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.