Last of the 2012 Predictions Concerning the Supply Chain, Part 1
March 08, 2012
In three previous posts [Supply Chain 2012: What Lies Ahead? and More Supply Chain Predictions for 2012, Part 1 and Part 2], I presented predictions about the supply chain from a number of supply chain analysts and groups (e.g., Bob Ferrari, Lora Cecere, Peter Marsh, Adrian Gonzalez, Steve Banker, IDC, and Manufacturing Performance Institute). The folks at Supply Chain Digest also annually assemble a group of respected analysts and get them to make predictions about the supply chain for the coming year. This year they asked for predictions from Gene Tyndall, Executive Vice President at Tompkins International, Dr. David Simchi-Levi, a professor at MIT, Jim Barnes, President of enVista, Mike Regan, CEO of TranzAct Technologies, and Marc Wulfraat, President and Founder of MWPVL International Inc. [“Supply Chain Guru Predictions for 2012 Full Text Version,” 15 February 2012] The article begins with the predictions provided by Tyndall. He writes:
“What do we see for 2012? … Let’s consider the following four trends:
1. As the economy improves slightly, the question is whether the changes made by most companies to survive during the multiyear Recession will continue as business as usual. Cost reductions, lean practices, more outsourcing, and tighter control of operating costs and capital made the headlines. Will these continue? I would predict for many, they will. The uncertainty, the risks, and the volatility are continuing. Most management teams have become risk adverse, and they will remain so this year.
2. However, the changing customer/consumer is demanding more, and companies cannot afford to try and meet the new needs with old ways. Multi-channel sales will expand and e-Commerce will grow. The e-Fulfillment strategies and operations are in need of challenging, and innovation. The customers are the drivers of change in these times.
3. Demand-Driven Supply Chains will expand. There simply is no way to grow profitably without transforming supply chains to the ‘new demand-driven’ strategies and operations. As technologies have improved for supply chain visibility, and apps have improved for optimizations across the multi-party supply chains, so have new ways of operating demand and supply. While S&OP advances have made some incremental progress, forecasting accuracy remains elusive. Thus, we need solutions that read POS near real-time and drive supply back across the chain with dramatically improved lead times.
4. And, last but not least, the supply side. What about the return of production to the U.S.? The so-called ‘nearshoring’ to Mexico and other Americas? Despite the highly optimistic predictions of the U.S. catching up to China in 3-4 years in manufacturing, we just do not see that. We do see important gains in U.S. manufacturing, in nearsourcing of some final assembly, especially in Mexico, and more postponement of final packaging, as well as key suppliers to the OEM’s locating more functions to the U.S. But, the sum of all this will still not be significant when measured against the huge gains in China production. This profile will not change until the U.S. provides substantial regulatory relief and major incentives. Most supply chains will continue to involve long lead times and ocean transport. Hence, the focus must be on #3 above.”
I agree with Tyndall that multi-channel commerce is changing the face of retail (especially e-Commerce) and that demand-driven supply chains will expand (driven in part by breakthroughs in how companies can analyze Big Data). I also agree with him that Sales & Operations Planning (S&OP) processes need to improve to achieve better corporate alignment. Although I agree with him that manufacturers aren’t rushing to return to the U.S., there has certainly been a lot more emphasis on that option than there has been in past decades. That will be one area worth watching. Simchi-Levi is next up and he offers six predictions. He writes:
“Some of the issues that have been in the forefront in 2011 will likely dominate the attention of executives in 2012:
(1) Supply chain risk management: The news in 2011 was dominated with the fallout from two major catastrophic events – the Japanese Tsunami in March and the floods in Thailand in September. Companies will focus on understanding their risks, modifying their strategies (very few companies) and creating contingency plans.
(2) Supplier performance monitoring: The demand for more supplier accountability, exemplified by the recent criticism of Apple in regards to work conditions at FoxConn, will require more focus on supplier performance monitoring. This of course is also part of effective risk mitigation strategies.
(3) Manufacturing moves closer to demand: The anxiety over the decline of manufacturing in the US and attempts to understand and revitalize it are taking center stage. Some recent data shows a new trend towards regional manufacturing (see my Sloan Management Review paper on Is It Time to Rethink Your Manufacturing Strategy?) This is driven by oil price, labor cost in developing countries and the risk associated with low-cost-country sourcing and manufacturing strategies.
(4) Implementation of Supply Chain segmentation and flexibility strategies: With the proliferation of channels, products and different customer value propositions, many companies need to segment their supply chain strategy. Indeed, the recent success of Dell, which successfully transformed its supply chain to address these challenges, will encourage other companies to follow.
(5) Investment in sustainability: Many companies are initiating projects for more efficient packaging and sustainability practices. On the legislative front, California approved a carbon cap and trade policy, Australia instituted a new carbon tax and there is talk of a UN carbon fee on cargo ships. Therefore, there is pressure on companies to invest in reducing carbon emissions and sustainability despite the seeming lack of interest at the US federal level.
(6) Technology: Technology will continue to advance on many fronts including:
• Increased use of business analytics – expected boost is likely to come from In-memory technology and investments in this area
• Increased use of RFID for tracking and end to end traceability
• Continued migration to cloud computing
• Innovative use of tablets and cell phones in retail.”
Tyndall and Simchi-Levi agree that multi-channel commerce is changing the face of retailing. They seem to disagree a little on if and when manufacturing will return to the U.S. Other topics raised by Simchi-Levi are subjects I have addressed (and will continue to address); namely, supply chain risk management, supplier monitoring, sustainability, and technology. Good stuff. The next prognosticator is Jim Barnes. He writes:
“As retailers look to increase comp sales they will focus less on ‘least cost supply chains’ but the ‘best managed supply chains.’ Why? Because while a retailer may save $.10 to move a pair shoes by optimizing their transportation they are missing out on $40 gross margin opportunity by improving their in stock % and therefore driving increased comp sales. 2008 and 2009 was about survival 2012 is about improving the customer experience.
“Retailers who have the appropriate planning, assortment and allocation solutions to get the ‘right SKU’ to the ‘right store’ at the ‘right time’ with the ‘right quantity’ will crush their competition. Those who are focused and reducing their ‘reaction time’ which is the time an item is sold to the time it back on the shelf will win the retail game. In 2012 and beyond it needs to be about speed to market, total cycle time reduction which eliminates variability, and therefore reduces inventory.
“I predict that retailers (fashion, highly seasonal, high value) will start to bring manufacturing back to the US. What is worse: paying an extra $20 to make a high end blouse/shirt or losing $100 because you have to liquidate it through a mark down strategy? I am not saying that retailers should bring ALL manufacturing back to the US/Mexico but a hybrid model where retailers can react to lumpy demand. The only way to move from push to pull is by reducing cycle times in the total supply chain. It is obvious easier to forecast when an item takes one week from factory to store then 12 weeks.
“Software companies that I believe get it and will make an impact this year are JustEnough in Merchant Planning, Main Street Commerce in multi-channel order management and allocation, and Empower in store scheduling and work force management. These companies have comprehensive solution suites solving real supply chain problems from source to consumption.”
Although Barnes doesn’t mention Big Data per se, you can’t create the best managed supply chain or get the ‘right SKU’ to the ‘right store’ at the ‘right time’ with the ‘right quantity’ if you don’t have a handle on Big Data management and analysis. Like the two commentators before him, Barnes also discusses manufacturing — in and of itself that says a lot. The next individual to offer predictions is Mike Regan; he makes three:
“1. The rate structure for … carriers as we progress into 2012: we think … carriers will get more aggressive in seeking higher rate increases as the economy improves. The reason for this is real simple. It costs more to operate a truck today, and with … carriers having done a great job in managing their capacity, there will be less equipment to haul freight if the economy continues to improve.
“2. The second thing you are going to have to watch is called the ‘preferred shipper’ area. Specifically, customers and shippers are going to have to look at their operations to see how they can become a preferred shipper with … carriers. One carrier put it best to me, saying, ‘If rates go up, shippers are going to have to look at what we call those “moments of truth” – how easy is it for a carrier to do business with my company?’ The reality is that the easier it is to do business with you, the lower your rates will be.
“3. We believe the issue of supply chain risk is going to be an increasingly important topic throughout the year. Last year we had the earthquake/tsunami in Japan and the flooding in Thailand. There were also some other natural disasters which exposed the fact that as companies continue to shrink their inventories and run in a Lean manner any disruption has a disproportionate impact on a company’s operations.”
Regan agrees with Simchi-Levi that supply chain risk management is going to stay at the top of many executives’ priority lists. Obviously, his focus on trucking gives his predictions a different flavor than the other commentators cited above. I’m a little surprised that Regan didn’t mention the shortage of drivers that will inevitably have an impact on supply chains; especially if, as predicted, wages for drivers may increase as much as 30 percent to attract new drivers into the business. For more on this topic, see my post entitled Trucker Shortage Continues to Garner Headlines. The final individual brave enough to offer predictions for Supply Chain Digest is Marc Wulfraat. He writes:
“The success of Amazon and other Internet retailers like Crate & Barrel is clearly proof that consumers are changing the way that they go to market. To this end, our predictions for 2012 are:
- “Many retailers have outsourced their e-commerce distribution/fulfillment centers and there are significantly differing levels of satisfaction with this strategy. When peak volumes need to be shipped on Black Friday and Cyber Monday, there are plenty of pain-filled stories where product did not get out the door. We predict that more retailers are going to move towards self-distribution to gain better control over their supporting distribution operations, particularly for the Internet retail channel.
- “We predict that the success of Amazon will attract more competition from retailers that operate in niche markets and also from large retailers that have the ability to scale their web store front to include thousands of non-stock items that are fulfilled through supporting distributor-suppliers. Home Depot and Costco are great examples of retailers that have been successful in leveraging supplier-partners to expand their product offering by having the supplier transparently perform the supporting fulfillment function.
- “For the supplier community, it is becoming imperative to provide support for multiple retailer web storefronts and this involves a fair amount operational and technological complexity. The Internet customer expects to receive their shipment within 3 – 5 days when inventory is available and the web store front accepts their order. If suppliers cannot transparently support retailer web store fronts then they will quickly lose market share to competitors that can.
“In short, we predict that 2012 will be another important high-growth year for the Internet retail channel. As such, retailers and their supplier-partners will be spending significant capital and energy to strengthen their supporting distribution operations and infrastructure for this channel.”
Like several of the other commentators, Wulfraat is emphatic about the changes in retail that have come about as a result of e-Commerce. Simchi-Levi discussed the need for supply chain segmentation to meet the challenges of multi-channel commerce and I believe that Wulfraat would agree. The one prediction I’m not sure about is “that more retailers are going to move towards self-distribution to gain better control over their supporting distribution operations.” Some companies have suffered growing pains when taking control of distribution operations and their reputations have suffered as a result. On the other hand, get distribution right — like Amazon — and you gain loyal customers.
Those are some pretty good predictions about what is going to happen in this year in the world of supply chains and logistics. As the year progresses, we are likely to read a lot more about each of the topics raised. Tomorrow I finish off the yearly predictions with some made by analysts at Manhattan Associates.