There was a rather interesting article, On the rebound, featured in the August 15th edition of The Economist Magazine of which supply chain strategic planners should take note.  This article points out that Asia’s emerging economies are recovering much more quickly that those in other parts of the world, but raises the question of longer term sustainability of this momentum.  I would argue that this momentum also implies an investment in more sophisticated supply chain planning and analytical decision-making tools.

What I found to be of most interest in the article was the Barclays Capital chart (Back on track) that indicates that emerging Asia’s  industrial production levels have jumped to an annualized rate of 36% growth in the second quarter, and output has regained levels achieved prior to the onslaught of the global economic crisis. The authors cite China as the prime influencer of this trend, where industrial production has risen 11% in the past twelve months.  The U.S. on the other hand, continues its decline in industrial production activity, which reinforces the premise that the emerging Asian economies, and Asian based supply chains are now leading in the overall recovery.

There was previous speculation among economic forecasters that emerging Asia economies that were highly dependent on export-driven markets such as the U.S or Europe would lag in the recovery, or at least front-end recovery in these countries such as the U.S.. The opposite has occurred thus far.

The authors make the observation that Asian firms, similar to other global firms, aggressively cut production to below the level of sales in order to shed excess costs. Different than the situation in other regions, these firms now need to reopen factories.  The authors point to industry observers that note that the current pick-up of activity simply reflects the rebuilding of inventories in anticipation of increased demand.  South Korea’s private consumption rose by an annualized 14% in the second quarter, and in China, consumer spending in urban areas is up by almost 11%, mostly driven by government stimulus incentives directly related to consumer spending.  The article notes: “…South Korea, Singapore, Malaysia, Taiwan and Thailand have all had a government boost this year of at least 4% of GDP.”  The argument is that stimulus has been more effective in these countries because Asian households were not burdened by huge debts, and that it was a lot easier for emerging economies to find worthwhile infrastructure projects.

While all of these trends are noteworthy, I would raise a couple of caution flags for supply chain planners.  First, similar to the current debate around government stimulus programs that motivated U.S. consumers to trade in their clunkers for new automotive purchases, the question of longer-term sustainability of demand is a very valid one, and pertains to Asia as well as other countries. Firms will need to continually sense for sustainability in product demand, or a structural shifting of demand.

Second, Asia has a particular problem related to over capacity in certain industry sectors that existed prior to the recession.  If Asian factories begin to crank-up demand too far ahead of real demand, that overcapacity problem will lead to price erosion and a need to find more outlets for goods, potentially leading to another condition of too much inventory and productive capacity.

On the subject of the threat of inflation, the article’s authors point out that growth in the overall labor supply as well as sustained productivity levels will need to combat future inflationary pressures across Asia. I would argue that implies Asian based supply chain organizations will need to step-up their investments in IT tools that can provide global-wide supply chain visibility, as well as timelier decision-making relative to overall inventory and production levels.

If Asia does lead the West in the global recovery it must do so with smarter supply chain business processes and supporting technology that can rapidly sense and respond to both domestic or export driven market changes.  This is not necessarily a call to large-scale IT investment, but rather investing in tools that provide more insights into the timely balancing of supply with actual demand.

 Bob Ferrari