Tuesday, October 28, 2008

Surviving global supply chain blues

CHRIS CATTO-SMITH

The global financial crisis is taking its toll across almost every international business sector. Asian economies face a new challenge, a downward spiral in the global economy with which they have become interdependently linked. Less than a month ago, there was still hope that America's financial crisis might be contained. China's economy was strong and other industrial countries such as Germany and Japan hadn't experienced the real-estate bubble that blew up the financial system of the United States.

Supply chains in crisis: The mayhem now taking place across the international financial sector is hurting activity in most developed economies. This is in turn bringing the crisis closer to developing economies. As the external sector weakens and costs of raising debt or equity rise, businesses will reduce investment, hiring and expansion plans. Fulfilling existing contracts now places many unforseen exchange-rate burdens. Domestic demand will therefore lose momentum, large firms will begin to go bankrupt, they will lay off employees, or indicate that they are stressed. Foreign-based firms will slow down their trade activity or even withdraw completely from certain markets.

Impact on Asia: There are many signs of trouble ahead, chief among them weakening export growth. Tens of thousands of export-oriented companies in southern China have gone out of business as a result of falling demand, rising costs and tougher enforcement of environmental and labour laws. Southeast Asia can expect an accelerating downturn in exports and then softening industrial production. There is little doubt that a synchronous slowdown is under way in the United States, Europe and Japan. Such a slowdown will also damage prospects for the large emerging economies such as Russia, India, Brazil and Turkey. Trade with the Middle East should remain stable, with increasing demand for fresh food from exporting countries with devalued currencies.

Local impact: As manufacturers cut back production, jobs will be lost while those remaining employed will see lower overtime and less income. Rural households that enjoyed record incomes due to high prices for higher value-added products such as rubber, palm oil, coffee, cocoa and other agricultural produce will cut spending as well.

Maintaining relationships: Farmers and retailers will need to work together to ensure the long-term future of their respective supply chains to make sure they are well placed to handle the global crisis. Farmers need a firm commitment from their retailers if they are to remain competitive. Those who have established dedicated supply contracts as a function of good practice will be better placed to meet volatile market pricing and logistics costs.

Ocean shipping: Some reports say that the cost to ship a container from Asia to Europe has recently plunged from $2,800 just a few months ago to just $700 today. The once-booming ocean shipping industry, benefiting from several years of high volumes and building ever-larger ships to meet seemingly never-ending demand for international container movements, is suddenly hurting as bad as any industry as demand softens substantially.

Outsourcing risk: For the past 20 years, international brands and manufacturers have been outsourcing production to China to take advantage of low labour costs. They have implemented and redesigned systems to be the most effective and cost-efficient, which has led to increased dependence on cost-sensitive, interconnected supply chains that are vulnerable to associated risks. The current financial crisis has shaken many of the basic precepts required for outsourcing. Many companies must now quickly mitigate these risks as the impact of global trade disruption becomes greater. Once foreign firms begin reducing their orders across the board, Chinese manufacturers will begin laying off employees to save money and this is where the trouble for China's domestic market will begin.

Summary: Economic conditions in coming months will be among the toughest Asia has had to manage since the crisis a decade ago. But Asia today is far more robust than in the 1990s, helped by strong external balances, massive foreign-exchange reserves, more diversified export bases and reformed banking sectors. Although one or two countries with financial vulnerabilities or political problems could suffer more than others, most large Asian economies will continue growing and rebound strongly once the global crisis ends.

However, the key to success will be how well organisations can adapt their international and local supply chains to control their internal logistics in order to minimise exposure (or potentially fatal damage) to their trading capabilities and relationships.

Weekly Link is co-ordinated by Barry Elliott and Chris Catto-Smith CMC of the Institute of Management Consultants Thailand. It is intended to be an interactive forum for industry professionals; we welcome all input, questions, feedback and news at:

bjelliott@abf1consulting.com

cattoc@cmcthailand.org

No comments: