The Future of Supply Chain Management, Part 4

Stephen DeAngelis

December 21, 2012

I love this time of year. Brave pundits sharpen their pencils and their wits predict what the coming year might hold. Such predictions always provide food for thought and often provide some intriguing insights as well. One of those brave prognosticators, the individual next up in this series looking at what might unfold in 2013, is Bob Ferrari. He offers up ten predictions regarding global supply chains in the coming years. In this post, I’ll examine what Ferrari has to say about his first five predictions: #1) Yet another year of global challenges to support revenue and profit growth; #2) Stabilized and potentially reduced inbound commodity prices, but certain exceptions in 2013; #3) The renaissance of U.S. based manufacturing will continue; #4) For manufacturers and retailers, supply chain talent retention, management and development will remain a significant problem across global supply chains, with special emphasis in China and Asia; and #5) Two industry supply chains, B2C and the Aerospace Industry, will undergo more significant challenges or increased turmoil in 2013. [“Supply Chain Matters 2013 Predictions for Global Supply Chains,” 14 December 2012; Part Two, 18 December 2012; Part Three, 20 December 2012]

Prediction #1: Yes, yet another year of global challenges to support revenue and profit growth

Ferrari writes, “The world economy continues to provide an environment of high uncertainty and 2013 will undoubtedly provide more reinforcement.” With America poised to jump off the so-called fiscal cliff as the new year begins, and other developed countries facing similar financial woes, I dare say that Ferrari’s assessment and prediction are accurate. He continues:

“The latest economic outlooks published by both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) each strike a very cautious and guarded tone. The IMF notes that the world economy has ‘suffered new setbacks”’ in 2012, and forecasts a ‘gradual strengthening of activity from the relatively disappointing pace of early 2012.’ The Economist in its The World in 2013 outlook issue for 2013 indicated that ‘huge swathes of the world seem to be embarking on a Japanese-style experiment with long-term stagnation.'”

Ferrari insists that “the implication for global supply chains is an obvious need to be able to forecast and actively monitor product demand by individual geography and by country.” With so much of the world in a financial malaise, Ferrari’s correct that planning and forecasting are going to be difficult this coming year. The global economy will only grow if consumers open their pocketbooks; however, Ferrari notes that “continued periods of global economic uncertainty eat away at consumer confidence. … Eroded consumer confidence inclines consumers to not spend, which has an implication for many industry supply chains. With the only current 2013 bright spot being developing markets and China, that is probably where global supply chain product fulfillment will concentrate in the coming year.”

Prediction #2: Stabilized and potentially reduced inbound commodity prices, but certain exceptions in 2013

Ferrari reports that commodity prices throughout 2012 were fairly stable and he predicts that pattern will continue through 2013. The primary reason that commodity prices will remain stable, he argues, is because the global economy will remain stagnant (as just discussed). The one exception to this trend, he believes, will agricultural commodities. He explains:

“The one significant exception is food related costs. Severe drought conditions in the U.S. during the summer of 2012 drove dramatically decreased harvests for corn, wheat and other agricultural commodities. Asia’s overall rice crop has been impacted by continued severe weather and floods throughout the monsoon season. Already there are indications of a rainy spring among South American food producing regions. Increased commodity food costs have therefore resonated to other dependent supply chains such as meat and poultry products, which will continue well into the New Year. Any continued occurrence of severe weather or drought conditions in 2013 will only add more pressure for increased commodity food costs.”

Even though he predicts fairly stable commodity prices, Ferrari nevertheless believes that procurement teams will feel a lot of corporate pressure “to dive deeper into indirect materials and services procurement spend levels, to seek out incremental cost savings opportunities in addition to direct materials spend. This will drive more interest in analysis tools that can identify such opportunities as well as more innovative programs to consolidate buying needs among groupings of companies to leverage price negotiations.”

Prediction #3: The renaissance of U.S. based manufacturing will continue in 2013, but further momentum is dependent on addressing key challenges in legislative and industry barriers and the new transformation of manufacturing.

This Ferrari prediction is more optimistic than one made by Craig Cuffie, vice president of supply chain and chief procurement officer with Clearwire Communications, and discussed in Part 2 of this series. Cuffie predicts that there will only be “a ‘limited’ amount of re-shoring of manufacturing from China back to the U.S.” Ferrari writes that his optimism is based on a number of factors. He writes:

“A boom in North American natural gas production, coupled with economic factors related to exploding double-digit growth rates for direct labor in China and other low-cost manufacturing areas, along with perceived instability of currencies such as the Euro and the Japanese yen, have fueled the current U.S. based manufacturing renaissance. … The Financial Times notes that manufacturers have announced more than $90 billion of investments in the U.S. as a result of the attractiveness of energy costs. This trend was especially prevalent in asset-intensive manufacturing, and included petrochemical, fertilizer, steel and heavy equipment industry. Since the start of 2010, U.S. industrial production has increased 12 percent in the U.S., while falling 2 percent in China.”

Ferrari tempers his optimism by noting that “U.S. legislators, private industry and trade union partnerships must address remaining identified structural issues to insure this renaissance continues.” Among those structural issues, Ferrari lists more intelligent application of existing regulations, transportation infrastructure improvements, streamlining the building permit process, and addressing training and education to improve the skill level of American workers. He concludes, “Manufacturers continue to lament that they cannot fill existing needs for skilled manufacturing people in the U.S. … A globally competitive manufacturing presence implies continuous innovation in process and products as well as the existence of an associated vibrant domestic supply chain. For many industry supply chains, that will continue to unfold across the U.S. in 2013.”

Prediction #4: For manufacturers and retailers, supply chain talent retention, management and development will remain a significant problem across global supply chains, with special emphasis in China and Asia.

Ferrari is not alone in worrying about the shortage of skilled human capital in the supply chain sector or predicting that it will continue. Adrian Gonzalez made a similar prediction in Part 3 of this series. Ferrari writes:

“The talent skill gaps are clearly impacting global supply chains. In spite of high unemployment levels across the globe, finding the right people with honed skills has become a recognized problem, which leads to a supply problem. The challenge is articulated for needs in managing the broader supply chain as well operations at the shop floor. If the global economy were to grow more dramatically, the problem would be even more acute. At executive leadership levels of supply chain, the gaps are identified in the need for broader leadership skills in the areas of supply chain strategy, change management, regulatory compliance and implications and tradeoffs of decision-making. The current rapid clock speed of business coupled with the numerous challenges that supply chain teams must address each day, or each week, now require skills that extend beyond singular functional knowledge or depth. These talent skill needs are especially identified as lacking in developing markets or high volume manufacturing regions such as China and Southeast Asia. Those professionals, who have acquired necessary skills, find themselves in high demand and jump to other organizations, causing additional frustrations with the organization that made the investment in training. … Manufacturers, especially small and mid-market firms, have turned to higher levels of automation and process sophistication to meet higher customer expectations and needs for increased productivity. The impact has been on the need for more math and process-focused skills among operators.”

Even he admits that training programs are expensive, he believes that industry has few alternatives to beefing up their in-house programs.

Prediction #5: Two industry supply chains, B2C and the Aerospace Industry, will undergo more significant challenges or increased turmoil in 2013.

For his fifth prediction, Ferrari gets very specific about two industries. Concerning B2C challenges, he writes:

“In 2012, the B2C sector continued to be impacted by the momentum in online multi-channel, or what some refer to as either Omni-Channel or Cross-Channel commerce. Retailers were impacted as consumers continued to shift their buying preferences to online channels and at the same time, demanded more options on order fulfillment, including both in-store pick-up and same-day delivery. According to the numbers from marketing analytics firm comScore, Inc., U.S. retail e-commerce spending was up nearly 16 percent in the first 26 days of November 2012. Cyber Monday online sales were estimated to be nearly $1.5 billion, a corresponding 16 percent increase from last year. It is no surprise that major retail executives such as Rob Walton, the Chairman of Wal-Mart have begun to openly declare that massive transformation is underway in how consumers will shop for goods in a ubiquitous connected world of mobile devices and shopping tools.”

Ferrari goes on to predict “at least one or two failure announcements concerning high visibility retailers” in the coming year. He concludes:

“We anticipate that the B2C sector in 2013 will feature more significant organizational realignment that addresses singular supply chain wide inventory investment across multiple fulfillment channels, including both actual and drop-ship inventory response programs. Once and for all, there will be a breaking down of the organizational barriers among traditional and online retail organizations among a singular retail firm. We expect a more vocal and balancing voice of the supply chain vs. the current predominant voice of marketing and merchandizing.”

Business consultants have repeatedly insisted that traditional industrial-age organizational silos are ill-suited for information-age operations. Let’s hope Ferrari is correct in predicting that barriers will begin to tumble. Concerning the aerospace industry, Ferrari writes:

“Aerospace supply chains struggled with very active challenges in 2012, which we predict will continue throughout 2013 as major OEM’s Boeing and Airbus exercise plans to increase overall supply chain volume production by an unprecedented 40 percent level by 2015. Industry executive have publically acknowledged that global aerospace supply chains are stressed. There has been admission that the current backlog of sold new aircraft is ‘disturbingly healthy’, noting that it is hard to sell more airplanes when potential delivery times extend out in years, almost 8-10 years at this point. There is finally open admission that the industry has a capacity problem that needs to be addressed which implies a need for expanded supplier process capability and increased investments in production output capability.”

Having to deal with the challenges of a “disturbingly healthy” business outlook is a good thing. CEOs dream about having those kinds of problems. Ferrari’s point is that if the challenges aren’t successfully met, the industry could suffer significant downstream consequences.