First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  June 26 , 2008  

The Supply Chain Perfect Storm



Gilmore Says:
I am back with a new Perfect Storm, and it goes way beyond just transportation. You really have to ask: Has the supply chain environment ever been tougher than it is right now?

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Throughout most of 2005 and early 2006, most of us in the business could not escape the constant barrage from media, consultants, vendors and various other sources about the so-called “Perfect Storm” that had developed in transportation. At the time, companies were suffering from an extremely tight capacity situation, rising freight rates that came with the demand-supply mismatch, terrible port congestion, fuel prices that were just starting their long rise, and a handful of other maladies.

I am back with a new Perfect Storm, and it goes way beyond just transportation. You really have to ask: Has the supply chain environment ever been tougher than it is right now?

Here are some of the key “fronts” that are creating the new Supply Chain Perfect Storm:

  • Oil prices of course are at mind-boggling levels, about $130 per barrel as I write this and driving diesel to $5.00+ a gallon. An unrelenting rise, like bike riding all week into a wind that never ends. Higher highs and higher lows. Goldman Sachs’ predictions of $200 a barrel oil sometime in 2009 – and certainly sooner if anything explodes in the Middle East.
  • An unhinging of world and US oil prices for the first time from US demand changes. Prices have spiked this year even as US consumption of gasoline has dropped rather steeply. This is an entirely new historical phenomenon. The US still uses the most oil, but not enough to really matter any more, with growth worldwide, China, India, etc. sucking up any drop in US demand and more.
  • Other energy costs are also on the rise. Natural gas costs are on the march; coal prices have about tripled in the past year, meaning higher operating costs across the board for energy to run our factories and DCs.
  • Commodity prices are also defying historical gravity, from metals to unbelievable “Agflation” in farm goods. Week after week, companies from Kodak to Starbucks to Kraft announce weak earnings and forecasts blamed largely on rising input prices. Prices for iron ore increased an astounding 70% or so this earlier year, which will lead to huge increases in steel costs. Dow Chemical this week announced a similarly astounding up to 25% increases in chemical prices after raising prices 20% just a few weeks ago. This is simply without precedent.
  • Normally in an economic slow down, the labor situation gets a lot easier to deal with. But distribution operations continue to have a hard time retaining workers. The blue collar workforce is aging. When the economy picks up, this situation will continue to deteriorate by most estimates. Bring on the robots.
  • Increased dynamics - the changes are more unpredictable than ever. Even a bad trend, if consistent, can usually be reasonably managed. But should you plan for $200 a barrel per oil or $100 or a return to $70? We’ve heard Procter & Gamble is running network scenarios at $5, $8 and $10 per gallon diesel. What will happen in China? Place your bets, and take your chances.
  • China is not only a supplier - the Chinese “dragons” are coming after your business. There is substantial over-capacity in virtually every manufacturing sector – except of course oil refining, agricultural products, and other commodities. The competition is brutal, and companies can’t raise prices to match cost increases.
  • Supply chain complexity is growing. In the face of rising competition, companies chasing revenue continue to add products, markets and other complexity-inducing strategies, as ex-Rubbermaid president John Mariotti so well articulated in his recent book on The Complexity Crisis. Complexity is a cancer to the supply chain and profit killer to the corporation.
  • New markets – not only is global competition fierce, it is being waged increasingly in developing countries where the price points and logistics processes operate in a totally new environment. Tata Motors and others plan on selling $2500 cars into emerging markets. It won’t stop at cars.
  • Wall Street pressure is worse very year. “Supply chain, please bail us out” as usual. Sacrifice long-term benefit for short-term earnings “saves” as required. Getting needed headcount to actually run the supply chain well is simply not in the cards (see Dell 2005-2007). This is the story I hear all the time.
  • Risk mitigation fever – everywhere I go, including a global supply chain meeting at a medical device company I attended just yesterday, risk mitigation seems to be near the top of everyone’s To Do list. And that’s a good thing. But mitigating risk often means adding cost and complexity. Between mitigating risk and battling the daily fires, who has time to do sufficient proactive planning?
  • Regulation around the globe is getting heavier, not easier. Expect more - times 189 countries. We are approaching a regulatory choke hold, or at least a half-Nelson.

I could add a few more, but you get the idea.

My friend and SCDigest contributing editor Gene Tyndall recently said “The world isn’t just flat. It’s fast, cheap, and out of control.” That had a nice ring to it, but it’s taken a few months for the reality of the thought to really sink in. He is absolutely right.

Is this really about the toughest it’s ever been in the “modern supply chain era?” The 1990s, when supply chain thinking really took off, seem like “the dead ball era” (baseball term) now by comparison. The good news is that it makes the supply chain more important than ever, and as Dave MacEachern of executive recruiter Spencer Stuart keeps noting, the demand for supply chain talent continues to outstrip the supply.

But it makes the day-to-day awfully tough. Will it get better? Or are we just at the start of even more tumult and pressure? Unfortunately, for my money, the global changes that are driving this latest Perfect Storm have a long way to run. If we get a breather for a time, use it to prepare for the next “N’orester,” as they say in Boston.

Are we in some type of Supply Chain Perfect Storm? Or is this just all business as usual? Do you expect things to get better, or is this environment going to be a permanent condition? Most importantly, what can supply chain managers do?


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