As we pen this commentary, we are entering the week of the Thanksgiving Holiday here in the U.S., a holiday to look back and reflect on the blessings of family and life. It is also our time to reflect and scorecard our Supply Chain Matters 2012 Predictions for Global Supply Chains which we published nearly a year ago. Our annual process is to first scorecard the current year’s predictions before publishing our upcoming 2013 predictions during December.
Our scoring process this year will be on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of; what were we thinking?
Let us therefore revisit our 2012 predictions.
2012 Prediction One: A continued year of high uncertainty of events related to the global economy will provide another year of multiple challenges in global supply chain’s ability to support revenue and profit growth needs.
Our prediction was pegged to outlooks provided by the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) which both predicted a high period of uncertainty surrounding the global economy in 2012. At the time, the building financial crisis involving the Eurozone countries portended a gloom scenario among the developed economies, suggesting a financial deterioration of the magnitude experienced in 2008-09. Our assessment was that the predictions felt as though the global economy would slip back into recession in 2012, and the question was, how severe. Many industry supply chains were also focused on emerging markets as their continued engines of top-line revenue and profitability growth, and a marked slowdown in either the developed nations, or the local developing market would have additional adverse effects on supply chains.
One year later, we can note that based on the economic results of the latest quarter, the Eurozone has officially entered recession, one that many economists believe will continue for many months to come. Politicians across Europe are dealing with the effects of political unrest brought about by high unemployment and dismal prospects for growth. Major industries such as Europe’s automotive industry are challenged with dramatically declining revenues with very low industry capacity utilization, which leads to speculation of government subsidies or outright closings.
China’s economy has also dramatically slowed, brought about by the effects of the Eurozone contraction, as well as a contraction in China’s domestic markets. Export orders have contracted and in the September period, there were reports of high excess inventories across many industry sectors within China. Similarly, the Latin America economies contracted including that of Brazil, again reflecting the consequences of a slowing global economy.
However, the U.S. economy has fared a bit better, albeit slow but steady growth. Throughout 2012 there have been more signs of increased foreign investment in U.S. based manufacturing, fueled by the implication of cheaper energy costs and better currency stabilization. Even some U.S. manufacturers elected to bring back previous outsourced manufacturing because of changed economics and concerns for better customer service and intellectual property protection.
2012 Prediction Two: Commodity and component price increases levels experienced in 2011, with some exceptions, will moderate in 2012, and procurement teams need to maintain a key eye on pricing, supplier health, and supply network agility.
Explosive growth in commodity costs generally moderated in 2012 with lower tiered raw material suppliers such as metals, chemicals and specialty chemicals now experiencing noticeable slowdowns in business volume. There are a few exceptions, but overall, commodities have shifted to a demand contraction and supply over abundance, primarily because of the overall slowdown in the global economy.
The one significant exception was food 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.
Energy costs in 2012 were primarily driven from political vs. supply and demand factors. Continued concerns concerning countries in the Middle East, particularly Iran caused the price of oil to remain high, despite efforts by Saudi Arabia to dramatically increase supply levels. Global transportation carriers were thus able to continue to benefit from across the board fuel surcharges.
Direct labor costs concerning China’s manufacturing sector, as expected, continued to dramatically increase as a result of continued labor unrest. Throughout 2012, there were continued incidents of riots and labor law violations, fueling more demands for increased wages.
Supply Chain Matters has heard numerous reports of supplier distress and some supplier failures during 2012, all leading to needs to active supply chain risk mitigation. During the year we noted that certain aerospace suppliers in Spain were reeling from the effects of dramatically decreased bank credit. The same trends occurred among European automotive component suppliers as well as other industry sectors.
2012 Prediction Three: Senior management among manufacturing firms will call for a re-visit of supply chain component and finished goods outsourcing strategies in the wake of continued major supply disruptions brought about by natural disaster and other events.
In 2011, manufacturers and retailers across many industry supply chains discovered the real sourcing vulnerabilities they had. In 2012, action strategies were definitely put into place to help mitigate such risks. Industries such as high tech and consumer electronics discovered high concentrations of single sourcing within a single country and have balanced sourcing across other regions. We recently noted how the country of Thailand has not bounced back to pre-flood levels of supply chain activity because high tech manufacturers elected to change sourcing to other countries across Asia. Similar trends have occurred across automotive.
The notion for including global-wide risk as a new dimension of sourcing decisions has indeed been adopted and is now actively occurring. These efforts were reinforced by another year of flooding brought about by increased typhoons that impacted Japan, the Philippines, Taiwan, China and other Asian countries. A severe earthquake that struck northern Italy impacted supplies of medical disposables across Europe as well specialty cheeses and other food products. Finally, global insurers and re-insurers, as we predicted, continue to re-evaluate casualty and business continuity insurance premium rates in the wake of the higher concentrated incidents of losses within specific geographic regions such as certain countries in Asia.
As we continue with this look back, readers are encouraged to share observations as to how global supply chain predictions panned out in 2012.