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Manufacturing Insights spoke with technology vendors, consultants, and buyers about what the coming year will hold for supply chains in the manufacturing industry. The result is our 10 predictions for 2009. Although there is no strict hierarchy, we do begin with predictions that relate broadly to supply chains (and underlying industry trends), moving then to those that look more specifically at key business processes, and ending with anticipated emerging business/technology initiatives.
Economic Woes- Looking for the 'Silver Lining': What a difference a year makes. On October 9, 2007, the Dow Jones Industrial Average reached an all time high of 14,279. One year later the index was down almost 40%, hovering in the 8,200 to 8,800 range. Stock values were not the only metric to swing wildly as is shown in Table 1.
Dow Jones Industrial Average on October 9
Crude Oil/bbl on October 9
Institute of Supply Management - PMI for Manufacturing, October
$/Euro on October 9
University of Michigan Consumer Sentiment Index - October
Source: Manufacturing Insights, 2008
Perhaps the most telling statistic in the table for manufacturing is the ISM PMI number. The October value represented the third consecutive month of economic contraction (the break-even point is 41.1%) after 83 consecutive months of growth. The sub indices for production levels, new orders, and employment all reached lows.
Earlier in the year, we wrote about being in a financial, not an economic, crisis. However, a diminished flow of credit, the grease that lubricates the gears of manufacturing supply chains, has drawn manufacturing directly into a recession. There remain several factors that indicate that the downturn may be with us for a while and will directly impact the way manufacturers run their supply chains:
1. There is more to come from the financial services meltdown. The trouble in the credit market won't end with sub prime home mortgages. Less than stellar mid term loans on consumer durables (e.g. autos, furniture, appliances) and credit card debt were also collateralized and are of questionable value.
2. Consumer confidence is at a historic low. The consumer sentiment figure shown in table 1 represents a low that hasn't been seen in decades. Plummeting home prices and 401(k) values have the average consumer feeling very pessimistic about future prospects.
3. Manufacturing activity is very low. As mentioned previously, the ISM PMI numbers show economic contraction for three consecutive months.
4. Retail sales are down. Sales through the back to school, Halloween, and into the holiday season are lackluster. We may start the calendar year with more inventory in the channel than ever before.
5. Heavy Job Losses. The U.S. continues to lose jobs at a significant rate. Year-to-date losses are approaching 2 million, with much of it in the last calendar quarter.
There is no shortage of bad news and indicators, but the large manufacturing firms we speak with realize that with a downturn comes an inevitable recovery. Even the automotive industry talks about past patterns of their industry being "first in, first out" when it comes to a recession and being ready to serve the pent up demand. Economic downturns also represent an opportunity for manufacturing companies to recalibrate their operations. Channel partners can be rationalized, inventories reduced, production assets modernized, and, most importantly, supply and demand can be rebalanced in preparation for a recovery.
Top 10 Predictions for 2009: Given the challenging economic environment in 2009 and manufacturers' intentions for austerity in IT investments, Manufacturing Insights offers the following supply chain predictions for 2009:
Prediction #1: Companies will exploit well-performing existing tangible and, especially, intangible assets to ride out the financial crisis and prepare for recovery. Constrained capital markets mean that the cost to borrow to support new investment is rising. Manufacturers have been in an intense review of their fixed asset portfolio, looking to decommission under performing holdings while increasing utilization of good performing assets. Asset performance will be a front and center for manufacturing firms who will try to optimize what they have before they invest in anything new.
At the same time working capital must be increasingly productive. Large manufacturers of enjoyed a long run of revenue and profitability growth that allowed them to build up sizable cash reserves. Investors will want those cash holdings put to productive use and many large manufacturers will be tempted to buy back stock to boost share price. Smaller manufacturers, typically suppliers to the supply chain captains, are not as flush and large manufacturers may have to use some of their liquidity to finance supply chain activity if credit markets don't open up. This use of cash will put increased pressure on manufacturers to optimize another working capital category, inventory, which has been rising faster than revenue.
Manufacturing firms will also look to optimize the benefits of intangible assets in 2009. These assets have a sunk investment, but typically can be applied an unlimited number of times. Some prominent examples include brand equity, intellectual property and 'trust' capital.
Using tangible assets optimally and applying intangible liberally will be key business capabilities for surviving the global economic slowdown.
Prediction #2: Modern Supply Chain organizations will put budgets under severe review and new investments will be cost-savings focused, requiring shorter payback periods. Expenditures will be made through the lens of cost/value.
The constraints on capital will put Supply Chain and IT budgets under the microscope. We are hearing with some frequency that companies are using zero based budgeting techniques, going back to a blank sheet of paper and building spending back up rather than just assuming a growth rate that keeps IT within an acceptable percentage of revenue. Capital spending will favor projects with fast implementation times and even faster benefit realization.
Hardware investment strategies will emphasize delaying upgrades while looking for ways to improve utilization. Desktop and laptop refreshes, already stretched in manufacturing, will be postponed including operating system upgrades--manufacturing firms may essentially skip the Vista cycle completely. Infrastructure investments that promote consolidated management such as virtualization and unified communications should be spared the knife because they promote higher utilization levels and more flexibility in supporting shifting business needs.
Software investment will move away from large multi-year platform upgrades unless those projects are being used for instance consolidation and can demonstrate, in a relatively quick time frame, lower ownership costs. Other consolidation projects such as data marts, portals, or data management tools will meet the fast implementation, fast payback criteria. The least likely investments to get trimmed will be those that enable better decision making which includes better data acquisition, information organization, analysis, and collaboration.
Prediction #3: Companies will "right size" their supply chains for profitable proximity and take a total-landed-cost approach to product sourcing. Standard corporate platforms will seek to configure, calibrate, and control increasingly complex scenarios.
The attraction of low cost country sourcing has been irresistible to many manufacturing firms. The ability to significantly change the cost basis was augmented by the ability to simplify supply chain management. The "some is good, more must be better" trap was apparent however as companies found rising labor costs, volatile transportation costs, and inventory increases mitigated much of the benefit in many cases.
Companies have moved quickly to a profitable proximity approach to sourcing that better balances geographic supply/demand with total landed costs. However, this movement has reintroduced complexity in planning and execution that is challenging companies to rethink their organizational structures, process flows, and use of technology.
While the fundamental drivers are about total landed cost, lead-times, and balancing the source of supply with consumption, there are also a number of 'influencers', such as intellectual property protection, risk management and sustainability that best-in-class companies are increasingly building into their sourcing strategies.
Profitable proximity will continue to be the guiding principle for supply chain strategy in 2009. In order to deal with the inherent complexity, companies will look to create a corporate wide organization that seeks to establish standard approaches to processes and information that can balance the need for cross enterprise visibility and local execution. Companies will re-evaluate their suppliers, manufacturing capabilities, and distribution facilities to establish an optimally configured supply chain that can be calibrated to demand and controlled to assure compliance with business and regulatory policy while assuring consistent execution.
Prediction #4: Supply chain technology initiatives must support the standard business platform and focus on modernization and decision making.
The corporate supply chain business platform will be supported by a enterprise wide supply chain technology platform.
The key business outcome objectives of the investments will be:
1. Compliance. Supply chains must recognize a host of security and environmental regulations from governments and assure compliance. Compliance, however, does not end with regulatory bodies. Customer mandates must be satisfied and well as self imposed business policies and service level commitments.
2. Customer service. Channel partners and customers will become more demanding in this economic environment and increasingly expect manufacturers to take on more supply chain responsibility. For those that can do it successfully, it represents an opportunity to lock in business, improve margins, and grow market share through the offering of innovative supply chain services in conjunction with the products being sold.
3. Autonomization and self correction. Closely related to compliance and service is the need to improve data acquisition so that the timeliness, accuracy, and completeness of information is sufficient to create the visibility necessary to make corrections. Increasingly, both the data acquisition and the corrective active will be completely automated without any human intervention needed.
In order to meet these objectives, manufacturing firms will invest in modernizing their operational processes and integrating their decision processes. Modernization involves not only getting the latest SOA architectural underpinnings in the warehouse, global trade, transportation, procurement, inventory, and order management modules, but also in the incorporation of advanced data acquisition technologies such as RFID, sensors, and global positioning. Using these technologies to re-deploy supply processes will be critical to achieving the three objectives.
Prediction #5: 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 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.
Whether 2009 will find the global economy in an 'official' recession or not, clearly growth rates are slowing across broad regions of the globe and 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.
Prediction #6: Customer Relationship Management (CRM) and consumer-centricity efforts continue to grow across the Modern Supply Chain as manufacturers attempt to improve innovation efforts. The sale is just the start, as services become an increasingly important part of the 'product experience'.
In the second half of 2008, we have had more conversations with clients on the topic of consumer-centricity than almost any other subject. Although customer relationship management (CRM) and consumer-centricity tend to be viewed through the lens of brand-oriented value chains (FMCG manufacturers and retails), there are significant implications across engineering and technology-oriented value chains--particularly as manufacturers increasingly view the 'sale' as just the start of the consumer interaction as services become an increasingly important part of the 'product experience'.
As we pointed out in prediction #1, we expect manufacturers to focus on brand equity in 2009 as a way to leverage 'existing assets'. For manufacturing companies with long histories, this is no longer about awareness, but relates to the central promise the firm makes to the market and to the consumer. Finding new consumers and markets that take advantage of accumulated brand value, and driving a better-performing NPDI process will be critical.
CRM and consumer-centricity are particularly important to FMCG manufacturers as they struggle with retailer private labels in a down economy. There is a fundamental struggle in the marketplace between manufacturer branded goods and retailer private label, where branded goods tend to skew premium while private label tends to skew value, and while it is the contention of MI that the healthiest categories will have a breath of premium-to-value and a complimentary balance of brand and private label, the premium/value interaction is particularly relevant when economic conditions sour, consumer confidence wanes and consumers increasingly look to value for their shopping needs.
Prediction #7: The high 2008 year-end inventory levels will cause manufacturers to look at supply/demand rebalancing with a focus on strategic network optimization and multi-echelon inventory optimization tools, and where industry-relevant, price and trade promotion management/optimization.
It is our view that manufacturers will have closed the year with high inventory levels--perhaps record inventory levels. Given the expectation that consumer confidence is likely to remain an economic casualty at least through the first half of 2009, we expect companies to look closely at rebalancing supply networks through the use of tools like strategic network and inventory optimization.
This links somewhat with Profitable Proximity and the notion of net landed cost and the geographic balancing supply with demand, but it is also about postponement techniques, supplier rationalization and better SKU management.
Specifically for fast-moving consumer goods (FMCG) we also see promotion management, and more importantly, promotion optimizations tools useful here as a way to help to rebalance supply and demand.
Prediction #8: Compliance-driven RFID initiatives continue to wane in favor of ROI-driven asset-tracking and security applications as manufacturers increasingly look at RFID as 'just another tool in the toolkit'. One consequence of this will be continued vendor consolidation in an effort to provide end-to-end applications.
At Manufacturing Insights, we think 2009 will be a turning point for RFID. The old saying 'reports of my death have been greatly exaggerated' is particularly applicable to the perception of RFID. While we see compliance driven initiatives (think Wal-Mart) on the wane, we are seeing a fairly robust adoption of the technology in security and asset tracking applications--many of them closed-loop.
The 'build it and they will come' days of RFID are over--although some vendors don't seem to realize it--as we see the technology being viewed more and more as just another technological 'tool in the toolbox' to help companies solve their business problems. We made the observation in our ongoing coverage of RFID/Machine-to-Machine, but the 2008 Airbus announcement to use RFID in their airplane assembly process was particularly notable because they investigated numerous technology options and settled on RFID as the most appropriate choice.
One result of this more pragmatic view of RFID is the need for technology vendors to provide more complete application sets. We made this observation in our 2008 predictions, and it proved correct as we saw a number of vendor consolidations/acquisitions to broaden technology portfolios. Expect to see more of this--either in the form of partnerships or acquisitions in 2009.
Prediction #9: As global economic pressures mount, outsourcing opportunities proliferate and global supply networks become more complex; risk management becomes both an increasingly significant capability and a key differentiator for the Modern Supply Chain.
The proliferating use of outsourcing, both off shore and near-shore, has resulted in highly distributed supply and manufacturing networks that require multiple partners, both direct and indirect, to bring products and services to the global market. They have become highly complex, involving a myriad of touch points that range from raw materials to the delivery of finished goods. These global supply networks must exhibit a high degree of adaptability, responsiveness and collaborative capability, or they quickly become chaotic with poor service levels and high inefficiency costs.
In this context risk management becomes much more important. We talk in our research of risk management along a continuum beginning with risk awareness and ending with full risk mitigation. Some companies have taken steps to ensure they have full risk awareness but choose not to mitigate either because the 'solution' is more costly than the 'problem' of because they simply misjudge the business implications--these generally are in the middle. At the ends, you have companies who either have little comprehension of the risks they face, or who have taken steps to ROI-driven, full mitigation.
It is important also not lose sight of the fact that there are enormous cost pressures on the supply chain to increase productivity and reduce inventory levels, and that this is in great part responsible for the distributed global supply networks that many companies now operate. These cost pressure are not going away, so it is incumbent on the supply chain organizations to understand the risks they face and take appropriate, ROI-driven mitigation steps.
Prediction #10: Sustainability discovers metrics. No longer a feel good public relations proposition or even a regulatory compliance mandate. Emerging standard measures and a desire to benchmark will impact sustainability initiatives and the associated investment in technology and services.
As we have observed in our sustainability research, companies tend to pursue 'green' efforts along a fairly predictable maturity path. As with any generalization, there are of course exceptions and companies may be motivated to pursue sustainability for any number of business reasons that will result in them entering the maturity path at different points.
Although we do expect to continue to see regulatory pressures and public perception/corporate social responsibility influencers, what we hear most in our discussions on sustainability efforts is 'green is lean'. Put another way, sensible sustainability practices are also about reducing waste and enhancing profitability.
Although there are a number of companies that have taken a proactive, visionary view of sustainability and launched initiatives that add net cost (at least in the short term), the bulk view green efforts as needing to either be profitable or as a result of legislative mandates. It is our view that the current economic recession, and a greater focus on cost control, will simply reinforce this notion of an acceptable ROI for green. In many cases, at least temporarily, we anticipate that green/sustainability efforts will be recast as efficiency initiatives.
So, on the one hand we have 'green is lean' and on the other we have 'ROI-driven'. The consequence of this, we believe, is that 2009 is the year where sustainability finally discovers metrics. Emerging standard measures and a desire to benchmark will impact sustainability initiatives and the associated investment in technology and services.
Guidance for Manufacturers: Buckle up; it's going to be a rough ride. There is more bad economic news than good, and despite the recent agreement in Washington to approve loans to the 'Detroit 3' automakers and a November lull in home foreclosures, most expectations are for a tough first half to 2009. So, it is practically certain that there will be more pain before we see evidence of a recovery. However, in 2009, supply chain and information technology organizations have the opportunity to contribute to mitigating efforts.
Every economic downturn eventually ends and vitality returns. History shows that companies who stayed the course in improving important core capabilities enjoyed higher success when the good times came back. Manufacturing Insights suggests that the following areas of IT investment be spared the knife:
1. Improving Product Management Decisions--continue to unify product lifecycle management applications to streamline processes
2. Supply Chain Optimization--consider investments in supply network and inventory optimization tools where return on investment and payback periods may be attractive in an economic climate of cost control
3. Modernize Operations and Value Chains--the use of sensor related technologies to improve the completeness, speed, and accuracy of data acquisition in inbound logistics, manufacturing, and outbound distribution should be pursued aggressively
4. Build Sustainability into Applications--beyond regulatory compliance and public relations, sustainability will be an important capability well into the next decade. Don't expect to be a specific application. Rather build considerations for improving recycling, reusing, reducing of resources into the applications you are already running
5. Governance, Risk and Compliance/Global Trade Management--globalization and supply network complexity continues to raise the profile of GRC/GTM applications
Although we expect to see investment in the supply chain application areas highlighted in this paper, clearly manufacturers are leery of new investments. If borrowing continues to be restricted and cash from operations suffers due to slowing sales, cash-flow availability to fund new investments will obviously be impacted. We do expect that for 2009, and perhaps the next couple after that will be about taking advantage of the information already available to you, encouraging evidence based management, and being precise in your tactics as well as frugal with your resources.
These supply chain predictions will be integral to our planned research in 2009, both for the Supply Chain and Emerging Agenda practices.
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