Despite Uncertainty, Encouraging Signs from the Supply Chain

Manufacturers are building inventories and investing in a U.S. economy fueled by cheaper energy, says a veteran supply chain expert.

The dip that U.S. GDP took in the fourth quarter (0.1%) rattled nerves briefly, but after accounting for the 22% decline in defense spending, observers like Paul Martyn, vice president of supply strategy for BravoSolution, a supply management software and services provider, see encouraging signs in the U.S. economy.

Martyn was following the drop in inventories in the fourth quarter carefully, as it signals how companies are looking at their prospects for the coming months. But he says it’s likely the drop was due to the impending fiscal cliff and fears among businesses that a downturn could leave them with too much invested in inventory. The January PMI numbers from the Institute for Supply Management showed that inventories were again growing (up from 43.0 in December to 51.0 in January).

“The other encouraging note is that in addition to inventories rising, the delivery times have actually slowed down. It’s taking longer for suppliers to get their deliveries and make deliveries,” observes Martyn. “From a supply chain perspective, I have capacity, time and inventory as my buffers for uncertainty. With inventory and time increasing, it’s an indicator that demand is more bullish among manufacturers in the U.S.”

Uncertainty breeds concerns about risk and one way manufacturers are trying to protect against volatility is through more sophisticated hedging strategies for the commodities they depend on, says Martyn. Rather than simply hedge against grain prices, for example, food manufacturers are bundling several commodities together in a hedge that looks at other elements affecting prices, such as the fuel used to transport it.

To deal with complex hedging calculations, says Martyn, corporate America is splitting into the “haves and have nots,” with the haves employing sophisticated analytics programs to examine their options.

An elevation of concern about the supply chain and purchasing is one outcome of the Great Recession, says Martyn. As a result, more companies are creating chief purchasing or procurement officer positions, with this person frequently serving as the chief financial officer’s right-hand, and shifting to more strategic procurement practices.

“Coming out of the downturn, companies that did well were able to adjust quickly and be quite nimble in the way they managed their supplies to reduce costs at time when revenue was coming down,” Martyn says. “Now going forward, it is not just about the cost savings and negotiating better rates but companies looking at cycles to be able to respond to adversity."

That quest for flexibility is affecting the way supplier contracts are being drawn up. There is more formula-based pricing that uses indices of the market rather than just a flat rate, says Martyn. He also sees companies going to shorter contracts in some cases, such as from 3 years to one year, even when it results in higher administrative costs.

Reshoring Will Take Time

Companies are also employing more sophisticated ways to track costs, using total cost of ownership models that can result in companies purchasing more domestically.

Reshoring is a reality for U.S. manufacturing, says Martyn, though he cautions that it will take time for its effects to be seen fully. In part, that is because lower energy prices arising from the natural gas boon are resulting in more capital spending on projects that will be years in creation.

“The capital-intensive nature of the manufacturing that will return here takes some time,” says Martyn.

Like many observers, Martyn cautions that we shouldn’t assume that the return of more manufacturing operations to the U.S. will result in the same numbers of jobs that were created in the past. Robotics, 3D printing and other technologies will result in more automated, less labor-intensive operations. And those operations will require skilled workers that are still in short supply. But despite these challenges, says Martyn, reshoring is a “trend that we can’t ignore.”

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