Executive Briefings

Danger Will Robinson--Economic Trouble for Global Supply Networks?

In our 2009 Supply Chain Top 10 Predictions (Document # MI215807), we wrote about the effect the global economic slowdown would have on increasingly distributed supply networks. Specifically, that the "economic uncertainty, particularly for smaller suppliers in emerging economies, causes manufacturer 'brand owners' to consider strategic investments at critical supply points and financial support for key suppliers."

Outsourcing continues unabated in Supply Chain, and as we have observed in recent articles on the U.S. economy, given the increasing focus on cost control in a down economy, it may even pick up speed in 2009. This is not without risk, however, as the global economic slowdown will inevitably affect many smaller suppliers in emerging economies--to the point where many of them will experience severe financial distress. Prudent, strategic risk management should prohibit a large manufacturer from sourcing critical components or substantial volumes from suppliers with borderline financials, yet it clearly happens--either because financial transparency is not possible or was not requested. Interestingly, there are increasingly some effective tools available from forward-thinking vendors that offer up-front supplier assessments based on extensive analysis of customs data, but most current supplier relationships have not had the benefit of such proactive due diligence.

One of these vendors, Panjiva, recently released its updated Manufacturer Watch List where they regularly track manufacturers/suppliers who have suffered at least a 50% decline in shipment volume into the U.S. over the most recent calendar quarter. Sourced from U.S. customs data for significant export/import (from suppliers/to U.S. companies with more than 10 shipments/year), this decline is viewed as a predictive proxy for suppliers at risk. In a recent press release, Panjiva observed that:

1. Almost half of significant U.S. buyers has done business with a watch list supplier within the last six months
2. Over one-third of significant U.S. buyers has done business with a watch list supplier within the last three months
3. Over one-quarter of all significant suppliers to U.S. buyers is on the watch list, having experienced at least a 50% shipment decline over the last quarter

Clearly, shipment declines do not have to mean financial distress (there can be other reasons for a decline), particularly given the highly variable cost nature of low-cost country sourcing, but, given the increasingly tight margins for suppliers in general, these statistics are alarming and suggest that global manufacturers/brand owners should be paying close attention to the health of their key suppliers.

As we observed in our 2009 predictions, as growth rates slow across broad regions of the globe and as shipments decline across a broad range of manufacturing suppliers, we expect to see end-user concerns heightened for the financial health of their supply networks. How this concerns manifests in behavior is less clear, but we would certainly expect manufacturer "brand owners" to consider strategic investments at critical supply points and/or targeted financial support for key suppliers.
Manufacturing Insights

In our 2009 Supply Chain Top 10 Predictions (Document # MI215807), we wrote about the effect the global economic slowdown would have on increasingly distributed supply networks. Specifically, that the "economic uncertainty, particularly for smaller suppliers in emerging economies, causes manufacturer 'brand owners' to consider strategic investments at critical supply points and financial support for key suppliers."

Outsourcing continues unabated in Supply Chain, and as we have observed in recent articles on the U.S. economy, given the increasing focus on cost control in a down economy, it may even pick up speed in 2009. This is not without risk, however, as the global economic slowdown will inevitably affect many smaller suppliers in emerging economies--to the point where many of them will experience severe financial distress. Prudent, strategic risk management should prohibit a large manufacturer from sourcing critical components or substantial volumes from suppliers with borderline financials, yet it clearly happens--either because financial transparency is not possible or was not requested. Interestingly, there are increasingly some effective tools available from forward-thinking vendors that offer up-front supplier assessments based on extensive analysis of customs data, but most current supplier relationships have not had the benefit of such proactive due diligence.

One of these vendors, Panjiva, recently released its updated Manufacturer Watch List where they regularly track manufacturers/suppliers who have suffered at least a 50% decline in shipment volume into the U.S. over the most recent calendar quarter. Sourced from U.S. customs data for significant export/import (from suppliers/to U.S. companies with more than 10 shipments/year), this decline is viewed as a predictive proxy for suppliers at risk. In a recent press release, Panjiva observed that:

1. Almost half of significant U.S. buyers has done business with a watch list supplier within the last six months
2. Over one-third of significant U.S. buyers has done business with a watch list supplier within the last three months
3. Over one-quarter of all significant suppliers to U.S. buyers is on the watch list, having experienced at least a 50% shipment decline over the last quarter

Clearly, shipment declines do not have to mean financial distress (there can be other reasons for a decline), particularly given the highly variable cost nature of low-cost country sourcing, but, given the increasingly tight margins for suppliers in general, these statistics are alarming and suggest that global manufacturers/brand owners should be paying close attention to the health of their key suppliers.

As we observed in our 2009 predictions, as growth rates slow across broad regions of the globe and as shipments decline across a broad range of manufacturing suppliers, we expect to see end-user concerns heightened for the financial health of their supply networks. How this concerns manifests in behavior is less clear, but we would certainly expect manufacturer "brand owners" to consider strategic investments at critical supply points and/or targeted financial support for key suppliers.
Manufacturing Insights