The Manufacturing Supply Base Shake Up — Much Ado in a Rapidly Changing Environment (Part 1)

Earlier this week, released their findings from a recent survey of their marketplace user base, looking at risk and other factors primarily in the industrial supply chain. The sample size is large enough to present a useful snapshot about the state of the manufacturing market and the top concerns for buyers and suppliers given the rather odd economic situation we find ourselves in at the moment, caught between recession and recovery -- and potentially a double-dip. In a series of posts looking at the current risk and sourcing related challenges and opportunities within global manufacturing today, I'll offer up a range of third-party and Spend Matters perspectives on market concerns and tactics procurement organizations are beginning to employ. In the first and second posts in the series, I'll share some of the highlights from the report as well as commentary from MFG's own Mitch Free and AJ Sweatt.

Some of the highlights from the Cliff Notes version of the study in the press release and the actual report itself (free download, PDF or HTML) suggest that volatility is ruling the day. For one, "more than one-third of North American manufacturers responding to the quarterly survey said they've experienced a significant supply chain disruption in the past three months -- with over half (51 percent) indicating they had suffered disruption." This number represents an approximate 15% increase over the previous quarter (when the percentage stood at 44%).

Interestingly, industrial buying organizations are backtracking on supplier rationalization efforts in the current environment.'s survey results suggest that more organizations are increasing "the number of suppliers they [plan to] engage with." This number "rose to 43 percent from 32 percent in the previous quarter." However, "only 8 percent actually grew their stable of suppliers -- the third straight quarter with such disparity." Perhaps we can attribute the backlash against supplier rationalization programs in part to the "backshoring" that is happening in North America as manufacturers bring spend from China and other regions back onshore. In this regard, "21 percent of OEMs said they've returned some production to North America from low-cost countries in the second quarter of 2010, up from 12 percent in the previous quarter."

This number will most likely climb even higher in the coming quarters, perhaps owning in part to the rising China price as well as an increasing belief that as China's past manipulative economic actions are further exposed, that the price could rise even further. Looking forward, suggests "Well over one-third (38 percent) [of respondents] said they will be researching bringing production into or closer to North America in the third quarter of 2010." But will the domestic supply base be ready to ramp up production and take new orders? I have serious concerns about the ability of domestic suppliers to scale up.

One trend Spend Matters spotted going back over a year in the recession is that many suppliers are less excited than you would project or estimate about taking on new orders -- especially from new customers -- in the current environment. With credit tight and working capital tied up in operations, not to mention the extended payment terms many buying organizations are requiring, it's becoming harder for suppliers to access cash to buy raw materials and parts and to add internal labor and machine-time capacity.

Moreover, with significant political uncertainty -- e.g., about rising health care costs with the pending implementation of already-passed legislation, the specter of significant tax increases, a reduction in the ability to expense major purchases starting in 2011, the lingering potential for cap and trade and other potential liabilities -- in the current environment, suppliers, especially small and medium-sized business owners, are being more cautious than ever.

How does, which interfaces with suppliers on a daily basis, see the credit crunch and other challenges impacting the manufacturing supply community? Stay tuned as we feature a quick interview in the next installment of this mini-series on the subject.

Jason Busch

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