I have penned previous posts commenting on what I termed as the “Great 2009 Backflush”, namely that global supply chains are rapidly ratcheting down output.  I purposely butchered a lean manufacturing term, since this rapid scaling back seems to be occurring at “just-in-time” or demand-driven speeds.

Additional evidence now comes from the latest headlines in the financial news today. October industrial output in Europe sank dramatically, forcing European companies to scale-back production.  Carmakers have especially been hit hard and have announced extended closings over the Christmas holidays. Another report indicates that U.S. sales at the wholesale level declined 4.1 percent in October, and that inventories had plunged by 1.1 percent, the largest inventory cutback since 2001. 

Before running off to the nearest pub to absorb yet more negative news, you need to dig a little deeper into the numbers, since financial journalists tend too often to generalize.  

Let’s focus on the U.S. side. You can note as I did, that the wholesale sales decline was about evenly split among durable goods and non-durable goods.  A visit to the U.S. Department of Commerce web site to review manufacturing inventories, the next step down the supply chain, will provide more succinct evidence of what may be occurring right now.  October inventories of manufactured durable goods (autos, machinery, equipment, etc.) increased $1.5B, reflecting their highest levels since 1992.  Any visit to an automobile assembly factory will provide ample evidence of this situation.  I suspect that the work stoppage at Boeing these past few months may have also contributed to the problem in this sector. On the other hand, inventories of non-durable goods actually decreased by $4.7B or 2.1%, driven primarily by petroleum and coal reductions. 

In my view, two forces may be in play.  First, the natural forces of a credit-driven, severe global recession are reflected most in the rapid decline of demand for durable goods.  That would be a no-brainer.  The other force at play may be the effect of price incentives.  The price of a barrel of oil is at its lowest point in months, commodity prices have tanked, retailers and wholesalers are doing everything in their power to sell the inventories they have. 

My premise is that 2009 will present distinct challenges for manufacturers, depending on your industry sector.  Durable goods output and inventories will remain the greatest challenge to overcome in terms of recovery. Structural problems in the global economy have to run their course. Non-durable goods inventories and demand seem to be responding to price incentives.  That should be a motivator for Sales and Operations Planning (S&OP) teams to strategize in 2009. 

A final note, when non-durable inventories do work themselves down, be prepared for longer lead-times and material shortages, since global capacity has been cut-back dramatically.  Supply chain wide visibility will be a crucial to navigate dramatically changing conditions in demand or supply.

What are you observing in your sector?  Are price incentives really working, or has senior management looked negatively on this strategy because of needs to generate more cash?

 Bob Ferrari