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.