The Supply Chain Matters blog continues its series of unveiling 2019 Predictions for Industry and Global Supply Chains. In this Part Ten posting, we focus on our final set of predictions which addresses what we feel will be unique industry-specific supply and customer demand network challenges anticipated in the coming year.
On an annual basis, the Ferrari Consulting and Research Group provides a series of supply chain management focused predictions for the coming year. These predictions are provided to our clients and readers of this Supply Chain Matters blog in the spirit of advising line-of-business, multi-industry cross-functional supply chain management and supporting IT teams a sensing of meaningful initiatives, programs or capabilities we feel will be of importance. The predictions further serve as our continued research and client advisory agenda in the coming year.
The context of these predictions includes a broad cross-functional umbrella of what today is supply chain management, and includes areas of supply chain leadership and strategy, product management, strategic sourcing and procurement, planning and execution, manufacturing, transportation and logistics, online fulfillment.
2019 Prediction Ten: Unique Industry-Specific Supply Chain Management Predictions
Each year, we conclude our annual predictions with unique industry-specific challenges that we believe will be dominant in the coming year. For 2019, we are including the following industry supply and customer demand networks:
High-Tech and Consumer Electronics Industry
We begin our industry-specific prediction with high-tech and consumer electronics supply and customer demand networks for two fundamental reasons. First, this industry has become more and more intertwined with automotive, aerospace, equipment and medical device customer demand network needs due to the increasing product value-chain concentration of electronics laden devices. Because of such expanding dependency, high tech supply networks were already challenged with many component shortages in 2018. The reasons were both supply and demand related. Major suppliers faced with huge capital costs to build new production facilities to accommodate more advanced production and technology support processes have been reluctant to add additional capacity with the current geo-political global trade environment. Building concerns of a slowing of global wide demand or even a global recession in late 2019 does not lend itself to major multi-billion capital investments. Major industry suppliers prefer to be in a capacity-constrained environment to preserve pricing power.
The ongoing plateau of the smartphone market growth affecting industry influencers Apple and to some extent Samsung, has been another catalyst for widespread industry concern. Major supplier revenues and profits have long been dependent on lower margins but higher overall unit volumes. That strategy is now being tested as any significant growth in smartphone production may be limited to emerging markets such as China and India. Such concerns have already prompted both of these major smartphone producers to take initial steps for moving final assembly and component supply production to either lower-cost or tariff protected regions.
The second and perhaps more significant challenge relates to the industry being caught in the crosshairs of ongoing China and U.S. tariff actions and heightened intellectual property protection actions, forcing even tougher decisions in the coming year. Prior rounds of U.S. tariffs of 10 percent on select high-tech and consumer electronic components can jump to 25 percent on both existing and new imports in early 2019 if the two nations cannot find a resolution to current escalating tariff actions. As we pen this prediction, Similar, yet unfounded suspicions have related to equipment produced by Chinese telecommunications providers Huawei and ZTE, which led to the arrest of the CFO of Huawei in December of 2018, prompted by a U.S. arrest warrant on suspicion of cyber-related activity.
The semiconductor design and production segment is especially in the cross-hairs given the strategic importance, supply network complexity, intellectual property protections and criticality to industry-growth and global competitiveness. Recent acquisition announcements involving either U.S. or Chinese based semiconductor firms have been nixed because of declared national security concerns.
We anticipate quite a lot of developments emanating from this industry sector in 2019, with cascading effects to other dependent industries.
Global Automotive Industry
Global Automotive Industry supply and customer demand networks will continue to be challenged by the complex and difficult transition toward producing more electrically powered and autonomous driving vehicles. There is also a growing global demand supply and demand imbalances, along with added costs from steel and aluminum tariffs that will likely manifest even more in the coming year.
In the U.S., consumers continue to prefer larger SUV’s and pick-up trucks in buying choices, and the expensive of demand for entry level or high-end sedans. That trend has prompted all three of the U.S. Big Three manufacturers to declare moves to move away from sedan manufacturing in the U.S. With the Trump Administration’s shunning of most climate-change and mileage improvement initiatives, manufacturers now have to turn to markets such as China or Europe for increased demand for electric and alternatively powered vehicles.
The imposition of steep imported steel and aluminum tariffs, coupled with equivalent higher prices for domestically produced metals, have U.S. auto manufacturers challenged by significantly higher costs. Industry reports indicate both Ford and General Motors have had an incremental cost impact in excess of $1 billion each. The late November 2018 announcement from GM indicating intent to shutter five North American manufacturing facilities and trim its overall workforce by 15 percent provided added industry woes. Politicians were not all pleased with the announcement and the significance.
A carryover from 2018 is the sourcing of adequate and cost-effective supplies of the unique rare earths and metals required to support larger production volumes of electrically-powered autos and trucks.
For China, the globe’s currently largest auto market, the industry is facing a significant capacity glut as Chinese consumers have throttled down their auto purchasing needs. Global consulting firm PwC has indicated that there is now enough capacity existing to produce 43 million auto annually. Demand in the overall domestic market stands at upwards of 17-20 million vehicles. Industry reports point to many idle factories with increasing cutbacks in weekly or monthly production. With China’s zeal to lead in electric car demand, The Wall Street Journal reported in December 2018 that at least 32 new electric car plants or now in the pipeline.
Similar but different forms of challenges surround European automotive firms as consumers are now increasingly shunning diesel-powered vehicles in favor of electric or hybrid powered vehicles. Manufacturers such as Volkswagen are investing billions to accelerate development and introduction of new electric vehicles, while luxury brands BMW and Mercedes continue to deal with the implications of threatened added tariffs and the trade war among the U.S. and China.
Commercial Aerospace Industry
The ongoing challenge remains the scaling-up of volume production of more fuel-efficient aircraft to meet multiple-year backlog of orders. Both Airbus and Boeing encountered supply network shortages in 2018, impacting expected monthly production volumes. The weakest link remains that of aircraft engine manufacturers CFM International, Pratt and Whitney and to some extent, Rolls Royce.
Both global manufacturers have indicated plans and initiatives to considerably improve output in 2019, yet they both continue the delicate balance of having to appease airline and leasing company customers, all of whom are growing increasingly concerned given signs of an uncertain economic outlook for 2019 and beyond.
A further looming supply network thrust for Airbus, and to a lesser extent, Boeing, is the threat of a hard or no Brexit. Commercial aerospace just-in-time supply networks extend across Great Britain and Northern Island.
Consumer and Packaged Goods Industry
This industry continues to struggle with changing product strategies in meeting rapidly changing consumer tastes for more healthy food choices, while also confronting the challenge of direct-to-consumer online distribution of products.
Extended supply and production networks need to be more responsive and aligned to continual market segment and distribution channel changes and needs.
The continuing threats of added industry M&A disruption and increasing CEO turnover are likely to continue in the coming year. We anticipate an additional challenge in attracting new supply chain and other line-of-business talent if the industry continues to have an overall focus toward cost reductions.
Pharmaceutical and Drug Industry
We have been a long-time critic of the dysfunction and stakeholder conflicts that exist across pharmaceutical and drug industry supply and patient healthcare fulfillment networks. The overall industry suffers from conflicting objectives regarding profitability, costs or service level needs. The industry’s drug pricing models remain under intense pressure, especially in the United States, as are calls for stricter oversight and monitoring of opioid drug distribution.
Throughout 2018, one of the most dominant themes percolating across industry segments was the presence of industry disruption among and concerning different segments. Our prediction is that beginning in 2019 and extending over the 2-3-year horizon, meaningful and constructive disruption will manifest into far different supply can patient demand network models.
The catalyst has centered on several ongoing industry developments.
One focuses on Amazon’s business initiatives and likely added presence or influence into the pharmaceutical and drug retail distribution supply or demand network sectors in the not-to-distant future. In January 2018, a partnership was announced among Amazon, Berkshire Hathaway and J.P. Morgan to improve healthcare costs and services for in excess of one million employees among all three companies. The alliance included the formation an independent, not-for-profit company to develop technology solutions to simplify the health-care system. The New York Times characterized the development as follows:
“The alliance was a sign of just how frustrated American businesses are with the state of the nation’s healthcare system and rapidly spiraling costs of medical treatment.”
That was followed by Amazon’s acquisition of PillPack, an online pharmacy that both packages and delivers presorted doses of drugs and medicines, with licenses to ship prescription drugs within 49 U.S. states.
CVS Health’s $69 billion move to acquire health insurer Aetna is by our lens, a further sign of pending industry disruption that will eventually influence industry supply and demand fulfillment networks.
In addition to changes in the industry stakeholder developments noted above, industry supply chains will again have to respond to item level tracking and verification requirements outlined by the U.S. Drug Supply Chain Security Act that was enacted in 2013. The industry will approach six years since this legislation was passed, and in November of 2018, the U.S. Federal Drug Administration (FDA) finally issued preliminary guidelines for item level visibility and traceability standards, again without a definitive enforcement date.
It would seem that this industry has the most opportunity to be able to leverage advanced technologies such as Blockchain, AI and machine-learning to address the challenge of item-level traceability and accounting. Perhaps 2019 will be the year of process breakthrough. We believe some answers will makes themselves evident in the coming year.
This concludes our full series of highlighting all ten of our 2019 Predictions for Industry and Global Supply Chains. Be advised that all ten of our 2019 predictions, along with additional updated content, will appear in a Research Advisory available for complimentary downloading from our Research Center in early January. We will alert readers when the report is available for downloading.
Again, we welcome reader feedback on our predictions along with submissions of added predictions in specific industry settings.
In this final day of 2018 we take this opportunity to extend to all of our readers, sponsors and clients our best wishes for a productive and rewarding New Year.
We have new changes to unveil in the coming weeks included added blog sponsors and fresh new research insights and content. We appreciate your continued readership and sharing of observations and insights.
Happy New Year
Bob Ferrari, Founder and Executive Editor
© Copyright 2018. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
