Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our annual ten predictions concerning industry and global supply chains for the coming year. We have maintained this tradition since the founding of this blog in 2008 and it continues to be quite popular with our readers and clients.
These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming year. Predictions are sourced from synthesizing developments and trends that are occurring in supply chain business, process and technology dimensions, researching various economic, industry and other forecasting data, along with input from clients, thought leaders and global supply chain observers. We take predictions seriously and align our research and blog commentaries to focus on each specific prediction area throughout the coming year.
Supply Chain Matters will revisit each of our annual predictions at the end of the year to ascertain how close or how far each fared. The report card regarding our 2014 Predictions can be re-visited at the below web links:
2014 Predictions Report Card- Part One
2014 Predictions Report Card- Part Two
2014 Predictions Report Card- Part Three
2014 Predictions Report Card- Part Four
2014 Predictions Report Card- Part Five
We continue to believe that industry analysts should openly state their insight and opinion of what to expect in the coming year without the need for a paid subscription. Readers therefore have the opportunity to compare and contrast various sources of predictions.
As in the past, all ten of these 2015 predictions will be included in a more detailed research report which will be made available for no-cost downloads in our Research Center in January. Readers will be able to register to download a copy or can email us directly. More details regarding that process will come later.
In this Part One posting, we outline our first five predictions for 2015.
Drum roll please …..
2015 Prediction One: More optimistic global economic growth with the usual caveats and uncertainties
Forecasts point to an optimistic global economic outlook for 2015 with continued cautions and unknowns for industry supply chains. The bright spots will continue to be the United States and Mexico.
The October 2014 forecast from the International Monetary Fund (IMF) predicts 3.8 percent global growth vs. 3.3 percent in 2014. Advanced Economies are predicted to grow 2.3 percent vs. 1.8 percent in 2014. World trade growth is expected to expand 5 percent in dollar terms.
The most concern resides for the Eurozone, where tepid growth and deflation remains an identified and concerning risk.
China’s growth is predicted to be 7.1 percent vs projected 7.4 percent in 2014. China’s economic planners will be caught in a difficult balancing act to manage growth but deal with high levels of debt. We have read of more pessimistic forecasts foretelling of broader setbacks ahead for China’s economic growth, with concerns for a stumble. Then again, China’s economic leaders were adroit in avoiding a stumble in 2014.
According to the IMF, developing economies are predicted to grow 5.0 percent vs. 4.4 percent in 2014. A significant surprise will be India which is expected to grow 6.4 percent vs. 5.6 percent in 2014. Growth is expected to accelerate in Latin America with Brazil and Mexico leading the charge. Argentina remains an ongoing concern.
The IMF expects resurgence of U.S. economy to continue at 2.3 percent vs. projected 1.8 percent in 2014. However a poll of 50 economists conducted by The Wall Street Journal in September indicates closer to 3 percent U.S. GDP growth in 2015. For the United States, the ISM PMI Index in November was reported as 58.7, a significant 7.4 percentage points higher than the value recorded in January.
The J.P. Morgan Global Manufacturing PMI Index, a composite index and recognized benchmark of composite global supply chain and production activity provided mixed signals by November of 2014. An overall value of 51.8 was recorded in November reflecting expansion of manufacturing production for the 25th consecutive month, but the rate of expansion eased to its lowest level since August 2013. Growth in new orders was recorded as a 16-month low with the trend in international trade volumes stagnated. North America continues to be reported as a key growth region while concerns were expressed for stagnation in China and further subdued growth for the Eurozone sector.
Another area of concern is fluctuations or shifts in global currency, particularly Asian currencies and the Chinese yuan. As we pen these predictions, the currency of Russia has been impacted by significant de-valuation.
The takeaway for industry supply chains and their sales and operations (S&OP) processes is to anticipate another year of needs to be able to predict supply chain demand and supply needs on an individual geographic region or country basis. Generalized planning no longer suffices and industry supply chain teams will need the means to be able to respond to short-term market opportunities or sudden changing trends.
2015 Prediction Two: General Moderation and Reduction of Commodity Costs with Industry Exceptions
Expect a continued overall moderation trend for the cost of commodities with certain industry specific exceptions. Dramatically lower oil prices in 2015 will be the biggest headline driving commodity and pricing trends in 2015.
As of mid-December, the Standard & Poors GSCI Index of broad based commodities is projecting a 27 percent decrease in overall commodity prices over the next twelve months.
As we pen our 2015 predictions, the prices of crude oil have plunged to their lowest levels in five years after the International Energy Agency (IEA) cut its forecast for global oil demand on the fifth occasion in six months. The news has added volatility among global equity markets as investors become increasingly concerned about the implications. Global oil prices have consequently plunged from the peak of $110 per barrel to a range of $60-$70. Some forecasts now peg 2015 oil prices as low as $50 per barrel.
Global and industry supply chain strategies are driven by the forces related to oil prices and the cost of energy and thus this commodity trend looms large for broader implications in 2015. The open question is whether the trend is permanent or short-lived.
Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen weather or risk events.
2015 Prediction Three: Momentum for U.S. and North America Based Manufacturing Sourcing Continues but Motivates Broader Needs
We predict that the momentum for U.S. and North America based manufacturing will continue in 2015 with discernable benefits for certain industries. The need to broaden investments in certain industry supply ecosystems and U.S. logistics and transportation infrastructure will continue to dominate business headlines and industry agenda.
Throughout 2014, U.S. and North America based supply chain related activity continued at a steady state. As of October, 16 of the total 18 tracked industries within ISM’s PMI indices were reporting growth momentum.
The continued growth of U.S. and North America manufacturing comes from a number of factors not the least of which have been the ongoing double-digit increases of labor costs in China, increased positive momentum of the U.S. economy and more attractive energy costs throughout North America. Specific efforts by Wal-Mart, other retailers and manufacturers concerning significant long-term commitments for sourcing products in the region have helped immensely.
In August of 2014, the Boston Consulting Group noted in its report, Shifting Economics of Global Manufacturing, that in some cases, the shifts in relative costs of manufacturing among China and North America have placed Mexico as the cheaper low-cost manufacturing alternative.
However, the sourcing of U.S. and North America based manufacturing continues to uncover gaps in globally competitive component supply chain networks, many of which still reside in Asia or China. This is especially the case in high tech and consumer electronics, footwear, apparel and other industries. Continued momentum is thus increasingly dependent on further re-building of global cost competitive North America based supply ecosystems among multi-industry supply chains.
A caveat for 2015 stems from the plunging price of oil and energy outlined in Prediction Two which could influence some manufacturers to remain concentrated in an Asia or Eastern Europe based sourcing strategy.
2015 Prediction Four: Internet of Things (IoT) Continues to Attract Wide Multi-Industry Interest But Certain Challenges Need to be Purposely Addressed
Cross-industry interest levels and momentum surrounding B2B products and services leveraging Internet of Things (IoT) coupling sensor-based based technologies will continue to attract wide multi-industry interest. IoT provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management. We expect more technology vendors to jump into this area along with heightened M&A activity as these vendors position for industry needs and requirements.
IoT will further drive a convergence among product and service focused supply chain planning and execution processes as well as certain product lifecycle management information integration needs. PLM and SLM provider PTC is a current example of this dimension but other vendors will be attracted to this business model.
The realities in the lack of consistent or conflicting global-wide standards, overcoming data security concerns and scalability of networks will provide more visible challenges for broader industry deployments. We have recently indicated a feeling of de-ja -vu for the replay of early RFID efforts, as vendors tended to ignore certain realities of the technology. Vendors will need to step-up efforts to address current challenges and individual industry needs.
2015 Prediction Five: Noted Industry Specific Supply Chain Challenges
Noted industry specific supply chain challenges will remain in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Automotive manufacturers will have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures.
B2C and Retail
Global retailers continue to be challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. In 2014, retailers encountered the realities of lower margins for online fulfillment, the needs to invest in enhanced inventory management, distrusted fulfillment and order management capabilities, and the perfect-storm presence of developments that resulted in dysfunctional west coast ports.
Retail sales in China, Asia and Australia are expected to surpass that in North America, but China’s efforts in greater scrutiny of foreign-based retailers and service firms will likely continue to impact growth expectations in the coming year. According to industry and business media, retailers are expected to instead target the other so-termed MINI countries (Mexico, Indonesia, Nigeria, Turkey) for growth prospects in 2015.
The accelerating trends and implications of Omni-channel and online fulfillment will impact traditional retailers with more casualties recorded in 2015. Amazon, Google and Alibaba will continue to be industry disruptors, movers and shakers in 2015 and Wal-Mart.com may join that list. We would not be surprised if Alibaba concentrates acquisition efforts toward more U.S. and North America online properties to prepare for a presence.
Consumer Product Goods
CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply and regulatory networks. The heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering to one or more CPG companies will continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The new winners in CPG will continue to be smaller, more nimble producers who lead in product, supply chain business process and technology innovation.
Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel in 2015 will likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs.
Renewed hostilities involving Ukraine or severe economic or currency crisis within Russia could impact strategic supply of titanium and other metals. The economic malaise that is expected to continue across the Eurozone region along with expected contraction in China will present 2015 challenges for Airbus and Boeing’s supply ecosystems. Boeing will especially be focused on continuing to influence more cost reduction and productivity efforts among its global suppliers while continuing to address identified issues from regulatory investigations in practicing added supplier oversight for design and production process quality.
In the U.S., an unprecedented and overwhelming level of product recall activity spurred by heightened regulatory compliance pressures will drive product quality and compliance as the overarching corporate-wide imperative. Cascading incidents in 2014 pointed to issues of quality lapses among global suppliers and early-warning of potential component defects. Existing product recall campaigns will most likely extend through the first-half of 2015, placing added strains on aftermarket service dealerships. Japan based air bag inflator supplier Takada will continue to deal with its creditability crisis and could lose significant new business if it does not step-up and get-ahead of the airbag quality crisis. OEM General Motors will especially be under the looking glass in 2015.
This concludes Part One of Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains. Part Two in this series will unveil our next five predictions.
We encourage readers to share in the Comments section their own predictions on what to expect in 2015.
In the meantime, we extend best wishes for the holiday season and the New year.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved