When times get tough, the best way for some companies to cope could very well come from the outside. This remedy will prove particularly useful for manufacturers that are able to outsource their supply chain and farm out capital costs to service providers.
Just two years ago, with Asia's economies--especially China and India--showing red-hot growth, economists believed the saying that "when the US sneezes, the world catches the flu" ceased to hold true. But, the current global economic slowdown has underscored just how true the statement is.
Michael Warrilow, Hydrasight
Vu-Thanh Nguyen, research analyst at Access Markets International Partners (AMI-Partners), noted how today's recession, which started in the United States, has severely affected business and consumer confidence worldwide. "Consumers are minimizing their spending and manufacturers will receive substantially less orders from retailers and wholesalers," he said in an e-mail.
Saj Kumar, vice president of SAP Asia's discrete manufacturing industry solutions group, said manufacturers in Asia, especially those producing high-tech products and automobiles, have been badly affected primarily because the market for their goods is U.S.-centric.
Gerald Tan, business director of analytical software vendor SPSS Singapore, said the continued weakening demand for products has resulted in drastic output contractions, creating a rapid downward spiral across the supply chain and logistics operations.
Nguyen said reports of an estimated 20 million job losses in China's manufacturing sector and the recent 84 percent profit drop by container shipping and logistics group Neptune Orient Lines (NOL), are examples of the scale of this recession's impact on the global supply chain.
Loh Sin Yong, general manager, CrimsonLogic eTrade, said companies badly hit by the decreasing trade are manufacturers, logistics service providers, raw material suppliers, wholesalers and retailers that require heavy capital investment, and have to now deal with excess capacity.
Nonetheless, Michael Warrilow, managing director for analyst firm Hydrasight, said "industry leaders are created in lean times, more so than in good times".
Farming out liability, costs
"Therefore, the organizations that will benefit most from the changing economic conditions will be those that can successfully transfer capital costs and liability to external service providers, while maintaining insight and control," Warrilow said in an e-mail.
Agreeing, Loh told ZDNet Asia in an e-mail that companies can outsource supply chain management (SCM) and make strategic use of SCM applications that automate transactions and information flow, and free resources to better meet fluctuating market needs.
"Apart from improving efficiencies in managing exchange of information, employing SCM helps companies remain flexible and responsive to the demands of the changing environment, which are key to survival in a recession climate," Loh said.
David Hope, managing director and vice president of Lawson Software Asia-Pacific, noted that as revenues fall, margins are squeezed and inventory stagnates in the warehouse, and the immediate reaction among manufacturers is to stop projects and postpone capital investments.
"But, is this really the right thing to do or is it a knee-jerk reaction?" Hope said in an e-mail. "Perhaps the correct question in these tough times is, 'can you afford not to invest'."
Manufacturers and distributors should instead think about the opportunities the current economic slowdown offers, he added.
To this end, Kumar told ZDNet Asia in an interview that forward-thinking manufacturers are continuing to drive product innovation during this slowdown.
"In fact, this is probably the best time for them to go back, look at the drawing board and see what they need to do." He explained that the fast pace of a good economy leaves little time for innovation. But in a lean period, without so many disruptions getting in the way, businesses have more time for research and development.
Smart companies, said Hope, will deploy flexible information and business process platforms.
"Companies that will emerge as the strong ones will have simplified their systems so that employees get the information they need to act quickly," he said.
A small percentage improvement that reduces operational costs can quickly aggregate up to a major difference in bottom-line performance, both in the short term and as the business starts to grow again, according to Hope.
"Some companies that have deployed integrated enterprise resource planning (ERP) systems report improvements such as a 20 percent reduction in operational costs and 25 percent reductions in working capital tied up in inventory," he said.
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| Companies that will emerge as the strong ones will have simplified their systems so that employees get the information they need to act quickly. |
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| David Hope, Lawson Software Asia Pacific |
The top concern of manufacturers, said Tan, is how to stay lean and profitable in uncertain times. Predictive analysis tools, therefore, help them anticipate market trends with greater precision and swiftly adapt to market shifts, thereby, optimizing resource management and avoiding oversupply.
Bryan Tan, Asia vice president of sales at Epicor, said ERP software can help manufacturers identify and plan the extended enterprise resources needed to capture, produce, ship and account for customer orders. "A distributed, common database provides the ability to access the right information, from the right source, at the right time, empowering all users through the supply chain to make valid, informed decisions."
Kumar added that before embarking on reducing operating costs, manufacturers must look at where and how their money is spent. "You can do it with very simple spreadsheets, which of course require a lot of manpower. Or you can have a richer, more sophisticated way of doing this," he said.
He noted that business intelligence (BI) tools with real-time analysis capabilities meet this need. "Instead of getting quarterly and monthly reports, you have real-time visibility as to where the money is going. It's a new area for us in terms of tailoring the BI solution to focus on cost management," Kumar said.
Nguyen agreed that ERP, SCM, and BI applications provide businesses with analyses about internal and external business conditions that help them make better business decisions and adapt to market changes quicker. But, he provided a caveat.
"It is important to note that a system's output can be only as good as its input. For example, if the market forecast is incorrect and your customer intelligence is outdated, then you will receive meaningless results," he said.
Warrilow said Hydrasight sees little "value add" being offered by traditional software vendors to adapt to current changes. "Moreover, most continue to acquire additional software and simply expect their customers to upgrade and integrate. The vary nature of software is that features and functions are continually added.
"As a result, on-premise applications become more costly to acquire and maintain over time," he said. "Vendors then pitch their more advanced technology during leaner times as being able to 'do more with less'. However, most organizations remain cautious and reticent. Any 'optimization' that hasn't occurred during more buoyant economic times is unlikely to be initiated during lean ones."
Hydrasight research shows that capital investments on new IT within the Asia-Pacific manufacturing and logistics industry are "on hold, with few exceptions", said Warrilow. "They are expected to stay that way through at least the end of 2010. Therefore, additional investments in technology will be limited to those that can add significant immediate value in supply chain optimization and particularly in meeting variability in demand within the supply chain itself," he added.
