The following global supply chain activity assessment posting will become a regular feature of our Supply Chain Matters and Ferrari Consulting and Research Group Quarterly Newsletter series, starting with the Q1-2013 Newsletter to be published later this month.  Readers automatically obtain a copy of our newsletter as registered subscribers to Supply Chain Matters.  If you have not done so, you can register as a subscriber by registering your email address in the Receive Posts via Email block on our right-hand panel.  It is our stated policy that no subscriber email addresses are shared with third parties.

Various reports of production activity indicators during the first three months of 2013 reflect somewhat resilient global supply chains with the exception of the Eurozone countries. Overall, the JP Morgan Global Manufacturing PMI rose to 51.2 in March from the 50.9 recorded in February. However, warning signs regarding higher input prices remain, along with threats for added supply chain disruption brought about by increased global tensions and continued frequent occurrences of natural disasters.

U.S. production activity reflected in the Institute of Supply Management (ISM) index recorded respectable readings of 53.1 in January, 54.7 in February, and dropped to 51.3 in March. While activities surged in the first two months, some headwinds were evident in March. On the positive side, employment growth increased 1.6 percentage points in March coupled with 2 percentage drop in inventories.  Both import and export indices grew in the final month. Of concern, however was a 6.4 percentage drop in new orders, and a 4 percentage point drop in backlog orders, both indicators of some continued slowdown in the weeks to come.  Separately, the U.S. Commerce Department reported a 3 percent rise in factory orders in February, essentially fueled by increases in orders for commercial aircraft and durable goods. There has also been evidence of some resurgence fueled by the housing sector. The report however, cautioned that measures for business investment had fallen, which may be initial indicators of the effects of business concerns regarding the current cutbacks in U.S. government spending brought about by “sequestration”.

PMI indices reflecting activity in China, South Korea, Taiwan, and India indicate little impact related to a global slowdown, but some localized warning signs. The HSBC China PMI recorded readings of 52.3 in January, 50.4 in February, and rebounded to 51.7 in March.  Keep in mind that the quarter included the celebration of the Chinese Lunar New Year where many manufacturers close operations for a week or more. Stronger new order growth was reflected in the March number, indicating increased momentum moving into Q2.  However, higher raw material input costs rose for the fifth straight month in February adding to profitability pressures.  Thus far, China has not been severely impacted by the slowdown affecting the Eurozone region.

South Korea increased its supply chain momentum in March, recording a PMI of 52.0, its highest reading in over a year. This compared with a 50.9 reading in February. Solid increases were reported for both output and new orders, no doubt fueled by increased activity related to the consumer electronics sector. Supplier delivery times were reported as being lengthened reflected in lower finished goods inventories and leaner overall supply chain inventories. Manufacturing employment increased for the fourth consecutive month. As we pen this commentary, heightened tensions with North Korea have however precipitated the closing of a border manufacturing economic zone with threats of military actions.

The Taiwanese manufacturing sector, another hub for high tech and consumer electronics supply chains, increased its activity for the fourth consecutive month in March. PMI readings were recoded as 51.5 in January, 50.2 in February, rising to 51.2 in March. New orders rose for the fourth successive month in March while manufacturing employment rates fell fractionally.  On the concerning end, average input prices rose for the sixth month in a row in March adding additional cost pressures.

Production activity in India has been impacted by persistent interruptions in electrical power. The PMI reading of 52.0 recorded in March was noted as the lowest reading in 16 months. While the March data signaled higher volumes of incoming orders, growth in new orders was the slowest in 16 months. Indian based manufacturers have further depleted their stocks of finished goods to meet order requirements while lead times are increasing due to the impact of power shortages.

In our Supply Chain Matters global PMI commentary in early January, we noted the alarming surprise of Singapore, a previous stalwart of global supply chain activity, where the country was in danger of falling into recession.  Singapore’s industrial output fell over 8 percent in January and February compared to the same period in 2012. According to PMI numbers released by the Singapore Institute of Purchasing & Materials Management (SIPMM), that country recorded a reading of 50.6 in March, somewhat higher than a 49.4 reading recorded in February, and a signal of more positive activity. New export orders and production activity increased during the month. A separate PMI for the electronics sector dipped from 51.9 from 52.1 recorded in January.

In contrast to rather steady supply chain activity in the above global regions, declines in the Eurozone sector intensified. The Markit Eurozone Composite PMI was noted as 46.5 in March, down from the 47.9 recorded in February and 48.6 recorded in January. According to Markit, the rate of decline is accelerating.  Of the four largest Eurozone countries, France had its steepest decline, with PMI falling to 41.9, while severe contractions were again recorded in Spain and Italy. Only Germany, with a PMI reading of 50.6 continued to experience higher supply chain activity but the rate of expansion is described as marginal. Markit notes that March reflected the largest fall in new orders for Eurozone manufacturers since December. Thus, the current Eurozone downturn shows signs of continuing well into Q2 and beyond. Of further concern is that input costs continued to rise while prices charged fell for the twelve consecutive month.  This is obviously a strong indicator of negative overall supply chain cost pressures, which manifests itself in needs to cut costs in capacity along with areas such as headcount, product support and technology spending.

As noted in Prediction One of the Supply Chain Matters 2013 Predictions for Global Supply Chains (available for no-cost download), continued uncertainties will challenge global supply chain management teams throughout the year. With the exception of the Eurozone sector, global supply chain activity has demonstrated a steady resilience during the first quarter of 2013 in maintaining positive momentum. While there are continued cautionary signs of concern within certain geographic regions, overall activity is trending surprisingly positive.  However, moderate challenges involving the Eurozone countries are deepening, and supply chain teams supporting this geographic area should anticipate continued pressures for cost containment, capacity and resource cutbacks.

Bob Ferrari