Supply Chain 2012: What Lies Ahead?

Stephen DeAngelis

December 28, 2011

This is the time of year when people start thinking about the months ahead. In this post, I’ll look at what some respected analysts and business leaders are saying about the supply in the year ahead and beyond. Perhaps the boldest of the prognosticators is Bob Ferrari, who makes ten predictions about the global supply chain in 2012. [“Supply Chain Matters Blog 2012 Predictions for Global Supply Chains- Part One,” Supply Chain Matters, 9 December 2011] He begins with the economy:

  • A continued spillover of high uncertainty of events related to the global economy will make business growth highly challenged, and thus provide another challenging year in global supply chain management.

Based on the fact that politicians in Washington lack both the courage and common sense to tackle pressing budget issues, I would say that Ferrari’s first prediction is probably a safe one. Although politicians in other areas have shown slightly more courage in tackling economic issues than Washington, it’s fair to say that the global economy is going to be lackluster through most of next year. The fact that it is a presidential election year in the U.S. doesn’t help. Politicians don’t want things to get better for fear that an improved economy will help one or the other party. Ferrari next turns to commodities and supplies.

  • Commodity and component price increase levels experienced in 2011, with some exceptions, will moderate in 2012, but procurement teams need to maintain a keen eye on both pricing and supplier health and performance and supply network agility.

Let’s hope he’s right. Volatility makes life miserable for everyone. In another post, Ferrari explains why he made this prediction. [“Supply Chain Matters 2012 Predictions for Global Supply Chains- Part Two,” Supply Chain Matters, 9 December 2011] He writes:

“Moving into 2012, all indications point to continued moderation of inbound price hikes, especially if economic output activity begins to falter. The U.S. Department of Agriculture has forecasted food inflation levels to moderate in the range of 2.5 to 3.5 percent in 2012 over the 3.5 to 4.5 rate increases experienced in 2011. Similarly, metals prices are expected to moderate or decline, especially if world economic output takes a dramatic negative turn in 2012. The October 2011 Manufacturing ISM Report on Business reported the ISM Prices Index as 15 percentage points lower than September, with areas such as plastics, primary metals, electrical equipment, chemicals, papers, among others, all indicating lower prices.”

His next prediction involves supply chain sourcing and risk management.

  • As a result of the major supply chain disruption events that occurred throughout 2011, senior management among global manufacturing firms will call for a re-visit of supply chain component and finished goods outsourcing strategies, weighing overall risk as well as low cost parameters.

In another post, Ferrari explains what he thinks will occur in this area in the coming year. [“Supply Chain Matters 2012 Predictions for Global Supply Chains- Part Three,” Supply Chain Matters, 12 December 2011] He writes:

“Attention will turn towards increased scenario planning, particularly for low-probability but high impact events along with the need to have more built-in redundancies across the global supply chain. … There are now increasing indications that the major global insurers and reinsurers will re-evaluate weather and natural disaster risk profiles in certain geographic regions that have had recent multiple occurrences or have the potential for increased natural disaster risk. Insurers will begin to request more detailed information related to global supply chain sourcing presence. Depending on that re-assessment, the criteria for global sourcing of components, contract manufacturing and finished goods may well have to include weighting for increased casualty and business continuity costs associated to a specific geographic region, particularly coastal regions of Asia Pacific.”

There is also a good chance that many manufacturers will reconsider near-sourcing in order to reduce costs, risks, and supply chain complexity. Ferrari next makes predictions about some specific industry sectors.

  • Three specific industry sectors, B2C, Pharmaceutical and High Tech, will be especially affected by significant supply chain challenges or turmoil in 2012.

Ferrari explains his prediction this way:

B2C Sector

“The B2C sector will continue to be impacted by the momentum of online multi-channel commerce and a more technology empowered consumer who demands multiple buying options and service experiences. Retailers have quickly come to discover that their supply chains need to have the ability to respond and execute holistically across all consumer buying channels, including online, in-store, vendor direct-ship, or combinations thereof. …

Pharmaceutical and Healthcare

“An article published in Strategy and Business in mid-November re-iterates that the Pharmaceutical industry must fundamentally re-think its supply chain. The article notes: ‘There is minimal communication, little effort toward mutual improvement, and no real desire to pursue efficiency gains.’ … Frankly, the industry has shown no public signs of resolving a myriad of supply chain issues involving the increased complexity of a global supply chain involving generic and contract manufacturing relationships. Rather than a mentality that views supply chain as a burden of cost centers, the industry must embrace supply chain efficiency and responsiveness, disciplined and meaningful sales and operations planning as a competitive differentiators.

High Tech and Consumer Electronics

“We have added High Tech / Consumer Electronics because of the residual impacts of the devastating monsoon related floods that impacted Thailand and other Southeast Asian nations in the fall of 2011. There are all indications that a significant shortage of hard disk drive components and production capacity will extend to the mid-2102, possibly to through the end of the year.” [“Supply Chain Matters 2012 Predictions for Global Supply Chains- Part Four,” Supply Chain Matters, 13 December 2011]

Ferrari next turns to the concept of control towers. He writes:

  • The concept for ‘supply chain control tower’ coupled with more leveraged use of predictive analytics will come to the forefront, but in 2012 there will be a need for vendors and consultants to focus on market education and early adoption support.

To read more about the control tower concept, see my post entitled Have You Heard about Supply Chain Control Towers? Ferrari’s next prediction is about cloud computing.

  • Cloud computing and managed services options directed at enabling supply chain business processes will continue to gain more traction.

In recent months, Oracle, SAP, and IBM have all paid premium prices for cloud-based companies. To learn more, read my post entitled SAP Heads for the Cloud. Ferrari predicts those acquisitions will continue.

  • Expect additional M&A and partnership activity among supply chain technology and ERP providers as vendors shore up application areas with the best prospects for sustained future growth.

Ferrari next turns to the subject of “counterfeit products, cargo theft, and other scurrilous activities.” He writes:

  • The challenges related to higher incidents of counterfeit products, cargo theft and other scurrilous activities within and across global supply chains will finally motivate government and industry to step-up process standards and corrective mitigation efforts.

To read more about what is being done in the area of cargo theft, read my post entitled Piracy on the Freeways. Ferrari next turns to technology. He predicts:

  • Wider scale leveraging and adoption of in-memory computing technologies among enterprise and specialty supply chain vendors, coupled with broader leveraging of data mining, have the potential to be game changing influences on supply chain business planning and response management.

Ferrari explains:

“This is … an area where the challenges for managing and mining large data volume and the fusing of the physical and digital aspects of supply chain can be brought together. The question is timing and demonstration, and readers should note that we have not affixed a firm 2012 timing for this prediction. The converging forces of a more rapid clock speed of business change, along with senior management imperatives for quicker, more timely and responsive decision-making in response to events, continue to motivate supply chain management teams to shed sequential supply chain planning and execution processes in favor of a combined response management process that is built upon more rapid planning and predictive analytics that anticipate various scenario responses to an unplanned event. Today’s cadence and process-sequential S&OP processes are having some difficulty with keeping up with the current clock speeds of business change. The goal now equates to delivering the most timely knowledge and insights to the point or process of need.”

I like the way that Ferrari refers to clock speeds of business change. The clock is definitely speeding up and decision aids need to keep pace. Ferrari’s final prediction involved mobile technologies and social media. He predicts:

  • The leveraged use of systems of engagement, namely mobility and social media applications within select supply chain, PLM and manufacturing process areas will gain additional momentum.

Another supply chain expert, Lora Cecere, offers up seven trends to watch during the coming year. [“Trends I Am Watching,” Supply Chain Shaman, 28 November 2011] She doesn’t make explicit predictions about these trends, but the fact that she is watching these areas implies that she expects significant activity in these areas. Her first trend deals with big data. She writes:

Big Data Supply Chains. The concept of the big data supply chain is the evolution of technologies to harness the explosion of data and new data sources–sensor data, unstructured text, demand and supply sensing, transactional data forms– to drive a near real-time response. … I will also be closely following the expanding capabilities of in-memory processing and the growing capabilities for reporting and analytics.”

Since my company, Enterra Solutions, is involved with analyzing big data (both structured and unstructured), I obviously agree with Cecere that significant progress is going to be made in this area over the coming months and years. The next trend she will be watching involves outside-in supply chain processes. She writes:

Definition of Outside-in Supply Chain Processes. Today’s supply chain processes are designed from the inside-out (from the enterprise processes of procure to pay and order to cash). Tomorrow’s processes will be designed from the outside-in (from the external environment to internal processes). The focus will be on sensing, shaping and driving an intelligent response. This evolution will take many years and will require the redefinition of current supply chain architectures. I will be following these trends.”

Cecere has been preaching the benefits of outside-in processes for some time. I suspect that her prediction that “this evolution will take many years” is based on some of the frustration she feels that companies are moving faster in this direction. Her next trend involves another of her favorite subjects — social commerce. She writes:

Digital Path to Purchase and Social Commerce. … In October [2010], Altimeter hosted an event – Rise of Social Commerce – to focus on the evolution of social processes to drive commerce. A year later, I find that the goals are still aspirational, but following one of four paths: extension enrichment of eCommerce, social as a new channel, social convergence of mobile/social and digital in the digital path to purchase and open innovation. The intersection of the open and social graph is still largely an untapped opportunity for the customer-centric supply chain.”

For more on this topic, read my post entitled Multi-Channel Commerce Gaining Ground. Her next trend, like her first, involves big data. She writes:

Evolution of Supply Chain Adaptors. To connect the end-to-end supply chain, companies need adaptors for both demand and supply relationships. These adaptors cleanse, harmonize, translate and normalize disparate data types to improve demand and supply sensing. Demand signal repositories (DSR) were an early form of this technology category. Companies are learning the hard way that building the end-to-end supply chain is not as easy as connecting ERP and APS building blocks.”

I believe that Cecere and Ferrari agree on this point. It is why Ferrari predicts that large ERP providers will continue to acquire companies that provide the adapter services described by Cecere. Her next trend to watch involves supply chain security. She writes:

Safe and Secure Supply Chains. With changing legislation for serialization in pharmaceuticals and food safety in global supply chains, I will be following the impact on supply chain execution and the extended supply chain.”

The Food and Drug Administration reports that “every year, 1 out of 6 people in the United States — 48 million people — suffers from foodborne illness, more than a hundred thousand are hospitalized, and thousands die.” As technologies improve and become more affordable, making the supply chain safer and more secure should be a top priority. In questionable economic times, however, anything that adds cost in the supply chain is received lukewarmly at best. Still, I agree with Cecere that this is an area to watch. Her next trend deals with sensing. She writes:

Supply Chain Sensing. Today, supply chains respond. They do a poor job of sensing. While latency in the extended supply chain is weeks (and the concepts of the bullwhip effect are understood academically), the impact is largely ignored in the extended supply chain system design.”

Proctor & Gamble CEO Robert McDonald agrees with Cecere that the future depends on sensing. He told McKinsey Analysts Michael Chui and Tom Fleming:

“We’ve been working with all our data partners to help them understand that our need is for real-time data. For us it’s really constraint theory—understanding where the constraint in our data is and pushing it all the way to the data source. Then, change the data source. For companies like ours that rely on external data partners, getting the data becomes part of the currency for the relationship. When we do joint business planning with retailers, for example, we have a scorecard, and the algorithm is all about value creation. Getting data becomes a big part of the value for us, and it’s a big part of how we work together. We have analytic capabilities that many retailers don’t have, so often we can use the data to help them decide how to merchandise or market their business in a positive way.” [“Inside P&G’s digital revolution,” McKinsey Quarterly, November 2011]

The final trend that Cecere is watching concerns benchmarking. She writes:

Redefinition of Supply Chain Benchmarking. Software as a Service (SaaS) offers companies the opportunity to redefine benchmarking practices to represent the near real-time supply chain potential of peer groups. I will be closely following this trend as SaaS offerings embrace content and global supply chains align to near real time performance signals.”

Since Enterra’s products are cloud-based SaaS offerings, I obviously agree that companies like mine have the potential to change how companies view and use supply chains. Individuals involved in supply chain management should be grateful to analysts like Bob Ferrari and Lora Cecere who have the courage to look into the future and offer their insights. They may not be right in all cases, but their views are an important part of the continuing discussion that must be held if supply chain management is going to remain relevant in the years ahead.