The Path Back to Prosperity

There is no doubt that the economic downturn has taken a toll on manufacturers. But if recent production reports hold steady, 2010 may bring muchneeded optimism to the entire industry.

The May Institute for Supply Management’s (ISM) monthly Report on Business showed that activity in the manufacturing sector expanded for the tenth consecutive month. What’s more, 75% of manufacturers believe they will see positive growth by the second half of 2010, according to the PricewaterhouseCoopers Manufacturing Barometer.

These “green shoots” raise many questions; perhaps the most immediate is, what can industrial manufacturers do now to prepare for a potential uptick? One clear and immediate step is to make sure their supply chains are more flexible and efficient.

Manufacturers typically have highly complex, global supply chains that span from supplier to facility to customer and many spaces in between. Creating a flexible network between these points gives manufacturers the ability to respond quickly to economic or market changes so they can handle spikes or dips in customer demand, better manage costs and ultimately, gain a competitive edge. In fact, a key step to manufacturers’ business recovery, according to the PricewaterhouseCoopers survey, is managing global supply chains efficiently.

Backlogs Bring Immediate Concerns

Flexible supply chains keep the right amount of inventory moving on time, all the time. But there are early signs that manufacturers may not be keeping up with demand.

According to the ISM, manufacturers believe their customers’ inventories are too low, and backlogs are on the rise. Of the companies who reported order backlogs in May, 30% reported that they had increased. If inventories remain low, the potential for delayed or cancelled orders is immense.

If backlogs are a problem, third-party logistics (3PL) experts can put in place a just-in-time (JIT) shipping model, which uses overnight air freight services to get goods to customers as soon as they’re ready. The beauty of a JIT model is that it can be a solution that is implemented in relatively short order.

Although air freight is more expensive than ocean freight, making the short-term switch can provide a big payoff, as it did for costume apparel maker Leg Avenue. The company used JIT shipping to handle its 2008 peak season, which precedes Halloween. The company’s story offers lessons—and results—that manufacturers can apply.

Due to the slow economy, Leg Avenue’s peak retail orders (made between May and July) were down. But as Halloween approached, consumer demand increased more than anticipated, so retailers low on inventory ordered a second wave of merchandise in the fall, worth $35 million in revenue for Leg Avenue.

Streamlining Shipping Options

Just-in-time shipping can be a short-term solution in some cases, but there are also long-term strategies manufacturers should consider to create a more agile supply chain. One good place to start is to rethink how to ship goods across borders. There are new options that can move goods to customers more quickly and cost effectively.

In the past, manufacturers that needed to ship products across the globe traditionally relied on one of two options: ocean freight or air freight. Ocean freight proved to be the most cost-effective and efficient option, especially considering the sheer volume of goods that a freight vessel can carry. The downside was that goods could spend weeks in transit. Conversely, shipping goods via air freight saves time, but for goods that have longer cycle times, air freight may not be worth the cost.

With today’s transitioning global economy, some 3PLs are developing hybrid services that combine both air and ocean freight for a single movement. This model involves using an ocean freight vessel to transport goods to a city that has a sophisticated port authority and airport. There, products are transferred from vessel to aircraft to reach their final destinations. The combination of services provides faster transit times than an ocean service, but it also consumes substantially less fuel and costs less than a pure air service.