First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  November 13, 2008  
     
  Supply Chain News: Recession and Supply Chain Transformation    
 

OK, so what does the current economic turmoil mean for all of us in the supply chain?

It’s amazing how fast things can change in our world now.

It was just a few weeks ago when I wrote a column on Supply Chain, AIG and What’s Next that offered some thoughts on the current mess and what it means to supply chain management. The world has turned even more since then.

I am an optimist, and actually believe the governments will turn enough knobs that before long one of them actually starts to work. To have all this happening economically amidst a change in US presidential administration is wild too. Just for example, it appears the auto company bail out simply can’t wait until January. The request for loans/bailouts will be coming from all quarters, and who can blame the supplicants. If GM and American Express are getting billions, why not us?

Here are some additional thoughts about the current environment:

  • We have “bubbles” bursting all over the place. As we’ve been reporting, some are calling the “ocean shipping bubble” the biggest of them all, and it is by some measures, in terms of price drops from peak to trough. Oil prices and commodity prices have collapsed with stunning speed. Now, the China “manufacturing bubble” is also popping – factories (and future capacity) are disappearing rapidly – as many as 100,000 plants now expected to close this year. (See Will there Turn out to be a “China Import Bubble” Too?)
  • I think, given the overall climate right now, that it will be politically very difficult for companies to announce they are shutting down Western factories and moving to Asia. If Lou Dobbs on CNN was railing about “traitor CEOs” and “exporting jobs” when times were good, the heat on companies doing so now will be even greater. Passage of the “card check” unionization rule could change that thinking, however.
  • Will that mean more investment in US and European factories? Maybe, if you can get the capital. But for most, that investment may be in automation to take out more costs. Fred Smith of FedEx is calling on Congress to allow US companies to expense rather than depreciate such capital investments, and says, in the end, it is the only way to raise blue collar wages by increasing productivity. (See FedEx’s Fred Smith Agrees US Needs to Return to a “Product Economy.”)
Gilmore Says:

Many of you will have to pull out that list of potential supply chain and logistics cost saving moves that you haven’t implemented yet. If you don’t have such a list, I would start building one immediately.


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  • Where are oil prices headed? If I really had to bet, I would agree with those who say we will see $100 oil again in 2009. The pain on the oil producers is so great right now, and the gap between supply and demand still relatively small in historical terms, that I think supply reductions by OPEC, et al, combined with some increase in demand spurred by the low prices (we are driving the Suburban a lot more again) will cause a move back up to occur. I do think, however, that the precipitous plummet also showed that the impact of “speculators” in driving oil and other commodities to the moon was real, despite many saying that wasn’t true.
  • The pressure to reduce supply chain costs has been escalating each year, and that pressure will now increase some more as CEOs and CFOs look to the supply chain to help sagging top lines. The good news is falling transport and input prices should be delivering big savings for most already, and certainly prices at the store haven’t yet reflected those cost changes, so margins should improve just as they shrunk on the way up for many. But many of you will have to pull out that list of potential supply chain and logistics cost saving moves that you haven’t implemented yet. If you don’t have such a list, I would start building one immediately.
  • I have to think that many Green initiatives will be put on hold for awhile. Transportation expense reduction provided the ROI behind many off these programs, and those numbers won’t be there at the same level today. I can’t believe there will be many companies that would take higher costs right now to do the right Green thing. However, many packaging improvements are just smart moves in and of themselves, and likely will continue, though with perhaps less urgency for a time. But would you risk a packaging change (e.g., Tide moving to a more concentrated form and package) right now if there was any concern it might impact sales? You could take that risk when times were good, when the reduction in transport costs on all units sold would mitigate any marginal sales loss from the change, and you thought the consumer would buy Green. But those dynamics are different today. However, will the new administration try to impose a carbon tax system in this climate? Would think that would wait, but you can’t be sure.

But what I really wanted to say is that, perhaps somewhat paradoxically, this actually could be the time for supply chain transformation. Over the past few years, we have seen supply chain and network transformations driven by three main things: rising input costs; the drive towards virtualization; and some companies simply getting SCM religion. Now, I think there will be different drivers.

Differences in supply chain performance between companies will actually be brought into greater relief in tougher times than in better ones. Barriers to make changes, such as uniting the supply chain under a single organization/leader, should fall. Improvement initiatives take on a higher priority. What was “important but not urgent” in the past better times becomes “important and urgent” in the present, to use Stephen Covey’s great framework.

So, take a step back from your daily activities at whatever level you are at and use this time to look at how can we make what you do better. Ask how we can rethink major areas and processes of how we do things today. Start thinking hard about what your supply chain should really be. While funding may be tougher to get, I think receptivity to ideas may actually open up.

The companies that do that now will have real advantage when things pick back up.

Beats following the stock market.

Is an economic slow down a good time for thnking about supply chain transformation or not? Do you have a list of potential cost savings ideas that could be implemented? What can companies do now to position themselves in the best shape for the recovery? Let us know your thoughts at the Feedback button below.

 
 
     
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