In a prior Supply Chain Matters posting, I noted that a good benchmark for what’s really going on in the global economy is to trace current activity in industry supply chains.  Specifically, that major chemical and semiconductor companies, first steps in many supply chains, were dramatically cutting back on production levels for the next few months.  This week, there is additional and profound evidence that global supply chains are rapidly ratcheting down output.

The Institute for Supply Management (ISM) index of U.S. manufacturing activity for November fell to its lowest level in 26 years.  More of concern, the index reflecting new orders declined to its lowest level in 28 years.  Both indexes imply that supply orders and production activity are in rapid decline.

A recent published Financial Times report also points to two surveys reflecting that manufacturing activity in China, the world hub of manufacturing, also declined sharply in November. This article indicates that most Chinese economists expect Chinese manufacturing to remain weak for at least six months, if not longer. A separate  FT report highlights that in Shenzhen province, China’s largest export hub of manufactured goods, 682 factories have ceased production thus far, with thousands of workers both unemployed and malcontent. Production levels in Europe and Russia have also significantly declined.

My view of all this unfolding data is that global supply chains are experiencing a rather new phenomenon which I will term as ‘the 2009 backflush of global supply chains’. Let me explain.

There have been two different sides to the rapid adoption of lean, pull-oriented, or demand-driven supply chain processes.  On the one hand, they have led to more customer responsive fulfillment, less total inventory, and far more cost-efficient supply chains.  On the other hand, when product demand dramatically decelerates as is happening, all tiers within that supply chain quickly feel the effects at just about the same time.  Add the fact that advanced supply chain technology has enabled broader, more-timely visibility and control across the extended supply chain.  Shake and stir, and perhaps what’s unfolding are an unprecedented set of events that are now cascading across many industry supply chains.

So the real question I’ll pose for comments is the following.

Will these same industry and business supply chains be able to ramp-up supply in the same manner when recovery returns, or are we about to witness permanent reductions in global capacity?

What’s your view?

Bob Ferrari