Many manufacturing and distribution firms are approaching the window for 2011 budgeting plans regarding supply chain activities and another dilemma is store for supply chain teams.  Previous cost reduction and productivity savings may again be called upon as an offset to increasing material costs.

Input commodity prices are again on the rise.  A recent Wall Street Journal article (paid subscription may be required) notes that in food products, metals, energy and other commodities, prices are again on the rise.  As an example, because of the severe crop failure in Russia, wheat prices have risen 34%.  In one year, corn is up 44%, milk 6.5% and cheese 29%. Copper is up 30% and other metals such as steel, aluminum and other metals are on the rise.

The implication is that in many industries, firms are determining whether increasing costs will be passed along in higher prices, or will be absorbed or buffered by reduction of costs in other areas.  The Journal article notes that companies like General Mills and United Technologies Corp. are inclined to pass along higher costs by selective price increases. Other companies in price sensitive markets such as The Hershey Company, are in the process of determining if inbound costs can be offset by other cost savings initiatives.

In either case, supply chain cross-functional teams will again have to ascertain what assumptions, plans and programs will need to either be accelerated or deferred in 2011.  Procurement teams may be again called upon to reduce oversetting material costs.

In our view, these challenges come at a very unfortunate time.  Now, more than ever, teams need to be prepared with the supply chain planning and execution capabilities required for the post-recessionary recovery.   Most companies who survived the global recession have done so by severe cost cutting and reduction of headcount. While balance sheets remain cash rich and profitability remains at high levels, supply chains are probably the highest state of lean than they have ever been in the last decade.  Carriers such as FedEx and UPS are handsomely benefitting from this lean and ‘get it to me in an expedited manner” environment. The ability to be agile or responsive to any increase in top-line revenue growth brought about by new products or market shifts remains uncertain with inventory and capacity highly constrained.  To coin a sports-related analogy, the question for many companies is whether 2011 results in a supply chain strategy of ‘defense’ vs. a strategy of ‘offensive” capabilities.

Supply Chain Matters would like to ascertain how your organization is planning for 2011 supply chain budgeting.  On our panel to the right, you will find an interactive poll regarding budgeting for 2011.  Make your selection and we will report on overall results in a future posting.

Bob Ferrari