The unprecedented global economic challenges impacting multiple industry settings have profound implications to both supply chain processes and the supply chain profession. Supply Chain Matters silver sponsor Kinaxis has sponsored an ongoing Expert Blog Series, where various industry experts have provided insights relative to these implications. I was honored to be an invited contributor to this series, and the following are my responses to a question and answer session in which I shared some of my perspectives relative to what I believe will be new structural changes in global supply chains.
I encourage my readers to share their perspectives, pro or con, in the comments section of this posting, or the simultaneous posting appearing within the Kinaxis 21st Century blog.
Kinaxis: What do you see as the major changes happening in supply chain management today? How has the supply chain management paradigm changed?
Bob: In my blog. Supply Chain Matters. I will occasionally make some predictions regarding changes underway or changes to come. More and more, I believe that a new wave of structural change is underway in the overall structure and flow of global value-chains.
At the turn of this current decade, major structural change occurred across industry supply chains, and supply chains truly became global and more complex. The motivations were many:
- Continuing business and product cost pressures and the emergence of lower-cost manufacturing capabilities in countries such as China.
- Viewing these new emerging economies as a vast future market, and beginning to build in-country business partnerships and supply chain infrastructure.
- Economic acceleration due to the post 9-11 recession in the U.S..
The economics for contract manufacturing became much more attractive for manufacturers, and many contract manufacturers in-turn shifted capacity toward lower-cost regions leading to explosive expansion in production capacity in China, Eastern Europe and other regions. Transportation and logistics capabilities have followed, with ports in Asia now leading the world in ocean container and bulk shipping volumes along with massive investments within in-country logistics and distribution capabilities.
I believe that new and different structural changes are now underway, or will continue to evolve as various countries attempt to recover from this severe global economic downturn. Certain significant trends will drive this pending change.
Kinaxis: Can you outline the effects on the supply chain and the trends you see going forward as companies face, and eventually recover, from the current economic crisis?
Bob: Sure, all in all I believe there will be significant demand side effects, supply side instability and increased supply chain risk – these will be the key influencers for the evolving structural changes of global supply chains.
Demand Side Effects:
The effects of this global recession are many, and potentially long-lasting. Financial net worth in the U.S. and other countries has dropped dramatically. When recovery eventually occurs, consumers may well have different buying patterns. Some economists, authors and forecasters collectively predict that consumers may have reached a significant life-changing event that will change the paradigm for future buying patterns. In a Harvard Business Review article titled Value-for-Money Strategies for Recessionary Times, (purchase required) authors Peter J. Williamson and Ming Zeng predict companies that historically sold premium product offerings to drive profits can no longer rely on this tactic. The new more cost-conscious and value-oriented consumer will no longer be willing to pay a hefty premium for product innovation, when other more cost-affordable alternatives exist in the market. These authors argue that the new source of product innovation will therefore be current product innovation teams residing in the low-cost regions.
Another concerning trend is the massive amount of retailer failure that continues to occur. Retail industry observers have dire predictions on the amount of retailers who will survive this current global recession. This trend could ultimately lead to a small group of large global-based or geographic retailers with even more buying leverage. Similar to the Wal-Mart effect, huge price and shelf-space leverage will become even more pronounced among these surviving retail giants unless manufacturers can find alternative channels to get their products to markets. On the other hand, in the developing regions, a large and complex network of local and micro retailers is the primary mechanism to get products to markets.
Supply Side Instability:
As demand for products fell at a very rapid rate, supply chains reacted with rapid speed, resulting in what I termed the great global inventory backflush. Prior to this pronounced global recession, manufacturers built high levels of productive capacity to meet anticipated demand for both existing and new emerging markets. This was especially evident in China where manufacturing capacity for basic commodities, toys, apparel and other markets existed to serve both worldwide markets, as well as China’s domestic market. A painful downsizing of this capacity is now occurring with the closing of thousands of factories. Similar overcapacity exists in global chemical, automotive, semiconductor, and consumer electronics areas, in-turn forcing decisions on temporary or permanent cutbacks. With the real likelihood of the structural changes in the demand noted above, and depending on the overall timing of the recovery, global overcapacity will exist in many industry sectors and in contract manufacturing.
Overall Supply Chain Risk Has Increased:
These past two years have seen a period of non-stop supply chain disruption, driven from a combination of major factors. Natural disasters brought on by the effects of global warming increased. Headlines of product contamination in the most regulated of supply chains have shaken consumer confidence, and driven manufacturers to call for self-regulation. Political instability and the threat of terrorism in the post 9-11 era continues to escalate, with a new threat of social unrest in certain countries brought on by the economic severity and loss of jobs brought about by the effects of this global recession. The magnitude of this recession has added the real possibility of major supplier failures across many industries.
Running-up to this collapse of worldwide demand, many global manufacturers began to feel the true impacts of rising labor costs within China. When oil spiked to near $140 per barrel in the summer of 2008, these same companies began to understand the risks of transportation cost spikes impacting the entire landed-cost sourcing equation for moving sourced products from the far east to markets in North America and Europe.
Kinaxis: What do you see as the implications of these trends? What supply chain strategies may need to be revisited?
Bob: While I do not portend to be a sole visionary or prognosticator, my gut tells me that a new wave of structural changes to global supply chains is underway. The extent of these changes remains to be seen, but in my view, certain areas will need to be reviewed or re-considered.
The effects of the emerging value-conscious consumer and customer will obviously lead to more structural change in the manner and regions where products are developed and mass distributed to global markets. Manufacturers now operate over 700 development centers in China and India, which could well be the new force for the next decade of product innovation. As authors Williamson and Zeng suggest, we could see entire value-chains established within a geographic region.
In terms of value-chain structure, the notion of the most cost-efficient supply chain will most likely trump the more costly product innovation value-chain. There is some opinion that contract manufacturers themselves, who have no choice but to maintain the most cost competitive and productive capacity, will dis-intermediate their brand-owner customers by establishing their own brands and global product distribution, as pointed out by Randy Littleson and Trevor Miles.
Increasing structural and political risk across global supply chains will also lead to some forms of structural change. High unemployment, a rising voice from consumers for buying local, as well as
nd other political forces in China, Europe and the U.S.manufacturers to revisit their outsourcing or near-shoring strategies. Politicians are under the gun to protect domestic jobs and insure their country’s competitiveness in tomorrow’s products and technologies. Consumers demand safety for the products they purchase, and demand that manufacturers have transparency in quality control and consistency. The existence of the brand itself hangs in the balance.
Your takeaway is that supply chain structural change is underway and strategy remains in high flux. Companies will need to double their efforts in deploying the most cost efficient and risk-balanced supply chain. The needs for highly collaborative and tech-savvy supply chain management are even more important enablers to navigate within this next era of change.