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01/11/2011

Supply Chain Year in Review 2010

What happened in 2010 in terms of the supply chain? Time for my annual review.

In terms of broads trends, once again the economy probably has to take center stage, and I think the deep and direct connection between the economy and the supply chain has been burned into all of us for some time. At many of the events I attended, sessions on the economy and economic predictions seems to have packed audiences, which was telling.

So the economy was in recovery in 2010 - sort of. We've now had I believe 17 straight months, including December, of a reading of 50 or more in the Institute for Supply Management's Purchasing Managers Index, indicating manufacturing expansion. Retail sales excluding automobiles were up 5% or more each month this year over the dismal 2009 levels. Factory utilization has climbed from the abysmal 65% reached in June 2009 to about 73% currently. (By the way, we have assembled all these data/charts in one article released in our On-Target publication this week. You can read here: Major Macro Trends Impacting the Supply Chain in 2010. It is quite good, if I do say so myself.)

Yet, the recovery certainly didn't feel all that great, with unemployment hardly budging at near 10% for the entire year, and GDP growth of 2-3% per quarter - well below normal recovery levels, especially from very steep recessions.  Consumer demand was still wobbly and skewed heavily towards bargains - dollar stores enjoyed another banner year. Supply chain staffs, pared deeply in 2009, remained lean, as companies focused on doing more with less. But unit volumes didn't rise that much for most companies, even as corporate profits and cash flow soared for many due to deep cost cutting, and units volumes are what drive supply chain hiring, so that was weak too.

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In just one year China's world stature in economics, international relations and much else soared dramatically. A decade or more in a single year, if you will.

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It does appear there is a real chance 2011 could be a strong year - more good economic numbers this week - let's keep our fingers crossed. We've been much too long in the doldrums.

China, meanwhile, kept zooming along, with near 10% growth for much of the year. The lowest quarter of growth it had during the recession - according to official statistics anyway - was 6% in Q4 of 2008.  That led China to surpass Japan in 2010 as the world's second largest economy, and IHS to predict it could exceed the US in 3-4 years. In just one year China's world stature in economics, international relations and much else soared dramatically. A decade or more in a single year, if you will.

That led to much angst in the US and Europe, with strident calls for China to increase the value of the Yuan currency to make its exports more expensive. Numerous country leaders and corporate CEOs called on China to open its markets more and better protect foreign IP. The US levied several controversial tariffs on Chinese goods, and protectionism here and in Europe was in the air - but in the end, not that much really happened there.

In my view, the Green supply chain movement went sideways at best in 2010 - though many companies, especially in the consumer packaged goods industry, made many advances. (Procter & Gamble, as just one example, in May announced it would start requiring suppliers to start reporting carbon emissions soon; WalMart also announced a new program to work directly with suppliers to reduce emissions and other waste).

But the Cancun climate summit in December was a dud, and there was a sense of Green "fatigue" in face of the economy, frozen winters, doubts about some of the data, etc. Most interesting though was the US EPA's controversial move, now playing out, to reduce greenhouse gas emissions through regulation, not legislation. We've been keeping close tabs on this at our thegreensupplychain.com. Several Green groups bemoaned the fact that consumer interest in Green is not anywhere near as strong as they hoped. Frito-Lay dropped its fully bio-degradable bag for its Sun Chips line after sales plummeted because  consumers decided the extremely noisy crunching sound the bag made wasn't worth the Green benefits.

I am going to run out of room here, so below are what I view as the rest of the top supply chain and logistics stories from 2010:

Rising Input and Oil Costs: Does it feel like deja vu all over again? The price of most commodities soared in 2010, with items like cotton and wheat reaching record highs. Oil reached $87 per barrel by April and stayed elevated for the entire year, ending at over $90. Once again, we are hearing companies either blaming rising input costs for profit shortfalls, or predicting their coming impact, as Nike did just last week. We could be north of $100 a barrel soon, and who know from there. Manufacturers and retailers are uncertain how to respond with continued consumer price sensitivity.

RFID Comeback: The long-suffering RFID community was bolstered by WalMart's announcement, under a new program leader, that it was going to require item-level tagging for certain apparel products, joining American Apparel, JCPenney, and other soft goods retailers in the move. The program made sense, was incremental, and avoided many other aspects of its previously failed efforts. There were reports for awhile of shortages of tag inlays and mobile RFID readers due to the move. Not much news since then, but it seems to be moving along. Essentially, RFID is moving into a more mature stage where it will become very easy to use, like bar coding.

Trucking Industry Dynamics: Too much happened here to do much other than lump it under a catch-all. For the first half of the year, rates mostly stayed in the toilet, though signs of some capacity issues were starting to emerge by late Spring. The carriers have remained very disciplined about adding capacity, and in the second half we saw rates starting to rise and more capacity concerns. These were exacerbated by the new CSA 2010 safety reporting rules, which could take hundreds of thousands of drivers out of the employment pool, rising diesel prices which could again wipe out thousands of independents, and just officially proposed new changes to the Hours of Service rules that could put another big hit on productivity. Is there a "War on Trucking?" More on this soon.

China Labor: An almost unheard of publicly reported strike in China in May at Honda plant there leads to increased wages of 20% or more in a number of factories, leading some to believe the "cheap Chinese labor party" is coming to an end. Many apparel manufacturers already headed elsewhere.

November Election: Republican takeover of House and gains in Senate mean Cap and Trade and "Card Check" union bills are dead for at least two years; also likely to see some modest change in transportation policy.

Supply Chain Software: Sales for most supply chain software companies are strong, meaning companies are buying. JDA Software CEO just recently makes unusually strong statement about strength of company's "pipeline." However, pronounced change of tone during the year of the industry focus moving strongly to "cloud-based" delivery models. This is the future.

Toyota Fiasco: World's largest car company sees reputation sullied for supposed problems with sticking accelerators. Though later evidence seems to show Toyota should be vindicated, company loses market share, and the disaster causes many to ask if Lean was taken too far.

Dr. Tom Mentzer Passes: One of the industry's most well-known academics, the University of Tennessee's Tom Mentzer, loses cancer battle in March.

Logistics Costs Way Down: Annual State of Logistics report in June finds logistics costs as percent of GPD plummeted in 2009 to just 7.7%, after long upward trend.  That's the lowest level in the 21 years of the report.

Cargo Bombs: Crude attempts by terrorists in October to plant bombs in parcel packages causes mini-panic, renewed calls for higher levels of cargo screening.

More WalMart: Retail giant makes more news by earlier in 2010 announcing it is going to move to more direct sourcing of its goods rather than using intermediaries, especially for imports, and later that it is going to take more control over its inbound freight moves from vendors. Both actions cause many in the industry to discuss/rethink their own policies.

Material Handling Merger: Two giants in the materials handling industry, Dematic and HK Systems, announce they are combining in August.

There is more but I am out of space. Look for a detailed 2010 event timeline in next week's On-Target magazine

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