The following is this author’s weekly guest commentary appearing on the Supply Chain Expert Community web site.

Last week, a Twitter alert from Steve Keifer, Vice President of Global Marketing at GXS made reference to a New York Times published article, China Confronts Mounting Piles of Unsold Goods. (paid online subscription or free metered view).  Supply Chain Matters also alerts Community members to this article because of the important implications to global supply chain sales and operations planning (S&OP) strategies in the coming months.

The Times article reports that a potentially severe inventory overhang is occurring across many of China’s manufacturing industries. According to the Times, the severity of this inventory problem has been apparently masked by the previous government reported data in order to prop up confidence in China’s economy. It cites situations where Chinese suppliers and end-item manufacturers have refused to cut back production while demand for goods has been steadily declining. Many cross-industry products are mentioned in the Times, and particular mention is made of the automotive sector, a known bellwether of a vibrant economy.  It describes situations where auto dealers have run out of physical space to store unsold autos even as OEM manufacturers continue to insist on shipping product. Reinforcing evidence comes from the most recent HSBC Purchasing Managers’ Index (PMI) which indicates that China’s output dropped to a nine-month low in August, but also pointed to increased idle capacity and building inventory.

This situation should be a concern for S&OP teams managing either their firm’s product demand fulfillment within China or outsourced activities involving suppliers, because it is an indication of an environment that currently will mask the real data to protect other interests. In our view, it also points to lack of fundamental supply chain inventory management and other principles that can only lead to more severe problems in the not too distant future.  A glut of inventory and the consequent building of idle excess capacity across many industry sectors can often lead to desperate measures which harm the market. They further imply a harder landing for China’s economy, and that could well involve other supply chains.

Traditional business media has provided reminders of China’s previous hard landing of late 2008, when export orders collapsed and thousands of smaller factories were forced into bankruptcy. S&OP teams may recall that this situation led to a collapse of export orders into China as well as a scrambling to find alternative qualified suppliers.  More importantly though, another major cutback of direct labor workers could provide a shock to China’s consumer markets.

Our advice to S&OP and supply chain planning teams is to pay much closer attention to the numbers and data coming from China. Closely monitor inventory data and push-back with any indication of irregularity or inconsistency. Augment data with on-the-ground observations and experienced insights. We all know that an inventory glut for one company is challenge enough, but when it involves many companies and many industries, it is a prelude to much broader implications not only to the China supply chain, but across global dimensions as well.

Bob Ferrari