The following is Bob Ferrari’s weekly guest commentary appearing on the Supply Chain Expert Community web site and the Supply Chain Matters Blog.

As major global companies continue to report September-ending quarterly earnings, the warning signs for global supply chains, as well as their implications, are becoming more and more evident.  Investors and equity markets are also taking notice as a litany of what is being perceived as disappointing earnings downbeat forecasts continues.

Snapshots of certain key players across various tiers of global supply chains provide a consistency in warning signs.  In the chemicals sector, both DuPont and Dow Corning have reported troubling news related to top-line revenue momentum. DuPont swung to a net-loss noting that revenues in Asia-Pacific and Europe have declined.  Dow Corning’s CEO noted significant impacts for Dow regarding the existing economic model in Europe, and predicted a “remake of the European model”. Dow further announced the closing of 20 manufacturing plants along with a 5 percent reduction in its global workforce, seeking to save $500 million by 2014.

Industrial and construction equipment manufacturer Caterpillar indicated that it was not expecting rapid growth in the coming months.  It predicted slightly better world growth in 2013, a modest improvement in the U.S., China and the rest of the developing world. In its reporting, The Wall Street Journal pointed to equipment manufacturers acknowledging that customer orders are being canceled or put on-hold amid a climate of high uncertainty over pending governmental economic policies. The CEO of United Technologies forecasted a continued slow recovery within the U.S. with Europe remaining a significant challenge. The CEO of Parker Hannifin indicated that his firm experienced a wave of canceled or delayed orders in the month of September from customers in construction and mining equipment. The environment was described as a flat-lining, waiting for something to happen.

Diversified manufacturer 3M reported quarterly earnings below expectations and lowered its full year outlook.  General Electric’s CEO has noted cautious optimism regarding the world economy in his travels among various audiences.

In the transport sector, shares of stocks among transportation companies are experiencing a discernible decline amid warning signs as to structural changes in global shipping patterns and economic activity.  As of late September, the Dow Jones Transportation Average was down 1.2 percent year-to-date but experienced a 5.9 percent drop in mid-September alone. FedEx has previously reported disappointing quarterly results and cut its global growth forecasts for both 2012 and 2013. It has since announced a $1.7 billion cost reduction initiative directed at the company’s priority air business segment. UPS in its earnings announcement this week noted a slowing of global trade and changing market dynamics. The company also expressed some uncertainty around the magnitude of the upcoming Q4 holiday shopping season. It will be interesting to note any significant shipment volume declines as the major railroads and ocean shipping companies subsequently report their earnings and operating results.

Many recent surveys reflecting supply chain management organization and business priorities have noted a shift from previous year’s priorities on cost reduction to supporting top-line revenue growth or enhanced customer services. That was a good sign, reflecting that supply chain teams could move beyond crippling cost cuts and invest in long-delayed new capabilities in added productivity, responsiveness, improved early-warning and agility.  However, the latest round of earnings reports among significant tiers of global supply chains are providing stronger signs that supply chain business priorities will once again be prioritized on driving further cost reductions from the overall supply chain. That in our view will have significant longer-term consequences and will add to the existing vulnerability of supply chains in assuring consistent product quality, resilience to a significant unplanned disruption or timely seizing upon a market opportunity.

Regardless, supply chain management and broader sales and operations planning (S&OP) teams should expect continued challenges in planning and executing their 2013 operating plans.  They should seek as much insightful information as they can garner.  Accurately predicting product demand, meeting higher service requirements from customers and assuring consistent supply will remain a significant challenge in the quarters to come.  Costs will once again be placed under the looking glass and since previous years of supply chain cost reduction have eliminated the obvious, there will be added pressures to challenge prevailing thinking and shift value-added cost to other supply chain tiers or service providers.

The current signs of continued economic uncertainty and consequent declines in export markets fueling previous top-line revenue growth should be a clear warning sign to supply chain management teams to be prepared to shift priorities and expect added challenges for removing inefficiency and cost.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.