While industry supply chain teams continue efforts in achieving 2016 year-end strategic, tactical, operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our prior 2016 Predictions for Industry and Global Supply Chains that we published at the beginning of this year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.
As has been our custom, our 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. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
But now it is time to look back and reflect on what we previously predicted and what occurred in 2016.
2016 Prediction One: A Year of Uncertainty and Continuous Challenges
Self-Rating: 3.8 (Max Score 4.0)
Our first prediction has traditionally focuses on global macroeconomic trending and consequently what industry and global supply chains should anticipate in the year ahead.
For 2016, we predicted another year of uncertainty in planning product demand and supply needs related to both global and domestic markets. From our lens, we felt that there would be a need for lots of contingency and various scenario planning options, and thus we predicted that sales and operations planning teams would be very engaged and challenged throughout the year to meet expected business outcomes.
As industry supply chains approached 2016, there were many global economic and other signs pointing to a slow or declining global growth. A stronger U.S. dollar and depressed commodity prices had sown much caution among manufacturers. Wide uncertainty regarding the global economy, investment strategies directed at increased stock buybacks and declining capital investments have led to an industry consolidation vs. investment-led business expansion. The current unprecedented lower cost levels of crude oil had negatively impacted the oil and gas and alternative energy sectors.
Perhaps the biggest uncertainty related to global and domestic markets umbrellas the shifting political electorate that has grown visibly frustrated with existing government policies on global trade, immigration and political leaders in general. The United Kingdom’s referendum decision to seek exit from the European Union (Brexit) was the sudden shock heard across global markets, and perhaps multi-industry supply chains in 2016. As we pen this scorecard, the U.S. electorate had provided yet another shock with the election of Donald Trump as President. The implications of the event are yet to unfold in the coming months and years, but the impact on multi-industry supply chains could well be significant in terms of changed strategies related to global trade, outsourcing or global climate change and sustainability strategies.
The International Monetary Fund (IMF) in its World Economic Outlook published in October 2015, had predicted 2016 global output growth of 3.6 percent, compared to a somewhat revised number of 3.1 percent for 2015. One year later, in its latest October 2016 report, the IMF has revised its 2016 global output for the second-time, now forecasting that global growth is expected to ease to 3.1 percent in 2016, recovering to 3.4 percent in 2017. The current outlook reflects a theme of “subdued demand” with cause for “disquiet” in the coming months since global growth has more to do with domestic consumer vs. widespread business demand.
China was obviously the biggest concern for 2016, followed by growth levels of the Eurozone and the United States. In its latest October forecast, the IMF is forecasting a slightly larger 6.6 percent growth for China vs. its original forecast of 6.3 percent. The IMF’s revised forecast for the Eurozone region is now 1.7 percent compared with a 2015 growth rate of 2 percent. Likewise, the United States is forecasted to end this year with 1.6 percent growth, compared with 2.6 percent in 2015.
The J.P. Morgan Global Manufacturing PMI Index, a composite index and recognized benchmark of global supply chain and production activity, while slightly registering an uptick in the latest quarter, reflected continued uncertainty and lower growth trending by the end of September 2016. (See below) By September-end, the index was reported as 51, 0.3 percentage points above the index value at the beginning of 2016. However, the index has hovered fairly close to the global contraction (50 index point) for most of 2016.
The latest global PMI data pointed to subdued growth in the United States and Asia. Downturns continued in Brazil, France, Malaysia, Thailand, Turkey and South Korea. Conditions across Europe were reported as slightly better.
We had predicted that: “the most important capability for 2016 would be the ability to control supply chain costs, clearly understand such costs across various fulfillment channels, and be able to contribute to expected business financial and operational outcomes. Indeed, industry and global supply chains should anticipate another challenging year and resiliency, adaptability and risk mitigation will be key themes.”
Indeed, the year has turned out to be one of continued uncertainties in many global dimensions with the senior management looking glass once again focused both on supply chain costs and supply chain responsiveness to business change.
2016 Prediction Two: Expect Favorable Outlook for Inbound Component and Commodity Costs but Procurement Teams Need to Step-up Supplier Management
Self-Rating: 3.0 (Max Score 4.0)
Due to the uncertainty and the heightened supply risks expected in 2016, we predicted that procurement teams would need to re-double their efforts on supplier assessment and monitoring and that collaboration with suppliers on product innovation and risk assessments would be essential. We further predicted that procurement can no longer unilaterally shift the burden of required cost reduction “over the wall” on to suppliers. Instead, teams would need to effectively balance cost control with opportunistic innovation. While CFO’s would likely mandate added cost controls, they would be even more attentive to supporting the firm’s top-line revenue and profitability growth as well as the financial viability of strategic suppliers. Value-chain innovation and timelier introduction of new and innovative products and services would be expected, along with little tolerance for surprises in 2016.
Looking back on the above, our sense is that generally, multi-industry procurement teams had indeed re-doubled efforts related to supplier assessments, collaboration and risk assessment. In the clear majority of industries, mandates for added cost controls did indeed occur, but that was mostly translated to extending the timing of supplier payments. Thus, our prediction for effectively balancing cost control with opportunistic innovation did not seem to be evident by events. In fact, this year has featured some incidents of high profile supplier pushback, including temporary suspension of supply, because of the working capital burdens of elongated payments.
On the global commodity price front, the direct raw-materials that make-up industry supply chains, entering the year, prices had generally declined sharply during 2015. The World Bank’s Commodity Markets Outlook published in October 2015 generally called for slightly higher non-energy commodity prices in 2016 including categories of agriculture, raw materials, fertilizers metals and minerals. In its latest October report, the World Bank points to generally lower commodity prices in the earlier part of this year now showing indications of rising by the third quarter. However all main commodity price indexes are projected to decline in 2016 except for food and precious metals. Agricultural commodity prices varied this year due to various global supply conditions but overall are expected to reflect a minimal decline for 2016, but rise slightly in 2017.
The dramatic slump in global commodities further contributed to the woes of the maritime shipping industry as more dry bulk vessels remain idled due to lack of shipping demand. (See Prediction Three scorecard) Commodity market speculators stuffed warehouses across the globe in hopes of waiting out more positive pricing trends and there were reports of some Chinese speculators attempting to game the market in specific commodities such as aluminum and copper.
The most influential cost factor for industry supply chains, beyond direct labor is oil and energy prices. We predicted that procurement, industry supply chain and transportation services teams should expect continued attractive costs for fuel and natural gas in 2016.This was described as a double-edged sword since historically low energy prices provide attractive cost-saving opportunities but do have a profound impact on the product demand for any energy related products and services such as oil exploration, refining or alternative energy related products.
In its early December 2015 meeting, The Organization of the Petroleum Exporting Countries ended a contentious meeting without any agreement to restrain production, leaving members to continue pumping crude at near-record levels into an already oversupplied market. That resulted in continued historically low prices for fuel and by January of 2016, oil prices had hit a 10-year low. Oil prices have since rallied to $45 per barrel by August, mostly due to involuntary production outages that brought balance to oil markets. As of the end of the third-quarter, oil prices are now projected to average $43 per barrel in 2016, but rise to $55 on average in 2017.
Overall, our predictions related to sourcing and procurement were generally on-the-mark for business and industry forces, but to some degree, not so for multi-industry organizational strategies related to improving supplier relationships and innovation.
This concludes Part One of our scoring of this year’s predictions. In Part Two, we will revisit our predictions on the turbulence surrounding global transportation and the widening of supply chain talent and skill gaps.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.