The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site where this author is a featured guest blogger.
This posting is a follow-up to our previous community commentary regarding the impact of higher inbound material prices on global supply chains. In January, Supply Chain Matters noted that the two most significant challenges in global supply chains for 2011 would be rising inbound material costs and product demand uncertainty. Two corporate statements this week now point to a pending business slowdown in emerging markets as another indicator of the interrelationships of these challenges.
An article in the Europe Business News section of The Wall Street Journal (paid subscription may be required) quotes the Executive Vice President of Nestle SA as indicating that natural and man-made disasters coupled with the spiraling costs of raw materials will impact sales in emerging markets in the coming months, especially China. Higher inbound material costs have caused price increases among food companies and these price increases are fanning inflationary forces as well as consumer unrest and pullbacks. Nestle’s Asia-Oceania-Africa zone was the fastest growing region in Q1 and accounted for around two-thirds of exposure to emerging markets. That region may now experience reduced growth. Although these forces will slow the rate of expected growth, Nestle cautions that overall growth from emerging markets will continue, albeit at a slower pace than originally anticipated.
As we noted last week, Nestle has acknowledged that price increases have to be selective, especially in the price-sensitive emerging markets, and is further implementing a number of strategies to overcome the impact of rising inbound costs. Mentioned strategies in this latest report are reducing waste and packaging, along with re-engineering products with cheaper materials. The article notes that target prices for goods distributed in countries such as Vietnam or China have been determined and where costs exceed these targets, other means of cost reduction need to be made.
Supporting these market slowdown announcements are media reports of a wave of violent worker unrest across urban areas of China as migrant workers feel the impact of lost jobs caused by industry sourcing shifts and vastly higher food prices brought about by inflation. China’s rate of inflation was reported as 5.5 percent in May. Violence has been reported in the southern China city of Zengcheng, a city of about 800,000 located close to the Guangzhou manufacturing region, along with other rioting in central China. Readers may recall that the recent multiple uprisings across the Middle East, or the so-termed “Arab Spring” have also been motivated by population unrest over the higher cost of food and staples. Civil war in the Ivory Coast caused Nestle to shut its factories in that region, and flavorings producer McCormick had to secure alternative sources of supply as a result of the uprising in Egypt.
Glencore International plc, who controls a large share of international trading among metals, minerals and agricultural commodities, also issued a warning. In an article published in the Financial Times (paid subscription of free preview account required), the CEO of Glencore, Ivan Glasenberg, warned that high inflationary prices and the Chinese government’s actions to curb those forces have caused a pullback in China, and added his hopes that this pullback would be temporary. He in turn noted that China’s monetary tightening would be temporary and the pullback could be short-lived. Since industrial commodities are the first stage of many different industry value-chains, this current pullback will be felt within upstream portions of supply chains over the coming weeks.
The effects of rising inbound costs are not just reflected in internal supply chain impacts. They also impact external demand trigger points. This is an important consideration for having the sales voice on emerging markets demand as part of the sales and operations planning (S&OP) process. If there have been aggressive assumptions made relative to product demand growth stemming from emerging markets, now may be the time to revisit those assumptions and run some additional scenarios of lower growth.
What is the view from your organization?
Has product demand from emerging markets such as China started to decline or taper-off?