Note: This posting can also be viewed on the Kinaxis Supply Chain Expert Community web site.
In the past, it was not very often that we would have the opportunity to view on the front page of the Wall Street Journal an article that directly concerns developments in global supply chain strategy That was before the onslaught of the global recession. Now we find supply chain related stories often on the front page.
Today’s U.S. edition of the Journal has the front-page headline, “‘Bullwhip’ Hits Firms As Growth Snaps Back.” (paid subscription required) The article cites events occurring within the supply chain of global heavy equipment manufacturer Caterpillar Inc. as a reflection of a large inventory replenishment cycle currently underway and the inherent risks it can cause. It also raises two important and rather pertinent questions. Will the current inventory replenishment cycle cause the “bullwhip effect” to again amplify through the various tiers of the supply chain? Will suppliers have the ability to scale-up activities to meet this new demand given the rather fragile financial and operational state that suppliers currently find themselves?
This article is a must-read for our supply chain community, and cudos to WSJ reporter Tomothy Aeppel for a well written article.
I’ve often commented on this blog that the overall level of inventories is at unprecedented low levels across the globe. The WSJ article cites the overall reduction as $207 billion since the financial crisis began, and further notes that the pendulum began to swing in October and November, when total inventories began to grow. This data adds further quantifiable evidence that an inventory replenishment cycle is currently underway. What comes beyond the current cycle is the open question.
My biggest concern therefore remains on the second question, namely, how will suppliers know when demand has moved to a more sustained growth cycle and, when that occurs, what capabilities and/or resources will suppliers have to scale-up in a timely manner to stay ahead of such demand.
The WSJ article addresses these concerns through the example of Caterpillar and its outreach to its supplier network. Caterpillar CEO Jim Owens has a PhD in economics, and that has pertinence to his understanding of “bullwhip” phenomenon. The company has prepared a number of potential business scenarios regarding business activity in 2010, ranging from conservative to optimistic. In its latest fourth-quarter earnings announcement, the company’s current guidance for 2010 sales growth has a range of 10% to 25%. With these scenarios in hand, it dispatched two procurement executives to hold meetings with 500 of the company’s major suppliers, representing 80% of all component purchases. The messages delivered seemed straightforward: Explain that inventory buys would begin and that even if end-item demand were conservatively flat in 2010, an unlikely projection at this point, Caterpillar would boost production in its factories by 10%-15%, along with the need for re-stocking dealer parts inventories. Caterpillar’s estimates that this baseline scenario alone would cause output from all of its suppliers to rise 30%-40% from current levels. In essence Caterpillar’s messages will help suppliers to assess the bottom threshold of buying activity expected in 2010.
To help financially strapped suppliers with added resources, Caterpillar also instituted a program that allows suppliers to factor their Caterpillar accounts receivable at favorable interest rates, thereby accelerating payment at five days rather than an average 60 days from time of invoice. Readers may recall our commentary related to major retailers such as Wal-Mart and Kohls also launching similar supplier financial assistance programs directed at key suppliers.
The article also notes how Caterpillar has proactively supplemented supplier relationships in other initiatives, namely:
- Creating a three month “freeze period” during the transition period, where orders will not be changed, allowing suppliers the ability to do firmer financial and resource planning
- Revamping end-item selling strategy away from predominately large customer customization, and instead introducing four “lanes” of customer buying options, ranging from a company configured in-stock lane containing most frequently ordered customer options, up to “lane four” custom configured with highest lead time.
- The existence of an ongoing supply risk-assessment team that meets weekly, assigning overall risk ratings to suppliers.
We should applaud Caterpillar for its proactive supplier outreach activities as well as its sensitivities to helping suppliers overcome the effects or false starts related to “bullwhip”.
In my view, if enough companies of the global scope and outreach demonstrated by Caterpillar institute such comprehensive supplier outreach programs, than industry supply chains will be able to more adequately scale and meet product demand needs. If on the other hand, large OEM’s continue to treat suppliers as pawns in multiple games of chess, than the effects of “bullwhip” will be even more far reaching.
Procurement and supply chain teams need to be thinking more like Caterpillar.
Congratulations and a thumbs-up to Caterpillar for their outreach, and to the Journal for its front-page recognition that supply chains, and suppliers do matter.