A Missed Opportunity in 2012- Cash Rich Companies Not Investing in Supply Chain

Every now and then we reach a point when it is time to make a statement about the current challenging business environment, especially when it relates to global supply chains, and this is that time.

Catching-up on last week’s reading, in particular two related articles published in the Financial Times, triggered this commentary.  One article noted that the biggest U.S. companies currently have an estimated $2 trillion in cash balances as a result of healthy earnings in 2011.

Reflect on that number for a moment, TWO TRILLION.

What a problem to have!

Where do you think a good majority of this cash is going to be directed?  If you speculate stock buyback and dividend payout programs, you are absolutely correct.  Amid a perceived uncertain economic environment, and not to mention a presidential election year, companies seem very reluctant to either hire or invest in longer-term capabilities. According to FT, analyzing the most recent figures available, last year, from Q4-2010 thru Q3-2011, U.S. companies diverted $336 billion into share buybacks,  That is the highest volume since 2007. Corporations also raised dividend payouts by 11 percent in 2011.  Some large companies actually issued more debt to finance buybacks of more than $2 billion.

That brought us to recall a January 4^th FT Insight Commentary article penned by John Plender (paid subscription or free metered view).  He observes that corporate profit margins are at all time highs because of savage labor shedding or shifting of labor costs to lower cost regions.  The open question raised by Plender relates to where will this cash be routed in 2012.  Pender opines that the obvious outlet again will be share buybacks.  Why? Because the compensation incentives of many of today’s senior executives is pegged to increased earnings per share measures.  He points out that academic evidence shows that a high proportion of CFO’s admit to a willingness to sacrifice economic value to meet short-term earnings target.  These trends are referred to as financial engineering.

Both articles are cause for considerable concern.  Manufacturers should not be faulted for being cautious given the current uncertain economic environment.  There should be some cushion of cash as a contingency.  However, the upcoming challenges in 2012 point to a significant need to reassess supply chain strategies and invest in longer-term capabilities.

Supply chains have been under enormous stress these past few years.  They have had to respond to relentless pressures to cut costs, reduce overhead and increase productivity.  For well over ten years, a flight to low-cost manufacturing regions was fueled by these pressures for cost reduction. However, the year 2011 offered stark evidence that the era of low-cost sourcing of manufacturing comes with significant risk, especially when supply chains are profiled in the leanest dimensions, or the sourcing of key components is too focused and vulnerable to disruption occurring in a single region.

Supply chain professionals had to perform yeomen activities and work countless hours to respond to assess and respond to major supply disruptions. Interestingly enough, the companies who managed the disruptions best were those who had healthy inventory safety stock levels.

We heard one senior supply chain manager express it best- we are perhaps in an era of the one quarter supply chain, configured for short-term measures and financial results.

Thus, the purpose of this commentary is to send a wake-up call to corporate boardrooms.

There is ample and proven evidence that companies who invest for the long-term, whether in people, process or technology, will reap the rewards of long-term industry competiveness.  Even in times of uncertainty, those that invested where far more able to leverage market opportunities when opportunities presented themselves in the market.

We all, as stockholders, whether direct or through our long-term retirement savings, need to send a clear and loud message to CEO’s that while languishing in earnings in cash is great and leads to healthy bonus compensation, the tradeoff can well be more financially damaging to the economy and to the corporation..

How about channeling some of that cash into investments in people, process, and in longer-term supply chain capabilities. Executives need only review our 2012 Predictions for Global Supply Chains to understand that challenges remain and investment in a longer-term window is way overdue.

Bob Ferrari

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