Anyone who has worked across borders will tell you how difficult it can be to maintain supplier and customer relationships from one end of the supply chain to the other. The resources required to do so are often taken for granted, even in a growing economic environment. But in a recession, these resources become even more constrained as many businesses recoil and dig in for a tough stretch of lower revenues, tighter or non-existent margins, and over-worked staff.
As consumers who overspent the past few years restructure their lives and finances, so are the businesses and organizations that benefited from that spending restructuring. Most businesess, depending on their individual situation, will have already reviewed, and made decisions about, how to focus and deploy their supply chain architecture over the next few months and even years based on the sudden changes in the global economy since the incredible downturn experienced just over one year ago.
When reviewing supply chain architectures that stretch across borders, there are a variety of measures that businesses, large and small, will take to survive:
- exit a particular market, or number of markets, entirely
- re-allocate and re-focus resources from one part of a region to another
- maintain existing architecture, but at a reduced scale
As someone who works in the highly competitive supply chain software industry, I have seen the exact mix above in both competitors and internally. For those of us who work as part of a company's supply chain overseas, the impact is felt immediately. The question is: are these decisions part of a larger strategy or simply non-strategic reactions that executives feel are required to avert disaster? The strongest companies will ensure that their actions fit within a well-thought strategy rather than fitting a strategy to their actions in retrospect.
The key to a solid recovery in global trade overall will be in maintaining and strengthening the trade links established by businesses, organizations and governments over the past decade as the global economy surged. These three entities should understand this in taking stock of the global supply chain architecture in place before making strategic decisions.
Cross-border supply chain links undoubtedly require the most sophisticated operations and resources towards building a solid foundation for future growth and economic benefit. Dissolving or endangering links with various markets may result in short-term benefits but actually reveals inherent weaknesses in strategy and policy that existed when the global economy was strong.
Below I review the six supply chain architectures and emphasize which ones are key to maintaining important supply chain strategies and programs across borders:
Human Architecture: People on the ground, on the seas, and in the air drive supply chains that extend across borders. Depending on which aspect of the supply chain is being managed, their role and importance can vary; but they are the glue that holds your supply chain together as it traverses borders into differing cultural, economic, security and political environments. As a result, a business, organization, or government must understand that staff cuts, if necessary, should occur across an extended supply chain, but should never "break" a chain in the sense that those who provide the glue between HQ and a market are lost, even if it means repatriating staff from overseas or overland.
When outsourcing is highly utilized, or viewed as a potential alternative to in-house human resources, in cross-border supply chains, the challenge requires a more sophisticated response in ensuring that your partners adopt an approach similar to what I described above. This goes into the strength of your relational architecture, which is discussed further down below.
Physical Architecture: Depending on your industry, the investment in this architecture can vary widely and it may be either strategic--value-adding R&D type facilities, logistics hubs, sales offices, etc--or non-strategic--outsourced, low-end manufacturing or back-office services. The less interchangeable your physical investments are with other locations within and outside a particular market, the more likely it has strategic value within an organization. Exiting out of an investment that is of obvious strategic value should not be done lightly and is best executed as part of a well-coordinated regional and possibly global strategy that leaves relationships and reputation with suppliers and customers largely un-damaged.
Financial Architecture: When the Global Financial Crisis hit economies around the world, those companies who had invested in nimble, responsive supply chains cut back considerably on the goods and services feeding their worst hit markets. Bob Ferrari has written extensively on this scale-back, "The Great Backflush," at his Supply Chain Matters blog. This reduced a large amount of working capital in supply chains around the world, and as cost-cutting mode swept into entire industries, a parallel increase in the risk of capital lending clouded banks everywhere. The resulting fallout has been noticed ever since in the markets and regions where businesses, organizations and governments were weakest in terms of the capabilities in securing and maintaining supply chain investments. Proper growth strategies combined with non-damaging cost-cutting tactics will be the touchstone of companies that rebound, remain resilient and position themselves well for future competitiveness.
Informational Architecture: If a company didn't have the proper supply chain visibility prior to responding to the Global Financial Crisis, they will likely have been burned enough to realize the importance of investing in the right technology, such as business intelligence and supply chain execution systems, or in asking their supply chain partners to do so. With reduced budgets for capital expenditures, supply chain managers will need to place even more scrutiny on their list of projects and reconsider the value added to their supply chain's capabilities in providing visibility and greater forecasting and responsiveness to changes in various operating environments.
Relational Architecture: One of the truer tests of a high-performing supply chain is in the strength and resilience of its supply chain relationships in the face of adversity and challenge. Depending on the importance of the goods and services provided, supply chain partners are at brought in as close collaborators at one extreme and kept to a distant, transaction-based relationship at another extreme. Obviously, in major crises, any new or modified strategy should seek to direct the most energy in maintaining and leveraging the former versus the latter, as the latter is likely more interchangeable with potential partners elsewhere. Burning bridges with partners in strategic positions in a particular market or region could unnecessarily limit options in the future when a crisis has well passed.
Innovation Architecture: Regardless of the economic challenges and uncertainties at hand, they are never an excuse to drop the activities that drive and produce innovation with an organization. If anything, such challenges highlight the need for even more investment in the resources and tools to generate new and innovative practices and solutions to the ever changing list of problems faced by an organization as part of the global economy. As with investments in technology, supply chain managers must be adept in illustrating the expected, tangible value from an investment in research and development programs.
Recent Trade News and Commentary
Recent news suggests that the global, private economy, in general, is still in the mode of reducing costs and doing more with less. Based on data related to the movement of global trade, there is little evidence that significant growth will occur with a broad base in the near future. There will always be pockets of growth in various regions or markets, but likely with uncertainty clouding the sustainability of such growth.
In the article "Rough Seas Slow to Calm for Container Shippers," the Wall Street Journal provides some numbers around the current state of ocean shipping, and by extension global trade:
"Since the second half of 2008, the shipping industry has experienced a spectacular downturn as charter rates collapsed alongside the rest of the global economy. Container-shipping rates even dropped to zero in January on the Asia-to-Europe route as brokers waived fees and charged only for fuel costs...
"Even though there are signs trade is picking up, depressed ship prices and relatively low rates are likely to prevent container-shipping companies from feeling the full effects of the recovery. "Not only does the industry have to maintain its services, it has to make payments to the bank, and at the same time there are new shipbuilding commitments which have to be financed and require even more capital to be injected by investors," said Theodore Petropoulos, managing director of Petrofin, a financial-services company specializing in the industry.
"While shipping companies that transport raw commodities saw rates rebound in the first half of 2009 as a result of demand from China, containers filled with manufactured goods experienced no such reprieve...Mr. Petropoulos said that in addition to cash-flow problems caused by the collapse in demand for services, container-shipping companies have experienced drops in the values of their ships."
Reduced revenue, reduced value in assets, increased strain on margin, and limited credit options make for an ugly view of balance sheets.
In a blog post also in the Wall Street Journal, takes a look at different regions of the world and asks, "Trade Turnaround: Can it Last?" First stop is Germany:
In Germany, particularly reliant on exports, there is widespread concern among companies that the emerging recovery is dependent on government economic stimulus policies that are due to run out next year in many countries. That could mean the export recovery slows or stagnates. Data out Friday showed German exports fractionally down from a strong July, but other indicators including new foreign orders point to rising exports in September and beyond, says Andreas Rees, economist at Unicredit in Munich. "German companies lost an awful lot of exports, but they’re steadily making up the lost ground," says Mr. Rees. However, he says: "It’s almost inevitable that we’ll have a setback at some point in 2010."
Economists point to some positive data in the lack of demand that has prevailed so far in the leading market regions of Europe, Japan and U.S.:
"...for a genuine trade recovery to happen, economists say a robust renewal in trade will have to come from Europe, the U.S. and Japan, whose economies together make up much of the world’s demand for goods. An analysis of trade data by Goldman Sachs found that Taiwan in recent months has seen increased month-on-month demand for its goods — especially semiconductors — from Europe and the U.S. September Taiwan exports to Europe were up 6.8%, seasonally adjusted, the fourth month in a row. Exports to the U.S. was up 6.9% after a 2.2% drop in August."
But others remain uncovinced:
"Some analysts are skeptical that the recovery in trade will be sustainable once businesses restock depleted inventories and the oomph of fiscal and monetary stimulus fades. Most investors will first be shocked by the sharp pick-up in Chinese exports heading later into this year and early next year, but then surprised by how quick the momentum will disappear,” Vincent Chan, head of research for China at Credit Suisse wrote in a recent note."
My belief is that once consumers and businesses retrench and feel comfortable in their financial position and also operational position, they will begin to make investments beyond simply the extent of their daily needs. But I just have the sense that, over the next 2-3 years, most will remain conservative relative to the previous ten years of spending decisions, and it is a mistake for governments to attempt to implement spending-oriented stimulus policies that aim to replace the drop in private sector spending, rather than help lay a strong foundation for future growth. Steve DeAngelis, at the Enterprise Resilience Management blog, touches on the problems associated with government policies that are implemented with little knowledge of how sophisticated and integrated cross-border supply chains have become in today's global economy.
At the Panjiva Blog, which tracks global trade trends, the most recent data suggests that trade flows into the U.S. have plateaued versus the growth earlier in the year. At the time, it is likely that businesses were re-stocking after supply chain inventories were quickly reduced in response to equally precipitous drops in demand. The Panjiva team comments on the latest data:
"The word from Panjiva’s research team: global trade activity declined in September. Specifically, from August to September, there was a 5% decline in the number of global manufacturers shipping to the U.S. market. Similarly, there was a 4% decline in the number of U.S. companies receiving waterborne shipments from global manufacturers.
These declines are the steepest we’ve seen since February, when global trade hit bottom, and would seem to confirm that American businesses have modest expectations for the coming holiday shopping season.
Pessimists will take note that it was last year’s August-September decline that marked the beginning of global trade’s six-month decline. However, we probably won’t see a repeat of last year’s global trade free-fall unless we get another macro shock to the financial system.
As mentioned above, I believe global supply chains are much more efficient and responsive than ever before, especially with the businesses and organizations that are at the top of each industry. As the economy continually grew over the past few years, there were few real tests across the global economy to see just how responsive supply chains would be under the stress of a dramatic downturn. I would dare to say they have in general performed pretty well, which is why there is a considerable number of companies in the S&P 500 able to report profits and drive stock prices upwards while the overall economy remains weak (more agile supply chains means the ability to quickly cut costs in the face of falling revenues).
Unfortunately, this is short-lived in the sense that cost cutting will provide diminishing returns before eventually damaging a business or organization in fundamental ways. But the overall effect has resulted in a significant number of lost jobs over a shorter time frame and those businesses and employees unable to respond just as quickly will be burnt badly and likely to face closure or unemployment until a more sustained level of growth is achieved over a longer period. As a result, companies inexperienced in managing the downward slope of the Global Financial Crisis will need to ensure that in making cuts they don't "cut in to the bone."
Bob Ferrari discusses this point in a post centered on supply chain professionals and companies trying to do more with less and I can't agree more with his arguments. Understanding and investing in a solid supply chain human architecture should be the first priority of any business or organization at this time, and will result in key advantages as economies around the world and across borders recover.
Excellent post!
You've described what here in the USA is being called a "jobless recovery" where the stock market and the financial markets are bouncing back with the help of federal tax dollars which they have mostly used to shore up their own positions. As you note the pump is primed,(supply chain) all we need now is water,(demand)which seems to be a couple of years up stream.
Posted by: historyguy99 | October 19, 2009 at 02:57 AM