First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  July 14 , 2011  

1H 2011 Supply Chain Review and Comment


Every six months, we review the supply chain world that was, and today I have a look back on the first half of 2011 in supply chain. It's amazing how easy it is to lose track of news and events even just a few months back, and we get good feedback from readers on these pieces which help them remember the news that was.

As unfortunately has been the case now for nearly three years, the dominant supply chain story was really the economic backdrop, with a sluggish economy in the US and much of the developed world, which impacts supply chain strategies, investments and more.

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The Japan earthquake gave us another lesson to absorb in our on-going supply chain risk management education.

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US GDP grew at just 1.9% in the first quarter, with about the same expected for Q2 when the numbers are released in a few weeks. This is very anemic for an economy that should be charging out of recession, and obviously is not enough to add jobs both in economic theory and in fact, as job growth is barely moving and the unemployment still over 9%, dampening demand.

Meanwhile, the Euro zone was fighting fire after fire with the sovereign debt crises in Greece, Ireland, and Portugal, somewhat in Spain, and maybe now most dangerously in Italy. There is a real chance these crises could take down the Euro and result in a return to country-specific currencies again, and worse, create a new financial debacle that will have a huge impact on the global economy. Keep your fingers crossed, but it doesn't look good.

To keep some economic spark going, the US Federal Reserve in effect printed a bunch of money (quantitative easing), which is far more than just a financial concept. Many have shown how this easy money policy has led to a devaluing of the dollar, which would have been worse if not for the Euro's troubles. Since most commodities are priced globally in US dollar denominations, that is the key factor in why oil and many other commodities rose sharply in price during the 1H, despite tepid overall global demand (see below).

It also led China, Russia, Brazil and others to further plot how to eliminate or reduce the role of the US dollar as the world's "reserve currency." We're trying to find someone who can explain exactly what impact this would have on import costs and other matters should it occur, but until we do, I will just say it cannot be good.

China, meanwhile, says it had GDP growth of 9.7% in Q1 and now 9.5% in Q2. But there are some dark signs on the horizon, including growing inflation that the government is trying hard to fight. That could mean slowing down growth, which will impact global exports to China, and perhaps increasing the value of its currency, which might increased costs on Chinese sourced goods (though the government clearly won't go too far in that direction).
More worrisome is what some say is a gigantic real estate bubble and huge debt incurred by many local Chinese governments. Some say there will a huge crash there, while others predict a soft landing. Everyone seems to believe there will need to be some sort of reckoning coming up.

Manufacturing through most of the first half was seen as the engine that was carrying the US economy. Capacity utilization continued its slow rise from the 2009 depths, rising from 73.8% in December to 74.5% in May, well above the disastrous 65% or so seen in June 2009, but still well below the 79% overage over the last 40 years.

But there are some worries that the manufacturing sector is now again slowing. The Purchasing Managers Index was roaring along early in the year, with levels above 60 from January to April, numbers that point to strong growth. That has changed in May and June to 53.5 and 55.3, respectively however, still indicating growth (any number over 50) but clearly decelerating the past two months.

Though it might be hard to perceive from the relatively modest month over month numbers, total retail sales excluding automobiles were up 8.5% in the US for 1H of 2011 over 2010. However, much of that was due to rising gas prices. Retail sales barely budged in the just released numbers for June, and some analysts have now pushed down their estimates for Q3.

Top Supply Chain Stories

Clearly the top story for 2011 thus far was the devastating earthquake and tsunami in Japan March 11. The event showed that even in these days of hyper-supply chain risk sensitivity, it turns out there are many of them lurking out there that companies may not realize. Apple, for example, developed a huge backlog for iPads because of shortages of some needed components coming out of Japan. It turned out there where many such vulnerabilities, especially in electronics and a few little know chemical products that represented tiny but essential parts of many recipes and caused production slowdowns and rising prices in many product markets. Another lesson to absorb in our on-going supply chain risk management education.

The second top story was the rapid rise in global commodity prices, echoing the story was saw in the first half of 2008 - and which was followed by the economic crash then. Prices for West Texas Intermediate started the year at about $88.00 per barrel, rising continuously in the next few months to a peak of around $113 by late April. Diesel prices naturally rose with it. WTI prices have now pulled back to about $95.00, up about 10% on the year.

The prices of many other commodities also rose sharply, leading to global concerns about "food inflation," and causing many US companies to reduce earnings estimates based on rising input costs.

Other supply chain news worth noting:

• The US EPA, in the absence of any climate change legislation, started issuing its own regulations for greenhouse gas emissions, under a controversial authority it gained from a Supreme Court decision several years ago. The first rules are not too burdensome, but have left some concerned about how far this will go amidst "separation of powers" arguments.

• In other government-related news, the National Labor Relations Board caused quite a stir by: (1) suing Boeing over its plans to open a nearly complete airplane factory in South Carolina over unionization issues, saying the company broke the law by opening the factory in retaliation for strikes in Seattle, the first ever such move; (2) proposing changes in the process from the time a unionization drive begins until the voting, which many believe will favor the union activity.

• Proposed changes in hours of service (HOS) rules in late 2010 led to a number of hearings and other matters before the Federal Motor Carrier Safety Administration, with much evidence showing the changes would have little safety benefit, and the FMSCA itself saying the move was mostly driven by "driver health issues." No final decision yet, but it could come any day, and we believe the HOS will change.

• There was much discussion about whether rising wages in China would soon reach a tipping point and cause the US to become very competitive if not even advantaged with China within a few years. Studies from The Boston Consulting Group and Accenture both reached similar conclusions on this issue, predicting a rebound in US manufacturing and giving companies something to think about when making network plans.

• There was much genuine excitement and some of the usual hype over item-level RFID in apparel retail as the year started, coming off the announcements of WalMart and others in 2010, but data has showed activity slowing by mid-year, for reasons that are not clear.

• In February, Maersk announced it was pushing the envelope again by ordering several new 18,000-TEU megaships, with delivery of the first in 2013.

• In what could presage future action, a GAO report tells Congress freight carriers, especially truckers, are not paying their fair share of full transportation costs, notably "social costs" from pollution and congestion.

• Seeing its same store sales slipping, in April WalMart announced it is reversing course on SKU reduction and bringing 8500 previously cut items back to its shelves.

• The battle over efforts in California to basically eliminate independent drayage drivers continued, with the Port of LA winning a legal battle in May that would allow the new regulations to be implemented, defeating (for now) the ATA lawsuit. But the battle isn't over, in what could ultimately have big implications across the US by bringing back local regulation of the freight transport industry. Stay tuned.

• The Annual State of Logistics report finds logistics costs in 2010 rose 10.4% to 8.3% of GDP, a reversal of direction from 2010 but still well below the 9.9% seen in 2007.

• Supply chain pioneer and thought leader Dr. Don Bowersox of Michigan State, one of the most important men in the history of supply chains, dies at age 79.

That's our 1H 2011 wrap-up - what did I miss?

Any reaction to our 1H 2011 summary? Did we miss any other important stories? Let us know your thoughts at the Feedback button below.

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