The Ferrari Consulting and Research Group through its affiliated Supply Chain Matters blog features a series of blogs outlining individual 2022 Predictions for Industry and Global Supply Chains.
In this series, we share with our readers excerpts of the ten specific 2022 Predictions that will be included in our Research Advisory that will be made available in early January 2022. In the following commentary, we outline our prediction relative to what to expect in direct materials sourcing and procurement activities in the coming year.
Since our inception in 2008, The Ferrari Consulting and Research Group has annually published a series of supply chain management focused predictions. They are produced to advise our clients, sponsors and the broader global supply chain management community as to what to anticipate in the coming year.
Our goal is to depict how likely global, regional, economic, industry and advanced technology trends will impact, and likely influence required supply chain management actions. They further provide the baseline of our added research and advisory topics during the coming year.
The context of these predictions include a broad cross-functional umbrella of what is today considered supply chain management, and includes areas of leadership and strategy, product management, strategic sourcing and procurement, supply chain planning and customer fulfillment, manufacturing, logistics, transportation and customer service management.
In the three prior Supply Chain Matters postings, we shared the context of our 2022 Predictions, as well as our first prediction relative to overall outlook:
In this Part Two commentary, we share our prediction in the area of strategic and tactical direct materials sourcing and supply management.
2022 Prediction Two
Restoring More Direct Control in Strategic and Tactical Direct Material Sourcing Will be the Driving Force for Businesses and their Supply Chain Management Teams in the Coming Year.
The year 2021 provided companies as well as government policy makers considerable painful evidence to the inherent vulnerabilities of globally extended and overly complex supply chains and of the needs among business’s to be able to better respond to major product demand and supply shocks.
A recent McKinsey survey of supply chain leaders stated that 93 percent of respondents had indicated that the Covid-19 crisis had exposed challenges within their global manufacturing and supply chain footprints. By the middle of 2021, only 15 percent had reportedly made necessary structural changes in sourcing strategies.
The business impacts of the significant component supply shortages and elongated supplier lead times were further made visible in corporate quarterly financial performance reports in 2021 and have clearly garnered the attention of C-Suite executives and company boardrooms.
We predict that efforts among supply management and procurement professionals in the coming year will include added defensive moves in assuring more reliable supply of key components such as semiconductor devices, electronics components, raw materials and other deemed essential inbound direct material needs.
Such moves may be interim term, tactical or longer-term. Reliable supply of key commodities which is often planned in a tactical lens will likely take on more strategic dimensions.
In prior years, companies tended to be cautious, and not inclined to make sudden sourcing moves related to materials sourcing. Rather, strategies tended to multi-year transition timelines. Neither were intentions to have direct control of manufacturing and lower-tiered supply networks. We believe that this will change in 2022 since in some industries, what transpired in 2021 will drive a more compelling agenda for direct control, even if it involves some added materials and margin costs. That stated, efforts directed at in-house sourcing and nearshoring of direct materials will remain selective and opportunistic, aligned with an overall supply network resiliency strategy that weights overall product margin costs with needs for added control.
While some companies rely highly dependent on China or Asia centric supply networks, forms of a ‘China Plus One’ sourcing strategy are more compelling.
Revisiting of Vertical Integration
These are signs of revisiting forms of vertical integration, but more weighted toward supply network risk mitigation or avoidance. Similar to practices that occur in high tech supply networks, primary manufacturers can elect to take on more direct control of longer-term supply contracting of deemed strategic components, even though these components may be consumed by contracted suppliers or contract manufacturing services providers. There are additional considerations relative to balancing domestic, nearshored or global sourcing strategies.
This was the principal vulnerability of global automotive manufacturers in 2021 when available semiconductor capacity was contracted away to other industries in mid and late 2020 prompting significant production cutbacks of finished autos and trucks. With many semiconductor producers indicating that the global demand and supply imbalance will likely remain for most of the coming year, this area will be a key focus for automotive and other industries. While global automotive designers and manufacturers can ill afford to take on the sole development and cost burdens of semiconductor fabrication and packaging, the industry will more than likely institute long-term supply agreements directly with semiconductor producers, pooling supply needs from a consortium of brands.
In the latter part of 2021, actions by some companies among other industry settings were in acquiring key supplier capabilities or deemed key suppliers. Other moves were in assessing options in moving outsourced production or services to more direct in-house control. Two retailers elected to acquire specialty fulfillment logistics and last-mile services providers to garner more direct control of the brand and customer experience. We predict more of these types of actions in the coming year.
Geo-Political Developments, Global Warming and Hybrid Industrial Policies
A further consideration in the coming year is in weighting the probabilities that in all likelihood, government actions for what are described as hybrid forms of industrial or supply network sourcing policies, aligned to national security needs, being the basis of policy and legislation. These efforts are already percolating within the European Union, the United States and Canada. China already practices forms of governmental industrial policy in the notions of fostering a global export economy but at the same time, avoiding any global dependence on essential raw material and commodity needs.
Such forces have surfaced with the realization that supplies of need critical drugs, medicines and personal protective medical supplies had a heavy reliance on China and Asia based producers, and not readily available during recent global-wide medical emergencies. They have since been expanded to domestic sourcing considerations for semiconductor devices, critical electronic components, lithium-ion batteries, solar collection or other forms of alternative energy supply components. The Biden Administration and European Union are each signaling added moves in such directions, and supply management teams will be assessing the likely implications in the coming months.
Global economists and think tanks are further coming to a consensus that a long-term decoupling between the U.S. and China relative to strategic and tactical supply network dependencies is more in the cards. That will provide a further weighting for strategic sourcing strategies in the coming months and years.
The year 2021 provided a stark reminder that our planet is warming to a higher degree than scientists initially estimated. With the completion of the COP26 Global Climate Change Summit, businesses and governments face a more compelling timeline for mitigating the ongoing warming of the planet and the implications In the coming year, there will be added considerations for reconfiguring supply networks based on business sustainability conformance goals. More of this will be addressed in our specific prediction focused on sustainability and broader ESR efforts that will occur in the coming year.
In Part Three of our individual 2022 predictions, we will share our belief as to what will occur in areas of supply chain management talent recruitment and retention and consequent selective automation strategies.
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