We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As a reminder, our self-scoring process will be based 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 on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014.
In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.
In this Part Four posting we re-visit Predictions Six and Seven.
2014 Rating: 2.0
Throughout 2013, business headlines were focused on the occurrence of highly visible incidents of perceived or alleged labor abuses, coupled with environmental safety concerns among production facilities supporting multiple industry supply chains. Thus, our 2014 prediction called for higher levels of visibility to those supply chains proactively addressing social responsibility and unfortunately, those that are inclined in accepting past status-quo. We predicted consequent business and shareholder implications surrounding such practices.
This was a prediction that unfortunately, did not occur to the levels we anticipated and thus we have given ourselves a low self-rating.
On the positive side, labor activism continued to be a discernable trend among so-termed, lower cost manufacturing regions. Business media such as Bloomberg provided added visibility to worker safety and pay conditions among female workers within regions such as Bangladesh. In China, the workforce has turned toward male dominance and reports of sexual harassment have come to light. In a Supply Chain Matters commentary in May we noted trends reflecting for the most part, a female dominated workforce in Bangladesh enduring workplace perils to sacrifice for the better good of their families. A predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.
In the high-tech sector, Apple continued to undertake meaningful steps to initiate broader supplier responsibility practices including substance use regulations across its supplier network. The highly visible consumer electronics provider published both its Eight Annual Supplier Responsibility report along with a new Regulated Substances Specification which was made available for open viewing. The substances specification called for the banning of cleaning agents’ benzene and n-hexane within all supplier factories. Unfortunately other high tech and consumer electronics brand owners appeared not to join in openly declaring higher standards for safe chemical use.
Many consumer products companies along with their respective supply chain suppliers made some continued strides in environmental and social responsibility particularly in the areas of palm oil and other agricultural commodity sourcing.
The apparel industry continued efforts by various industry consortiums to improve factory safety working conditions across countries such as Bangladesh and Cambodia. In an early November update, we were disappointed to observe that a large number of garment factories across Bangladesh failed safety inspections. According to reports, the inspections uncovered critical structural deficiencies within 100 factories that require immediate repairs. In 17 of the inspections, factory conditions were deemed to be so unsafe that the factories were ordered closed. Around 110 of building inspections uncovered the need for immediate actions required to bring the facility above acceptable safety levels for production to continue. Garment workers in Cambodia have increasingly become more vocal in seeking higher wages within that country and some European retailers have pledged to offer higher wages. However, industry consortium efforts appear to have bogged down with little outcry from external groups or stockholders.
Prediction Six was a disappointment in 2014, not just for us, but for various industry supply chains who still weigh lowest cost higher than active social responsibility practices and accountability.
Our prediction cited that the ongoing cumulative effects of increased financial and business related risks would motivate manufacturers and retailers to once again revisit multi-tiered global sourcing strategies.
Overall, 2014 has turned out to be a tame year in terms of global supply chain risk and major disruptions, with some notable exceptions, and that more likely has muted any major efforts for changed sourcing.
According to global re-insurer Munich Re, Natural disasters worldwide caused about $42 billion in economic damages during the first half of 2014, well below the average amount of $95 billion for the same period during the past 10 years,. Insured losses totaled about $17 billion during the first half of 2014, compared with a 10-year average of $25 billion. Increased volcanic and earthquake activity caused some concerns in Northern California and in Iceland during August while in Asia, there were constant incidents of major earthquakes, many of which located in non-industrial areas.
Social and Political Unrest
In the area of social and political unrest, early 2014 brought a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear while territorial hostilities among Russia and Ukraine presented threats of potential European supply chain disruption. In May, a dispute over drilling rigs in the South China Sea precipitated rioting across Vietnam that caused disruption to hundreds of China-owned factories. The Middle East was a constant threat for continued hostilities, specifically related to Syria and Iraq.
One of the largest ever recorded outbreaks of the deadly Ebola virus that has struck certain West Africa based countries has the strong potential to impact industry and global supply chains if the outbreak is not controlled. The outbreak which initially began in March has now broadened to nearly 16,000 reported cases and nearly 5700 deaths. Potential threats are in global transportation and logistics as well as localized outbreaks that could impact specific industry supply chains in the light of past severe global outbreaks of SARS or influenza.
Humanitarian focused supply chain activities continue to provide the critical defenses for avoiding a broader pandemic outbreak involving far more countries and geographies. While a global pandemic might have been characterized as a low probability scenario among various industry supply chains, Ebola remains an acute current day reminder of a disruption that can impact many industry and global supply chains.
Merger and Acquisition
In the pharmaceutical and drug sector, business headlines reverberated with a slew of planned or attempted merger and acquisition activity as the major industry players jockeyed for strategic advantage in product pipelines, cost structuring and emerging market access. Any of these would have provided the potential for major supply chain disruption.
Specific Industry Disruption
Two of the most notable industry related disruptions in 2014 involved automotive and global shipping. An unprecedented level of product related recall announcements precipitated by lax product design and supplier management practices prompted the cumulative effect of multitudes of brands recalling millions of automobiles and light trucks that has brought automotive service supply chains to crisis stages. The most visible incidents involved an alleged defective design of ignition switches installed on multiple General Motors produced vehicles. The other ongoing crisis involves alleged defective air bag inflators produced for multiple automotive brands by Japanese supplier Takada. Automotive OEM’s may well revisit their supplier sourcing, quality conformance and product design practices in the light of the current levels of risk exposure.
The other major disruption with ties to global sourcing was the perfect storm of near paralysis that impacted U.S. west coast ports at the very height of import and export shipment activity related to the 2014 holiday fulfillment period. As we pen this self-rating commentary, the port crisis continues, with little optimism related to easing, and the reverberations and effects of this crisis will likely alter global surface shipment routings in the months to come.
We continue in the belief that the days of global sourcing based on one-dimensional dimensions of direct labor or transportation are over. Consequent sourcing decisions that factor elements of possible risk will bring forward far different dimensions of balancing global sourcing with risk mitigation. Since 2014 provided an overall tamer risk environment, out of sight was probably out of mind. However, the symptoms and casual factors remain evident.
This concludes Part Four of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess our remaining 2014 predictions in the final posting of this series.
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