The following is this author’s guest commentary appearing on the Supply Chain Expert Community web site.
In a previous joint Supply Chain Expert Community and Supply Chain Matters commentary in early July, we highlighted impressions from the reported June indices reflecting on global supply chain activities. The impact of the ongoing European financial crisis and a slowing of China’s economy accounted for significant drops in key supply chain related indices for June, and considerable notes of caution were surfaced. We cautioned supply chain planning, procurement and sales and operations planning (S&OP) teams to pay close attention to these indices in the coming months since the 2008-2009 global recession provided stark lessons on how quickly the global can change in a matter of weeks and months.
As we move into August, financial media is again featuring headlines reflecting growing global headwinds. Media slants headlines to garner more readers, supply chain teams, on the other hand, need to ascertain the on-the-ground realities.
Today’s Financial Times features a headline article (paid subscription or free metered view) commenting on the latest purchasing manager indices from key Asian countries. It features a quote from Chinese premier Wen Jiabao, warning against underestimating the risks posed by the current global economy and that “downward pressure is still relatively big”. The article also features a trending chart of U.S., China and Eurozone PMI indices since 2008 and it is striking to view the finite differences of the last few months to that of the 2008-2009 contraction. The differences are in major geographies, with the U.S. showing more resiliency, at least through July.
A second FT article on the same topic points to an ongoing period of inventory adjustment. As manufacturers, retailers and global logistics providers wind down their reporting of June-ending results, a very uncertain outlook seems to be developing, depending on specific industry, tiered presence in the industry supply chain, and geographic region. Yesterday, the Institute of Supply Management (ISM) released July PMI data for the U.S., and it was noteworthy to read the selective quotes from various industry segments. While global activities are clearly contracting, some industries, and some regions such as the U.S., reflect counter activity. As we concluded in our early July commentary, planning the global supply chain for the remainder of 2012 and 2013 will be somewhat challenging and will require high levels of analytical precision along with various planning scenarios.
A snapshot of the latest July data provides noteworthy trend. First, Europe is clearly moving toward a recessionary period. The Markit Eurozone PMI Index was down for the 11th straight month falling to 44.0, from 45.1 in June. The Eurozone manufacturing growth engines of France and Germany are contracting at a rapid pace and the U.K is showing clear signs of contraction as well. New orders reflect a continuing downward trend. While teams need to make their own conclusion, it seems apparent that one significant sector of the global economy is clearly contracting, and the fallout is impacting other global regions such as China and South Korea.
China’s official manufacturing PMI index fell only one tenth of a percentage point in July, from 50.2 in June to 50.1 in July. Output, new orders and backlog however trended lower indicating the effects of reduced business activity. South Korea experienced its sharpest fall in exports this year and Taiwan also reported its first contraction. Since August represents the beginning of supply planning for the upcoming 2012 holiday buying season, all eyes must be turned toward the mood of individual country consumers.
In the U.S., the ISM Manufacturing PMI for July was up a tenth of a point, recording 49.8 in July compared with 49.7 in June, indicating some leveling off in the past three months. New orders and production indices were slightly up, while order backlog was down by one and half points. What should be of most concern to planning teams is that inventories are once again growing, with a significant five point increase in just one month. Prices are also on the rise.
Again, it is our view that now is not the time for generalized or historic based planning. Rather, analytical rigor, consensus and scenario based planning methods are most appropriate. S&OP teams should keep a clear focus on what’s happening in individualized geographic markets, tapping local, on the ground field teams for frequent information updates and be prepared for planning the supply chain according to individualized regions. Precision inventory planning is essential.
The coming months will again be yet another test of the resiliency and response capabilities of individual supply chains.