It is a Monday morning and I’m facing a six hour plane ride enroute to the Kinaxis Kinexions conference. Noting that my carrier is Southwest Airlines, I was compelled to not only bring my own food and snacks but to bring lots of reading material to compensate for zero entertainment and creature comfort amenities. One of the best companions, I have found for a long plane ride are unread copies of Economist magazine where there is ample time to read from cover-to-cover. The October 8 issue provided an insightful but stark commentary on the business implications of current economic events occurring across Europe which I suspect will have many potential implications for global supply chain strategy and preparedness.
The article is titled: Under the volcano- how companies are preparing for various scenarios, (paid subscription or metered view requirement) and it provided some stark reminders that European businesses remain highly concerned about current events surrounding Europe’s ongoing sovereign debt crisis and how these events will unfold in financial and economic terms. Some business forecasters believe that the Eurozone could fracture or possibly break apart completely. That would imply implications for credit, inflation, currency and cross-border trade. Reading of the various scenarios and contingencies that some European manufacturers are undertaking should cause supply chain executives to also reflect on contingency planning.
Supply Chain Matters believes that senior supply chain executives, if they have not done so thus far, should be initiating and contemplating scenario plans and contingencies in three potential areas of supply chain impact. These three areas are to buffer overall business impacts, but in the perspective of crisis bringing opportunity, there may be some opportunistic considerations to consider as well.
The three contingency areas should include:
- An impact to B2B, P2P and E-Commerce fulfillment strategies involving suppliers and customers located within Eurozone countries. These processes are currently predicated on a single Euro-based currency. If the Eurozone were to split into two-zones, strong and weak, or to split altogether, the implications for systems supporting B2B commerce would be rather fluid, and potentially complex. There would be implications in supplier contracts in adjusting or re-negotiating financial exposures, invoicing and currency collection. While contracts may have contingencies already identified, it would be wise to begin a contingency focused analysis of areas of potential impact or exposure. Similarly, IT support teams should be thinking about potential systems impacts and response strategies.
- Another area could be supply chain shocks in logistics/transportation and customs requirements. Today, Europe and global-based manufacturers can assume a seamless physical flow of component and finished goods across Eurozone countries. Hopefully that will continue, but then again, sudden shocks could occur if certain countries are jettisoned out from the Eurozone or forced to fall back on independent customs and transport regulations. Severe financial crisis could bring motivation t0 add more import tariff revenues to depleted treasuries or weakened economies.
- The third contingency area would be financing of inventory and working capital. Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain are already experiencing difficulty in acquiring affordable access to credit and loans. A worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies. Mid-market firms are especially vulnerable. Financial supply chain, suppler health checks, inventory and tooling investment implications should be considered.
The Economist article additionally notes that many European firms are now accelerating efforts to buffer exposure to a potential Europe financial crisis, and are thus are aggressively accelerating plans to market and sell their products within the emerging market economies of China, India and Latin America. That makes lots of sense. But at the same time, non-European companies may be afforded added opportunities to compete for additional business in these emerging markets by virtue of the existence of a more stable currency, banking or financial system that provides affordable access to financing product innovation, services or added inventory pipeline.
The intent of our commentary is not to raise immediate alarms but to begin prudent planning for possible supply chain disruption scenarios. Just like last year’s volcanic ash incident that shutdown Europe’s air traffic, high uncertainty should motivate active contingency planning.
Readers and supply chain focused consultants are welcomed to share their perspectives for contingency plan considerations.