Supply Chain Tips for Financial Meltdown by Ron Keith

1. Supply Chain Tips for Financial Meltdown
January 26, 2009
Ron Keith
Chief Operating Officer
Riverwood Solutions
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 and 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 it’s
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 basic
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

2. 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 resulst 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 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

3. 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 and will likely continue to depreciate at an accelerating
pace. Don’t worry about the upside for the next quarter and focus on
exceptionally prudent supply chain practices so your company can live to
fight another day.
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