In October of last year, Supply Chain Matters advised senior supply chain executives to initiate scenario plans and contingencies in three potential areas of global supply chain impact. One of these areas directly involved emerging developments reflected in the Eurozone financial crisis with the potential impact on financing of inventory and working capital.  Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain would experience difficulty in acquiring affordable access to credit and loans.  Our belief was that a worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies.

This week, the Wall Street Journal reported (paid subscription or free metered view) a significant reminder to this impact, one that is impacting multiple aircraft manufacturers.  Spanish based manufacturer Alestis Aerospace SL, an airframe supplier to Airbus, Boeing and Embraer, has been forced to slow production because of a lack of access to working capital. This Seville based manufacturer was placed under court administration, the Spanish equivalent of bankruptcy protection, earlier this month.  Alestis was formed in 2009 from the merger of several smaller aeronautic manufacturers within Spain. The company produces composite aircraft ribs, panels and skins for the Airbus A320 and A380 aircraft, among other supply contracts. The WSJ also notes that the company has gained valuable capabilities in the building of parts from composite carbon materials, supporting today’s new wave of lighter, more fuel efficient aircraft models. Alestis has gained at least one long-term supply contract from Airbus.

The financial crisis impacting Alestis was ultimately prompted last week, when the government of Spain ordered all banks to raise provisions against potential losses tied to real estate loans. That dried up available capital to companies such as Alestis. The other twist to this situation is that the company resides in an economic area that is primarily driven by credit requirements stemming from tourism, services and real estate vs. high-tech manufacturing. Because aerospace projects tend to have longer time windows, the local banks, struggling to survive themselves, can no longer afford or unable to finance loans tied up for multiple years.

Global aircraft manufacturers have accumulated customer orders that have provided years of capacity and production backlog for this industry.  Supplier failure, especially related to competency in new technologies is not something that the industry needs right now.  The WSJ reports that Airbus procurement teams are paying special attention to prompt payment and are monitoring Alestis’s key supplier network as well. Supply Chain Matters is of the point of view that alternative financing solutions will also have to explored, including the option of acquisition.

This is yet another reminder that in this era of global value-chains, an economic crisis in one geography will often spillover to other regions. We once again advise senior supply chain executives to insure that risk contingency planning is actively practiced, especially concerning ongoing developments in Europe.

Bob Ferrari

It is a Monday morning and I’m facing a six hour plane ride enroute to the Kinaxis Kinexions conference.  Noting that my carrier is Southwest Airlines, I was compelled to not only bring my own food and snacks but to bring lots of reading material to compensate for zero entertainment and creature comfort amenities. One of the best companions, I have found for a long plane ride are unread copies of Economist magazine where there is ample time to read from cover-to-cover. The October 8 issue provided an insightful but stark commentary on the business implications of current economic events occurring across Europe which I suspect will have many potential implications for global supply chain strategy and preparedness.

The article is titled: Under the volcano- how companies are preparing for various scenarios, (paid subscription or metered view requirement) and it provided some stark reminders that European businesses remain highly concerned about current events surrounding Europe’s ongoing sovereign debt crisis and how these events will unfold in financial and economic terms.  Some business forecasters believe that the Eurozone could fracture or possibly break apart completely.  That would imply implications for credit, inflation, currency and cross-border trade. Reading of the various scenarios and contingencies that some European manufacturers are undertaking should cause supply chain executives to also reflect on contingency planning.

Supply Chain Matters believes that senior supply chain executives, if they have not done so thus far, should be initiating and contemplating scenario plans and contingencies in three potential areas of supply chain impact. These three areas are to buffer overall business impacts, but in the perspective of crisis bringing opportunity, there may be some opportunistic considerations to consider as well.

The three contingency areas should include:

• An impact to B2B, P2P and E-Commerce fulfillment strategies involving suppliers and customers located within Eurozone countries.  These processes are currently predicated on a single Euro-based currency. If the Eurozone were to split into two-zones, strong and weak, or to split altogether, the implications for systems supporting B2B commerce would be rather fluid, and potentially complex.  There would be implications in supplier contracts in adjusting or re-negotiating financial exposures, invoicing and currency collection. While contracts may have contingencies already identified, it would be wise to begin a contingency focused analysis of areas of potential impact or exposure.  Similarly, IT support teams should be thinking about potential systems impacts and response strategies.

• Another area could be supply chain shocks in logistics/transportation and customs requirements.  Today, Europe and global-based manufacturers can assume a seamless physical flow of component and finished goods across Eurozone countries.  Hopefully that will continue, but then again, sudden shocks could occur if certain countries are jettisoned out from the Eurozone or forced to fall back on independent customs and transport regulations. Severe financial crisis could bring motivation t0 add more import tariff revenues to depleted treasuries or weakened economies.

• The third contingency area would be financing of inventory and working capital.  Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain are already experiencing difficulty in acquiring affordable access to credit and loans.  A worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies.  Mid-market firms are especially vulnerable. Financial supply chain, suppler health checks, inventory and tooling investment implications should be considered.

The Economist article additionally notes that many European firms are now accelerating efforts to buffer exposure to a potential Europe financial crisis, and are thus are aggressively accelerating plans to market and sell their products within the emerging market economies of China, India and Latin America.  That makes lots of sense.  But at the same time, non-European companies may be afforded added opportunities to compete for additional business in these emerging markets by virtue of the existence of a more stable currency, banking or financial system that provides affordable access to financing product innovation, services or added inventory pipeline.

The intent of our commentary is not to raise immediate alarms but to begin prudent planning for possible supply chain disruption scenarios.  Just like last year’s volcanic ash incident that shutdown Europe’s air traffic, high uncertainty should motivate active contingency planning.

Readers and supply chain focused consultants are welcomed to share their perspectives for contingency plan considerations.

Bob Ferrari

Anyone following business headlines these past few weeks could not miss the less than flattering headlines surrounding the recent decision by Hewlett Packard’s board of directors to oust CEO Leo Apotheker with newly appointed CEO Meg Whitman.  These headlines have particular significance for supply chain implications because of HP’s previous publically announced decision to explore strategic options for possibly shedding its PC division.

In our Supply Chain Matters commentary surrounding the ouster we observed that the PC division decision raised yet another bomb of uncertainty for HP’s customers and supply chain partners, that could  also threaten to unwind HP’s high volume leverage in contracting and procurement of strategic hardware components such as displays, memory and other key components.

Today, business media is now reporting that HP is actively re-thinking its previous decision.  The Wall Street Journal reported that fresh analysis conducted by HP indicates that the cost implications related to a spinoff may well outweigh the benefits. Specifically cited in the WSJ reporting is that the company is acknowledging that separating the PC division “would significantly diminish H-P’s buying power with component makers because H-P would lose economies of scale.  It could complicate H-P’s supply chain and decrease profit margins on some products, the analysis suggest.”

For most procurement and supply chain management leaders, this new HP development should be a no-brainer, since grounding in supply chain’s strategy’s impact to business bottom line results comes with the designation of supply chain leader.  The obvious question remains- were any of HP’s former senior leadership team actively voicing such cautions, and why was this recent analysis not completed prior to the announced spin-off decision? Only insiders can provide a true account.

From a broader perspective, Supply Chain Matters believes that it brings forth a very current and real reminder that C-level executives residing in any manufacturing or retail firm need to possess a solid understanding of the tradeoffs of supply chain strategy.  Some argue that senior operational and former supply chain executives, for instance Tim Cook, the current CEO of Apple, are adequately experienced in leading manufacturing and branded companies because of their supply chain roots.  Others, including ourselves advocate that a senior supply chain or operations executive  needs to have a meaningful voice at the senior management table for business strategy discussion.

There is credence for both approaches.

Suffice to reiterate that for manufacturers and retailers, supply chains do matter a lot in formulating and deploying change in corporate strategy. Supply chain input is also crucial in tactical decision-making when overall service level, bottom-line cost, and asset tradeoffs are being considered.

Readers may recall that under the leadership of former CEO Mark Hurd, HP elected to de-centralize its supply chain voice several years ago, folding that voice within separate business units. HP lost that voice and input at the senior management ranks, and we trust that it quickly returns before it is too late.

Bob Ferrari

©2011 The Ferrari Consulting and Research Group, LLC and Supply Chain Matters

The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

Fellow supply chain expert community blogger Lora Cecere has started a Big Data Supply Chains dialogue on her Supply Chain Shaman blog.  Lora points out that supply chain “data volumes are exploding, data velocity is increasing and data types are proliferating.” Lora makes the argument that organizations increasingly need to embrace the concept of “Big Data Supply Chains” which are defined as “value networks that extend from the customer’s customer to the supplier’s supplier, that sense, shape and respond by listening, testing and learning with minimal latency.” Lora advocates that Big Data Supply Chains will transform Advanced Planning and Scheduling (APS) as well as redefine CRM and SRM applications. Some, such as ourselves, point to this new area as being the foundation for predictive analytics or supply chain cockpit capabilities. They are in essence, the next frontier for enabling smarter and more informed decision making in S&OP and other enterprise management processes.

Supply Chain Matters read a recent report published by Accenture that makes some rather important observations regarding the direction of predictive analytics.  Many of today’s business warehouse or business intelligence applications are built with design principles of data being attached to particular applications. For instance, SAP installed base customers are well aware that individual SAP applications feed data to SAP Business Warehouse (BW), and when applications such as SAP APO (Advanced Planning and Optimization) require more-timely data intensive reporting, a condensed copy of BW is actually affixed to the application.  Accenture points out those new data platform architectures will be selected primarily to cope with soaring volumes of data along with the complexity of data management, in effect, data de-coupling from individual applications.  The Accenture paper further advocates for streaming databases that include distributed ownership and control of data, not just the physical storing of data in different application silos and data centers.

In her commentary, Lora rightfully outlines some of the significant challenges involved towards achieving this concept. While these new approaches have the potential to allow the supply chain to “learn and predict”, they do present challenges for gaining executive level investment support, especially the CFO, not to mention the CIO who has to deal with the consequences of exploding data eating up IT infrastructure. That particular tenant is one we feel is the most important, since without executive level leadership and sponsorship, many IT initiatives have little chance of success. Also, as many in our community know, previous multi-year ERP implementation that ended up consuming far more management time and costing too much money have left a sour taste for technology leapfrog. The principles of predictive analytics imply that various supply chain functional teams will need to have much deeper skills in data management, trading partner collaboration and analytics disciplines. It further implies that trading partners and customers will be comfortable with sharing of sensitive data. There are also strong implications for some organizational centralization of analytics teams.

In our view, all of these factors point to fairly significant change management. Change does not occur until and unless organizational motivators for change exist. We continue to believe that success, for the business and for customers and suppliers, are always the best catalyst for change, especially in the current volatile and uncertain business environment.

Instead, why not channel big data challenges into baby step initiatives aimed at a portfolio at information hubs augmented with predictive analytics competencies. Consider pilot programs targeted at specific problems in demand sensing, supply risk, or logistics and distribution orchestration.

“Big data supply chains” are indeed overwhelming organizational and physical resources, adding more challenge to the needs for more timely and market responsive decision-making.   Work closely with IT, business and trading teams and channel the frustration toward a new framework of data architecture and predictive analytics capabilities.

Consider that if we are thinking of doing a major renovation of our homes, and we do not understand all that is involved, we often do some homework, seek knowledge from experts, set a reasonable budget and timeline and gain the support of fellow family members.  This same analogy can be applied to channeling the frustration of drowning in data into the harvesting of predictive supply chain capabilities. Walk before you run and take steps that bring teams to initial successes along the journey.

Bob Ferrari

Supply Chain Matters readers across the globe will certainly conclude that this has been a tumultuous week to say the least.  Financial, business and broadcast media have featured nonstop reporting and commentary of the current wild swings in financial markets.  Investors are genuinely concerned about the debt load of certain countries and the will of politicians to make difficult and informed decisions regarding budgets. U.S. politicians playing their game of brinkmanship regarding the U.S. debt ceiling precipitated an unprecedented  downgrade of U.S. credit worthiness by Standard and Poors. Gold has reached an all-time high and it seems that investors are exiting financial markets to sit on the sidelines in safe havens.  Its almost a “cave mentality”, and the words “global uncertainty” have taken on sobering meaning.

For the supply chain community, the open question is what will be the impacts of this week’s precipitous events going forward.  What can we anticipate?  How will customers and consumers react, if at all,  in the coming weeks?

Observers, analysts and commentators are beginning to weigh-in and Supply Chain Matters will offer its thoughts.

Bob Parker, Group Vice President of IDC Manufacturing Insights, in his commentary featured on the IDC Community web site, viewed current events as potentially a positive.  Bob opines that manufacturing, specifically export growth, and have been leading the current recovery.  He notes that American export momentum was substantially halted by the political process in Washington, and that foreign buyers of U.S. made capital goods were possibly sitting on the sidelines waiting for buying conditions concerning interest rates and currency to become more attractive. He argues that there will be more incentive for buyers to place orders in the next 60 days before the dollar deflates. He cautions however that IT and manufacturing spending staying robust is contingent on European nations staying afloat, stabilization in the Middle East and the U.S. government getting its act together and not self-destructing.

On Supply Chain Digest, Editor-in-Chief Dan Gilmore concludes that most decisions in terms of supply chain initiatives and hiring would be put on-hold, awaiting a more definitive view of events.  He also concludes that supply chain staffing has been cut too thin, a view that Supply Chain Matters has been expressing for several months now.  Dan also provides insightful observations relative to what impacts could come in global markets, currency blow-ups and pricing pressures among manufacturers and retailers.

Our view is the following.  The events this week have to be categorized as a pause for concern and surely requires executive and team discussion.  This is hopefully not a re-visit of 2008/2009, where customer demand fell off the table in a matter of weeks, and manufacturers and service providers had to take dramatic measures to preserve cash and industry presence. Some industry supply chains such as automotive, retailing and transportation were permanently altered by the events of 2008/2009. Manufacturing activity, however, is at a plateau across the globe, and that is a signal for caution since order rates have slowed.

That stated, for manufacturers and service providers this is a period where attention to business and market intelligence, demand sensing and response management capabilities are critical.  Rather than across the board freezing of initiatives and hiring, we believe that the focus should be centered on what capabilities are needed to sense and respond to volatile and changing market conditions in the coming months.  Scenario planning of various market scenarios are again key, along with a vibrant and open Sales and Operations Planning (S&OP) process that can deliver candid news to executive teams.  The notion that increases in inbound materials costs can be passed along in customer price hikes will continue to be challenged by customers and retailers, and manufacturers will need to adjust to these realities. Procurement teams need to pay close attention to the overall health of the supply base and not push too far for those added cost concessions.

While, as Bob Parkers points out, export markets have been the engine for U.S. manufacturers, warning signs are evident. China continues to experience high levels of inflation, and economic events concerning China need close attention. China just reported its biggest trade surplus in two years and there are signs that China’s leaders may allow the value of the Renminbi  to rise more quickly to stem growth.  We also know that China holds considerable investment in U.S. treasuries and may be getting concerned regarding current events and the long-term prospects of the dollar. India has also come under inflationary and growth pressures and signs are emerging of a potential slowdown in certain markets.  Tata Motors just announced disappointing first quarter earnings and sales of the Nano tumbled significantly in July. The Middle East remains uncertain as unrest continues among various nations.

For certain industries, there are realities that previous staffing and IT cuts have compromised quality control and service requirements and initiatives to fix these problems should continue to be supported. Supply chain professionals may be suffering from continuous stress and over-work but now may not be the time to jump ship. Your skills and capabilities are needed more than ever.

A final note concerns technology and software providers.  The industry may have experienced a vibrant period of customer investment in technology, and in certain areas such as control, sensing and responding, that may continue.  However, Supply Chain Matters advises caution since sales and buying evaluation cycles will surely extend themselves once again.  If you were feeling pressures from customers in areas of annual maintenance and upgrade costs, those pressures will escalate in the coming weeks as end-users and IT teams need to come-up with new areas to offset costs and unpredictable revenues. Buyers will seek value and numerous references, and will continue to pit one vendor against others in terms of the best deal.  The C-suite once again, now factors in technology decisions.

We encourage our readers to also share their observations regarding this week’s implications for supply chain activity in the coming months.

Bob Ferrari