Accenture Academy Blog

If anyone can definitively say that we are in an economic recovery mode, I’d sure like to get some clarity. It seems as though every snippet of good news is overshadowed by some mega-event that threatens to derail the recovery process. Within the last 30 days, the following events have created mayhem in global marketplaces and supply chains:

April 14—The Eyjafjallajökull volcano in Iceland erupts. The resulting ash cloud caused enormous disruption to air travel across western and northern Europe over a period of six days. Additional localized disruption continued into May 2010, creating havoc for travelers and air freight alike.

April 20—The offshore oil-drilling platform Deepwater Horizon exploded 41 miles off the coast of Louisiana.  The explosion has created the largest oil spill in U.S. history, with an estimated 5,000 barrels (or more) of crude oil being released into the Gulf of Mexico.

May 6—Europe's debt crisis turned into a stampede of automated selling, pushing the euro to an almost 14 month-low and gold to near record highs. The Dow Jones industrial average suffered its biggest ever intraday drop in terms of points, a fall of 998.5 points at its low point.
Still, positive signs of a U.S. recovery are emerging.  The April 2010 Manufacturing ISM Report on Business® revealed that economic activity in the manufacturing sector expanded in April for the 9th consecutive month, and the overall economy grew for the 12th consecutive month. Regarding the report, Norbert J. Ore, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, stated, "The manufacturing sector grew for the ninth consecutive month during April. The rate of growth as indicated by the PMI is the fastest since June 2004 when the index hit 60.5 percent. Manufacturers continue to see extraordinary strength in new orders, as the New Orders Index has averaged 61.6 percent for the past 10 months…”

Also, lost in the May 6th market mayhem was the improvement in the U.S. employment situation. The number of Americans filing initial claims for unemployment insurance fell for the third straight week. There were 444,000 initial jobless claims filed in the week ended May 1, down 7,000 from a revised 451,000 the previous week, according to the Labor Department's weekly report.

A final dose of good news was provided by the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) on May 12th. BTS reported that the Freight Transportation Services Index (TSI) rose 0.9 percent in March from its February level and 2.6 percent from March 2009. This was the first year-to-year increase in the index since July 2008. The Freight TSI measures the month-to-month changes in freight shipments in ton-miles, which are then combined into one index. The index measures the output of the for-hire freight transportation industry and consists of data from for-hire trucking, rail, inland waterways, pipelines, and air freight. 
 
Of course, these positive indicators reflect performance gains made prior to the three mega-events. It will be interesting to see what impact they have on domestic and global economies. If the numbers continue to improve despite unexpected challenges, then the recovery may be stronger than many people believe. On the other hand, a dip in these numbers is a sign that the recovery is fragile and may not be able to withstand multiple shocks.

So, what should supply chain managers do in this uncertain environment? If they haven’t done so already, it is time to do some contingency planning.  Contingency plans include specific strategies and actions to deal with specific variances to assumptions resulting in a particular problem, emergency, or state of affairs. While these plans typically focus on negative events like an economic relapse, supply chain managers should also prepare for a potential uptick.

Key preparations should focus on:
  • Transportation capacity—combine the rising Freight TSI with the significant equipment reductions of 2008 through 2009, and it won’t be long before shippers feel the pinch. Already, capacity is tightening in certain markets and equipment types. Supply chain managers must work diligently to secure affordable, quality transportation for the second half of 2010 and beyond. Seek out carriers with strong financial standing and the ability to quickly boost staff and equipment.
  • Inventory agility—many organizations have pared inventory levels to the bone over the last two years in an effort to reduce supply chain costs and protect margins. While I don’t advocate bumping inventory levels to pre-recession levels, companies must develop more agile supply chains that rapidly respond to demand changes. Place smaller initial orders and replenish based on demand, work with suppliers that can ramp up production to support demand spikes, and/or judiciously increase safety stock.
  • Supply chain visibility—organizations need to create a transparent or “glass” pipeline that provides visibility to supply and demand to anyone who needs it. Information regarding inventory errors, transportation disruptions, and other issues must be quickly detectable. This allows the company to address current problems and prevent future recurrences.  Work with software providers to achieve real-time inventory-monitoring capabilities, standardize data- and information-sharing processes with supply chain partners, and use the visibility-driven insights to responsively manage by exception.

Why are these three issues important? It’s all about satisfying the immediate demands of today’s customers. They are waiting longer to make purchases and are more demanding when they finally pull the trigger. If you don’t have what they need, when they need it, then they will go elsewhere without thinking twice. As the Boy Scouts say, “Be Prepared.”

 
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Comments:
  1. Total "recovery"
    By н/а Валентина Евгеньевна Кузнецова н/а Валентина Евгеньевна Кузнецова on Monday, May 24, 2010 at 6:47 AM
    Brian, firstly, thank you for your blog. It's really interesting reading it and getting some new ideas on SCM and economics situation from you. I suppose that the keys you offer should be used by all companies at any time (in crisis or in a recovery mode). As for Russian situtation (I work in Russia) supply chain visibility is really a thing that rarely reached. In smaller companies it is easier to make your supply chain visible because such companies are more active and agile. As for big (for ex. oil and gas) companies where I work it is really a hard task. Anyway I hope that in few years we'll see some positive results and supply chains even in big Russian companies will be more transparent and agile.
  2. Sorry, I didn't write my name. Valentina, Russia. + one thing
    By н/а Валентина Евгеньевна Кузнецова н/а Валентина Евгеньевна Кузнецова on Monday, May 24, 2010 at 6:56 AM
    I also wanted to tell that reading such blogs and learning news from this site gives much experience. And I've got one question. How do you think: all these catastrophes, disasters and unpredictable changes in economy or just in life of the whole world - do they affect dramatically the main principles (or keys) of logistics (and SCM) or do these keys stay unchanged, I mean for ex. visibility, inventory agility? And will there be any new approaches to SCM after some other events happen? What is your opinion?
  3. Supply Chain Principles
    By Brian Gibson Brian Gibson on Tuesday, June 1, 2010 at 8:55 AM
    Valentina - Thanks for your comments. Regardless of company size or location, I think that everyone would like to have greater visibility of their supply chain. Some companies are better than others but none have total clarity of what is happening in their supply chains.
  4. Supply Chain Principles - Part II
    By Brian Gibson Brian Gibson on Tuesday, June 1, 2010 at 8:56 AM
    The economic woes and environmental problems that seem to barrage us these days only serve to make SCM and its key strategies more important. It is imperative that companies have greater agility, inventory visibility, and the flexibility to add/delay/shift inventory flow in response to changing condidtions. When possible, SC networks need to be demand driven and less reliant on forecasts. The only principle that I see as becoming a bit outdated in our current environment is the concept of consolidating purchase orders for quantity discounts. Not only is this not lean, it requires you to hold large inventories and makes it difficult to be agile and responsive to changing market conditions.