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.