Once a year, just before the start of the New Year, our parent, the Ferrari Consulting and Research Group along with Supply Chain Matters provide a series of predictions for the coming year. These predictions are provided in the spirit of assisting industry supply chain teams in setting management objectives for the year ahead as well as helping our readers and clients to prepare supply chain management and line-of-business teams in establishing meaningful programs, initiatives and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and service management.
Our predictions series includes a re-look at all that occurred in the current year, a reflection of future implications, and soliciting input from clients and other supply chain and blogosphere observers. Unlike others, we incorporate a lot of thought and perspective into our annual predictions and take the time to actually scorecard our annual predictions at the end of the year. Readers are welcomed to review our scorecard series related to 2015 predictions that occurred in late November.
In our introductory posting, we unveiled our complete listing of ten 2016 predictions for industry and global supply chains.
In this Part One posting, we dive into the first two predictions.
2016 Prediction One: A Year of Uncertainty and Continuous Challenges Related to Global Supply Chain Activity
Our first prediction related to global activity is that industry and global supply chains should anticipate another year of uncertainty in planning product demand and supply needs on an individual geographic region or country basis. From our lens, there will be a need for lots of contingency and various scenario planning options, and sales and operations planning will be very engaged and challenged throughout the year to meet expected business outcomes. Even more production overcapacity across China’s industry sectors will add to downward global pricing pressures affecting specific industry supply chains.
As industry supply chains approach 2016, there are many global economic and other signs pointing to a slow or declining growth environment. A stronger U.S. dollar and depressed commodity prices have sown caution among a broader group of manufacturers. Wide uncertainty regarding the global economy, increased stock buybacks, declining capital investment have led to industry consolidation over investment-led business expansion. The current unprecedented lower cost levels of crude oil have negatively impacted the oil and gas and alternative energy sectors.
Even more production overcapacity across China’s industry sectors will add to downward global pricing pressures affecting specific industry supply chains. China’s industrial production continues to grow at faster-than-expected pace adding more negative influences for multiple industry supply chains in 2016. We predict added production overcapacity will continue to effect global markets as produced goods flood industry supply chains. The country’s National Bureau of Statistics reported that industrial production rose 6.2 percent in November prompted by the latest round of government economic stimulus. Fixed asset investment has grown 10.2 percent year-over-year in the first 11 months of 2015 amid declining exports and domestic retail sales. While global economists predict that overall GDP growth will drop below 7 percent in 2015, the current economic stimulus hopes to hold the 7 percent threshold. That we believe will lead to more troublesome global overcapacity. Added to concerns for China are growing incidents of labor unrest as more and more Chinese manufacturers become financially strained. According to a business-sentiment index from China’s Caixin business magazine, factory employment has fallen for 25 consecutive months.
Added to this environment are pronounced merger and acquisition developments that can reap havoc on supply chain business processes, systems and organizations. To cite one example, the very high profile mega-merger of Kraft Foods by H.J. Heinz, announced in March of 2015, has led to a plan to cut $1.5 billion in costs, including an announcement to close seven North American plants because of perceived operational redundancy. At the same time, the combined company intends to increase its quarterly dividend by 4.5 percent. Similarly, mega-mergers sweeping the pharmaceutical industry will prompt challenges in consolidation of backbone systems and supply chain processes.
The above stated, the International Monetary Fund (IMF) in its October World Economic Outlook has predicted 2016 global output growth of 3.6 percent, compared to a somewhat revised number of 3.1 percent for 2015. Keep in-mind that the IMF originally forecasted 3.8 percent growth for 2015, but steadily revised that number downward during the year. Current concerns center on modest growth among advanced economies, particularly the Eurozone and the United States, along with severe economic distress within Brazil, Russia and certain other Middle East countries. China is obviously the biggest concern, with a forecasted growth of 6.3 percent compared to an estimated 6.8 percent in 2015.
The J.P. Morgan Global Manufacturing PMI Index, a composite index and recognized benchmark of composite global supply chain and production activity provided concerning signals by the end of 2015. Global production was described as the slowest pace in almost two-and-a-half years and has been trending downward throughout 2015. The index dropped to a low of 50.6 in September and as of November the index recorded at 51.2 reading. By November, the ISM PMI reflecting U.S. activity, and the Caixin China PMI both recorded values below the 50 mark, both together representing the bulk of global manufacturing and supply chain output.
The most important capability for 2016 will be the ability to control supply chain costs, clearly understand such costs across various fulfillment channels, and be able to contribute to expected business financial and operational outcomes.
Indeed, industry and global supply chains should anticipate another challenging year and resiliency, adaptability and risk mitigation will be key themes.
2016 Prediction Two: Favorable Outlook for Inbound Component and Commodity Costs but Procurement Teams Need to Step-up Supplier Management
Global commodity prices, the raw-material of industry supply chains, declined sharply during 2015. The World Bank’s Commodity Markets Outlook published in October 2015 generally called for slightly higher non-energy commodity prices in 2016 including categories of Agriculture, Raw Materials, Fertilizers Metals and Minerals. We believe that may be too optimistic and that continued overcapacity will drive inbound prices generally lower.
The World Bank has additionally cited the weather-related risk of El Nino which typically has adverse effects in Latin America, East Asia and Australia. Recent weather forecasts indicate that the current 2015-2016 El Nino wave could be one of the strongest on-record, affecting wide portions of the United States as well. According to the report, the effects could have a significant impact on country-specific agricultural prices.
The most significant commodity price trend remains that of oil, as the price of crude oil has reached seven year lows amidst of global glut of supply and little demand growth.As our reading audience is well aware, one of the most influential cost factors for industry supply chains, beyond labor is oil and energy prices. But, this can be a double-edged sword since the current historically low energy prices will provide attractive cost-saving opportunities but does have a profound impact on the demand for any energy related products and services such as oil exploration, refining or alternative energy related products.
The cost of crude oil fell below $50 per barrel at the beginning of August 2015, and dropped below $40 per barrel by early December, plunging to near seven-year lows. Prices have been driven lower by a global glut in worldwide crude inventories, expectations of slowing global economic growth, particularly in China and other emerging markets. Industry watchers broadly expect prices to stay low throughout 2016 due to the current global supply and demand imbalance.
Due to the uncertainty and the heightened supply risks expected in 2016, procurement teams will need to re-double their efforts focused on supplier assessment and monitoring. Joint collaboration with suppliers on product innovation and risk assessments will be essential. More than ever, more information needs to be shared and trusted relationships must be nurtured. We further predict that procurement can no longer unilaterally shift the burden of required cost reduction “over the wall” to suppliers. Instead, teams will need to effectively balance cost control with joint collaboration and opportunistic innovation. While CFO’s will likely mandate added cost controls or manadates, they will be even more attentive to supporting the firm’s top-line revenue and profitability growth as well as the financial viability of strategic suppliers. Value-chain innovation and timelier introduction of new and innovative products and services will be expected, along with little tolerance for surprises in 2016.
Keep your browser pointed to Supply Chain Matters as we continue dive into each of the above 2016 predictions in more detail. In our Part Two posting we will explore Prediction Three- continued turbulence in global transportation and logistics, and Prediction Four- the widening of supply chain talent and skills gaps.
In the meantime, share your own predictions over and above those that we have outlined. Utilize the Comments section associated with this posting or email us directly with your predictions at: feedback <at> supply-chain-matters <dot> com. We will share all contributed predictions in a final predictions of this 2016 series.
Bob Ferrari, Founder and Executive Editor
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