The 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.”