Supply Chain Tips for Weathering the Financial Meltdown

Jan. 21, 2009
In this broadly deflationary environment, inventory is a poison and responsiveness its only antidote.

Supply chain mistakes can be extremely costly in the very best of times, leading to excessive cost, confusion and downright chaos. But in today's global financial crisis, mistakes are magnified. One major misstep could be catastrophic, as we will witness over the coming weeks as the Nortel bankruptcy ripples through layers of the supply chain.

Despite the numerous advances in ERP systems, dynamic demand planning tools and supply chain modeling software over the past decade, most major supply chain decisions are still ultimately made by people -- and individual people and companies react differently to the issues currently presenting themselves in this economy.

As we head into 2009, supply chain mistakes can trash a balance sheet more quickly than ever, or leave incremental sales on the table in an increasingly competitive market environment. With most companies tightening both their belts and their inventory exposure, it will become more important than ever for suppliers to maintain supply flexibility without taking excess material risk. In this broadly deflationary environment, inventory is a poison and responsiveness its only antidote.

Whether you're dealing with the dramatic secular downturn or industry specific issues impacting the supply and demand balance, the following are five steps you can take to help ensure your business' supply chain is responding appropriately to the current economic conditions.

1. Talk forecasts with your Electronic Manufacturing Services (EMS) provider. Despite contracts and assurances to the contrary, most EMS providers have already lowered their demand signals into the supply chain unilaterally on behalf of their various OEM customers. And although managing excess and obsolete exposure is absolutely critical for both parties in these times, it's equally important that the OEM and EMS provider do not both take down demand numbers independently. When this happens, demand signals get dramatically over-corrected and thus the supply chain drives less material than actual demand would dictate. Talk with your EMS provider and agree upon a specific demand plan, an ongoing schedule for regularly updating that plan together, and the appropriate supply chain signals for the current environment. Keep in mind that ultimately the OEM owns most of the raw material liability, so lying to yourself or your key supplier will not advance the cause.

2. Systemically bring in lead time fences in ERP. As demand drops universally, suppliers typically find themselves with increased inventory and excess capacity. Reducing lead time fences in ERP tends to reflect the new, albeit temporary, supply realities in a contracting market. If the EMS provider runs the ERP and requires the OEM to approve component lead times (as is contractually customary), the OEM needs to make sure that lead time approvals reflect the desired change and the current market conditions. This process will require the EMS provider to manage raw material orders more tightly, and will result in a reduction of the OEM's overall material exposure. It will also likely reduce weighted average material cost as commodity materials such as DRAM, Flash, PCBs and resins all show increased price erosion in contracting markets. But remember, it is extremely important to continue to monitor systemic lead times as the markets eventually stabilize and then return to a new state of normalcy.

3. Validate the financial viability of your critical suppliers (and their customers). Although this seems a simple exercise, understanding who is and who is not at risk in this financial Armageddon requires a different approach. Profitability, cash flow and sales growth must still be considered, but they now take a back seat to issues such as debt maturities, loan covenants and customer concentration ratio. There are a number of specialized component providers that have Top 5 customer concentration ratios in excess of 90%, suggesting the loss of even a single top customer (such as Nortel) could be a catastrophic event. If you have critical suppliers with a Top 5 customer concentration ratio greater than 70%, you probably need to better understand the risk profile of their key customers.

4. Never kick a supplier when he's down. Many a hard negotiating commodity manager cannot resist the temptation of renegotiating a hard deal with a supplier on the ropes in a troubled market - the rationale being that when times are particularly tough, companies cannot afford to lose a key account and are therefore willing to sell their soul to keep the business. While this is a common reality, the ramifications are broad, potentially dire, and unfortunately rarely fully understood. Undermining an already weak critical supplier has obvious attendant risks, but less obvious are the longer term consequences. Suppliers tend to provide the best service to the best customers, and when things get tight (which they always do coming out of the capacity downsizing cycle that inevitably accompanies a downturn), flexibility around capacity-constrained products, services and terms goes to the most profitable accounts. Build relationships with your suppliers that drive long-term success for both parties, and that will be mutually beneficial in the subsequent upturn that will inevitably follow.

5. Don't fight the facts. When you roll up the sales forecast next month and it shows orders are down 20%, resist the temptation to ignore the facts. It is not a forecasting anomaly. Your company is not immune to the global downturn. Everyone likes a good upside and prefers not to trim their forecast, so be assured that your customers are probably not sandbagging. Between stock prices, real estate values and commodity prices, the world has lost $50 trillion dollars in the last 12 months -- the single greatest contraction of wealth in world history. Cash is no longer king; it is now a ruthless dictator. Your company's balance sheet (more so than your products or technology) may very well be your single greatest asset. This downturn is real, cash is everything and inventory is huge potential liability that will likely continue to depreciate at an accelerating pace. Don't worry about the upside for the next quarter. Instead, focus immediately on exceptionally prudent supply chain practices so your company can live to fight another day.

Ron Keith is COO of Riverwood Solutions (, an innovator of managed supply chain services.

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