The following posting can also be viewed on the Supply Chain Expert Community web site.
A Monday can sometimes be a slow day for business and financial news, but yesterday, on the eve of the meeting of the World Economic Forum in Davos, it seemed that a common headline for print and video outlets revolved around the challenge of exploding inbound material costs and mounting concerns of inflation. In economic circles, these trends will often point to the need for companies to eventually raise product prices, which fuels the fears of inflation or, perhaps, another slowdown in consumer spending. There is, however, even more at stake in terms of supply chain capabilities.
The latest poll displayed on the Supply Chain Expert Community web site seeks an opinion as to what will be the biggest supply chain challenge in 2011. Thus far, the majority of respondents have responded that demand volatility and collaboration with customers and suppliers seems to be the prevailing opinion. It may well turn out that the current trend of explosively rising inbound material costs will present the most difficult supply chain related organizational challenges for 2011.
The trend of exploding inbound material costs should be of little surprise to the community of supply chain management professionals. This trend started months ago and the pace is now accelerating. The statistics are troublesome. In food commodities, the price of corn has already risen by 84 percent, , wheat 61 percent, soybeans 48 percent, and sugar 18%. Within industrial and discrete sectors, the price of steel is expected to double sometime this year. We have all read of the exploding prices in precious metals and rare earth materials, and the price of oil and associated energy related products is again on the rise.
One of our Supply Chain Matters Top Ten Predictions for Global Supply Chains in 2011, addressed this specific challenge. Prediction Two noted that in the year 2011, supply chain cost reduction pressures will run into a stone wall as rising inbound material costs provide difficult roadblocks for supply chain teams in their ability to deliver any offsetting aggressive cost reduction objectives. We noted how the CEO of global auto parts supplier Bosch had indicated that this rebound in commodity prices would put intense strain on industrial companies, as well as their suppliers, and there could well be more supplier casualties. The dilemma is that the previous toll of multiple years of cost reduction efforts evokes a concern that any current increased reductions risk cutting into ‘the bone’ of supply chain performance capabilities.
The counter argument is that by raising prices for products, companies will be able to offset rising inbound material costs. In fact, the wave of announcements may be about to begin. Other long-time industry observers, however, are quick to caution that companies remain under pressure to keep delivering healthy levels of margins, profitability and cash.
It seems to me that now, more than ever, is the time for supply chain management teams to step-up their communication and education to senior management regarding the specific trade-offs of cost reduction objectives. The risks are rather high, along with the consequences. Leaning too much toward further offsetting supply chain cost reduction may well harm the ability for agility and responsiveness in these very uncertain business times. Passing this cost reduction burden on to suppliers also risks more disruption and harm.
Conversely, aggressive price increases could negatively impact demand for products, and if a wave of companies join the stampede, the risks of another economic slowdown seem to me to be very real.
While supply chain management teams may not have the final say, now is the time to insure that open and unfiltered communication exists with senior management, and that supply chain cross-functional teams come to some consensus on the impacts of various cost reduction or supply chain restructuring options. Planning and mitigation now can avert a potentially serious business impact later.
How is your organization viewing the current challenge of exploding input costs?