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Supply chain professionals, like it or not, remain in an environment of high volatility.  Need some proof, consider the following…

A mere three months ago in December of 2009, I penned commentary on the Supply Chain Matters blog regarding the existence of euphoria among U.S. manufacturers.  At the time, a Washington Post article reported that the weak U.S. dollar was helping U.S. manufacturers to win back business previously lost to other global competitors.  This was certainly positive and uplifting news as these U.S. manufacturers approached 2010, but I stressed a cautionary note to the conclusions of this article.  While the economics of product cost, quality, inventory and logistics tradeoffs shifted more toward U.S. manufacturing sourcing, the political dynamics of today’s world economy must always be factored.

Last week, an article in the Financial Times (free sign-up preview account required) makes note that the recent fall in the value of the euro has given the eurozone economic recovery a new lease on life.  The article notes that German manufacturing output, thus far, in March has increased at the fastest pace since the mid-1990’s, and business confidence in Germany has jumped to its highest level in the past two years. Germany’s export orders are increasing at record speed, and the European composite purchasing manager index rose from 53.7 to 55.5 in February, its eighth consecutive monthly increase. The German global export manufacturing machine once again has been primed.

If you had read either of these press reports in isolation, or without context, the conclusions would in some cases influence senior managers to believe that a specific regional economy was on the road to post-recessionary recovery.  If both are placed in context of time, than perhaps the conclusion is that the geopolitical swings in currency rates are occurring at a much higher rate. The interplay of China, Germany and the U.S. economies are all swinging back and forth motion like a pendulum.

The reality for procurement sourcing and product planning teams is that global volatility is an unfortunate given in the current post-recessionary world of ongoing uncertainty. Reacting to current snapshots in time, driven by today’s rapid shifts in currency or energy markets will often change the economics of sourcing, and we need to be cautious about various options of response.   A sudden reaction to a currency or energy market shift in time may not prove to be prudent, since as we now can observe, today’s markets change rapidly. Conversely, not responding appropriately to a longer-tern structural economic shift could ultimately be financially costly.

In the long term, most manufacturers, large or small, are better off by being recognized for product and service innovation as opposed to being evaluated as the lowest-cost producer. Customers often want to establish long-term supplier relationship with innovative and value-added suppliers, suppliers that can be extensions of a long-term business relationship. These same customers, however, need to also navigate their business models to seek any means to drive more top line sales growth in 2010, and/or drive more procurement cost savings. Thus they will seek out an opportunistic relationship with this year’s lowest cost provider to exploit sales expansion plans or create product promotional opportunities in the market.

Given this commentary, you may well ask the obvious question; How will we sort out all of this uncertainty in our organization’s business planning?

My advice to is to invest in supply chain intelligence and advanced analytical capabilities, tools that focus on supporting more informed decisions that can have multiple alternatives or economic impacts. The new table stakes for firms is the need to quickly assess the impacts of rapid changes in markets and their implications to short and longer-term supply and demand plans. If a customer approaches your sales teams with an unplanned buy, how will your firm rapidly respond toward filling that requirement?  Conversely, if sudden changes in the economy cause a customer to cancel existing pipeline orders, what actions can be taken to buffer the financial impact of excess inventory or production capacity?

In an environment of volatility and rapid change, effective planning is more about the ability to quantify the impact of various changed business scenarios, rather than a summarization of what has occurred in the past.  Today, markets are changing very quickly and timely response capabilities are indeed what will differentiate the survivors.

Bob Ferrari