We begin this blog with first alerting clients of The Ferrari Consulting and Research Group and our Supply Chain Matters readership that our Q3 2017 Quarter Newsletter published yesterday and should be in the email inboxes of those who have signed-up for electronic subscription.
Within each of our Newsletters, we typically review overall global supply chain activity during the prior quarter. In this week’s Q3 Newsletter, we made note of discernable increased momentum for global supply chain activity. That trend is of course rather positive, but at the same time, provides some sign posts and added cautions for the global supply chain management community.
After going to press with our Newsletter, the J.P. Morgan Global Manufacturing PMI for the month of October was published by J.P. Morgan and IHS Markit in association with ISM and IFPSM. The overall headline was that global manufacturing and supply chain activity reached a 78-month high value of 53.5 in October. That included the steepest rate of expansion in the investment goods sector which is a rather positive sign. An acceleration was further registered at intermediate goods producers.
Beyond the euphoria of the current indices, supply chain leaders should hone-in on the important underlying trends which supply chain teams in certain industries and firms are likely already experiencing at this point.
The first was pointed out in our Newsletter, namely that rates of improvement are discernably stronger and more prevalent in developed regions as contrasted with emerging regions. Some of this trend may have root cause in foreign currency headwinds, ongoing economic headwinds in certain emerging regions such as China, India, or Indonesia. Some of this trend may be evidence of shifting product strategies which are changing the sourcing of production closer to actual demand regions.
The second noted trend is that the continued strength of overall demand is testing available capacity which has resulted in decreased overall inventories and subsequent increasing backlogs of work, which is currently characterized as being at the greatest extent for over six-and-a-half years. That is likely a clear sign that lead times for products are being extended by various domestic and global suppliers.
While overall demand activity in developed regions continues to grow at these levels, so are the pressures to recruit additional skilled workers. Our community is acutely aware of ongoing challenges in overcoming skills gaps for manufacturing and supply chain talent needs and that trend is likely exacerbating with increased global production momentum.
Supply chain and sales and operations planning (S&OP) teams need to weight such trends in tactical and strategic discussions in the current end-of-year quarter where end of year business financial outcome goals, and 2018 plans are typically reviewed. In the coming weeks, being unexpectedly out of stock, and expecting certain suppliers to be able to immediately respond with available inventory may not be an appropriate assumption at this point without supplier validation and assessment.
The October PMI authors further report that input price inflation has risen to a nine-month high on a global basis. Procurement teams are likely experiencing requests or notices of price increases among suppliers, particularly emerging region suppliers. Here again, supply and demand imbalances, coupled with continued headwinds in foreign currency markets, needs for added workers are all factors in the current price inflation. The first tendency is to likely push-back on price-increase notices from suppliers. We would caution procurement and sourcing teams to ensure that alternative suppliers or sources are gauged before taking such actions.
Another reminder for procurement teams is to communicate on a more-timely basis, current trends and observations to product management, line-of-business and S&OP teams for their awareness and consideration of whether other options need to be explored or product promotions of certain products need to be adjusted. In some cases, key suppliers need to know that customers understand the current economics at-play and are willing to consider temporary price increases or ideas to offset such increases. Planning for 2018 should likely consider the implications of increased supplier pricing or added lead times for products. Insure that master data related to planning and material requirements planning systems are updated on a more frequent interval to reflect actual conditions.
A final reminder relates to increased concerns for potential trade law changes related to either NAFTA or Brexit, with the latter drawing the most concern for Eurozone based manufacturing and services firms. With a 2019 Brexit deadline still looming, and the current Eurozone production activity surpassing a fifty-two-month high, the need for alternative sourcing decisions has more evident for action in 2018 in the light of constrained production capacity. Likewise, some global auto manufacturers are looking to NAFTA based production for added global revenue growth needs, but now need to consider whether some potential changes in NAFTA rules-of-origin changes will be adopted, or the U.S. walks away from the current talks.
In summary, ongoing positive trending in global manufacturing activity provides added optimism for 2018 but be diligent to the underlying sign posts that come with the current environment.
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