In our Part One posting, I provided an end-of-year reflection and final grading on the first three Supply Chain Matters 2009 predictions for global supply chains. In this posting, I will grade the remaining two predictions.

As previously noted I’ve assigned my own grading, on a scale of A (excellent- you nailed it), B (pretty darn good), C (average- you had the right idea), D (what where you thinking).  Of course, since I’m self-grading myself, readers are more than welcomed to dispute my grading by adding individual commentary

Prediction 4: A changed offshore and near-shoring framework

Status: Ongoing, but Opportunistic          Final Grade: B

The basis of this prediction was my feeling that as industries began to rebound in the post-recession, organizations would take a more rationalized view of overall sourcing.  I noted that the BRIC (Brazil, Russia, India, and China) countries would be the first that companies would focus on, because they were each showing positive market growth potential before the global recession began. 

As I reflect on the current situation, the majority of these countries, with the exception of perhaps Russia, are indeed leading the growth charge.  There have been many manufacturing companies, which we have been noting on this blog, who are clearly shifting or increasing their design and production operations into these regions. I have also noted that the outsourcing decision is becoming more differentiated.  Companies I believe will continue to outsource for cost advantage, but the more over-riding objective will remain new market access and growth.  The latest announcement from Daimler noting that it would shift manufacturing of its C-Class sedans away from Germany and to the U.S. was somewhat in-between cost-driven and market access. Individualized new sourcing decisions stemming from firms such as Dell Computer and certain Japanese consumer electronics OEM’s have been cost driven, shifting previously owned manufacturing activities more toward contract manufacturers located in lower cost regions.

The situation of near-shoring is somewhat more clouded.  The rising levels of drug-related violence, the current decline in overall demand within U.S. markets, and the past incident of the H1N1 flu outbreak have caused manufacturers to take a pause in targeting Mexico.  It seems that Canada or the U.S. will remain a more pragmatic option.  Previous near-shoring in Eastern Europe also appears to have stalled as the European consumer economies continue to demonstrate flat or slower growth.

In 2009, the bottom-line for outsourcing and near-shoring was that companies became opportunistic in assessing where the market growth opportunities lie in the coming years, and what the most cost-competitive sourcing decisions needed to be to insure overall advantage or competitiveness.

Prediction 5: Singular leadership for the global supply chain

Status: Active, but in different dimensions  Final Grade: B Minus

Predictions need to be bold, as well as grounded in realities.  It was for this reason that I predicted that supply chains in 2009 will become more centrally managed.  Thus far, this prediction is being played out, but not solely based on centralized management.

As an example, Dell began the year with a massive re-structuring that placed supply chain leadership in the hands of re-aligned global product groups, but again changed that relationship to a geographic alignment, the sum total being a decentralized focus of supply chain’s voice  Announcements from companies such as Hitachi, Sony, Toyota would thus far indicate a more centralized focus.

I may have thus misjudged the end-state, but perhaps on the right track in terms of pending change. The reasons were obvious.  Most cost reduction gains made prior to the recession were probably made with the constraints of existing organizational structures.  Procurement can do only so much with suppliers, distribution and logistics can do only so much with transportation and logistics costs.  Centralization and/or alignment with worldwide product management changes the game and opens new opportunities to overcome previous barriers.  It also facilitates a more holistic view of overall planning and fulfillment processes, as well as opportunities to better integrate supply chain decisions with product development and marketing.

With 2009 developments  now as hindsight, this prediction should have stated that continuing business pressures will cause significant organizational change involving supply chain organization.

Added Prediction Six at Mid-Year: A Visible Supply Chain Failure

Status: Most Likely Averted                        Final Grade: C Plus

When visiting 2009 Predictions in June, we added the above prediction because there were many supply chains in a very precarious state.  At the time, I did note that I was a bit out on a limb, but my feeling was that all of the severe cost cuts that supply chain organizations have taken coupled with the business and external challenges coming to pass in our 2009, that we may well observe a visible supply chain failure before the end of the year.  

The visible candidates that I had in mind when I added this mid-year prediction were Boeing, Chrysler, and General Motors.  Each had to deal with significant challenges related to suppliers as well as overall value-chain capability, and the situation was not looking good.  At year-end, it appears the each of these potential candidates have taken on proactive leadership actions to avert our prediction.  I must admit that this was one prediction that I’m pleased did not occur, and I enthusiastically accept my lower grade.

In Summary

As I look back and grade all six of the 2009 predictions, they were overall, pretty darn good.   Of course, its one thing for a blogger to be able to pen such predictions, quite another for readers to have to deal with and overcome these challenges during this unprecedented year of significant challenge and change. 

Many in the supply chain community lost their jobs as a result of cost and business developments in 2009, and those that survive have to deal with not having enough hours in the day.

My final comment is to shout out a hearty salute and “well done” to all planning, procurement, logistics, distribution and other related communities for proactively managing and navigating through a very difficult 2009.  The challenges go on, but its time to give yourself and your teams a pat on the back and a “thumbs-up”. The year 2009 was yet another not to be forgotten.

Let us take the time to enjoy the upcoming holiday season and renew for the coming New Year.

Again, feel free to share your own comments and grading perceptions relative to 2009.

I’m currently drafting the Supply Chain Matters 2010 Predictions, so keep this site bookmarked for upcoming posts.

Bob Ferrari

Just before the beginning of 2009, in the spirit of annual tradition, I outlined five Supply Chain Matters global supply chain predictions for 2009.  Here are the web links to Post One, and Post Two which originally outlined these predictions.

These predictions have been provided to assist our community in preparing for the coming year as well as provide commentary and preparedness.

I noted that I would (unlike certain others) revisit these projections both midway in the year, as well as year end to assess whether the predictions were on the mark, or “out to lunch” so to speak. 

I’m going to assign my own grading, on a scale of:

A (excellent- you nailed it)

B (pretty darn good)

C (average- you had the right idea)

D (what where you thinking). 

Of course, since I’m self-grading myself, readers are more than welcomed to dispute my grading by adding individual commentary.

In this fist posting, I will grade the first three of our original predictions for 2009.

Prediction 1: Expect 2009 global supply chain flexibility to be radically reduced

Status: Active             Final Grade: A Minus

The basis of this prediction was the massive effects of the global recession in late 2008, which resulted in fairly swift and dramatic reductions in global inventory and production capacity towards the final weeks of 2008, and my belief that this would continue well into 2009. While the overall global situation was extremely constrained in the early part of 2009, the initial signs of a bottoming and potential upswing are beginning to show in select industries and global regions.

The latest U.S. Department of Commerce statistics for October  2009 indicate that manufacturing shipments were down 8.2 percent from a year earlier. That is quite improved from the 17.8 percent reduction reported in May.  Inventories are down 8.2 percent from a year ago, just about the same level as May.  The key inventory-to-sales ratio was pegged at 1.30 in October vs.1.42 in May, indicating even less inventory available.

Within the lowest echelons of industry supply chains is where we look for the indicators of supply demand and production trending.  According to the latest forecast from the American Chemistry Council, chemical industry output within the U.S., which slipped 4.7% in 2008, is now expected to fall 7.2 % in 2009. That is slightly better than the 8.1% forecast at mid-year.  In the first half of the year, the industry noted that it had its worst decline since the 1980′s, reflecting a massive de-stocking trend.

In the first half of 2009, the semiconductor industry experienced its worst two quarters of sales output ever experienced.  The Semiconductor Industry Association’s latest annual forecast predicts an 11.6 percent decline for 2009, reflecting some improvement occurred in the second-half. That industry is currently forecasting 10.2 percent growth for 2010, indicating just about another year to return to sales levels experienced in 2008.

As predicted, industries such as automotive, heavy discrete, consumer durables as well as retail continue to react to the threat of major supplier failures and governmental bodies made large stimulus efforts to try and save key industries. We highlighted a Business Week article in November which reported that the high tech industry was experiencing shortages in a wide range of key components because of the effects of significant capacity and production cutbacks. Retail giant Wal-Mart joined other major retailers in extending a helping hand to its suppliers by providing supplemental financial support programs to assist suppliers in factoring their accounts receivable.

Prediction 2: Significant structural shifts in both demand and supply relationships

Status: Active                         Final Grade: A Minus

Structural supply chain shifts occurred on all fronts.  On the demand side, depressed retail sales and a generally cautious consumer has indeed led to retailer failures and cutbacks during 2009.  Retailers such as Boscov’s, Circuit City, Crabtree & Evelyn, KB Stores, Linen N’Things, Ritz Camera, Sharper Image and Wickes all succumbed.  In the automotive industry, the bankruptcies of both Chrysler and General Motors led to consolidation and large cutbacks in the overall number of retail dealers.

Many wholesalers and distributors also succumbed, particularly those related to home construction industries.

On the supply side, structural change occurred in certain industries.  There have been lots of headlines regarding the structural shifts underway in the distressed automotive sector, as certain global or regional OEM’s such as Fiat (Italy), Geeley, (China), BAIC (China) began to make strategic moves toward acquisition.  Existing suppliers to the U.S. automotive industry remain in a financially fragile situation. In alternative energy vehicles, the race is on to establish high-volume, lower-cost rechargeable battery production, insuring the next-wave of industry dominance. 

In consumer electronics, Japan based OEM’s such as Panasonic and Hitachi are re-structuring value-chain networks away from Japan in favor of the higher growth development regions and lower cost regions Taiwan based Acer Computer is challenging the likes of Dell and HP by leveraging its low-cost value-chain structure and faster reaction to evolving market opportunities.

Prediction 3: Supply chain risk continues to be a key 2009 competency

Status: Very active                Final; Grade: A

When I pondered this predication, I was really hoping that I may have been a bit too aggressive in my commentary.  In 2009, this prediction has played out more than any of us really expected or wanted.  Incidents have been non-stop as well as far reaching, involving more than just the risk of supplier failures mentioned earlier. 

In the food industry, the year exploded with the reported U.S. outbreak of salmonella in peanut products that subsequently impacted over 1800 other food product supply chains.  That was followed by suspected contamination of pistachios, and the suspected E.coli contamination involving cookie dough. 

There continues to be ongoing ocean piracy originating from Somalia, involving millions of dollars of expense and disruption to shipping.  The H1N1 flu outbreak began in Mexico and has spread to involve a global pandemic.  Although resulting death rates have been fortunately low thus far, there remains a threat of an even more severe strain that could ultimately severely disrupt global commerce.  And in a related twist, the fall of 2009 brought has brought disruption in the H1N1 vaccine supply chain, as low production yields have caused disruption in planned vaccine delivery needs.

We noted the continued widespread occurrence of counterfeit and bogus parts that are proliferating multiple industry supply chains, including even those that are national defense oriented.  The 3G and 4G Wireless blog noted that an estimated 150 million mobile phone handsets in China, roughly 20% of output, were either counterfeit or off-brand phones. An estimated 34% of these so-called  ”shanzhai ji” or bandit phones are estimated to have been shipped to export markets.

Supply chain risk and disruption is occurring on all fronts, and I again urge organizations to have a response and mitigation plan developed that spans multiple functions, not just procurement.

In my part two posting, I will grade the remaining two 2009 predictions.

Bob Ferrari

Just before the beginning of 2009, in the spirit of annual tradition, I posted my five global supply chain predictions for 2009.  Here is the web link to Post One, and Post Two. While I certainly don’t claim to be a sage, this has been my attempt to assist our community in preparing business process and information technology capabilities that will be needed in the forthcoming year.

I also noted that I would (unlike certain others) revisit these projections midway in the year to assess whether my advice holds true.  As we approach mid-July and the summer vacation period, it seems like a good time for this year-to-date assessment 

In this first post, I will reflect upon the first three predictions.

Prediction 1: Expect global supply chain flexibility to be radically reduced

Mid-year Status: Active and Ongoing

The basis of this prediction was the massive effects of the global recession in late 2008, which resulted in fairly swift and dramatic reductions in global inventory and production capacity towards the final weeks of 2008, and my belief that this would continue well into 2009.  While the overall global situation continues to remain fairly constrained, the first signs of a bottoming and potential upswing are beginning to show in select global regions.

The latest U.S. Department of Commerce statistics for May 2009 indicate that manufacturing shipments were down 17.8 percent from a year earlier, while inventories were down 8 percent from a year ago.  The key inventory-to-sales ratio was pegged at 1.42 in May, slightly better in the past three months, but remains considerably spiked from levels of one-year ago. 

In the lowest echelons of industry supply chains, where we look for the first indicators of supply movement, the demand and production activity is up ever so slightly.  According to the American Chemistry Council, chemical industry output within the U.S., which slipped 4.7% in 2008, is now expected to fall 8.1% in 2009, before a minimal increase of 1.6% in 2010.  The industry has experienced its worst decline since the 1980′s, reflecting a massive de-stocking trend.  Q2 output in the semiconductor industry rose to double digit levels, after the worst two quarters ever experienced. While the second half of the year looks stronger, industry caution remains as to whether output will sustain itself.

As predicted, industries such as automotive, heavy discrete, and consumer durables continue to experience the threat of continuing supplier failures and governmental bodies have made stimulus efforts to try and save key industries.  The most successful to date has been China and Germany.

With all of these data points, I believe that the prediction of radically reduced flexibility will continue into the second-half.  The same advice also hold true.  Global-wide supply chain visibility to quickly sense any changes in supply or demand patterns will remain critical.

Prediction 2: Significant structural shifts in both demand and supply relationships

 Mid-year Status: Active and Ongoing

Structural supply chain shifts continue to occur on all fronts.  On the demand side, depressed retail sales and a generally cautious consumer has indeed led to retailer failures and cutbacks during the first half of 2009.  Retailers such as Boscov’s, Circuit City, KB Stores, Linen N’Things, Sharper Image and Wickes all succumbed.  In the automotive industry, the bankruptcies of both Chrysler and General Motors led to consolidation and large cutbacks in the overall number of retail dealers. Industry watchers expect this trend to continue if U.S. consumers continue with fugal spending patterns through the remainder of this year.

On the supply side, structural change is well underway across certain industries.  There have been lots of headlines regarding the structural shifts underway in the distressed automotive sector, as certain global or regional OEM’s such as Fiat (Italy), Geeley, (China), BAIC (China) began to make strategic moves toward acquisition.  Existing suppliers to the U.S. automotive industry remain in a financially fragile situation, with the potential of more bankruptcies to follow. We have also commented on efforts by certain automotive suppliers to diversify into supply for other industries. In alternative energy vehicles, the race is on to establish high-volume, lower-cost rechargeable battery production, insuring the next-wave of industry dominance. 

In consumer electronics, Japan based OEM’s such as Panasonic and Hitachi are re-structuring value-chain networks away from Japan in favor of the higher growth development regions. Taiwan based Acer Computer is challenging the likes of Dell and HP by leveraging its low-cost value-chain structure and faster reaction to evolving market opportunities.

I believe that structural changes will continue well into the second-half and my advice for supply chain organizations in maintaining agility, increasing supplier collaboration and monitoring, as well as all around preparedness continues.

Prediction 3: Supply chain risk continues to be a key 2009 competency

Mid-year Status: Very active and ongoing

When I pondered this predication over six months ago, I was really hoping that I may have been a bit too aggressive in my commentary.  So far in 2009, this prediction has played out more than any of us really expected or wanted.  Incidents have been non-stop as well as far reaching, involving more than just the risk of supplier failures mentioned earlier. 

In the food industry, the year exploded with the reported U.S. outbreak of salmonella in peanut products that subsequently impacted over 1800 other food product supply chains.  That was followed by suspected contamination of pistachios, and the latest suspected E.coli contamination involving cookie dough. 

There continues to be ongoing ocean piracy originating from Somalia, involving millions of dollars of expense and disruption to shipping.  The H1N1 flu outbreak began in Mexico and has spread to involve a global pandemic.  Although resulting death rates have been fortunately low thus far, there remains a threat of an even more severe strain that could ultimately severely disrupt global commerce.

Supply chain risk and disruption is occurring on all fronts, and I again urge organizations to have a response and mitigation plan developed that spans multiple functions, not just procurement.

In my part two posting, I will comment on the remaining two predictions.

How do you view each of these projections thus far in 2009?  Is your organization effectively dealing with each of these trends?

 Bob Ferrari

This is the time of year when many blogs, industry analysts and media reporters comment on their outlooks and predictions for the upcoming year.  In my previous Part One post, I shared for Supply Chain Matters readers the first three of my five 2009 predictions for global supply chains. In this post, I will share the remaining two predictions.

Prediction 4: A changed offshore and near-shoring strategy framework- During 2008, many manufacturers began to re-look at their individual sourcing strategies for materials and production needs.  There were many motivators, not the least of which was the unprecedented hikes in energy prices that caused transportation costs to skyrocket.  Other concerns on the minds of sourcing professionals were the high rates of wage inflation as well as currency exchange rate in China.  As we embark on 2009, energy prices have taken a dramatic downturn, but this phenomenon may be short lived when economies eventually turn around.  More important, I believe, is a rationalization of sourcing to either growing an emerging market or source to a more predictable product cost area.

Right now, about the only geographic regions that show some growth for 2009 are the so-called BRIC countries (Brazil, Russia, India, and China).  While growth may be in single digits compared to previous double-digit rates, it is nonetheless growth.  Recent news that Procter &Gamble and others are investing in supply chain infrastructure to support growth in these regions is evidence that longer-term growth strategies lie in these markets.  On the other hand, the U.S. and Europe are very large markets, and although these markets are currently demonstrating dramatic declines in demand, the year 2009 will provide ample opportunity to re-visit near-shoring sourcing alternatives.  While Mexico and Eastern Europe will continue to be attractive near-shoring alternatives, high unemployment and political forces in the U.S. and Europe will cause some manufacturers to re-consider their near-shoring strategies.

Prediction 5: Singular leadership for the global supply chain- If you consider the sum total of my 2009 predictions, than you must also consider the need for manufacturers and retailers being forced to deal with the stark realities that more wide-scope decisions involving organizational restructuring, consolidated planning and operations execution, and budget cutbacks will more than likely require the need for one manager to assume leadership for the entire value-chain.  My view is that supply chains in 2009 will become much more centrally managed. 

The overall manager will be the most adept in a broad understanding of holistic supply chain business processes, risk management and the scope of information required to make timely and informed decisions.  The skill level will, in my perspective, be broad and encompass product, business, technology and functional scope of strategy, and day-today execution.  This person will clearly grasp the big-picture, be able to manage overall change among cross-company organizations, and understand that functional lines in supply chain will not cut it in this current crisis ridden environment.  This manager had previous titles of operations, materials, manufacturing, procurement or information technology, both more importantly, can lead in crisis and rapid change.

So you have my five predictions for 2009.  I will revisit these projections midway in the coming year to ascertain what might have changed.  In any case, stand by for another year of challenge.

Bob Ferrari

I trust that all of our Supply Chain Matters readers are having a restful holiday season.  The year 2008 was a challenging year for many in supply chain, and 2009 will add more to the overall stress levels, so it’s best to be prepared and be ready. 

This is the time of year when many blogs, industry analysts and media reporters comment on their outlooks and predictions for the upcoming year, and I hope to provide background commentary on the most interesting ones.  But before all of that begins, I want to share my five 2009 predictions for global supply chains in two posts.  In this first post, I highlight the first three predictions.

Prediction 1: Expect global supply chain flexibility to be radically reduced- Readers of this blog will recall my recent observations of the massive backflush underway in global supply chains.  The severe recession in the U.S. has rapidly spread across global regions, and many industries have dramatically cut-back on inventory levels and production capacity.  As we enter 2009, lead times for all forms of materials will inevitably increase, since a lot of past capacity has been idled, especially in the first quarter.  The implication is that your company’s ability to service and maintain key customers will rely heavily on timely demand-sensing to detect early changes in product demand, as well as superior planning and execution to fulfill orders on a timely basis.  More than ever in the past, global-wide supply chain visibility to sense changes in supply or demand patterns will be critical.  Sales and Operations Planning (S&OP) teams will need to be extra diligent in factoring decreased supply chain flexibilities toward achieving 2009 revenue goals.

Prediction 2: Significant structural shifts in both supply chain demand and supply relationships- This past holiday season has dealt a severe blow to many retailers, as depicted in holiday sales declines in the double-digit ranges.  Some retail industry observers have dire predictions on the potential amount of retailers that will file for bankruptcy or will permanently disappear.  Wholesalers remain financially fragile.  Some in markets such as building construction and durable goods have experienced significant cutbacks in demand.  Online retailers such as  Amazon.com have however shown some strength in sales during the current recession. When all the dust settles, I believe there will be a structural shift in supply chain relationships, with the mega-retailer survivors such as Wal-Mart assuming even more bargaining power in buy-sell relationships, inventory collaboration, or other programs.  Some manufacturers may find very limited channel outlets for their products, which will in-turn cause structural shifts.  Sales and marketing teams will have to re-double efforts to maintain channel outlets for products and insure cash flow for businesses.

On the supply side, industries such as automotive and heavy discrete or consumer durables are destined to experience significant supplier failures.  While certain key suppliers may be afforded assistance by large manufacturers, other tiered suppliers will either face restructuring or just fade away.  Governments will continually be asked to financially assist their key strategic industries such as automobiles, but the real key to survival lies in maintaining a robust supplier network within that region.  I believe that strategic sourcing and procurement professionals will face a continuous challenge to just maintain existing supply agreements, and may well have to also consider structural change in the way suppliers are selected and managed. More than ever, in 2009, maintaining strong supplier relationships will be a key to navigating severe disruption.

Prediction 3: Supply chain risk management continues to be a key 2009 competency- This past year alone, stories of product safety, product contamination, and higher occurrences of natural disasters, terrorism and other risks constantly challenged supply chain organizations.  The U.S. outbreak of salmonella supposedly linked to tomatoes, later ascribed to peppers, caused major financial loses for U.S. tomato growers.  The major earthquake in China’s Chengdu and Sichan provinces tested high tech and other companies risk preparedness plans. Hurricane Ike striking the heart of the U.S. energy and petrochemical related supply chain caused significant supply interruptions which took weeks to correct. A litany of product recalls continued to involve the most fundamental of consumer health and safety related value-chains, which culminated in the tragic milk scandal involving China’s dairy-related supply chains.  All of these incidents provided sobering reminders in 2008 of the reality of supply chain risk management being a constant given for our functional world.

The year 2009 will add more factors to the risk equation, most important of which will be financial risks and the structural supply chain instabilities noted in our previous prediction.  Global recession can also lead to increased levels of terrorism or political instability, and supply chain specialists should not forget the impacts of high energy prices on transportation movements and global logistics.  I believe that these combined risk forces are bound to continue in 2009, and companies will need to allocate resources toward identifying and responding to supply chain risk.

Bob Ferrari