Although the economy is not growing rapidly, some companies are anticipating strong growth and recognizing the challenges that growth can present. Yes, growth is not always easy. There can be challenges to financial resources, labor and the one we'll discuss today, vendor performance.
The Wall Street Journal carries a story today, "Boeing Examines Supply Chain for Weak Links" (probably gated, but you really ought to have a subscription). The aircraft company wants to ramp up production of its 737 by 60 percent over the coming three years. That's a big production increase, and Boeing wants to ensure that its vendors can deliver. Instead of simply placing orders and communicating production plans, Boeing is sending teams to evaluate each critical vendor's ability to deliver. This is great practice, similar to what Caterpillar did in the early days of the economic recovery. (See my article about Caterpillar and the "bullwhip effect.")
The Boeing story brings up an important point: the overall economy does not have to grow rapidly for a company to have vendor performance challenges. Boeing is enjoying strong orders for the 737. Some other companies are seeing their particular products in growing demand, even as the overall economy is growing only modestly. Your overall sales may even be falling, but if you have one key product that is enjoying strong demand, make sure you can get the parts you need to continue production.
The latest industrial production report from the Federal Reserve shows that overall industry increased output by 3.7 percent in the 12 months through November 2011. But look at the sectors with really strong growth:
Oil and gas drilling, up 21.2 %
Motor vehicles, up 15.6 %
Transit equipment, up 25.3 %
Even outside of these hot sectors, there are specific products with above-average demand.
1. Understand each vendor's ability to deliver parts reliably.
2. Look for alternative vendors when you identify a vendor who may not be able to deliver.
3. Evaluate the vendors who are not current problems to determine if they might become a problem.
4. Honestly talk to customers about the challenge.
Although I'm not a supply chain expert per se, I've been around this problem long enough that I can identify the steps you need to take to ensure your access to critical parts. Give me a call if you need support.
United States businesses sold nearly $40 billion worth of goods to South Korea last year, a record volume. Over the first three quarters of 2011 we’re running 13 percent above last year’s pace, so South Korea is a very good customer. American exporters need to understand the outlook for South Korea’s economy in order to make business plans and consider contingencies.
Japan has had some difficult times, but its economy is still vitally important to many American businesses. Our exports to Japan totaled $60 billion last year, and so far this year they are running 10 percent higher, despite the problems caused by the earthquake and tsunami. What does the future hold for U.S. companies doing business with Japan?
China’s economy is increasingly important to many American businesses. Even if your company doesn’t export, you may be selling to another company that depends on China for a significant portion of its revenues. I’m not a China expert, but one of my clients asked for some insight with a business perspective on China, Japan and South Korea, so in this series of posts I’ll share what I think corporate executives needs to know about these economies.
Consumer spending fell and gradually recovered–-but that’s not the whole story. Stressful times change the composition of spending as well as the total level, a lesson that all business leaders should understand. Earlier this year I spent some time with telecom industry leaders who gave me a great example of consumer shifts.
Should a business buy its own building in this market? A small business owner recently asked me that very question. I think it’s a great idea to consider in many areas, given the weak real estate market, but it’s not a slam dunk decision.
Real estate markets are unbalanced in most parts of the country: vacancy is too high, but construction is too low. That sounds contradictory, because construction should be low when vacancy is high. Looking forward, however, we’ll find insufficient supply when the economy improves.
Underlying this view of real estate is an economic outlook (more details in my Economic Forecast 2012-2013) for moderate growth in the coming two years. We won’t have enough growth to get us back to feeling good again. The unemployment rate will remain above normal, but declining to about 7.5 percent. Moderate economic growth will increase demand for all kinds of real estate, both residential and non-residential.
The current pace of construction is well below net absorption in most parts of the country, pulling the vacancy rate down. Net absorption should pick up in 2012, but the pace of construction won’t keep pace. Most construction planning is going on in cocktail hour chatter, not formal discussions with architects and bankers. Money is still tighter than average, though not quite so hard to come by as a year ago. Many developers lack the equity that their bankers want, especially with so much doom and gloom pervading the country. The key fact to remember, however, is that demand for space can grow much faster than space can be built. This applies in spades to downtown office towers, and also in less dramatic effect to suburban office, industrial, flex space and retail.
We’ve had high vacancy rates and low construction in the past. What usually happens—but isn’t happening now, at least not yet—is that developers look forward, see the tighter rental market, and then begin speculative projects. This reduces the swings between high vacancy and low vacancy. Instead of the market tightening to an extreme, low vacancy rate, the new speculative supply satisfies the rapid increase in demand. Because that’s not happening now, we’ll see a pronounced move to a landlord’s market in a few years.
Past real estate cycles have been dominated by interest rate swings. All we have now is downward creep in long-term interest rates for those with good credit, and no loans available to those with less-than-great financials. Going forward, long-term interest rates will rise but not to such high rates that development is choked off. The key issue is demand for space.
The biggest risk to Main Street America today is the European financial crisis. Over the past decades United States exports have increased substantially, now totaling about two trillion dollars a year. When adjusted for inflation, our exports have doubled since 1996, tripled since 1990, quadrupled since 1987. Most of today’s business leaders gained their experience in a time when international trade played a much smaller role in the economy. The news from Europe is tedious, for sure, greatly complicated and changing daily. The big picture is simple, however: Europe is on the brink of recession. A financial collapse on the Continent will clobber many United States companies, reducing their need for offices and industrial space, in turn reducing consumer spending, retail space demand, and families’ ability to pay for housing.
The most likely forecast is that Europe muddles through its problems and thus the United States enjoys moderate but not great economic expansion. Contingency planning for the unpleasant alternative is vital, not just for giant exporting corporations but for local real estate professionals as well.
Free Monthly Newsletter The Businomics(TM) Newsletter keeps you up to date in a simple graphical format. We'll email you two or three pages of charts once a month, with Bill's comments. Skim the newsletter for two minutes and you're up to date. View a sample and then sign up.