Top Nine Supply Chain Challenges in 2009

Top Nine Supply Chain Challenges in 2009
(Industry Week – David Blanchard)

Better make sure risk management is at the top of your to-do list this year

As if a shattered economy isn't bad enough, the prospects of supply chain disruptions on a global scale have manufacturers taking a closer look at their risk management strategies. According to Bernie Hart, global product executive, logistics management, with financial services firm J.P. Morgan's Global Trade Services group, while 2009 will have plenty of challenges for manufacturers, a number of promising opportunities will emerge as well. Hart lists the following nine trends that will characterize global supply chains throughout the year.

1. Supply chain risk mitigation in an economic downturn

Supply chain risk mitigation will receive increased focus in 2009 versus past downturns due to the following factors:
• supplier financial risk,
• volatility in energy, commodity, labor rates and currency exchange,
• unpredictable economic recoveries.

2. Searching for working capital

"This trend will bring increased scrutiny to the supply chain as companies look to reduce inventory and lower operating or carrying costs," Hart says. "In addition, buyers will look to extend payment terms, while suppliers will drive to collect receivables more quickly, creating the need for a liquidity buffer – such as supply chain financing – to mitigate this brewing payables/receivables conflict. The current credit environment is pushing buyer/supplier partnerships to look to their trade flows to drive the creation of additional liquidity."

3. A resurgence in letters of credit

Hart reports that his firm, financial giant J.P. Morgan, has seen a resurgence in the use of letters of credit to facilitate the financing of international trade. With credit getting tighter in all sectors, the supply of letters of credit have been declining while the cost has risen dramatically, Hart notes. "For the right borrower and the right transaction there are still deals to be done, but the market will remain tight for the near future."

4. Shortening the supply chain

U.S. manufacturers will continue to reconfigure their supply chains, Hart says, by moving plant operations and sourcing vendors closer to home and away from Asia. "Limited free trade agreements, high energy costs, and rising labor and production costs in Asia all contribute to companies re-evaluating extended supply chains." Mexico in particular has become an increasingly popular source for manufactured goods, Hart notes, citing a U.S. Commerce Department report that indicates a 7.2% increase from year-to-date imports through Mexico compared to the year before.

5. Improved speed and savings in Mexico

Mexico is piloting a new customs regime called the Regimen de Recinto Fiscalizado Estratégico (RFE). "A customs regime," as Hart explains, "is a country's specific set of trade regulations, processes and practices that regulate the actions of importers and exporters." The Mexican government's hope is that the RFE will decrease logistics cost in terms of dollars per container and numbers of days in transit which, in turn, will help attract additional production to Mexico. The program could save an importer between US$200 to $600 per shipment, according to Mexico Customs estimates. The RFE is expected to go live in early 2009, Hart says.

6. More free-trade agreements and more scrutiny

While the United States is expected to finalize three new free-trade agreements (FTAs) in 2009 with Colombia, Panama and South Korea, it remains an open question as to whether the Obama administration will view FTAs as a priority. "The complexity associated with understanding and leveraging FTAs is beyond the scope of many companies because they either lack the expertise, resources, technology, or all of the above to do it efficiently and cost-effectively," Hart says. "Many companies eventually come to a decision point: either invest internally or outsource to a global trade expert."

7. China clamps down on oversight

"Chinese officials have vowed to clamp down on product safety failures by launching national investigations and ordering local officials to report all possible product safety issues," Hart says. "The regulatory environment is expected to become stricter in China with the introduction of a control list or catalogue of commercial encryption products developed and made overseas. Impacting high-tech manufacturers outside of China, this new control list calls for tighter regulatory oversight of firms that use encryption technology within their products."

8. The Amended Lacey Act

The United States is now the first country in the world to prohibit the import, export, sale or trade in illegally harvested wood and wood products.
As a result of an amendment to the 108-year old Lacey Act, the United States now prohibits the import, export, sale or trade in illegally harvested wood and wood products, Hart says. "This will require detailed reporting – scientific name, quantity, value and country – of any plant matter incorporated into an imported product brought into the United States. This law broadly covers plants used in processing, no matter how miniscule the amount and no matter how far removed from the harvesting of the plant." As Hart sees it, the amendment could have "significant consequences for U.S. importers who will be subject to new data reporting requirements," although the specific scope of what items are covered under the amendment is still being defined.

9. A global eye toward consumer product safety

Signed into law in August 2008, the Consumer Product Safety Improvement Act could lead to similar regulation around the world that will address safety standards and requirements for children's products, such as mandatory testing, the reduction in lead paint usage, and more visible cautionary statements related to choking hazards, Hart reports. "In November 2008, representatives from China, the European Union and the United States met in Brussels for the first high-level trilateral summit on product safety to discuss key developments and further joint activities to improve cooperation and the exchange of information relating to consumer product safety. Upon import, products must be accompanied by certification that they comply with all applicable consumer product safety rules and similar rules, bans, standards and regulations under any other laws administered by the importing nation."