The following is this author’s weekly guest commentary appearing on the Supply Chain Expert Community web site.
The 4th of July holiday in the U.S. is often a time of great summer celebration, complete with fireworks, family picnics and group barbeques. But when supply chain professionals return to their work places, the latest economic indices will challenge Sales and Operations Planning (S&OP), supply chain planning and procurement teams to analyze and prepare many different scenarios regarding supply chain activity in the second half of 2012, along with next year.
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 have surfaced. The U.S. focused ISM June PMI Index dropped 3.8 percentage points in one month, from 53.5 in May to 49.7 in June, reflecting a below 50 contraction and the appearance that the European economic crisis has a spillover effect. The all-important new orders index, a key indicator of supply chain momentum, plunged over 20 percent, from 60.1 in May to a reading of 47.8 in June. Exports dropped 6 percentage points from 53.5 in May to 47.5 in June. The inventories index fell 2 percentage points from 46.0 in May to 44.0 in June.
The headline for preliminary HSBC China PMI also reflects a drop of activity, but more importantly, export demand from both Europe and the U.S. was especially weak. Overall, new export orders sank 2.7 percentage points to a 39 month low of 45.8. Elsewhere, the June PMI for Brazil sank for the third straight month, while the June index in both South Korea and Taiwan also contracted for the first time in five months.
Global supply chains are catching a chill from both Europe’s deepening economic contraction along with the impact of China’s efforts to cool down a previous overheated economy, compounded by the building contraction in Europe. This author has heard talks from two different noted economists over these past two weeks, and both pointed to a multi-year period of contraction in Europe before the Eurozone can work its way through tough economic challenges. Since many U.S. corporate supply chains extend to Europe, that is a significant prediction to factor.
Since considerable portions of U.S. based corporate revenues and profits have come from these overseas markets, planning for the coming months and quarters will be challenged, to say the least. Needless to state, prior or generalized product revenue forecasts are not going to cut it in this new period of global uncertainty along with plans that extend 12-18 months. The reality is that product plans will have to reflect near real-time demand from individualized countries as well as key customers and scenario based planning tied to supply chain business intelligence are a must. Similar to what occurred in 2008-2009, diligent market sensing and agile response to any marked changes in product and services demand will be the norm in the coming months as events unfold. The current extreme and highly unusual weather patterns spurning frequent natural disasters along with more frequent occurrences of earthquakes add uncertainty and risk as well.
On a more positive note, the print edition of today’s Wall Street Journal’s featured a front page article (paid subscription of free metered view) observing that pricing for inbound raw materials have plunged dramatically because of the sudden economic downdraft. In fact, raw material inventories are on the rise. Overflowing oil storage facilities and metal and raw materials warehouses in China spilling over to adjacent areas are sure signs of a back-up in supply chains. Past principles related to the time it takes for raw material prices to ripple through the supply chain are no longer valid in times of just-in-time inventory principles, and customers will again add to pressures to reduce prices sooner.
The Independence Day holiday in the U.S. is a celebration of the founding of a nation, and how a small team of visionaries and patriots could prevail. Thomas Paine, an American patriot, scribed an expression: “These are the times that test men’s souls.” This expression is perhaps appropriate for S&OP and supply chain teams as they plan the second-half of 2012.