VideoThe metaphor of the global supply chain, meant to convey strength through interconnectedness, has lately come to symbolize the opposite: companies dragging each other down as one fails to gauge demand while another struggles to meet it, or to manage the cash flow needed to remain a viable part of it.
As proof of the various pressures that supply chains are under, consider what happened earlier this year to Best Buy and Mattel. Best Buy noted in March that it could have sold more electronics equipment in the previous three months had its suppliers not reduced their volumes in anticipation of slowing demand. Mattel, meanwhile, saw its net income plummet, from $600 million in 2007 to $379.6 million in 2008, as customer orders shrank and 1,000 Chinese toy exporters went out of business. "These are tough times for our partners on both sides of the supply chain — the vendors that supply us are facing financial difficulties and so are our retail customers," Mattel CEO Robert Eckert says. "We're scrambling to make sure we can get the parts we need to make our products."
"With weak consumer demand, the entire supply-demand equilibrium is out of whack," says Frank Burkitt, national supply-chain and operations practice leader at Deloitte Consulting. "Many suppliers have trouble funding their operations because they can't access working capital or a significant line of credit, and are failing as a result." On the front end, forecasting demand is more difficult than ever.
This puts companies' balance sheets in peril. According to a 2009 survey by commercial-property insurer FM Global, more than 40% of senior finance executives, representing the largest companies in the United States, say they have experienced an unexpected disruption in their supply chains that has "negatively affected" their financial performance. Deloitte's own data indicates the same. "The financial risk of the supply chain is the biggest threat out there," Burkitt asserts.
Yet amid these many pressures, companies are not about to scale back their ever-expanding supply chains. "No one is going retro," says Blythe J. McGarvie, author of the book Shaking the Globe: Courageous Decision-Making in a Changing World. The FM Global study backs her up, noting that 62% of respondents expect their global sourcing activities to increase over the next three years.
Today's global supply chains comprise many more links than previously, which makes it very difficult to gauge the potential impact of trouble far down the line. But companies now realize that they must make that effort. "In the past, the 'enterprise' in 'enterprise risk management' was thought to be the company itself," says consultant James Lam, president of James Lam & Associates. "But the global economic crisis has made it plain that 'enterprise' refers to the total business environment — your suppliers, their suppliers, your customers, distributors, and even your bankers."
Add to that the impact of rising commodity prices. At Sara Lee Corp., rising fuel and animal-feed costs sent its commodity bill soaring, even as the consumer-products maker of Hillshire Farm, Jimmy Dean, Pickwick, and other well-known brands confronted a shift in consumer demand, away from restaurant meals and toward eating at home. "That's a plus and a minus for us, given our two lines of business, in food service and retail," explains Sara Lee chief supply chain officer George Chappelle. "It caused us to really think about how we schedule our plants to adjust to that kind of shift."
One major change involved merging what had been essentially two separate supply chains. "This provided a 10% savings in administrative costs and made us more efficient in terms of how we deploy capital," Chappelle says.
The company also intensified its focus on Lean manufacturing and Six Sigma efforts and exited some product lines. Mattel is also paring its catalog; it plans to eliminate the bottom 20% of products that, as CEO Eckert says, "don't contribute much to our success or our customers' success."
Enter Finance
One aspect of supply-chain management that is likely to become a legacy of the recession is a much more careful assessment of the financial viability of suppliers and customers. "The credit and stability of our vendor base has certainly elevated itself in the supply-chain risk-management category," says Michael Kramer, CEO of Kellwood Co., a St. Louis–based apparel manufacturer, with sales of $1 billion annually from labels like XOXO, Vince, and Baby Phat. "We've extended our due diligence further into their operations to get a better read on their financial stability. We also talk to the suppliers' suppliers. We'll ask them flat out, 'Are you getting paid?' If they're not, it could be an indication that their customer — our supplier — has financial problems."
Paul Reilly, CFO of Arrow Electronics, a $17 billion distributor of electronic components and enterprise computing gear, has a similar perspective. "We have increased our due diligence to ensure suppliers have the financial strength to withstand stress in their businesses," Reilly says. "Our customers, incidentally, are requesting the same things from us."
At Corning, assessing the financial condition of suppliers has become so strategic that the procurement group has turned to the finance group for credit analysis expertise. "The global economic crisis catalyzed the need for us to be more deliberate and rigorous around examining the financial security of our suppliers; consequently, finance has taken on the task," says Mark Rogus, senior vice president and treasurer of the $5.6 billion maker of specialty glass and ceramics.
Reader CommentsDisplaying 1 of 1
Marcelle Green
Sep 15, 2009 1:51 PM ET
Good Advice
Russ, Thank you for sharing this insight. A lot of businesses have been having a hard time forecasting and projecting … more
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