War Impact on Supply Chains Downplayed

Few companies expect short-term disruptions from conflict, but leery of long-term economic effects, AMR survey shows

Boston, MA — March 24, 2003 — Most U.S. companies do not anticipate major business disruptions from the war in Iraq, but they are leery of the potential long-term impact that the war could have on the domestic economy, according to a survey by technology consultancy AMR Research.

The "FastFacts" survey by AMR showed that U.S. companies do not expect an economic expansion to begin anytime soon, with enterprises expressing concern that the war could have an impact on consumer spending, which drives nearly three-quarters of the world's largest economy.

Service organizations, in particular, are more likely to be concerned about consumer confidence and spending. "The consumer confidence numbers are tracking at 10-year lows," notes AMR analysts David O'Brien and John Bermudez, "although consumer spending has maintained its steady rise, even through the economic slowdown."

The consultancy predicts that the degree to which consumer spending holds up over the next two months — a key issue for the U.S. economy — will depend on an array of unknowable variables, including how fast U.S.-led forces are able to accomplish their objectives in the Iraq war, the risk of terrorist attacks within the United States and the impact of other geopolitical risks, including the situation in North Korea.

Given that level of uncertainty, it is perhaps surprising that AMR reports that most manufacturers have not significantly altered their planning scenarios. Their major concerns, based on the survey, are managing such logistics-related problems as international shipping and travel.

"Of the 35 manufacturers surveyed, 42 percent indicated that international trade logistics (ITL) was the largest business concern resulting from the war," AMR writes. "Only 7 percent said that supply shortages were a problem, indicating that contingency supply plans have already been implemented."

That conclusion jibes with a recent survey of industrial buyers that showed many companies have begun building alternative supply networks as a hedge against potential business disruptions.

The latest Industrial Purchasing Barometer (IPB) survey by Thomas Register revealed that one-third (33 percent) of industrial buyers have looked at alternative suppliers as a result of supply-chain disruption concerns due to such factors as a potential war in Iraq and fears of terrorist attacks.

Additionally, just over one-third (34 percent) of the buyers in the IPB survey reported they have been increasing the number of their suppliers as a result of those concerns, and 65 percent are using the Internet as the primary source for locating alternate suppliers. And 17 percent reported that they are buying more from local suppliers.

In the AMR survey, about 25 percent of manufacturing companies reported that they are holding higher than normal levels of finished goods and raw material inventories, which, O'Brien and Bermudez point out, will depress profits and extend new purchasing triggers. Depressed profits, coupled with uncertain consumer demand, could delay business expansion and capital spending.

Looking ahead, the consultancy advises that while most companies are taking the war in stride, it may be equally important for enterprises to consider post-war scenarios, too, especially shifts in supply chain costs.

"Manufacturers of products requiring high energy consumption or transportation costs may want to consider using supply chain modeling tools to analyze potential scenarios," O'Brien and Bermudez write. "For example, will significantly higher oil prices warrant more stocking locations closer to key customers to minimize less than full truckload shipments? The only certainty is that there is likely to be a lot of economic volatility ahead and much that can affect your supply chain — and this volatility is exactly what these tools were designed to address."