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Red alert! Red alert! – Supply Chain Prediction 2013 is beginning to materialize…

Earlier this year in Feb 2013, I had made my prediction for the Supply Chain of 2013 – You can read it here in : Predictions for the Supply Chain in 2013.

In that post,

Well, I have my prediction too for the supply chain of 2013 (and 14 and 15 too). If anything I’d call it the rise of the Supply Chain Currency Wars. The first shot of this new phase of global currency wars was launched by Japan a week or two ago. While it will start slowly, over the next few years, this sort of tit-for-tat devaluation will play havoc with global supply chains especially the one’s with finely tuned cost calculations justifying the location of factories and/or distribution centers.

Devaluation of currencies over a matter of couple of quarters and in-kind retaliation is going to drive up financing risk in the supply chain. Were such a scenario to come to pass, then supply chain operators need to nail down some other variables so as not to have all the variables in a supply chain in a volatile flux.

Big Data – Nyet. Bigger and Badder visualization – Not a chance.

Increased volatility, upset cost calculations – Yes, sir – that’s for breakfast, lunch and dinner around the corner. Almost all the Emerging Market countries (such as BRIC) have entered a period of flux, not unlike what the Nutty Market countries at the periphery (Egypt, Syria etc) entered into roughly 2 years ago. This flux in the Emerging Markets – both China and India have received a lot of foreign investment in the past years.

So take one scenario : As projected growth and real growth decline, these countries will be subject to capital outflows. This is why, devaluation of the currency is the only way out for countries that constitute the manufacturing base of the world – the hope would be that devaluing their currency makes their exports cheaper and thus keeping the growth engine going. However, this is a problem for all other developed countries other than the US.

Capital outflows from emerging markets need to go somewhere. Where? You have only two choices – Bonds or Equities (well, there’s a third – Dollars). As the Fed ramped up talk about tapering the Quantitative Easing, yields have spiked for US Treasuries. Remember that if the yields spike too much, governments at all levels in the US (local, state and federal) will essentially stop functioning as they have promised to i.e. the inability to finance and roll over maturing debts at spiking rates. Equities have doddering at ever higher and higher valuations – buying into the markets at these levels is asking for trouble.

If it is bonds that these capital outflows crowd into – yields come down and everything is kicked down the road for a few more years. If it equities that these capital outflows crowd into – the markets are buoyed for a little longer with the attendant desire for the wealth effect that the Fed has been hell bent on creating.

Then the cycle reverses again intolerable equity valuations or dampened yields force capital outflows from the US back outwards in search of return.’

So what do Currency Wars mean for the supply chain? Take your pick: Disruptions, Volatility, Uncertainty, Wild swings in valuations and costing, Sourcing variations that inevitably lead to quality variations.

In one word : Variability. That’s the bane of any operation.

Why currency wars happen?

First Ms. Lagarde and now Mr. Bernanke (in the recent testimony on Capitol Hill) assure us that there is no currency war happening. Well, that’s true on the face of it.

However, why do currency wars begin? Because they work. Initially. Unless you’re willing to say the following that the populace of an advanced economy is going to sit back and watch their exports and by implication their jobs affected. But you might say – China has been manipulating their currency for at least a decade.

However, I think the issue with China is that it serves primarily as a low cost manufacturer by default for most of the advanced economies. While each developed economy didn’t particularly like the idea of currency manipulation by China, it affected each equally, more or less. This is quite different when each developed economy is trying to jumpstart their economies and boost exports by devaluing their currencies. The first few actors will benefit from this practice and the longer that these activities persist, the effects die down.

But please be under no illusions – these are desperate measures that have pricing volatility effects on every supply chain.

Amending the Supply Chain Prediction…

NOT!!!

However, here’s Ms. Lagarde of IMF : Lagarde sees Currency Worries, Not ‘War’.

"There’s been lots of talk of currency wars, and we have not seen any such thing as a currency war. We’ve heard currency worries, not currency wars," said Lagarde. "We’ve not seen confrontation but deliberation, dialogue, discussions and clearly this G-20 meeting has been extremely helpful and productive."

Lagarde’s comments echoed those of the G-20 nations on Saturday, who declared that there would be no currency war. This has taken the heat off Japan, which has been criticized for its expansive policies that have driven down the yen following the election of Prime Minister Shinzo Abe.

We’re all diplomats for now. Like I said in my prediction, we’ll first take the time to get this wrong to the fullest extent possible before we admit to the possibility that it was a war all along. So far we have no confrontations but deliberation, dialogue and discussions only. But confrontations arise from accusations – so until we see all sorts of accusations thrown about, it’s quite alright to be in the mode of Supply Chain worries.

Like this kind:

Bank of Korea Governor Kim Choong-soo told the Wall Street Journal on Sunday that he was concerned over the weakening yen’s impact on his country’s economy. The governor stressed the importance of strengthening financial safety nets to give smaller nations the confidence to not have to stockpile currency reserves.

However, be not alarmed when such protestations erupt from the smaller economies. When you sniff the first wave of accusations between the larger economies, you’d do well to have already taken a long hard look at every and any extended supply chain and start diversifying options – especially options that have a strong currency component to it.

Predictions for the Supply Chain in 2013

SC Digest has posted a round up of Supply Chain Predictions for 2013 :

Part 1: Predictions from Supply Chain Gurus for 2013 – 1

Part 2: Predictions from Supply Chain Gurus for 2013 – 2

The predictions from supply chain gurus span the gamut from Big Data, Analytics, Dealing with longer lead times, Talent, South America and Africa. And e-tailers?

Well, I have my prediction too for the supply chain of 2013 (and 14 and 15 too). If anything I’d call it the rise of the Supply Chain Currency Wars. The first shot of this new phase of global currency wars was launched by Japan a week or two ago. While it will start slowly, over the next few years, this sort of tit-for-tat devaluation will play havoc with global supply chains especially the one’s with finely tuned cost calculations justifying the location of factories and/or distribution centers.

Devaluation of currencies over a matter of couple of quarters and in-kind retaliation is going to drive up financing risk in the supply chain. Were such a scenario to come to pass, then supply chain operators need to nail down some other variables so as not to have all the variables in a supply chain in a volatile flux.

In summary, while global supply chains can tolerate some uncertainty, it isn’t quite clear to me whether it can tolerate the sort of volatility that global currency wars entail. The Gold standard of Supply chains might mean something entirely different in a couple of years time.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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