As we transition into the final month of 2011, it is time to re-visit the Supply Chain Matters 2011 Top Ten Annual Predictions for Global Supply Chains which we outlined a year ago. The full report is still available for free download within our Research Center.
Since the founding of the blog, we have established a tradition of publishing our predictions at the start of the coming year, and then rate our predictions toward the end of the year. Our predictions are offered in the spirit of providing a means to establish perspectives for what we believe can be anticipated in global supply chain management, and to help our readers establish some directional thinking for their organizations and teams in the coming year.
This series begins by a re-visit of the projections made for the current year, in this case 2011, with commentary of how close or far the prediction came to reality. In December, we will declare our annual projections for the upcoming 2012 year.
Readers are welcomed to add their comments and observations regarding the supply chain challenges that occurred during 2011, as well as to rate our predictions efforts. Yes, we enjoy praise as well as constructive feedback.
This initial posting examines our first two projections for 2011.
Prediction One: Business recovery will remain sluggish, but the second-half of 2011 should provide some uptick in product demand and supply chain fulfillment needs.
As we penned our 2011 predictions in late 2010, some business recovery in the global economy was underway but our feeling in entering 2011 was that the pace would remain sluggish and sporadic, with some select areas of improved growth. While supply chain professionals were starting to feel that the worst was over, continued diligence to the needs of growing top-line revenue growth would be required in 2011.
This prediction turned out to be fairly obvious at the time, but the most significant reality was the state of change that impacted the global recovery throughout 2011. From a rather optimistic perspective in April 2011, the IMF’s later September World Economic Outlook stated:
“The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing.”
Rather than the projection of 4.2 percent growth in global output made earlier in the year, the IMF adjusted its forecast to 4.0 percent, which we believe may turn out to be even lower when the actuals are finally determined. Rather than the 2.3 percent growth projected for the United States, the IMF forecast was revised downward by a full percentage point. The IMF goes on to indicate the barrage of shocks that have continued to impact global economies this year, including the devastating earthquake and tsunami that occurred in Japan, demand in the U.S. stalling within an environment of political impasse, and the continued financial turbulence of the Eurozone economies.
Added shocks come from the ongoing monsoon floods impacting supply chains that originate in Thailand and the worsening sovereign debt crisis occurring in Greece, Italy and other Eurozone countries. As we pen this commentary in mid-November, Eurozone industrial output for September is reported to have fallen by two percent, its biggest monthly fall since September 2009. While overall Q3 industrial production was expected to be positive, significant production weakness is occurring in certain affected countries, and is expected to impact Q4.
Our prediction of some uptick in the second half of 2011 will not come to pass, primarily because of the shocks that continue to impact global economies and supply chains.
Top line revenue growth has come from the emerging economies in Asia, with many manufacturers finding that the majority of their revenues originate from these regions. At the same time, the forces of rapid growth of inflation, and stronger policies on the part of governmental regulators to stem inflation growth are ratcheting down earlier growth rates. The good news was that many industries experienced some forms of manufacturing resurgence during the year. The not so good news is that, as predicted, value-chains are being stretched to their widest dimensions.
Finally, we predicted some form of an inventory wave in the second half of 2011. According to the ISM inventory index, manufacturing inventory levels grew in April, June, August and September, but October levels were dramatically down. The U.S. Census Bureau calculation of the inventory-to-sales ratio dropped to a value of 1.25 in the first half of the year, but grew to the 1.28 level in July/August. There does not appear to be a second-half inventory wave, which could be good, or not so good in terms of 2012 momentum.
Overall, our prediction of sluggish and sporadic growth held true. Unforeseen was the amount of shocks that occurred in 2011 and have muted any uptick in the second-half.
Prediction Two: The year 2011 will provide more supply chain cost reduction pressures and the challenges may be tough to overcome. This may be a year where supply chains will not be able to deliver aggressive cost reduction objectives.
Many manufacturers and retailers indeed struggled to overcome sharp increases in commodity and component costs, but price increases seem to have moderated within the second-half. Supply chain teams were indeed hard-pressed to deliver significant incremental cost decreases that could impact margins.
The ISM Manufacturing Prices Index hovered in the low to mid-eighties level from January thru April, and moderated downward during the latter half of the year. The October value of 41.0 was half as much as earlier in the year, and represented the lowest level of price growth in over two years.
The financial headlines throughout the year headlined higher costs impacting gross margin and profitability levels. A select sampling of manufacturers reporting incremental cost increases included:
Ford Motor Co. $2 billion
Hershey $700-800 million
Kraft Foods $500 million
Kimberly Clark $750 million
Procter and Gamble: $1 billion
Many manufacturers and retailers reported cost increases in the range of 5 percent to 10 percent, and realized that offsetting input cost increases with compensating reductions in other area of supply chain costs would not achieve profitability goals. Transportation costs also remained high in spite of some moderation in the cost of energy during the middle part of the year.
Many were forced to compensate by raising prices throughout the year, and within consumer and business markets, customers began to reel from these higher prices. These trends especially impacted emerging economies such as China, where higher food prices triggered high levels of inflation and have fueled social unrest. Similarly, continual political and social turmoil among Arab countries has been blamed on higher costs for food and other staples.
Fortunately, our prediction of cost squeezing impacting a broad group of suppliers did not come to pass primarily because of the manufacturing boom experienced during the year. The one caveat however is China, Europe and Japan. In Europe, the deepening sovereign debt crisis is showing signs of impacting small and mid-market supplier’s ability to access working capital financing at reasonable rates. For China, a combination of both rising input and higher labor costs have placed smaller suppliers that were already operating at thin margins in perilous positions. The other impact was, of course, the unprecedented occurrences of natural disasters, specifically the Japan tsunami and Thailand monsoons, which may yet take an added financial and operational toll on suppliers.
Input commodity and component price increases, consequent offsets and unplanned events did indeed buffer aggressive supply chain cost cutting but the end results as we enter 2012 are highly fragile supply chain networks.
This concludes our Part One scorecard update of the initial two predictions incorporated in our Supply Chain Matters 2011 Predictions for Global Supply Chains.
In our Part Two update, we will revisit predictions three and four.
Bob Ferrari
