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 series of predictions for the coming year. 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 New Year.
In Part One of this series, we unveiled the methodology and complete listing of our 2014 predictions. In this posting, we explore our first two predictions, which traditionally focus on what to generally expect in global economic and procurement dimensions.
An Optimistic yet Uncertain 2014 Global Outlook with Consequent Impacts on Industry Supply Chains
As has been noted in our annual predictions since 2011, the global economy continues to present an environment of uncertainty in many dimensions. However, economic forecasts concerning 2014 are a bit more optimistic but come with many cautions or caveats.
Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) forecast some growth in the global economy in 2014 but both agencies point to notable downside risks. The IMF forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.9 percent in 2013. It attributes much of the anticipated growth to be driven by the advanced economies. Emerging market growth is expected to be weaker while the Eurozone region is expected to gradually pull out of recession, but at a rather modest 1 percent pace. Growth in China is anticipated to level off to the 7 ¼ to 7 ½ percent range.
The OECD also forecasts global growth to be 3.6 percent in 2014, rising from a forecasted 2.7 percent in 2013. The OECD has also downgraded growth projections for emerging economies, citing slower trade, subdued investment levels and potential further negative shocks that could impact these economies. In August of 2013, business media featured reports indicating that the BRIC honeymoon was over after the OECD declared that their data reflected slowing economic momentum for Brazil, Russia, India and China
Both organizations reinforce the existence of rather fragile consumers. Job growth remains tepid with unemployment levels especially high among young professionals in Europe and little improvement in the United States. Weakness in the European banking system and the cumulative effect of two years of recession does not add to the confidence levels of European consumers. The past shutdown of the United States government and continued brinkmanship actions over fiscal policy continues to spook consumers and is reflected in their spending levels. Each quarter, analytics firm ComScore polls a select group of U.S. consumers regarding their rating of economic conditions. For the past three quarters, consumer responses of poor economic conditions have consistently averaged between 40-42 percent. Similar sentiment continues across the Eurozone. The implication is that any product or retail focused supply chain focused on demand from direct consumers will continue to experience the effects of consumers who will be cautious in spending, and will be highly sensitive to price and value.
In 2014 industry supply chains will continue to be constantly challenged and must further enhance capabilities to be able to plan, sense, respond or adjust to product or services demand. Industry supply chains and their planning and S&OP teams who had previously planned on aggressive growth and product fulfillment in emerging markets need to be more diligent in the coming year. Overall, the ability to sense and respond to changing markets at the discrete region or country level will prove beneficial. Supply chain wide visibility to inventory, or exceptional supply and demand imbalances at the regional level will prove important as a differentiator to other competitive players.
Stable Inbound Commodity and Component Prices with Certain Exceptions
Commodity costs moderated significantly in 2013. As of mid-November 2013, the Standard and Poor’s GSCI Commodity Index was down approximately 5 percent year-to-date. Prices in certain sectors were down considerably, for example grains down 22 percent, industrial metals down 13 percent and agricultural products down 20 percent. The IMF forecasts that most commodity prices should remain flat or fall over the next 12 months. Some upside price risks were forecasted in corn coffee and wheat products.
In the all-important area of energy and fuel, both the IMF and the U.S. Energy Information Administration (EIA) are forecasting that oil prices are expected to stabilize at the levels incurred in late 2013. The EIA is currently forecasting a 2.8 percent drop in the price of West Texas Intermediate (WTI) crude oil for 2014, with both a 5.9 percent reduction in the per gallon cost of diesel and a 3.2 percent reduction in the per gallon cost of gasoline. Of course, any significant political or terrorist-related event in proximity to oil-producing regions changes the equation altogether. There are some upside price risks in the cost of U.S. natural gas in 2014 due to expected demand surges.
While commodity price pressures will generally moderate in 2014, we continue to believe that certain emerging market regions will be challenged by locally based commodity price pressures brought about by either localized economic, currency or other political factors.
Component pricing trends remain dependent on specific industry demand and supply developments, and will obviously continue to be dynamic. As always, industry supply chain dominants with the largest volume scale and long-term financial resources will garner attractive pricing. Small and mid-sized manufacturers and retailers should continue to benefit from buying consortiums or networks that provide scale.
In the area of procurement of services, trends will again be dependent on supplier relationships, buying scale or influence along with specific geographic regional specific trends. As always, the ability of procurement teams to obtain a deep understanding of spend patterns enterprise-wide requirements, with savvy contract management and supplier intelligence, will benefit in contributing to cost savings.
Bottom line, an easing of inbound pricing pressures should allow procurement executives to re-allocate their teams towards an increased focus on overall strategic needs for deepening supplier based collaboration in products and services, and in nurturing a deeper focus on joint supplier focused sustainability programs that deliver both innovation and cost avoidance opportunities.
Keep your browser focused on Supply Chain Matters as we continue with this 2014 Predictions series.
As always, readers are encouraged to add individual or their own organizational perspectives to these predictions in the Comments section associated to each of the postings in this series.
A complete and more detailed research report that includes all of these predictions will be available for no-cost downloads in January.
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