Predictions Concerning the Future of Supply Chains

Stephen DeAngelis

December 15, 2010

The end of the year is always a joyful time for tabloid newspapers. They don’t have to wrench their minds thinking up provocative headlines or pursue off-the-wall stories or compose fabulous fake articles about celebrities or aliens. They simply have to turn their pages over to any number of clairvoyants who are willing to prognosticate about the future. Yogi Berra once purportedly stated, “Prediction is very hard, especially about the future.” Mr. Berra was correct; which is why serious analysts venture cautiously into the realm of prognostication. Knowing that serious people shy away from making predictions, Robert J. Bowman applauds the “brave individuals who stood up before the San Francisco Roundtable of the Council of Supply Chain Management Professionals … and offered their best guesses as to what the future holds” [“Five Fearless Visions of the Future. Well, Maybe.” SupplyChainBrain, 29 November 2010]. Bowman writes:

“Anyone who dares to predict the future must long for the prehistoric days before the invention of the internet. Back then you could make the wildest statements imaginable, and no one breathed a word when you turned out to be wrong. On the other hand, you could claim to have predicted some earthshaking event without fear of contradiction. Who kept copies of those ratty old supermarket tabloids from years back? Now, thanks to the Web, the most offhand comment lives forever in cyberspace.”

Bowman reports that predictions proffered at the Roundtable were immediately “subjected to an ‘agree’ or ‘disagree’ vote by other panelists, then the entire audience.” I agree with Bowman that such a format is intriguing and probably highly entertaining for the audience. Bowman continues, “Here, then, are this year’s bold predictions, accompanied by appropriate comments from naysayers. Feel free to chime in with your own opinions.”

Prediction: ‘The cloud is here upon us,’ said Mark Buck, supply chain and procurement leader with Bio-Rad Laboratories, Inc. Within five to seven years, he believes, traditional enterprise resource planning systems will be a thing of the past. Major software applications will be hosted off-site by vendors, while companies will only need to keep some basic internal capability for tracking financials.

Or not: Buck’s view garnered near-unanimous agreement from the audience. But attendee David Ginsberg, vice president of supply chain management with Sonic Manufacturing Technologies, cautioned that some companies might have gone too far down the path of outsourcing. ‘Manufacturing has been reduced to a purchase order,’ he said. He thinks businesses will start building back certain internal capabilities, in a trend that could slow the stampede to the ‘cloud.'”

I’d probably take a more cautious view of movement to the cloud. Do I believe it is here to stay? Yes. Do I believe that everybody will be moving their systems to the cloud? Probably not. Just look at the number of legacy systems that still exist in the business world. Looking back eight years (rather than forward five to seven years), I found an interesting article by computer scientist Federico Zoufaly that discussed legacy systems [“Issues and Challenges Facing Legacy Systems,” developer.com, 1 November 2002]. Zoufaly wrote:

“Despite the availability of more cost-effective technology, about 80% of IT systems are running on legacy platforms. International Data Corp. estimates that 200 billion lines of legacy code are still in use today on more than 10,000 large mainframe sites. The difficulty in accessing legacy applications is reflected in a December 2001 study by the Hurwitz Group that found only 10% of enterprises have fully integrated their most mission-critical business processes.”

I’m sure those statistics have improved over the past ten years; but I’m also willing to bet that some businesses still use legacy systems for which they are having a difficult time finding programmers who know the outdated codes in which those systems were developed. That’s why I’m always cautious when I see predictions about how quickly businesses will transition to new software. I’m not even sure that IBM is as optimistic about the movement to the cloud as Mr. Buck. It is tweaking its strategy because cloud services haven’t taken off like many analysts have predicted [“IBM revamps cloud strategy,” by Richard Waters, Financial Times, 31 October 2010]. Waters reports:

“IBM has overhauled its strategy for cloud computing, which involves selling computing services from centralised data centres, in the latest attempt to kickstart a business that it hopes will become a mainstay over the long term. The move reflects a broader rethink by the technology industry as it tries to make one of the most talked-about IT trends more palatable to large business customers, which have so far held back from cloud computing. In its latest revamp, IBM said it would sell cloud computing through its services division, which generates nearly 60 per cent of its revenues. Rather than try to encourage companies to hand all their data to IBM to be stored and processed, the company said it planned to sell individual services from its data centres that could be integrated into a company’s existing IT systems. ‘We’re trying to play to our strengths,’ said Mike Daniels, head of IBM’s services division. The move would leave companies in control of their IT but was meant to bring greater flexibility and lower cost by standardising particular parts of their processes, he said.”

The next prediction is perhaps the boldest of those discussed by Bowman.

Prediction: In the next 12 to 18 months, companies that blindly outsourced their manufacturing to Asia will start bringing some of that capability back to the U.S., said Jim Miller, vice president of worldwide operations with Google Inc. This ‘general backlash against outsourcing’ will be driven by a number of factors, including inflation of the Chinese currency, new geopolitical uncertainties, the push for greater sustainability and cleaner technologies, and political pressure from domestic sources.

Or not: ‘A lot of companies were accustomed to offshoring,’ said panelist Lisa Bugajski, senior director of supply chain operations with Adobe Systems Inc. ‘Bringing it back to the States is too costly.’ Miller agreed that companies will find it tough to unravel the ‘ecosystem’ that was created in the move toward outsourced manufacturing. Audience member Mike Hamilton, senior global account director of Ceva Logistics, said the prospect of higher taxes on business in the U.S. will serve as a barrier to ‘on-shoring.'”

I’m probably in the “or not” category on this one. Higher business taxes may represent a barrier to on-shoring, but it is not the only barrier. While there will be some return of manufacturing as the “China price” rises, many companies have disposed of factories and other property used for manufacturing. Purchasing new land, buildings and equipment will not be cheap (despite the depressed real estate market). Hiring new employees will probably discourage some companies as well. Some companies are more than happy to let some outsourced company deal with the HR headaches. On the other hand, a combination of real estate bargains, tax incentives, and rising transportation costs that eat into profits could make this prediction come true for some companies. The next prediction turned out to be non-controversial.

Prediction: ‘We are in the midst of a transition to electronic software delivery,’ said [Lisa] Bugajski. Adobe’s customers no longer want a packaged product taking up space on their shelves.

Ditto: Total agreement from panelists and audiences alike. Said panel moderator Carl Guardino, president and chief executive officer of The Silicon Valley Leadership Group: ‘I think that’s a prediction like the sun’s coming up tomorrow.'”

It’s really hard to argue with that prediction. Electronic delivery is better for customers and suppliers as well as the environment. The next prediction had to do with Chinese supply chain management.

Prediction: From Greg Stein, vice president of supply chain with Better Place, a provider of systems and services for electric vehicles. He believes that a consortium of Chinese ‘new energy initiative’ companies will soon acquire a top ten global third-party logistics provider. Their goal will be to support rapid growth in China’s raw material imports and indigenous automotive industry.

Or not: Disagreement centered on whether Chinese interests would be able to assimilate a marquee foreign player into their distinct culture. Stein replied that they won’t even try; they’ll keep the 3PL’s management team in place and draw on its expertise. But audience member Alan Davis, practice leader with Strategic Solutions Partners, LLC, said the only entity in China that could afford a top global 3PL would be a state-owned enterprise. ‘They prefer to joint-venture with companies,’ he said. ‘I don’t think they see the advantage of having a foreign company on China’s ground.'”

I have mixed feelings about this prediction. China is sitting on a lot of cash and it makes sense that it (through a state-owned business) would want to purchase supply chain expertise. I also agree with Mr. Stein that acquisition of a world-class 3PL would be primarily for external supply chains. The acquiring company would likely draw on expertise from the 3PL company to establish an internal 3PL business that could better cope with the nuances of doing business in China. The next prediction has to do with the semiconductor industry.

Prediction: Hugh Durdan, chief operating officer with eSilicon Corp., a fabless semiconductor company, sees more of a balance between supply and demand in the semiconductor industry next year. Foundries took a lot of equipment offline in response to the global recession, then were caught short when demand bounced back in late 2009 and early 2010. The return of some capacity in 2011 will help to meet that renewed appetite for product, he said.

Or not: [Jim] Miller agreed that supply and demand will likely approach a state of rough equilibrium in the last half of 2011, but he believes the first half will see a continuing correction. ‘The [semiconductor] market will actually get softer before it starts to stabilize,’ he said. Durdan noted that Ireland and other struggling European economies present a nagging short-term problem for chip suppliers. ‘We’re not predicting that the macro-economy is going to grow,’ he said.”

Durdan’s prediction obviously focuses primarily on the developed world’s economy since he predicted “that the macro-economy” is not “going to grow.” Emerging market countries are predicted to have continued growth (with China even strategizing how to limit its growth so that its economy doesn’t overheat). The next prediction concerns increased utilization of electric vehicles.

Prediction: [Greg] Stein sees major progress ahead toward the ‘greening’ of transportation, with large-scale fleet operators making the switch to electric vehicles by 2015. Companies such as UPS, FedEx and Hertz will lead the charge, converting 20 percent of their fleets to electric. Miller chimed in with a related prediction, that the push for green initiatives and sustainability will move from being ‘an exogenous activity in a supply chain to one integrated into mainstream supply-chain strategy and operations.’

Or not: There was little disagreement, although Buck warned against getting too excited about a massive shift by commuters to public transportation. ‘It’s very tough to put Americans into a bus,’ he said. ‘Even in China, they’re buying cars.'”

I agree that transportation companies with significant short-haul business will probably make the switch to electric vehicles for a number of reasons. Electric vehicles are still impractical for long-haul routes. I also agree with Mr. Buck that mass transit is not likely to make dramatic in-roads with the commuting public until it develops an on-demand scheme that meets individuals’ schedules rather than the other way around. The next prediction concerned China.

Prediction: Fifteen years from now, the world will realize that China ‘is not the juggernaut that we make [it] out to be,’ said [Jim] Miller. The nation faces a number of systemic problems, including the prospect of ‘the mother of all real estate bubbles.’

Or not: Don’t be so sure, said [Mark] Buck. ‘China is coming up strong everywhere I see. It’s not temporary.’ But Miller wondered whether the masses of skilled engineers that China is turning out will be true innovators, ‘or are they just exploiting cheap labor? Can they make that cutover?'”

Frankly, it’s hard not see China as a juggernaut, despite the myriad of challenges they face. Will they turn out to be true innovators? Probably. Take a couple of minutes and watch Chinese workers erect a 15-story hotel in less than a week.

Bowman ended his post concerning predictions by noting that last year’s panel members had all changed jobs between last year’s Roundtable and this year’s Roundtable. He asked, “You think any of them predicted that?” The future seldom unfolds as people predict. There’s nothing wrong with that, however, life would be pretty boring if was completely predictable.