As the calendar approaches the close of the first-half of 2021, Supply Chain Matters will be publishing a series of blogs focused on assisting industry supply chain management and business sales and operations planning teams in their planning and tactical strategies for the second half of this year.

Part of this effort will focus on snap shotting the latest economic and other forecasting and sentiment data as well as a revisit of specific areas of our 2021 Predictions for Industry and Global Supply Chains that were published at the beginning of the year by our research arm.

 

Economic Forecasts

At the beginning of this year, The International Monetary Fund’s (IMF) World Economic Outlook published in October 2020 forecasted a 2021 global growth rate of 5.2 percent, under the primary assumption that the COVID-19 coronavirus levels would be brought to low levels by the end of 2022. The IMF’s recent forecast published in April revised the global growth output upwards to 6 percent in 2021, moderating to 4.4 percent in 2022. The agency specifically noted: “The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility. High uncertainty surrounds this outlook, related to the path of the pandemic, the effectiveness of policy support to provide a bridge to vaccine-powered normalization, and the evolution of financial conditions.”

Among advanced economies, the agency’s October forecast projected a growth rate of 3.9 percent for the coming year after an expected negative 5.8 performance in 2020. That number has been revised upward to 5.1 percent this year, moderating to 3.6 percent in 2022. Specifically related to the United States, the latest forecast indicates 6.4 percent annual growth this year, moderating to 3.5 percent in 2022. For the Eurozone, this year’s forecast stands at 4.4 percent, moderating to 3.8 percent in 2022.

Among emerging market and developing economies, the October forecast was 6 percent growth after an overall contraction of 3.3 percent in 2020. China was the exception since the country was able to quickly bounce back from the pandemic by the end of Q1-2020. That country’s forecast called for a growth rate of 8.2 percent this year. The April forecast for this region now indicates an upward revision to 8.4 percent, moderating to 5.6 percent in 2022.

Let’s now focus on retail sales, specifically in the United States.

Earlier this month, The National Retail Federation (NRF) adjusted its prior forecast for annual retail sales (excluding spending on restaurants, gasoline and autos) to grow from between 10.5 percent to 13.5 percent this year. That number was nearly double the February forecast that predicted a growth rate of between 6.5 percent to 8.2 percent. Non-store and online sales are now forecasted to grow between 18 percent to 23 percent to a high range of over $1.1 trillion. The latest retail forecasts has a lot to do with the high levels of U.S. population now having been vaccinated coupled with government stimulus which has provided consumers with added spending resources. Data further indicates that U.S. consumers incurred a high savings rate and correspondingly low debt rate during the months of 2020, hence the pent-up buying that is now occurring.

However, the latest government data indicates that U.S. retail sales in May declined 1.3 percent as shoppers elected to focus their spending on services such as restaurants, vacations or contractors. It remains uncertain as to the timing when consumer switch to high levels of buying in the coming weeks. Unemployment levels remain lagging because of a number of factors, primarily the availability and affordability of childcare.

 

Bullwhip Effect Risks are Rising

Supply Chain Matters and other media continue to observe that the ongoing global product demand and supply imbalance among multiple industry sectors is worsening.

We are all obviously stating the obvious, what supply chain and business operations planning teams are already acutely aware of. In some industries, the shortfalls are extreme. Increasing price inflation on inbound materials is another factor of building risk concerns which are eroding product margins and overall profitability. Some businesses are now electing to raise prices on end products, but that in-turn compounds overall planning based on historic demand levels.

Hence, the warnings for the demand distortion bullwhip effect being ever present and should be an especially important consideration in planning for the second half of this year.

For many consumer facing industries, the second half is the period of peak demand levels leading up to the traditional back-to-school and end-of-year holiday period.

The U.S., the ratio of business inventories to sales fell to a level of 1.23 in March, according to government data. That has been noted as the lowest level in U.S. government reporting dating back to the early nineties.

There are already reports that some retailers and manufacturers have accelerated the timing of their second-half component and inventory purchases to try to overcome lagging inventory levels and the now significant global transportation delays that continuing occurring, especially for material sourced in China and other areas of Asia. Yet these same areas are currently being impacted by new port and manufacturing delays brought on by new variants of the coronavirus and populations remaining to be vaccinated.

While all of the above economic and retail forecast data point to robust levels of product demand continuing for the remainder of this year, there is the reality of a drop-down factor for 2022. For long lead time items such as semiconductors, complex machinery or other advanced electronics, the risk is magnified since demand may moderate over the lead time period.

 

Resolving the Bullwhip Quandary

We do not portend to provide the magic formula to resolve this very real risk especially with business revenue and profitability expectations being so high in this current period. Those expectations extend across multiple tiers of product supply networks and hence there will be a lot of scrutiny of new and replenishment orders.

An area that should be of keen focus right now is leveraging data-driven advanced planning technology tools that monitor and assess both internal product and external product demand patterns and alert to anomalies and outliers. Similarly, timely monitoring of actual demand, planned and actual inventory levels is a must along with more frequent demand and supply operational assessments. This an area where machine learning and artificial intelligence enhanced planning applications can provide meaningful assistance.

Depending on specific product categories, we believe that use of either deterministic, probabilistic or stochastic planning algorithms needs to be carefully assessed and weighted. Alternative supply may or may not be a viable option in the current environment.

During initial periods of pandemic last year, the primary emphasis of supply chain and sales and operations planning teams was a command-and-control war room response. The need was to be able to continually assess product demand and supply conditions and to garner as much visibility as could be as to overall component and inventory conditions.

As teams turn their attention to the important second half, more focus has to turn towards assessing and weighting risks of the bullwhip effect and in dynamically balancing as much as possible, real demand with planned and actual supply.

Augmenting planning with the timeliest external demand and market sentiment indicators and leveraging advanced machine learning technology to alert to anomalies is indeed a requirement as is constant collaboration and alignment across the supply network.

We close with an analogy.

Those readers who have had the opportunity to play the beer game (originally conceived by MIT) in their case study learning know that the game was developed to help players understand the consequences of the inflating bullwhip effect among various supply chain tiers, among other planning and disruptive tenets.

The lessons being undertaken in 2021 is not only are the ingredients that make up the beer in short supply, but the cans are also, as well. Drinkers consume either by brand loyalty or by substitution. In the end, they still want to drink beer in the moment, and sometimes that comes down to whatever might be available.

It’s a difficult challenge and revised thinking and directions are required.

 

Bob Ferrari

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