The Supply Chain Matters blog continues its series of unveiling 2019 Predictions for Industry and Global Supply Chains. In this Part Three posting, we highlight our third prediction which reflects on what we believe will be unprecedented levels of global supply network management challenges in the coming year. Predictions

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.

We initiated this series in a blog that summarized themes and insights included in all ten of our predictions.

Part One of the series highlighted what industry and global supply chain management teams should expect from a global economic outlook perspective.

Part Two highlighted our prediction of alarming talent needs among all functional and technical support areas of supply chain management.


2019 Prediction Three- Unprecedented Levels of Global Supply Network Challenges Will Continue to Concern C-Suite and Industry Supply Chain Senior Executives in 2019.

Prediction Summary

In 2018, we predicted a challenging year for managing direct material costs. While inbound commodity prices were expected to have modest increases at the beginning of 2018, global trade and tariff actions compounded by heightened crude oil pricing challenged many commodity cost expectations.

We now believe that industry supply chain teams must prepare for unprecedented levels of similar and added global supply network challenges in 2019.

In 2019, Chief Supply Chain Officers along with strategic sourcing, supply management and strategists will be compelled to position C-level, line-of-business and product management for alternative sourcing strategies options that either can change or alter the composition of the product bill-of-material, source components within different regions, or source closer to major sales regions.

The notions of waiting out the storm with added price increases can have a short window of realism before end customers themselves push back and move on.

A further consideration that will likely become more obvious will be investing in higher levels of manufacturing process automation which affords companies the flexibilities to source products near major regional consumption or core markets that include the United States. The strategy that may likely evolve will be to produce products as close to customer as possible, leveraging higher levels of manufacturing process automation or additive manufacturing methods while minimizing exposures to higher transportation costs. This will likely be a multi-year transition depending on specific industry.

Our belief for 2019 is that business advisor and added strategic business roles will remain in high-demand for both Chief Supply Chain and Procurement Officers and will require added leadership and collaborative skills with other senior leadership executives of businesses. Exercising the across the board supply chain cost reduction option may well have more detrimental impacts for industry supply chain teams.

Supporting Data, Information and Evidence

Global Commodity Supply Streams

Entering 2019, specific regional challenges reside in agriculture, automotive, capital equipment and high-technology component areas primarily from the result of aggressive tariff actions emanating from the United States.

The World Bank Commodity Markets Outlook published in October 2018 indicated that commodity prices were driven by a number of factors in 2018 that included commodity-specific supply disruptions, rising U.S. interest rates, appreciation of the U.S. dollar and growing global trade tensions. The report dwelled on specific regional implications for commodity markets and the possibilities of structural or regional shifts in commodity markets in 2019 and beyond.

Overall, energy prices were driven higher in 2018 having risen by 3 percent by the third quarter of 2018, essentially 40 percent higher than the same period in 2017. Oil prices have been on the decline in the latter stages of 2018 and are expected to average $72 per-barrel for the year.

For 2019, the World Bank expects energy prices to stabilize at 2018 levels to an overall average of $74 per barrel. That stated the agency cites a number of heightened supply or demand risks that could disrupt energy markets.

As of mid-December 2018, many commodities are tracking toward price declines for 2018 because of building fears for economic slowdown and global trade tensions. The Bloomberg Commodity Index was down more than 6 percent led by a 16 percent drop in copper and a 13 percent drop in oil prices.

Metals prices were expected to gain 5 percent in 2018 and stabilize globally in 2019. Stated downside risks related to the worsening of trade tensions between the U.S. and China and weaker global growth if China’s manufacturing economy contracts substantially. Industry supply management teams will need to pay especially close attention to evidence of such risks in 2019.

Agricultural commodity prices are forecasted to gain nearly 2 percent globally in 2019, but again, the bank cited significant downside risk emanating from escalating trade tensions. The report specially addressed the impact of Chinese tariffs on U.S. agricultural goods with the potential for structural market shifts related to demand for commodities such as soybeans.

The Institute for Supply Management (ISM) Semiannual Economic Forecast published in December 2018 reflecting the views of U.S. based purchasing and supply management executives included a consensus belief of increased raw material prices in 2019, while expecting business profit margins to improve in 2019 over 2018. That translates to an assumption of passing on higher costs to customers which is reflected in a special question posed in the December 2018 survey. The panel consensus split was 51.9 percent indicating higher pricing of products with the average increase being noted as 6.1 percent.  According to the report, raw material prices increased on average in a bandwidth of 5.7 to 7.8 percent during 2018. For 2019, the panel’s range of expected product price increases ranges between 5.2 to 5.9 percent.

Risk of a Full-Blown China-United States Trade War

During 2018, the U.S. and China had each announced two rounds of corresponding tariff actions on the flow of trade among the two largest global economies. The Trump Administration imposed tariffs involving upwards of $250 billion in U.S. imports. China retaliated with tariffs on upwards of $100 billion in U.S. imports along with adding restrictions for U.S. businesses operating in the country.

A planned third round of more severe tariffs was scheduled to take effect at the beginning of 2019. In early December, a dinner meeting involving China’s President Jinping Xi and U.S. President Donald Trump concluded with an understanding to pause trade actions for 90 days pending additional trade negotiations.  Actions by the Trump Administration after the dinner meeting have now raised speculation as to whether any trade deal can be made, and the odds of achieving an agreement among the two countries are fading with each passing week. The overall risk is that significant tariffs could extend to essentially the full complement of intermediate components and consumer goods imported into the U.S. from China. Such a development has significant implications of U.S. manufacturers, retailers and services providers in 2019.

Structural Supply Network Changes Already Underway

A report by the Economist Intelligence Unit, Asia’s Winners in the U.S.-China trade war, predicts that an elongated trade conflict among the globe’s two biggest markets will not only have an adverse impact on the world economy but will also cause production to be performed in more expensive locations, adding to adverse impacts for monetary policies. Similarly, a survey conducted by the American Chamber of Commerce in South China published in early November suggested that 70 percent of companies were considering relocating some or all of their manufacturing outside of China, preferably to other Southeast Asia countries. Current evidence from global financial institution stakeholders points to supporting both of these agency predictions.

The result could be countries such as Mexico benefiting for commercial aerospace supply networks, with the lion’s share of alternative sourcing shifting towards existing ASEAN countries such as Vietnam, India, Indonesia or the Philippines.  The transition would extend over a two to three-year period.

Specific Commodity Impacts for U.S. Manufacturers and Services Providers

China’s targeting of added tariffs on imported U.S. agriculture products and increased incidents of more severe climate conditions are already shifting global agriculture demand patterns. U.S. farmers have incurred severe demand impacts for soybean, meat and other products as a result of such tariffs. China has initiated efforts to acquire its agriculture and meat needs from other countries such as Brazil and Argentina. Two major hurricanes that struck the U.S. Southeast along with severe drought conditions across the U.S. West in 2018 impacted agricultural and farming areas. Critical planting and farming decisions will need to be made for 2019 markets amid a lot of uncertainty.

The imposition of steep U.S. tariffs on aluminum and steel imports has reportedly had the opposite effect of increasing both domestic and import prices of these metals. U.S. domestic producers increased prices to fund new investments in capacity causing U.S. manufacturers to continue to rely on imported aluminum and steel, with higher price burdens.  In December 2018, The Wall Street Journal reported that the benchmark price for U.S. hot-rolled sheet steel had increased 22 percent in 2018 and 70 percent higher than the price of similar steel in other countries. That has motivated steelmakers in Asia and Europe to continue to supply U.S. markets since they can still make a decent profit after factoring tariff and transportation costs. U.S. domestic manufacturers such as AccelorMittal and Nucor have reported net profits at high double-digit levels at the expense of U.S. manufacturers.

The wake-up call to higher metal prices came in late November 2018 when General Motors announced an accelerated corporate restructuring calling for the closure of five North American plants and the slashing of its salaried workforce by 15 percent.

Similarly, added tariffs on imports of high-tech components from China coupled with an aggressive U.S. crackdown on needed intellectual protections will have a negative impact on both Asia based and U.S. high-tech manufacturers. A hint of such risk stemmed from Apple’s decision to cut back its planned output levels of iPhones for both Q4-18 and for CY2019, causing a ripple effect of planned cutbacks among Asian high-tech components-based suppliers. The arrest of the CFO of Chinese telecommunications producer Huawei caused a ripple effect stock market selloff among specific U.S. based suppliers in fears of reduced revenues and a deepening of trade conflicts.

Specific Commodity Impacts for Eurozone Manufacturers and Services Providers

For Eurozone industry supply chain teams, the coming year will present its own set of unique economic market and geo-political trade challenges.

Brexit looms large as a continuing disruptive and uncertain threat for supply and demand management. Industry and regional supply chain management teams were originally expecting a soft Brexit. As we publish this prediction in mid-December 2018, the British Parliament was scheduled to vote on the Brexit Agreement negotiated with the European Union. The vote was then delayed by Prime Minister Theresa May, following an assessment that the British government was headed for an embarrassing defeat. The Prime Minister was then threatened with a no-confidence vote from her ruling political party. With Britain scheduled to leave the European Union on March 29, 2019, the Prime Minister appears to be relying on giving the British Parliament a stark take-it or exit without any deal choice in any pending vote.

Parliament’s rejection of the Brexit plan on the table risks an unprecedented political crisis that could lead to various indeterminate outcomes and implications for trade and commerce. With every passing week, a hard or more drastic Brexit becomes plausible. A further possibility would be that the March deadline is blown, and industry supply chain management implications extend later into the coming year.

Reports in mid-December indicate various industry supply chain literally stockpiling component and finished goods inventories fearing a “no-deal” Brexit in which the UK undergoes a hard exit threatening to slow or halt the flow of goods that move into and out of the UK and across the English Channel. Particular industry supply chains most impacted would be commercial aerospace, automotive, food and pharmaceutical related supply and demand networks.

Added trade concerns continue to be focused on threatened tariffs from the United States on EU manufactured autos as well as other products. German luxury car producers BMW and Mercedes currently export SUV’s produced in the United States directly to China, thus they are financially impacted by the effects of an escalating trade conflict between China and the United States.

With the EU cutting its economic growth forecast from 2.1 percent in 2018 to a forecasted 1.9 percent in 2019, teams will be under pressure to cut additional costs while remaining agile for any added market or supply disruptions. Additional country-specific concerns will remain focused on Italy, where concerns are building for that country’s public finances and growing debt load.

Global Final Production Site Changes

We sense a growing need to source final production and/or product assembly processes to be located closer to major customer concentrations within global regions.

Increased investments in higher levels of manufacturing process automation and additive manufacturing techniques can provide added flexibilities in production siting or alternative sourcing among global regions depending on geo-political risk factors. Closer proximity of final manufacturing further contributes to savings in transportation costs to end customers.

Supply Management Challenges Will Increase

For the most part in 2018, procurement teams attempted to manage the added impacts of tariffs by front-ending procurement needs prior to tariff implementation dates or by attempting to route international buys through tariff non-impacted global regions. In the specific case of China, some may be leveraging the falling devaluation of the Chinese yuan which has depreciated 5.5 percent in 2018, to buffer some of the added tariff costs.

In 2019, the options will become more limited and depending on what occurs on the tariff front, challenges will heighten as to what short or longer-term strategies are most appropriate for individual businesses.

U.S. manufacturers and retailers have attempted to manage tariff impacts by either squeezing suppliers for added cost concessions, absorbing added costs, or passing such cost along in higher prices for finished products. Entering the new year, purchasing commitments for 2019 have generally remain constrained awaiting any definitive data as to whether trade conflicts may subside. That has forced China based suppliers to attempt to seek out non-U.S. markets to make-up for revenue shortfalls.

Some manufacturers and retailers have pressured international suppliers to absorb the cost of added tariffs while preserving existing pricing, in-essence, shifting the cost impact across lower tiers of the supply network. In November, The Wall Street Journal reported on such practices occurring across U.S. automotive supply networks as customers were pressuring suppliers with communications that existing multi-year supply agreements would not be re-visited for added tariff costs or that suppliers must adsorb such costs.

History and events strongly imply that such strategies ultimately are short-lived and damage overall supplier relationships. In the case of automotive, lawsuits among customers and supplier are already evident.


This concludes Part Three of our 2019 Predictions for Industry and Global Supply Chains.

In a subsequent posting in this series, we highlight our fourth prediction which predicts that cyber-attacks involving supply or production networks is inevitable and that cyber-risk and information security threats continue to mandatory.

In the meantime, if your organization requires assistance in preparing for challenges in the upcoming year, please get in contact with us for added information on any of these predictions.


Bob Ferrari

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