In the first week of December, I penned a posting which I titled the Great 2009 Backflush in Global Supply Chains. In that update, I noted that the acceleration of inventory reductions across many industry supply chains was far more rapid than many of us have seen for a long time, spreading simultaneously and rapidly all the way down to the lowest levels of supply, including chemicals, petrochemical, and semiconductor  suppliers.  My observation at the time was that the rapid adoption of lean and just-in-times methods caused all tiers of the supply chain to react and contract at the same time.  I also pondered how fast these supply chains would be able to ramp-up, when recovery returns.

It’s not everyday that the Wall Street Journal publishes a front page story that directly relates to developments in global supply chains, so I highly recommend you read today’s headline story, Clarity is the Missing Link in Supply Chains. I especially call attention to this article to my Supply Chain Matters readers residing in Asia, who often find themselves on the tail end of many supply chains.

This latest WSJ article outlines the experience of a CEO of chip designer Zoran Corporation.  It depicts a series of events late last year where in just a few short weeks, business virtually stopped as OEM’s and contract manufacturers all reacted simultaneously to severe declines in business.  The other premise brought out is that global recession has exposed a harsh reality that many supply chain participants seem to have all collectively hit the brakes at the same time.  Other evidence provided was that in the final quarter of 2008, while overall consumer electronics purchases dropped 8%, product shipments fell 10%, and semiconductor chip shipments dropped 20%, pointing to a potential over reaction in turning-off the flow of supply. The other premise is that participants who reside two to three levels down in the value-chain possibly suffers the most due to either over-reaction or lack of visibility to true end-item demand in various markets.

While this story highlights a specific and noteworthy occurrence in the consumer electronics and high tech sectors, I suspect the same has occurred in other sectors of discrete and consumer goods manufacturing.  Output levels of basic commodities have all been dramatically reduced, leaving starkly bare value-chains in many industry sectors, particularly those hit hardest by this recession.

The unprecedented “Backflush of 2009″ will indeed provide our community many lessons for the future.  Three of the most important lessons that I believe will serve as a future benchmark are:

1. Do not dismiss the overall importance of having two-way, trusted supplier collaboration.  A lack of trust manifests itself in an arbitrary or wholesale reduction in supplier orders, without providing visibility to what’s really occurring in end-item demand. Causing your suppliers to share unequal or excessive financial burdens does not lead to win-win, especially when the recovery of the economy returns.
2. Technology, especially that related to global supply chain visibility, analytics, and simulation, does play a critical role in quickly sensing or responding to unplanned or unexpected events in the overall supply chain.
3. Lean and just-in-time methodology continues to have benefits, but we need to understand as a community that these methods sometimes cannot manage very rapid or sudden changes in market demand.  That’s when mangers have to manage across organizations and across businesses.

Bob Ferrari

Jason Busch made some observations on his Spend Matters blog relative to a recent editorial appearing in the Wall Street Journal.  This opinion piece, United They’ll Stand, was written by Professor Robert Handfield from North Carolina State University in Raleigh, and essentially delivers the message that the decisions of supply-chain managers in the current aftereffects of the severe economic crisis may be among the most important they’ll ever make. This sometimes requires a rethinking of their relationships with their key suppliers.  I urge my readers to review this editorial, since Professor Hatfield delivers very succinct and timely messages for our community.

Jason calls attention to another blog posting penned by Gartner Industry Analyst Debbie Wilson.  Ms. Wilson’s premise is that while she conceptually agrees with Handfield, these recommendations are deeply flawed because of certain business or industry realities.  I disagree with Ms. Wilson, and will respond to each of her points:

1. Ms. Wilson states that many if not most companies simply do not have the funds available to provide financial assistance to suppliers, and protecting your own interests outweighs that of a supplier.  My response is that this is exactly the thinking that I suspect Dr. Handfield has challenged.  Making some efforts to keep key suppliers financially viable protects any customer’s interests.  Financial assistance can take many forms, from more timely payments for services, to a helping hand in any and all areas of business.  Toyota and other leading-edge companies do not shy from reaching out to key suppliers in times of crisis, and key suppliers have, in-turn reached out to Toyota in times of crisis. As many companies have learned the hard way, when major disruption occurs in your supply chain, you certainly expect your key suppliers to respond proactively.  So why not do the same when these same suppliers face crisis.
2. Ms. Wilson points out that many troubled suppliers require too much assistance for any one customer to get them on their feet again.  My response is that this statement is too generalized.  Not all suppliers fall into this broad generalization, so don’t use it.
3. Ms. Wilson further observes that the most vulnerable suppliers are those that populate a severely troubled industry, such as the U.S. automotive industry, and how can a buyer help out multiple distressed suppliers.  To some extent this is true, but not all automotive Tier One suppliers suffer from the most severe problems.  Some of the most savvy automotive suppliers have built new relationships with stronger OEM’s, some of which were foreign based such as Honda, Toyota, and others. It’s a two-way street.  In the specific case of the U.S. automotive industry, the government has deemed that the industry is strategic to the economy, and has stepped in to assist certain key suppliers.
4. Last, but not least, Ms. Wilson states that a supplier that has systemic issues achieving profitability isn’t the best candidate for being a “strategic supplier”.  This is once again just too broad a generalization. Isn’t it more difficult and costly to locate and qualify a new supplier, than to assist a trusted supplier? If Ms. Wilson and other procurement professionals were a bit more open-minded in their thinking, there would be a more open-minded lens that systemic issues of supplier profitability may have been caused by the strategies that always placed that supplier at a disadvantage in price negotiations or reverse auctions. Perhaps that supplier is strategic because they are one of few vendors that can supply a product, or hold patent to a product.  Again, let’s not generalize.

The bottom line is that Dr. Handfield has raised some practical observations and recommendations in his opinion piece.  I, for one, will include them in my consul to companies and clients, since they make very practical sense for these extraordinary economic times.

 Bob Ferrari