Introduction

Industry supply chain management teams continue efforts in achieving 2019 final quarter strategic, tactical, and operational line-of-business performance objectives and expected business outcomes, especially in this all too important final quarter. This affords Supply Chain Matters the opportunity to look back and review our prior 2019 Predictions for Industry and Global Supply Chains, which were published at the beginning of this year.  Predictions

The Ferrari Consulting and Research Group, the parent of the Supply Chain Matters blog has published our annual predictions for industry and global supply chains since our inception in 2008. Our approach is to view predictions as an important resource for our clients and blog readers, thus, we do not view them as a light, one-time exercise. Unlike other industry analyst firms, our predictions for the most part, do not take a sole perspective of a three to five-year window with nebulous degrees of probability. Our belief is that industry business and supply chain management process needs are changing rather quickly and that leaders need a focused view of what could likely occur from business, functional and advanced technology perspectives in a one to three-year timeframe. An important part of annualized predictions is assessing what really occurred and why. Thus, every year in November, we look-back and score our predictions for the year.

As has been our custom, our scoring process is based on a four-point scale.  Four will be the highest score, an indicator that the prediction indeed occurred.  One is the lowest score, an indicator of, what-on-earth were we thinking? Ratings in the 2-3 range reflect that we probably identified the right trending, but events turned out differently. Admittedly, our self-rating is subjective, and readers are welcomed to add their own assessment of our individual predictions in feedback comments.

In the Part One posting of this series, we revisited 2019 Prediction One, which related to what supply chain management teams would have anticipated in global economic outlook, and Prediction Two, the notions of supply chain talent recruitment and retention reaching alarming levels.

After looking-back at current year predictions, we will then transition into the unveiling of our 2020 Predictions expected to occur starting in mid-December.

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

Self-Rating: 4.0 out a maximum 4.0 score.

 

Candidly, this area of prediction is one that we would have wished that we got wrong, but that was not the case.

The term ‘unprecedented’ turned out to be the appropriate descriptor and nailing such a prediction provides us little comfort.

However, we need to acknowledge that industry supply chain teams for the most part performed extraordinarily in helping to overcome tariff obstacles, in navigating alternative material flows and in analysis of major impact areas. It was not easy work, likely requiring long hours of added effort. We applaud all that did so.

The Prediction

Our prediction was that industry supply chain teams would have to be prepared for unprecedented levels of added global supply network challenges in 2019.

Specifically that Chief Supply Chain Officers, Chief Procurement Officers, along with strategic sourcing, supply management strategists would be compelled to position C-level, line-of-business and product management for alternative sourcing strategies options that either would change or alter the composition of the product bill-of-materials or source components within different regions. We called attention to the real risk of a full-blown trade war breaking out between the United States and China, and that would likely precipitate initial structural changes in product sourcing away from China.

As we pen this prediction scorecard in mid-November 2019, negotiations among U.S. and China trade representatives have yet to reach a comprehensive truce. Instead, a termed ‘phase one’ agreement is the focus with an expected approval timeline for some time later this month or December. Each country’s negotiating team seems to be entrenched in areas of non-compromise, hence what actual agreement eventually made is uncertain.

Regarding Brexit, after two failed attempts to reach a formal exit agreement, the deadline has now been pushed to the end of January 2020, pending a new UK Parliamentary election to be held in mid-December. The threat of a hard Brexit remains real, are so are the significant industry supply chain disruption implications.

Another regional conflict, directly involving South Korea and Japan also emerged in the second half of the year, with direct impact on high tech and consumer electronics supply networks.

Supply Chain Matters itself featured multiple update commentaries each and every quarter, and which each update, the stakes for certain  industry supply networks in terms of added tariff related costs and product impacts grew. Many industries and many companies large and small were impacted. The latter, SMB’s remain especially impacted with the implications. Certain industries, namely agriculture, apparel, autos, high tech and consumer electronics, machinery and general consumer goods remain impacted.

This month, we were compelled to declare to readers that despite the business headlines, global trade tensions are not subsiding, and neither are the implications.

Sourcing strategy moves involving other parts of Asia and within geographic regions are already underway. Yet, the reality is that such sourcing shifts take multiple months to successfully initiate, thus this topic is sure to be included in our 2020 Predictions.

 

Commodities and Direct Material Components

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. For the most part, some commodity and raw material costs relatively declined because of lower manufacturing activity but escalating tariff costs have clearly impacted  business profits.

Our belief was that the notions of waiting out the storm with added price increases would have a short window of realism before end customers themselves pushed back and moved on. The jury is still out relative to that part of our prediction.

Supply Management Themes

Regarding themes, we pointed to higher levels of global supply chain risk, complexity and cost leading to the presence of discernable structural industry shifts occurring with far-reaching longer-term effects:

  • Final production and/or product assembly processes located closer to major customer concentrations. Increased investments in higher levels of manufacturing process automation and additive manufacturing techniques to provide more flexibilities in production siting among global regions.
  • More supply network sourcing being shifted away from China to other Asia-based regions with specific countries or regions benefitting.
  • Facility and technology investments in online customer fulfillment being prioritized and leveraged to move closer to customer concentrations to save on transportation and logistics costs.

Our observations, discussions and readings lead us to believe that all of the above actions are in various phases of action planning. In the specific case of moving component or production sourcing away from China, indications are that capacity levels among suppliers and manufacturer’s in countries like Vietnam and India are reaching maximum levels and windows of opportunity may be temporarily unavailable for certain capabilities.

Our further belief for 2019 was that the business advisor role would remain in high demand for CSCO’s and CPO’s requiring added leadership and collaborative skills with product and line-of-business executives. Similarly, scenario and analytics-based decision-making would become important key competencies. All appears to be the case including C-Suite executives having to explain to investors what actions are being explored or taken to mitigate the longer-term impacts of added tariffs.

 

 

2019 Prediction Four: Cyber-Risk and Information Security Safeguarding are Mandatory Since the Threat of a Cyber Attack Involving Supply Networks is Inevitable.

Self-Rating: 3.5 out a maximum 4.0 score.

We predicted that cyber-related risk and information security safeguarding would consume business, IT and industry supply chain teams, not so much by choice, but from compelling needs dictated by stockholders, boards and C-Suite executives.

The World Economic Forum had specifically identified supply chain cyber-threats as two of the top-five global risks in terms of likelihood, with just cause. Many of current day cyber-attacks originate from either State-sponsored or highly sophisticated technical teams. Hackers and state sponsored cyber thieves have moved toward a new fifth generation of attacks that is now surpassing the defensive capabilities of individual businesses. Cyber and national security experts had indicated that cyber threat incidents were going to get worse before they get better because of the added sophistication of cyber predators.  Chief Information Security officers are similarly concerned about next generation threat sophistication.

The brute reality was that supply chain management and IT teams had little or no visibility into suppliers among multiple tiers of supply networks, including various system interfaces. An April 2019 report from Cybersecurity News indicated that 50 percent of attacks that target supply chains seek lateral movement or “island hopping” where hackers target not just the primary organization but those connected along the various tiers of the supply chain.

There was a steady stream of incidents that involved supply or customer demand network penetration, some reported, some not so.

A sampling of reported incidents involved a:

  • Large global computer manufacturer hit by a described very sophisticated malware attack that leveraged the maker’s Live Update Software Utility distribution application resulting in one million Windows PC’s receiving namely malicious code embedded in trusted software code.
  • Norwegian based aluminum company confirming that hackers leveraged a form of ransomware that crippled the company’s global operations. The attack was estimated to cost the company $35 to $40 million.
  • Belgium based global supplier of military and commercial airplane parts, noted as being the most important in global scale, having to cease production in factories among four countries due to a ransomware attack. The forced the idling of upwards if 1400 manufacturing workers for periods up to a week.

What appears to be evident thus far is that 2019 incidents have not matched the wide-scale and disruptive implications as those that occurred in 2018. However, the threat remains inevitable, as are the implications for disruption in operations and the compromising of critical information related to customers, products, processes and control mechanisms.

 

This concludes Part two of our revisit of Ferrari Consulting and Research Group 2019 Predictions for Industry and Global Supply Chains. In an upcoming Part Three of this series we will revisit and assess Prediction Five, Supply Chain Digital Transformation strategies, and Prediction Six, the multi-year transformation toward Digitally Enabled Response Networks.

In the meantime, readers and clients are encouraged to continue to share their own specific assessments of what occurred in 2019, as well as their own anticipations for the coming year.

 

Bob Ferrari

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