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.
Readers can view the entire listing by clicking on this web link: 2013 Predictions for Global Supply Chains.
In this Part One commentary, we explore our first two predictions for 2013:
Prediction #1: Yes, yet another year of global challenges to support revenue and profit growth
As we noted in both our 2011 and 2012 Predictions, the world economy continues to provide an environment of high uncertainty and 2013 will undoubtedly provide more reinforcement. The latest economic outlooks published by both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) each strike a very cautious and guarded tone. The IMF notes that the world economy has ”suffered new setbacks” in 2012, and forecasts a “gradual strengthening of activity from the relatively disappointing pace of early 2012. “The Economist in its The World in 2013 outlook issue for 2013 indicated that “huge swathes of the world seem to be embarking on a Japanese-style experiment with long-term stagnation.”
The IMF projection is for 3.6 percent global wide growth in 2013 vs. a projected overall 3.3 percent growth in 2012. According to the IMF, “output is expected to remain sluggish in advanced economies but still relatively solid in many emerging market and developing countries. Unemployment is likely to stay elevated in many parts of the world.” Both agencies point to noteworthy downside risks, citing the ongoing Euro area financial crisis and the threat of U.S. “fiscal cliff” triggering major contractions and further recessionary economies. The OECD now acknowledges that a recession is ongoing in the Euro area, and that the effects of that recession have spilled over to consequent slowdowns among emerging market economies.
The implication for global supply chains is an obvious need to be able to forecast and actively monitor product demand by individual geography and by country. An example of the importance of this planning capability can be noted in the contrasts of some current forecasts below:
IMF Projection 2012 2013 OECD Projection 2012 2013
Euro Area (0.4) 0.2 (0.4) (0.1)
U.S. 1.3 1.5 2.2 2.0
Japan 2.2 1.2 1.6 0.7
China 7.8 8.2 7.5 8.5
India 4.9 6.0 4.5 5.9
Continued periods of global economic uncertainty eat away at consumer confidence, and in November 2012, many indices of consumer confidence across the globe turned more negative, including the index reflecting U.S. consumers, which had been on the rebound earlier in the year. Eroded consumer confidence inclines consumers to not spend, which has an implication for many industry supply chains. With the only current 2013 bright spot being developing markets and China, that is probably where global supply chain product fulfillment will concentrate in the coming year.
As in the past, our 2013 projections do not include any effects of further economic shocks that may come as a result of major natural disasters, political events or energy shocks. Continued unprecedented climate related events were felt throughout 2012 in the frequency and severity of storms, as well as a major drought in the U.S. Midwest. These conditions have had a cumulative effect on the overall supply of food commodities and food prices. Continued tensions in the Middle East, particularly Iran, Syria and Israel continue the threat for potential energy price shocks that could impact global supply chains, not to mention continued political events related to severe economic contraction.
Once again, global supply chains will be constantly challenged throughout 2013 to sustain top-line revenue growth, while cost reduction pressures will most likely increase in some regions as firms continue on a strategy of preserving cash and reducing expenses. Procurement teams will be challenged to uncover even more cost reduction opportunities, with the most likely target being indirect spending, especially services.
Job cuts actions continue across Europe while U.S. based firms continue to focus on China and other developing economies for revenue and profitability growth. We again predict business challenges in sustaining needed working capital including inventory investment for suppliers residing in recessionary economies, particularly across Euro countries. Signs of supplier stress continue and we could well see further supplier failures with impacts to industry supply chains. Many global manufacturers prepared for contraction scenarios in 2012, which actually occurred in the Eurozone. For 2013, these same manufacturers will remain cautious and look for any growth opportunities that may develop.
Prediction #2: Stabilized and potentially reduced inbound commodity prices, but certain exceptions in 2013
Explosive growth in commodity costs generally moderated in 2012 with lower tiered raw material suppliers such as metals, chemicals and specialty chemicals experiencing noticeable slowdowns in business volume. There are a few exceptions, but overall, commodities have shifted to a demand contraction and supply over abundance, primarily because of the continued overall slowdown in the global economy. (See Prediction #1) In global steel volume alone, a gross situation of excess underutilized capacity has forced political upheaval in announced decisions to close steel producing facilities across Europe and other global regions. Steel producers will seek some sense of a demand-supply balance in 2013 to maintain pricing power, but we believe that will prove unsuccessful.
The one significant exception is food related costs. Severe drought conditions in the U.S. during the summer of 2012 drove dramatically decreased harvests for corn, wheat and other agricultural commodities. Asia’s overall rice crop has been impacted by continued severe weather and floods throughout the monsoon season. Already there are indications of a rainy spring among South American food producing regions. Increased commodity food costs have therefore resonated to other dependent supply chains such as meat and poultry products, which will continue well into the New Year. Any continued occurrence of severe weather or drought conditions in 2013 will only add more pressure for increased commodity food costs.
Energy costs in 2012 were primarily driven from political vs. supply and demand factors. Continued concerns concerning countries in the Middle East, particularly Iran caused the price of oil to remain high, despite efforts by Saudi Arabia to dramatically increase supply levels. Global transportation carriers were thus able to continue to benefit from across the board fuel surcharges and consequent high rates. In manufacturing, The U.S. has a continued advantage in more attractive pricing of natural gas supplies leading to a continued renaissance in U.S. manufacturing related investments. (See Prediction #3 ). We believe this advantage will carry over to either more at-par or lower prices for U.S. manufactured components and materials.
As noted in our Prediction #1, with a highly uncertain global economy in 2013 and clear signs of recession impacting Europe, Japan and perhaps other economies, the pressure for additional business cost reductions will cause procurement teams to dive deeper into indirect materials and services procurement spend levels, to seek out incremental cost savings opportunities in addition to direct materials spend. This will drive more interest in analysis tools that can identify such opportunities as well as more innovative programs to consolidate buying needs among groupings of companies to leverage price negotiations.
This concludes Part One 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.