This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series postings that include both the full listing of 2012 predictions and Predictions One and Two.

Prediction Three:  As a result of the major supply chain disruption events that occurred throughout 2011, senior management among global manufacturing firms will call for a re-visit of supply chain component and finished goods outsourcing strategies, weighing overall risk as well as low cost parameters.

During the last three years of our Predictions series, we included a prediction for increased incidents of major supply chain risk and disruption.  In 2011, we predicted that increased incidents of major supply chain disruption would bring senior executive attention and leadership to the area of supply chain risk identification and proactive risk mitigation planning. That will accelerate in 2012.  Two of the most devastating incidents that impacted global supply chains, namely the severe earthquake and tsunami in northern Japan in March and the monsoon-related floods that occurred in Thailand have provided the wake-up call that the zeal of lower cost outsourcing has exposed certain industry supply chains to significant business risk.  Manufacturers and retailers residing in automotive, semiconductor, consumer electronics and other industries discovered the real sourcing vulnerabilities they had.  Global manufacturers such as Honda, Toyota, Nidec, Sony, Texas Instruments, Western Digital and others saw their supply chain operations disrupted for months, with considerable financial and business consequences.

Many supply chain teams can well imagine the consequences if the magnitude of the Japan disaster, which was severe, had occurred in China.  Ratings firm AM Best in a recent webcast noted that 60 percent of China’s industrial economy is currently located on its east coast, which also has a high vulnerability to flooding, and questioned whether risk management concerning the world’s largest manufacturing region is advanced enough to protect its manufacturers and their respective supply chains. While manufacturing may be shifting more towards China’s interior regions, vulnerabilities still exist.

We predict that in 2012, a senior management motivation to concerted action finally will occur, and this will be the start of a changed global sourcing landscape in the coming years.  Attention will turn towards increased scenario planning, particularly for low-probability but high impact events along with the need to have more built-in redundancies across the global supply chain.

In prior years, sourcing strategies were motivated either by a quest for lowest cost provider or having some presence within emerging growth markets, allowing perceived access to a huge growing market such as China. The third dimension will be global wide risk, namely to balance sourcing in that no specific region adds significantly to overall capacity, process, or inventory exposure risk.

A further compelling motivation for the C-Suite will be the future cost of casualty and business continuity insurance.  As an example, Munich Re has recently indicated that 80 percent of all global insurance losses in the first nine months of 2011, nearly $259 billion, were caused by a series of natural disasters occurring in the Asia-Pacific region.  That figure obviously does not include losses resulting from the October-November floods in Thailand. Preliminary estimates point to loses, as a result of the Thai floods, estimated to be in the range of an additional $10-$11 billion.

There are now increasing indications that the major global insurers and reinsurers will re-evaluate weather and natural disaster risk profiles in certain geographic regions that have had recent multiple occurrences or have the potential for increased natural disaster risk. Insurers will begin to request more detailed information related to to global supply chain sourcing presence. Depending on that re-assessment, the criteria for global sourcing of components, contract manufacturing and finished goods may well have to include weighting for increased casualty and business continuity costs associated to a specific geographic region, particularly coastal regions of Asia Pacific.

This concludes Part Three of our Supply Chain Matters 2012 Predictions.  In Part Four, we will explore our prediction that three specific industries will undergo significant supply chain challenges in the coming year.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

This commentary can also be viewed on the Supply Chain Expert Community web site, upon which the author is a featured guest blogger.

One of the cornerstones of the Supply Chain Matters blog is to track the history of specific supply chain related events involving industries and to help our readers connect the dots in term of strategy and results. In May 2009, we featured a commentary regarding Fiat Group and its unfolding strategy of opportunistic supply chain strategy, specifically its planned acquisition of Chrysler in the U.S..  At the time, this author was impressed with Fiat chairmen Sergio Marchionne and his strategy to make both companies global players in the industry.

As we approach the end of 2011, the story of Fiat and Chrysler is much more positive, with an even stronger potential.  We call readers attention to an article published in the December 19 edition of Time, Power Steering- How Chrysler’s Italian boss drives an American auto rival. (paid subscription required) Author Bill Saporito pens a very insightful look at Chrysler, where it was, and what it is becoming, and in particular, the noticeable leadership of its chairmen, Sergio Marchionne. Sergio has a knack for turning around dysfunctional automobile companies along with a keen understanding of operations and value-chain management.

The article points out that Fiat’s small-car prowess, engine technology and superior manufacturing capability was a perfect complement to Chrysler’s needs. Fiat which now owns 53.5 percent of Chrysler, has made its impact. Chrysler revenues were up 23 percent in Q3-2011 and could top $55 billion.  Operating profit could reach $5 billion vs. hemorrhaging $1 billion a month in 2009. In May, Chrysler transferred $5.9 billion to the U.S. treasury, paying off its bailout loan six years ahead of schedule.

The article goes on to expound on the unique leadership style of Mr. Marchionne, specifically his no-nonsense approach to management, his deep analytical abilities, and attention to the details of all aspects of the business, including manufacturing and value-chain.  He has thus far resized the company, flattened management layers, and overhauled the vehicle line-up in record time. Mr. Marchionne is a strong believer in elimination of management layers and practices promoting people buried in the ranks to higher levels of responsibility, giving such people all that they need to succeed and prove their potential. It is referred to as loose-tight management, a concept which many successful companies have practiced.  At the same time, he also holds people accountable for definitive results and is not shy about pulling the plug when results are not forthcoming. The author notes that: “Marchionne has the Steve Jobs gift of absolute focus.” He gets into the details. He also does not choose to have his office within Chrysler’s former executive penthouse, opting instead to locate his office in the engineering department, a visual reinforcement that it is no longer business as usual.

As was noted in 2009, Marchionne has a vision that the surviving global automotive OEM’s will need to have sufficient volumes of production to support each of the major world markets, at least one million for each major product platform in order to drive required global production cost efficiency and sustained profitability.  This translates to a combined goal for producing 6 million vehicles among the Fiat and Chrysler brands, with today’s volumes at 4.2 million vehicles. Fiat has become a global leader in efficient, high-volume, robotized production of small displacement engines and there are plans to have a similar focus for V6 engines.  Fiat also excels in small diesel powered engines, and its production facility in Poland recently exceeded a production target of 4 million 1.3 litre, 16 valve MultiJet technology engines. Technology and world class manufacturing knowledge transfer is underway among both companies with a cultural premise that production workers, not engineers, own the quality control process.  A global manufacturing boss has been appointed to oversee both Chrysler and Fiat, and the article points out that Mr. Marchionne has been known to show up from time-to-time at warranty analysis and quality performance meetings. Chrysler itself has not been known to invest in advanced supply chain software technology for planning and business intelligence but that may perhaps change.

The first totally new vehicle of the combined Fiat-Chrysler collaboration will debut in 2012 with a C-class Dodge branded vehicle. It will be based on the Fiat platform of the Alfa Romeo Giulietta, adapted for U.S. market requirements. There is a further plan to invest $23 billion to develop new vehicles for Chrysler through 2014, a rather aggressive plan by U.S. automotive industry standards, and all vehicle can be adapted by Fiat for other global sales needs.

The Time article concludes with a very characteristic Marchionne quote: “People need to trust you that you’re going to pull them out and that they will follow you when you pull them out.  If they don’t get that comfort, they’re going to drop you. This is true of organizations.  It’s true of countries.”

We would add that this quote represents a philosophy that is rather important for senior and team focused supply chain management in the coming year and beyond, namely the ability to lead, get into the details, provide people with the means and tools to accomplish their goals, and to foster consistent accountability.

In our 2009 commentary, we closed with the statement that whether the combined force of Fiat and Chrysler was totally successful, we have the opportunity to observe a visionary company with a leader that truly understands the importance of a leveraged global value-chain and integrated supply chain execution.  Two years later, this case study continues to play out with positive potentials.

Time will tell if this will become a definitive case study in vision and consistent execution in supply chain management but the scorecard thus far is rather positive.

Bob Ferrari

© 2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.