Supply chains at risk: Lower consumer spending is altering inventory, sourcing strategies

As retailers cut inventories in the face of softening demand, manufacturers are grappling with strategic questions like where to source goods from, and how to rationalize their supplier bases to remain healthy during the downturn and be well-positioned for the next recovery cycle.<br/>


The precipitous drop in consumer spending that has been cited as a major cause of the ongoing economic recession now has manufacturers scrambling to adjust supply chain management strategies.
In fact, lower consumer spending took the top position on the list of supply chain risks in a recent survey conducted by Boston-based AMR Research see ).

“As retailers cut inventories in the face of softening demand, this risk is cascading up consumer and industrial supply chains,” Noha Tohamy, an AMR Research VP said in

a report summarizing the survey’s findings

. “Companies like Cisco and Procter & Gamble are grappling with tactical questions, like where to cut and position inventory, and strategic initiatives, like where to source and how to rationalize their supplier bases to remain healthy during the downturn and be well-positioned for the next recovery cycle.”
Tohamy said AMR conducts this risk assessment survey on a quarterly basis, and it’s clear from the results of the most recent canvass—covering the first quarter of 2009—that the economic downturn is dominating the thinking of supply chain executives.
“Lower consumer demand is dominating the list of risks this quarter, with 37 percent of respondents identifying it as No. 1,” Tohamy said. “Additionally, only 15 percent expect this risk to decrease by next year.”
Product quality failures placed second on risk list, with 35 percent of respondents identifying it as their second top concern.
Volatile energy and commodity prices—which consistently took first and second place honors last year—placed third and sixth, respectively, on the most recent list. But Tohamy cautions manufactures not to get complacent about these risk factors.
“Although global supply chains are currently enjoying low energy and commodity costs, last year’s record highs are still a fresh reminder to supply chain professionals that they cannot assume any price stability when making inventory, transportation, or manufacturing decisions,” she said.
The potential of having intellectual property stolen was fourth-highest risk factor cited in the latest survey. This fear—coupled with concern over product quality—appears to be causing manufacturers to rethink outsourcing and offshoring strategies.
For instance, Tahomy said, China—which continues to be plagued by both recall and IP protection problems—is now getting more competition from India as a manufacturing center. These factors also are contributing to a continuing toward nearshoring on the part of U.S.-based manufacturers.
“Respondents indicated they will increase their nearshoring of sourcing and manufacturing activities by a ratio of 5 to 1,” Tahomy said.
Mexico was cited as the preferred nearshoring destination by 84 percent of respondents, followed by Canada at 55 percent and Brazil at 49 percent.
When it comes to strategies for mitigating risk, collaboration with trading partners was cited as the most used—and most successful—method in the current economic environment ( see Figure 5 below ).

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