Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide a series of predictions for the coming year. We have maintained this tradition since the founding of the blog in 2008.
In our Part One posting, we explored our first two predictions for 2013, the overall economic and business challenges, and our prediction of inbound commodity prices.
Our Part Two posting explored predictions #3 and #4, which noted a continued renaissance in U.S, based manufacturing and the very important challenge of supply chain skills development and retention.
Our Part Three posting explored Prediction #5, our industry specific supply chain challenges prediction.
In the following posting we address the critical need for supply chain resiliency and responsiveness in 2013 as well an increased penetration of Chinese companies in other industry supply chains.
Prediction #6: Supply chain organizations must either embrace and augment resiliency and responsiveness capabilities in 2013 or deal with the consequences of poor business outcomes.
Since its inception in 2008, Supply Chain Matters has outlined numerous events where industry supply chains became significantly disrupted. We have provided quantification of the negative impacts to the business, either in people, service or financial dimensions, and have incorporated predictions for continuous disruption in prior years. Many supply chain senior executives and their teams are now coming to the understanding that volatility and rapid business change are the new normal. This may perhaps be an overused term, but is one with important meaning. Constant volatility in product demand, supply, and other unplanned events are exposing the vulnerabilities of existing planning, execution or S&OP decision-making processes. In 2013, we elevate our prediction to umbrella the more compelling need for holistic needs for supply chain wide resiliency and responsiveness.
In our polling, discussions and research in 2012 we have come to conclude that while many supply chain teams desire these capabilities, they lack articulation of a well-defined and pragmatic roadmap. Investing in these capabilities takes on important people, process, change management and technology augmentation connotations. Process becomes an understanding that the current clock speed of business requires that supply chain planning and execution must come together as a continuous, synchronized process. Rather than forecasting models, responsiveness requires decision-making capabilities that are anchored in predictive analytics, the ability to assess and respond to various likely business scenarios. It implies deeper cross-functional, customer and supplier collaboration and engagement processes, and not passing the problem along to another tier of the supply chain for singular resolution. It further implies more leveraged use of social based, systems of engagement. Rather than drowning in all forms of data, it is about mining and visualizing needed insights as to what needs to occur, and when. The term “big data”, in our view, is overhyped IT and vendor term, and lacks clear understanding for action among supply chain functional teams. Finally, a smarter and more responsive supply chain requires different sets of people and team skills.
In our 2012 Predictions, we pointed to the capabilities incorporated in “supply chain control tower” (SCCT) which addresses the need for quicker, more timely and informed supply-chain wide decision-making as coming to the forefront in terms of market education and early adoption. SCCT will continue to come to the forefront in 2013. The motivation for this market interest was to insure supply chain wide resiliency and responsiveness and we predict that SCCT interest will begin to shift from user education to the initial roadmaps for enabling people, process and technology-enabled capabilities. SCCT initiatives that were primarily originated in the high tech and consumer electronics industry will spread to other industries in 2013.
Likewise, supply chain teams must provide more visible leadership to other parts of the business as to what augmented capabilities are required to enable a smarter and more resilient supply chain, along with a time-phased roadmap of measurable milestones.
The takeaway of this prediction is that the visible gaps among global supply chains with more resilient and responsive capabilities vs. those that are not will considerably widen in 2013, and will be reflected in more negative outcomes for the broader business and for stockholders.
Prediction #7: Chinese based manufacturing and service firms will markedly increase their presence and influence in global supply chains during 2013.
According to a July 2012 Bloomberg article, China, which holds in excess of $3 trillion of foreign-exchange reserves, has been encouraging companies to buy assets overseas, particularly in securing commodity resources, advanced technology or building more internationally focused businesses. We would add that by our view, the strategy includes strategic supply chain process and product component capabilities. The Wall Street Journal ranked China sixth in both number of deals and in acquisition value, behind countries such as the U.S., the United Kingdom, France, Germany and Japan. It expects China to double its acquisitions over the next five years.
While resources and energy have been the predominant strategy to date, industry supply chain penetration strategies are also evident. With multiple years of financial stress eating at the global economic climate and with access to cheap and abundant financing, Chinese manufacturers and other firms are primed to continue moving into other geographic regions and associated industry supply chains. Current double-digit growth rates in direct labor costs within China have motivated manufacturing firms to shift manufacturing to other countries, while Chinese suppliers are now compelled to invest more advanced process and product innovation.
The most active area to date has been in the U.S. based automotive industry, where the major financial crisis that hit in 2008-2009 made many distressed suppliers attractive for acquisition. As we pen these predictions in December 2012, the latest acquisition prize has been Wanxiang’s acquisition of U.S. car battery manufacturer A123 for $256 million in a bankruptcy auction. Some industry groups and U.S. lawmakers immediately voiced concerns, given that A123 developed advanced battery technologies via investment from U.S. fiscal stimulus funds. Wanxiang officials are actively responding, by not including any of A123’s military business in its acquisition efforts and listening to concerns.
In the high tech and consumer electronics sector, Lenovo has set a blazing trail not only in market growth, but also in blending both owned and outsourced manufacturing presence. The company serves as the current benchmark for China’s industries in acquiring an international marketing, product and supply chain presence. Its product portfolio has widened beyond computing to include smartphones. The company has also made significant manufacturing presence investments in both Brazil and the U.S., working proactively with legislative leaders to assuage political and economic security issues.
These strategies certainly come with major political hurdles existing in the resident acquisition focused country, as witnessed by previous acquisitions being derailed by Canadian, European, or U.S. lawmakers. However, Chinese firms have begun to exercise more patient and pragmatic approaches to appease political concerns. Some political leaders in economically distressed regions are actively recruiting Chinese companies to invest in their communities. This month, China’s energy giant Cnooc was finally able to close on an $18 billion purchase of Canada’s energy group company Nexen after a lengthy period of negotiations and concessions. This deal is being noted as a milestone toward the growing maturity of negotiation practices.
Other industries of acquisition activity have included alternative energy, where Chinese firms were able to scoop-up the assets of bankrupt companies Evergreen Solar and First Solyndra and now position for U.S. based manufacturing presence.. According to the Financial Times, Chinese firms are also turning their attention to machinery makers in Europe, including Germany. As of this writing, one of the largest homebuilders in the U.S., Lennar Corp. has secured financing from China Development Bank to develop two major residential real estate projects amounting to 20,000 homes near the city of San Francisco. There is reported speculation that this deal stipulates that China Railway Construction Corp (CRCC) will play a role as either a supplier or contractor. CRCC is also a interested bidder for the planned project to build a high-speed rail line connecting the cities of San Francisco and Los Angeles, which is currently undergoing a delay because of lawsuits.
For these reasons, we believe that 2013 will feature even more of an outreach from Chinese manufacturers and suppliers into broader geographic and industry supply chain presence.
This concludes Part Four of our 2013 Predictions for Global Supply Chains.
As always, readers are encouraged to comment on these predictions as well as add additional thoughts as to what to expect in 2013.
© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.