The last few weeks have brought all sorts of concerning news that reinforces multiple supply chain risk and disruption factors.
We at Supply Chain Matters previously noted in our research report of our belief that the two most significant challenges for 2011 would be rising inbound material costs and increased shortages of materials. What we did not realize was how quickly these forces are accelerating. So much, in fact, that some economists and Wall Street analysts are beginning to whisper about the potential of a double-dip recession, if commodity shortage trends continue at the current pace. Another concerning development is the spreading political unrest and leadership changes occurring in the Middle East, along with other social tensions in Europe and the U.S..
Let us together begin to connect some dots relative to global events.
The issues of exploding commodity prices are more visible each day, and it seems that at this point, no food or resource related producer is immune. The challenge for financial and procurement professionals currently lies in assessing to what extent product prices can be raised to offset increased costs without a significant impact or pull back in customer demand.
I just read a very insightful article in Bloomberg BusinessWeek, Hungry for a Solution, which links the social unrest in the Middle East, among other forces, to be propelled by anger and hunger caused by excessive food prices. One of the disconcerting summaries notes: “Whether the world tips into agricultural mayhem or not depends on the North China Plain’s next wheat harvest.” This article cites the World Bank as noting that rising global food prices have pushed 44 million additional people into extreme poverty in the developing countries. Bloomberg notes that the World Bank is calling for the establishment of coordinated regional food reserves for certain countries and regions. Yesterday, the U.S. Department of Agriculture warned of a protracted period of extremely high food prices that could extend into 2012, with an especially high spike expected in the second half of this year.
Traditional financial media of late has had numerous commentaries concerning current dynamics in the commodities markets. It seems that buyers who are exercising forward buys to hedge price increases and continuity in supply are running head-on with the usual market speculators and commodity hedge funds, causing prices to spike even further. Strategic sourcing professionals are caught up in these current dynamics and are most likely experiencing some stressful work days.
Of more concern, political and social unrest across the Middle East, and in particular Libya, are driving up the price of oil and energy, and, if this trend continues, that has significant implications to supply chains. The price of a barrel of oil has risen 12% alone during these past three days, closing yesterday at $97.28 after closing slightly north of $111 per barrel the day prior. Morgan Stanley and others analysts have benchmarked the $150 per barrel level as the threshold for triggering significant recessionary forces. China, now a key player in the global economy has had strong inflationary growth in its economy, and a spike in the cost of energy may trigger more inflation, and higher prices.
Some consumers remain concerned about loss of jobs, high food prices, world and other events impacting their personal wellbeing, while others, who were feeling more confident, are beginning to open their wallets. The implications for current developments could throw cold water on entire economies and growth momentum.
Now more than ever, procurement and supply chain teams need to come together for developing alternative scenarios for any number of options related to an increasingly uncertain economy, and uncertain customers. If you have not done so by now, insure that you genuinely communicate to key suppliers how important their success is tied to your success. That does not imply more cost concessions. It implies true collaboration in navigating through some stormy waters ahead.
Invest more time and resources into integrated sales and operations planning, as well as enhanced visibility to what may be occurring at either end of value-chains. Finally, insure that your organization has some form of a supply chain risk identification and mitigation plan.
Storm clouds are brewing and barometers are unsteady. Be prepared.