Monday, May 03, 2010
By Dr. Edward F. Knab, Productivity Constructs, Inc.
Most businesses have already experienced major challenges in their global supply chain resulting from the downturn in the global economy. Similarly, looking forward there are a number of significant issues that will have a major impact on sourcing strategies, international commerce, and the flow of working capital. Some of these concerns have carried over from the economic chaos of last year while others are only beginning to percolate to the surface of the supply chain. It is likely that all of these factors could result in significant unexpected costs, delays, and increased disruptions in importers and exporters supply chains. We will examine each of these trends briefly and suggest some strategies that may minimize their impact.
1 -- Lack of Working Capital
There continues to be a lack of liquidity in the traditional banking sectors. Businesses are being forced to consider non-traditional sources of working capital, often found in the company’s internal operations. Companies are reducing inventory to free-up operating cash, rationalize product lines to focus on profitable products and lower operating costs by increasing their productivity. Buyers will likely attempt to extend payment terms and move toward consigned inventories; while suppliers will focus on aggressively collecting receivable. These actions will result in tension between buyer and seller and a need for supply chain financing as a liquidity buffer to neutralize this conflict. The current credit environment is pushing buyer and supplier partnerships to look at their trade flows to drive the creation of additional liquidity.
2 -- Economic Downturn Risks
The possibility of a long term continued economic downturn has created significant risk for most businesses. This has translated into major restructuring of supply chain operations in an attempt for businesses to survive if the downturn continues and to better position themselves for additional market share and profits when the economies around the world begin to recover. These efforts have focus on driving out inefficiencies out of the supply chain while minimizing risk. Supply chain risk mitigation will receive increased focus due to the following factors:
- Fluctuating energy costs resulting in unstable commodity prices: Businesses must plans for variable energy and commodity prices, as well as variable labor and currency exchange rates. Business categories such as industrial goods and construction are likely to see robust price increases as major economies around the world announce economic stimulus packages.
- Financial risk: There will be a rise in supplier bankruptcies and companies will need to reevaluate their supply chains to identify and support their key partners and reduce the number of potential “weak link” suppliers. At the same time multiple suppliers for a single product or part must be secured to ensure supply chains keep running.
- Recovery prediction: Economic recoveries will likely be unpredictable; the ability to quickly react to global shifts in demand will be critical for success. Redundant manufacturing capability should be established across multiple geographies in order to improve time-to-market for end customers and to be able to balance and buffer demand globally.
3 -- Supply Chain Compression
U.S. manufacturers are reconfiguring their supply chains by moving plant operations and sourcing vendors closer to home and away from Asia. Limited free trade agreements, high energy costs, and rising labor and production costs in Asia all contribute to companies reevaluating extended supply chains. Mexico has become an increasingly popular source for manufactured goods as companies compete on time-to-market strategies, seek financial advantages found in Mexico’s multiple free trade agreements and capitalize on Mexico’s investment incentives.
4 -- Letters of Credit
The downturn in global markets will reduce demand for commodities and associated goods and services. However, the reduction in available credit for trade financing will result in resurgence in Letters of Credit as a means of risk mitigation.
5 -- Mexico As A Trading Partner
Mexican customs officials have been piloting a new customs procedure that seeks to attract more foreign investment by speeding up the import process associated with the supply chain and eliminating the delays traditionally associated with the customs process at the US port of entry. The Mexican government is committed to these procedural changes known as Regimen de Recinto Fiscalizado Estratégico (RFE). The new process will decrease logistics cost and the days in transit which, in turn, will help attract additional production to Mexico.
6 -- More Free Trade Agreements
Although Free Trade Agreements (FTA) have been promoted over the past several decades as a method to increase international commerce many are perceived to have resulted in the migration of US jobs to other countries. It is expected that several new free-trade agreements will be approved this year with Colombia, Panama and South Korea. It is expected that the US Customs and Border Protection is expected to challenge many FTA claims in the future by requiring proof that the products in question meet the legal standards.
7 -- Consumer Product Safety
In August 2009, the United States signed into law the Consumer Product Safety Improvement Act (CPSIA), presenting certain manufacturers and importers with a new set of regulations to manage. Considered to be the most sweeping consumer product safety law enacted in decades, the new law is expected to usher in similar regulation around the world to addresses safety standards. Similarly, after being pushed by the US Department of Transportation, in January Toyota announced the most massive recall in the company’s history for safety related defects.
Dr. Knab’s 30 year professional career has been focused on the expansion of global supply chains and global markets. He spent 20 years developing global sourcing solutions for the hardware, office products, and office furniture industries establishing a global supply network of over 400 independent manufactures across Southeast Asia. As a consultant Knab’s company Productivity Constructs has been a leader in providing customized industrial design leadership for global supply chains and automated distribution networks. Please contact Dr. Knab at ed@edwardknab.com for more information about this article.
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