First half of 2009 – goodbye and good riddance.
After the financial and Wall Street meltdown of the last four months of 2008, the economic weakness that was already in motion greatly accelerated, leading to something like a “great recession” in the first six months of this year.
So, the economy, unfortunately, really was the main supply chain story of the first half of the year, with publication after publication and pundit after pundit offering advice about “what to do in a downturn” until you almost couldn’t bear to read another one of them.
The demand uncertainty led to much (appropriate) angst over managing inventories. The first place many companies pulled back was in ordering from China. Container volumes into the US fell by 22% in April, for example, as import traffic dropped at rates well above the overall fall in the economy. April marked the 22nd consecutive monthly drop in year-over-year container volumes – incredible.
"The just released Fortune 500 list of the world’s largest companies saw the number of US firms fall to 140, the smallest number ever."
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Though mostly anecdotal, stock outs at retail seemed to surge as a result of inventory reduction strategies, costing manufacturers and retailers, in some cases, badly needed revenue.
Of course, the recession led to a collapse in most commodity input costs that reached a bottom in late February/early March. The price per barrel of oil, using “NYMEX sweet crude” futures, reached a bottom of $33.98 on Feb. 12. Yesterday, it was at $60.14, after spending much of June near $70.00.
Diesel fuel prices dropped to an average “on the road” low of just under $2.00 in most areas of the US the second week of March. Last week, it was at $2.56; a year ago this week, it was $4.61. The odd thing is, as oil prices are now tied to the state of the world economy, we should actually root for oil to stay in the $60-70.00 range, rather than head back south.
Transportation rates were simply in the dumper. Many ocean and truckload carriers have, at least in part, been moving freight at less than variable costs, putting many in severe financial stress. While many truckload carriers have exited the market, leading to a capacity reduction of 15% in the US, demand has fallen even more, about 18%, according to a financial analyst that follows the industry. He also says many more TL carriers are technically bankrupt, but that the banks haven’t yet pulled the plug on them, in part because the asset values are so low now (overseas markets for used trucks, once quite robust, have now dried up). But the bankruptcies could accelerate at any time.
US TL carriers are expected to order just 75,000 new Class 8 trucks this year, with the normal replacement rate said to be somewhere near 225,000. All this could lead to a severe capacity crunch when the economy does recover.
On the LTL side, Yellow Roadway (YRC Worldwide) has teetered on the edge of bankruptcy for much of this year, but so far has managed to remain solvent.
Parcel carrier DHL left the US domestic market at the end of January.
The rails saw volumes drop too, but have been able to keep pricing somewhat firm, versus other modes. That, of course, is the result of not much competition, leading to several pending bills in Washington that would eliminate the rail carriers’ anti-trust exemptions and regulate “bottleneck” pricing, among other changes. Though the vote on one bill was recently postponed to consolidate legislative action, something is likely to happen here in 2009.
China took a hit given the fall in exports, and tens of thousands of manufacturers there have folded. Some, however, say the Chinese government orchestrated much of this, and was happy to see “low end” producers go under or move further west. With a smart and aggressive stimulus program, however, much of it focused on infrastructure, China is still expected to grow its economy some 7% this year.
The just released Fortune 500 list of the world’s largest companies saw the number of US firms fall to 140, the smallest number ever, while China added nine to the list for a total of 37, most of which also rose in position. “Demography is destiny,” as they say.
Still, the drop in US and Western imports did put the break on rising prices out of China. All told, US import prices in May (excluding oil) were down 5.8% versus a year earlier, for example, a continuing trend.
Many companies were consumed with worries about the financial health of their supply chain partners, especially key suppliers. That led to all manner of risk mitigation strategies – and some debates about whether or not a more healthy company should spend some of its own money in various ways to keep a tottering supplier on its feet.
The changing dynamics of input prices and demand caused some battles, mostly behind the scenes, between manufacturers and retailers on the prices the retailers would pay for goods. That spilled over in a public way in February, when Brussels-based grocer Delhaize SA, which also owns the Food Lion chain in the US, pulled some 300 products of CPG giant Unilever off of the shelves of its 775 stores in Belgium early this year that it said were priced too high. A compromise was eventually reached.
With the new administration and Congress, US businesses have growing concerns about the potential for “card check” legislation to pass that would make it far easier for workers to unionize. Business groups have lobbied hard to kill or water down potential legislation, but meanwhile, many companies are hiring consultants and developing strategies to weather the storm if the idea does become law.
Also on the legislative front, the US House did pass a “cap and trade” bill in June, though no one, including most of those who voted for it, understands what is in it. The bill’s fate in the Senate is less certain.
There was growing concern earlier in the year over escalating drug-related violence in Mexico, causing many to wonder about the country as a sourcing location even as others were promoting Mexico and “near shoring” strategies. With help recently from the US, however, it looks like some measure of control over the violence is starting to occur there.
Meanwhile, in March, Mexico slapped a large tariff on a variety of US goods, in retaliation for the failure of the US to live up to its NAFTA commitments to let Mexican truckers operate in the US and the Obama administration ending an existing pilot program.
About a year after he announced sweeping changes to Dell’s vaunted supply chain model, Michael Cannon, the company’s first real head of global supply chain, was shown the door at the beginning of the year. The cause has never been made clear. Just last week, GM made the same move with its head of supply chain, Bo Andersson. Some say the “new” GM will need more help from suppliers, and that the hardline approach Bo was known for needed to be changed for a new model. Our friend Fred Berkheimer, head of logistics for Unilever NA, also just retired.
RFID at Wal-Mart, at least, seemed in free fall, with a program at Sam’s Club delayed and almost no apparent activity at the US stores group. In February, Procter & Gamble ended what it termed a “successful” pilot with Wal-Mart on tagging promotional displays, it appears because Wal-Mart simply wouldn’t do anything with the data.
That’s our review of the top supply chain and logistics stories from the first half of 2009 – anything we missed?
A lot happened – a lot of which we would like to forget.
What’s your reaction to our first half supply chain review? Any key stories or themes we missed? Let us know your thoughts at the Feedback button below.
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