The Ferrari Consulting and Research Group through its affiliate the Supply Chain Matters blog shares select individual prediction snapshots that are included in our annual 2023 predictions for industry and global supply chains research advisory.

 

Background

The Ferrari Consulting and Research Group has annually published a series of supply chain management focused predictions since its inception in 2008. They are produced to advise our clients, sponsors and the broad global supply chain management community as to what to anticipate in the coming year.

Our research advisory report for 2023 begins with a review of the themes of our prior three years of predictions and the derived learning for the supply chain management community. That includes an overview of our themes for 2023 which were shared in a previous two-part series published on Supply Chain Matters. We further include our ten specific predictions for the coming year addressing areas of business, process, people, technology and other key areas.

Our complete detailed research advisory report will be made available on a complimentary basis in the Research Center menu that will appear on the top panel of our two web sites on January 20.

In a previous posting, we published Part One of this multi-part series which highlighted our first prediction, that supply chain management teams should anticipate a considerable amount on uncertainty and that a significant challenge will be to avoid complacency in strategies and actions.

In this Part Two posting, we provide highlights to Prediction Three outlined in our advisory.

 

2023 Prediction Three: More Direct Control in Strategic or Tactical Multi-tiered Direct Materials Sourcing will Continue to be a Prominent Element of Business Strategy for Chief Supply Chain or Chief Procurement Officer Efforts.

 

Prediction Background

The lessons of the continuous supply chain related disruptions of these past three plus years, now coupled with increased concerns from business leaders for establishing more direct strategic and tactical control of such networks, will continue to be a prominent element of business strategy and needs for added alignment in 2023 and beyond.

A clear opportunity ripe to be addressed is the shifting of the prior focus of just-in-time driven, end-to-end efficiency flow of materials and resources, to an outside-in flow of physical and digital based information focused on customer or channel focused fulfillment material, resource and support needs. Planning and decision making capabilities that were not up to the task for providing the timeliest and context aware awareness to both customer fulfillment and business performance outcomes is a further area of reexamination.

A China Plus sourcing stance has become ever more important as is longer-term alignment to government induced supply chain policies and legislation initiatives for deemed critical materials. Higher cost levels will need to be mitigated or reduced. Business and supply chain focused media reports already point to increased supplier and manufacturing investment in regions such as Mexico, Eastern Europe, India, Vietnam and other regions as responses to added supply network resiliency or agility.

A published Future of Freight study sponsored by Deloitte in September 2022 indicated that U.S. firms are expected to reshore upwards of 350,000 jobs in 2022 alone. Bloomberg reported in November 2022 that shipments of motor vehicles, computer parts and boats, manufactured in Mexico and destined for U.S. customers increased to a level of $41.8 billion in September.

In early April 2022, economists at Goldman Sachs indicated that supply chain resilience was now a top-of-mind topic for manufacturers and retailers and observed that three main strategies were being undertaken. For those businesses located in the U.S., the strategies were exploring nearshoring of prior foreign production, diversifying supplier networks and adding additional contingency inventories.

Adding to this movement are increasing efforts by major nations such as the Eurozone and the United States for assuring the presence of multi-tiered supply networks for key strategic raw materials and designated products such as semiconductor devices, biotechnology, electric powered or alternative energy related technologies, among others, as a matter of national security policy efforts.

Major U.S. legislation passed into law in 2022, namely the Inflation Reduction Act and the CHIPS Act, contained financial incentives along with provisions for product sourcing content related to the U.S., Canada or Mexico. Published reports cited data from the Dodge Construction Network indicating that the construction of new U.S. based manufacturing facilities had soared by over 116 percent.

 

Prediction Implications

In 2023, procurement and supply management leaders will be expected to not only provide leadership for supply resiliency, added value, required protections and augmented support measures focused on certain key and deemed vulnerable suppliers, but also supply network cost reduction efforts. In the latter category, renegotiation of transportation and logistics contracts will be an obvious action as will analysis of other supply chain cost reduction opportunities in services or outsourcing areas.

We anticipate that this will be a delicate and perhaps challenging balance of priorities, with leveraged use of advanced technology software tools providing a benefit. The war for talent will especially apply to this area.

Geo-political trade reduction, the ongoing effects of climate change, a global energy shortage, broader Environmental, Social and Governance (ESG) concerns, and other risks have increased, further requiring added prioritization of supply network resiliency and likely supplemental supply management agility actions.

Procurement leaders will be stretched in their abilities to collaborate and align across C-Suite, technology and broader functional supply chain alignment of strategies, talent and other resources. Some will rise to the challenge, some will struggle.

Our added concern for this area is that a good many experienced supply management professionals elected to retire over the past two years and thus supply network and individual supplier knowledge may have departed the organization as-well, hence the importance of augmented technology.

Below are additional predictions from a global regional perspective.

 

China

Throughout most of 2022, China’s zero tolerance Covid-19 lockdown policies precipitated numerous manufacturing and transportation disruptions. Key manufacturing regions including Shenzhen, Shanghai, Beijing, Zhengzhou and Wuhan were impacted by both the threat of and actual occurrence of new variant Covid-19 infection rates and the government’s zero-tolerance lockdown policies. The culmination and likely milestone action of 2022 was in November

When local restrictions forced both a multi-day lockdown and worker disturbances of Apple’s prime manufacturing services provider Foxconn’s Zhengzhou “iPhone city” manufacturing complex, Apple had to issue an uncharacteristic press release informing customers of shipment delays of the latest iPhone 14 models. CEO Tim Cook then acknowledged the company’s 60 percent sourcing of supplier manufacturing in the country was too much and industry reports pointed to stepped-up efforts to seek alternative sourcing options across Asia including India and Vietnam. By late December, Apple’s shares closed at their lowest level since 2021 amid investor growing concerns over the supply and potential revenue shortfalls of iPhones and other hardware products during the crucial holiday fulfillment period. However, Apple’s China Plus efforts were already underway and are likely to be accelerated. Bloomberg reported in early January 2023 that the consumer electronic provider had from April to December, exported more than $2 billion of iPhones from India based contract manufacturers.

From our perspective, these incidents will likely be chronicled as the ultimate motivation for China’s leaders in December to completely eliminate Covid-19 restrictions across the country. We believe such moves have significant implications for the eventual regionalization of semiconductor and high tech advanced component supply networks in the coming years.

For manufacturers, retailers and wholesalers still direct dependent on China for supply of materials and finished goods, the likely scenario of widespread virus infections and elevated death rates in early 2023 leading to further localized manufacturing and transportation disruptions. Ocean container shipping carriers, in order to preserve profitability levels amid declining shipping volumes out of China, are very likely to cutback on scheduled sailings and maintain slow transit times. That will again impact component, product and customer fulfilment lead times.

Eurozone

The European continent faces a challenging winter and spring in 2023 as individual countries deal with shortages of natural gas previously supplied by Russia. Energy intensive chemical and other process manufacturers such as BASF have already moved sourcing and production of certain chemicals, fertilizers and other products to the U.S. and other countries where natural gas supplies exceed those in Europe.

The severity and degree of economic recession, persistent high levels of cost inflation and contracted product demand levels will likely lead to stagflation conditions, adding to business and supply chain challenges related to product sourcing. Depending on resolution of the Russia and Ukraine conflict, short-term use of energy derived from fossil fuels or coal will have continue.

 

United States

After continuous expansionary levels of U.S. based manufacturing and supply chain activity levels, 2022 came to a close with PMI indices pointing towards muted product demand and deteriorating operating conditions. The S&P Global US Manufacturing PMI® reported a December value of 46.2, signaling the fastest decline in operating conditions since May of 2020, which is equivalent to the peak of the Covid-19 pandemic. The December 2022 Manufacturing ISM® Report on Business®  recorded a value of 48.4 which was 10.3 percentage points below this index at the start of the year. Similarly, the December value was equated by the report authors to the lowest value since the coronavirus began. Manufacturing levels reportedly contracted again in December after expanding for 29 straight months.

Thus, data reinforces that U.S. manufacturing activity will likely remain in contraction for at least the first part of 2023, dependent on resiliency and spending patterns of U.S. based businesses, consumers or foreign based buyers.

The implication is that small and medium sized U.S. based manufacturers will have a tendency for being hesitant to make added strategic capacity or capability investments depending on the extent, depth or duration of an economic recession.

As indicated earlier, the passage of U.S. trade and inflation related legislation favoring the sourcing of key strategic materials has already led to more extensive U.S. based manufacturing capacity and resources among large manufacturers over a longer two to four year horizon, depending on the subsidies outlined in the legislation.

 

This concludes our Supply Chain Matters Part Two posting of select 2023 Predictions for Industry and Global Supply Chains.

We will feature three additional of our detailed predictions over the coming days so keep your browsers pointed to Supply Chain Matters.

We welcome additional client and reader feedback to this series and to specific predictions.  Our contact information is noted on our web sites.

 

Bob Ferrari

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