Boeing and its associated supply chain partners to achieve, given past history.

One other item should be of supply chain community interest. Boeing’s overall inventory level increased by $1.8 billion to a current number of $18 billion.  The inventory rise was attributed to 787 work-in-process, supplier advances and tooling.

In our Supply Chain Matters Q3 Quarterly Newsletter scheduled for distribution later this week, we comment that aerospace supply chains remain under various forms of stress.  In the case of Boeing’s supply chain, there was celebration that after three years of delay and frustration, an important initial milestone has been reached.  Yet, when we examine the current backlog numbers for both Boeing and Airbus, and factor their combined needs to now ramp production levels to extraordinary volumes to meet airline delivery requirements, the notion of complete supply chain synchronization, agility and intolerance to disruption, adds so much more to the implications of that stress.

Bob Ferrari