Uncertain economic times require better supply chain practices (October 01, 2010)

Opportunities to use supply chain management to bolster overall company efficiencies are being missed in Canada because the discipline remains silo based and tactical as opposed to company wide and strategic, Mike Croza, managing partner, Supply Chain Alliance Partners, told the 24th Annual Transportation Innovation and Cost Savings Conference.

“In 2010 we still have a long way to go for supply chain management in Canada. I’m not sure why it hasn’t stuck,” Croza told
the well-attended annual gathering, held at the CNE grounds in September.

Croza believes the continuing lack of focus on improved supply chain practices is symptomatic of a corporate culture that has “rested on the laurels of having a low dollar for too long” and not yet made the adjustments necessary to be competitive in the new reality of a Canadian dollar that is at par with the US greenback. Croza criticized corporate Canada for not making the necessary investments in capital equipment, information technology and management practices to remain competitive.

He pointed to a supply chain roundtable pilot being conducted by Supply Chain & Logistics Canada in coordination with Export Development Canada which found many supply chain process gaps and inadequate leveraging of information, particularly at the mid market level.

“We are working harder, not smarter,” he said adding that the likelihood of a strong Canadian dollar, which has hurt sales into the US in recent years, continuing for the near future requires a strong business strategy.

“Supply chain can really make a difference in the business. Canadian companies are ill prepared to take advantage of the economic upswing,” he said.

He explained that there are several barriers to supply chain management receiving the strategic importance it deserves. To begin with, leadership at many companies is sales driven and tends to view supply chain management as tactical. Another barrier is that much of Canadian business is comprised of small to medium-sized companies, which are very entrepreneurial in nature and have difficulties “seeing the whole picture.” And there is also a skills gap among supply chain professionals that needs to be addressed.

But Croza said part of the blame for supply chain management not being considered as strategically important as it should be lies with those who practice it day to day.

“We need to be better salesmen. Supply chain people are not good at selling what they do and the benefits of supply chain management,” Croza said.

Supply chain management faces another tough challenge, according to Dr. Mary Holcomb, associate professor of logistics at the University of Tennessee. Dr. Holcomb pointed out that annual research on supply chain practices that her university is involved with shows that for most companies (48%) trying to “be all things to all people” is the leading strategy in place right now, which is a very difficult strategy to pull off. The research also reveals a “relentless focus” on reducing costs.

“We don’t see that going away. We are going to be leaner than we ever have been,” Dr. Holcomb said.

Unfortunately, leaner supply chain staffs are also spending less time on seeing, understanding and dealing with the whole picture.

“Time spent on tactical issues is growing. I would like to see less time spent on tactical issues and more time spent on strategic issues,” she stressed.

The leaner supply chain staffs at North American companies will have to find ways to deal with unpredictable demand levels, which was ranked as the top issue by most supply chain executives included in the research. Increasing prices and service demands were considered the second most important issues, particularly for small and medium sized firms.

Speaking of costs, Roger McNight, a senior advisor with En-Pro International did not have good news for the long-term pricing of energy costs, a real thorn in the side of shippers and carriers alike just a couple of years ago. At the moment inventory levels are in over supply and that is making for lower prices but beyond 2010 “there could be problems,” McNight warned.

One of the contributing factors to future fuel costs rising is the lack of refining capacity in North America. In the US there were 381 refiners in 1981 compared to just 140 today. In Canada we have just 15 refineries.

“No new refineries have been built in the US since 1976,” McNight said, pointing out it takes about 10 years and $7B to build a refinery yet legislative changes during that time span could cause significant issues.

“When recovery does hit for real, the US will be reliant on offshore refiners,” McNight said.

Another factor that will contribute to higher fuel pricing in the future is the growing impact of “subjective” elements such as financial markets, speculators and traders on the value of crude.

“The price of crude is following emotion and intuition rather than fact,” McNight lamented.

McNight, Dr. Holcomb and Croza were all concerned about the ability of corporate North America to handle the challenges presented by an economic upturn. But the conference’s opening speaker, Peter Hall, vice president and chief economist at Export Development Canada, argued that recovery may prove elusive.  Hall is worried that economic indicators show we are headed for a double-dip recession.

“This is something to be worried about. Nobody knows what to do with a situation like this. A mid rebound pause is not something we’ve had to deal with before,” he said.

Hall pointed to several indicators that the US, Canadian and in fact global economy are slowing again and may be headed towards another recession. The Baltic Dry Index he said has rebounded from “falling off the cliff” during the recession but has rebounded at a considerably lower level than prior to the recession.

“That is an indication everything is not right,” he said.

He also said that the impact of all the stimulus spending committed by governments around the world to prop up their economies has basically run its course.

“I would submit that the aggressive growth we saw in the fourth quarter of 2009 and the first quarter of 2010, we’re out of it. The danger is if you come out of fiscal stimulus growth before the economy kicks in, you get very low growth and that is a very dangerous period,” Hall said.

He pointed to several key markets that remain under water in the US. The US housing market is still in the midst of realigning itself and shows no signs of recovery. It could be a year before that turns around.

“If you don’t have recovery in this, you don’t have recovery,” he said.

He also pointed to the US consumer confidence index which has shown extremely moderate recovery. He believes it could be 15 months before that turns around.

“That is a very long time to wait. Does this look like the consumer base whose strong buying will pull the world out of recession?”

Hall pointed out Germany, the powerhouse economy of Europe, slowed appreciatively in the second quarter, just like the economies of Canada and the US. And he sees China going into its own version of recession in the third quarter, slipping down from its pre-recession levels of double-digit growth.

Particularly dangerous this time around should the global economy slip back into recession, is that the governments of the
major industrialized countries are in too much debt to do much about it.

“We are slow enough right now that the probability of getting into a double-dip recession is high,” Hall said, pegging it at 50%. CT&L