This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.
Readers can review the full listing of 2012 predictions at the following link.
In this Part Two posting, we explore our first two predictions for 2012.
Prediction One: A continued spillover of high uncertainty of events related to the global economy will make business growth highly challenged, and thus provide another challenging year in global supply chain management.
As we noted in our 2011 Predictions scorecard, 2011 moved from a manufacturing resurgence to a period of high uncertainty. Both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) now point to a period of high uncertainty in 2012. The IMF’s World Economic Outlook stated in September that: “The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing.” In preparation for the November G-20 Summit meeting held in Cannes, both organizations noted that the world economy has elevated risks of falling back into recession without bold actions on the part of governments.
The IMF points to considerable uncertainty about how fiscal sustainability will be achieved in the U.S., Japan, and some Eurozone economies. The agency further points to the need for consistent, coherent, and co-operative approach to crisis resolution in regard to the ongoing Eurozone fiscal crisis. While growth in the Asian region has propelled the global recovery thus far, strains in the Eurozone crisis could have a negative impact on Asian growth. Signs of a slowing in previous growth cycles in the emerging markets are already showing. China, Brazil, and India are collectively slowing according to Q3 GDP numbers.
The OECD projects GDP growth will remain weak in the advanced G-20 economies over the next two years and the growth pace of major emerging markets is expected to be lower. The OECD points to a marked slowdown with patches of mild negative growth for the Eurozone and a gloomier outlook if EU leaders fail to restore market confidence or if financial contagion spreads to other advanced countries such as the U.S… The gloom scenario suggests a financial deterioration of the magnitude experienced in 2008-09, which could lead to a drop in GDP levels of the major OECD economies of up to 5 percent by the first half of 2013. Unemployment is expected to remain high in many advanced countries.
These grim projections do not include any effects of further economic shocks that may come as a result of added natural disasters or political, social or unplanned events. Politicians and economists are very careful in avoiding the “R” word until it is obvious. While we profess not to be trained economists, it feels like the global economy is at risk of slipping back into recession during 2012, and the question remains as to how severe. Many advanced countries remain reluctant to propose or sustain economic stimulus measures such as investments in transportation, new growth opportunities like alternative energy, or supply chain related infrastructure.
For these reasons, global supply chains in 2012 will be highly challenged to help in sustaining any top-line growth, while cost reduction pressures will unfortunately increase. Uncertainty has already begun among industry supply chains as reflected in lower order volumes and cautious prospective. The challenge will be in where to cut costs, since previous cost cutting has taken on the most obvious areas, and now rather difficult decisions lie ahead. Similar to what occurred during the 2008-09 Wall Street financial crisis, emphasis will likely be placed on increased customer service and the retention of key customers. Inventory investment will also be challenging, particularly in Europe where access to affordable credit may become problematic.
While many manufacturers have relied on emerging markets as the growth engine, that could change in 2012 as these economies will continue to adjust to the effects of rising prices, high inflation and the uncertainty of global export markets. Protection of domestic producers may well increase in order to sustain any internal employment and economic growth. U.S. manufacturers could fare better than European producers if contagion does not spread.
Prediction Two: Commodity and component price increase levels experienced in 2011, with some exceptions, will moderate in 2012, but procurement teams need to maintain a keen eye on pricing, supplier health and performance, and supply network agility.
In the first-half of 2011, industry supply chains struggled with rather high levels of inbound material price increases that significantly impacted gross margins and profitability. Many companies had to pass along these increased costs in higher prices to customers and consumers in the range of 5 to 10 percent. Transportation costs remained high in spite of some moderation in the cost of energy during the middle to late part of the year.
Moving into 2012, all indications point to continued moderation of inbound price hikes, especially if economic output activity begins to falter. The U.S. Department of Agriculture has forecasted food inflation levels to moderate in the range of 2.5 to 3.5 percent in 2012 over the 3.5 to 4.5 rate increases experienced in 2011. Similarly, metals prices are expected to moderate or decline, especially if world economic output takes a dramatic negative turn in 2012. The October 2011 Manufacturing ISM Report on Business reported the ISM Prices Index as 15 percentage points lower than September, with areas such as plastics, primary metals, electrical equipment, chemicals, papers, among others, all indicating lower prices.
The U.S. Energy Information Administration (EIA) forecasts global crude oil consumption to grow from 88.2 million barrels per day in 2011 to 89.6 million bbl. /day in 2012. According to the EIA, China and other emerging economies will account for all projected 2012 consumption growth. Consumption in member OECD countries is projected to be relatively flat in 2012. OPEC crude oil production is expected to remain flat in 2012, with U.S. retail gasoline and diesel prices also expected to remain flat or slightly decline in 2012. As in the past, a large caveat is associated with these forecasts, namely that political unrest across the Middle East, terrorist incidents, or other shocks impacting supply do not occur during the year. It will be interesting to observe how a moderation in energy prices will impact current transportation carrier surcharges and rate increases during 2012.
Our caveat in price increases applies to specific industries that will be influenced by the after-effects of the monsoon floods that impacted Thailand, specifically hard disk drives and other precision electronics. Current indications are that supply and capacity shortages may extend further into 2012. Any other occurrence of a major supply disruption in 2012 should also be monitored. The U.S. west coast is long overdue for a major earthquake event, and further major seismic shocks surrounding Asia’s Fire Ring are always a concern.
Beyond price issues, procurement teams will need to once again keep a keen eye on supplier health and performance, especially if the Eurozone financial crisis spills over to other economies. Overall, supply chains remain rather fragile with all of the shocks that occurred in 2011. The need for agility in supply contracts is very important. Rather than pressuring suppliers for added price reductions, it will be more important to maintain a reliable network of supply flexibility.
This concludes Part Two of our Supply Chain Matters 2012 Predictions. In Part Three, we will explore our prediction that 2012 will bring a complete re-visit to supply chain outsourcing strategies, namely because of the new impact of supply risk and business continuity insurance coverage.
In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.
© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.