When Eyjafjallajokull erupted last spring, a significant portion of Europe's air space was shut down by ash, and the world's eyes were on the airline industry. Less noticed was the impact on global supply chains. One volcano highlighted how tightly integrated global supply chains are around the world. On a larger, more significant and drawn out scale, the global economic crisis of 2008 and 2009 provided significant disruptions and high demand volatility in supply chains for companies across many industries. In a number of sectors, demand and supply almost came to a halt, forcing companies to enact short-term measures to tightly manage inventories, costs, and cash flow. Compare this with early 2010. As the global economy continues to recover, most of the companies now believe there will be a significant upturn in demand from their customer base as well as a significant increase in company profitability over the next few years. A survey conducted by PRTM Global Supply Chain Trends 2010-2012 with 350 global participants, including from the Middle East, revealed that, generally, senior management in the GCC are optimistic about economic recovery, but their global operations are ill-prepared to meet a significant upturn in demand. However, the optimism may not show the whole picture, and that is a concern. The findings indicate that many companies lack the capabilities critical for meeting a growth in demand or for managing an increasingly complex international supply chain. Driven by short-term demand, many companies did not strengthen critical capabilities during the recession. Only a small percentage truly improved supply chain flexibility and processes needed both to capture an increase in demand and to better manage high volatility. While optimism abounds - more than half of survey respondents expect average gross margins to surpass 10 percent over the next three years - three-quarters of respondents cite demand and supply volatility coupled with poor forecast accuracy to be the biggest roadblocks they currently face in capturing profits from the economic upturn. While executives worldwide are gearing up their supply chains for the expected recovery in global demand, the Middle East represents a special case. Blessed with a central location, and a distinctive mix of domestic and international market focus, this region has enjoyed continuous strong growth and escaped some of the recent global economic turmoil. Yet the Middle East faces its own set of supply chain trends and challenges over the next few years. Notably, the majority of Middle Eastern executives that were interviewed expect their gross margins for the next two years to be very similar to those of the last three years. By contrast, the vast majority of respondents from the Americas, Europe, and Asia said they expect their gross margin to grow significantly, essentially catching up from the decline in 2008 and 2009. This difference can partly be explained by a 350 million-consumers-strong domestic market focused on less volatile industries such as petroleum products, food and beverage, agricultural/dairy products, and textiles. However, the regional trends that were identified may not capture the whole picture. A recent Dubai International Financial Centre (DIFC) analysis reveals that only 11.6 percent of the merchandise trade from the Middle East is domestic, while 43.7 percent of trade is conducted with developing countries. At the same time, trade between emerging economies has doubled over the last 20 years, with developing countries now accounting for 80 percent of trade growth. The region has strong logistics and distribution capabilities, with a well-established third party logistics industry and continued infrastructure investments. The Emirates, for example, has just opened the Dubai Logistics Corridor, the world's largest airport and intermodal platform. It is ranked 24th out of 155 countries for logistics efficiency by the World Bank's Logistics Performance Index. Bahrain, Kuwait, and Saudi Arabia are not far behind (32nd, 36th and 40th respectively), with large logistics initiatives of their own. That said, the region has some difficult challenges to contend with. The local supply base for raw materials (other than oil and gas) and manufactured components is narrow. In addition, the Middle East lacks regional tariffs and trade agreements, which puts it at a disadvantage with the EU, NAFTA, and ASEAN blocs. Seaports across the region do not use the same standards for diverse elements such as package sizes, customs requirements, and bank guarantees. No less important is the paucity of skilled resources as compared with nearby Europe or Asia, and the resulting higher labor costs. Although the Middle East is geographically positioned at the crossroads between East and West, the distance from the European and Asian markets poses a significant disadvantage when Middle Eastern companies must compete with local players. Within the Middle East itself, countries vary widely in their supply chain capabilities. Cold chains (a temperature-controlled supply chain), for example, range from robust in one country to virtually nonexistent in another. Across the region, ample opportunities for improvement exist, including the facilitation of cross-border movements and customs and the reduction of paperwork. Now is the time to act. Middle East companies should focus on: finding end-to-end supply chain opportunities, as opposed to just logistics; continuing to develop supply chain capabilities across functions and technologies, and integrating those capabilities with those of suppliers and customers; developing supply chain talent by investing in training; and preparing for global competition by finding market niches that are suitable for export, while optimizing the cost-to-serve of the domestic customer base. While supply chain managers today spend a great deal of time making plans to mitigate risk, the emphasis over the next 6-12 months should be on bouncing back from disruptions. - The writer is director, PRTM Management Consultants. __
