The Ferrari Consulting and Research Group through its affiliate, Supply Chain Matters blog unveils part two of a summarized overview of our annual prediction themes for industry and global supply chains for the year 2023 and beyond.
In our previous published Part One commentary, we summarized the challenges and action taken by industry and global supply chain during the years 2020-2022, along with the key learning. In this Part Two commentary, we will summarize what we predict will be the economic and business challenges of 2023 along with our overall prediction themes in key supply chain capability, process and technology areas.
Economic and Business Challenges Expected in 2023
In a prior 2023 predictions focused initial blog we highlighted the IMF’s sobering economic forecast which calls for 2.7 percent of global economic growth for the coming year which began with the statement:
“Global economic growth prospects are confronting a unique mix of headwinds, including from Russia’s invasion of Ukraine, interest rate increases to contain inflation, and lingering pandemic effects such as China’s lockdowns and disruptions in supply chains.”
Some economists and forecasters such as Bloomberg Intelligence are anticipating a more sobering 2.4 percent global GDP growth in the coming year, down from a prior estimate of 3.2 percent and representing the lowest global growth since 1993.
Economists and forecasters additionally point to the risk of stagflation for some select economies such as Europe in the coming year, the combination of high rates of cost inflation and economic stagnation.
Recent surveys focused on corporate CFO’s indicate that these conditions are now of concern for senior business executives. Such fears often manifest themselves in efforts to aggressively address cost structures including payroll and supply chain related costs. They can further overweight shareholder returns as contrasted with needs to preserve the learning and added investment areas required to instill more resilient product demand and supply networks.
Coupled with the latest economic updates was last month’s indications from the World Trade Organization (WTO) that global trade will slow sharply in 2023, after decelerating in the second half of this year. That will have a direct impact on the dynamics of global container shipping, airfreight and logistics networks.
Overall Themes for the Year 2023
Our overall theme for industry and global supply chains for 2023 is a Year of Adaptation, Realignment and Response to Economic and Geopolitical Forces.
In line with prevailing economic forecasting, readers should anticipate continued uncertainty of global markets and the actual likelihood of various regional economic and manufacturing recession conditions in the coming year. By all accounts, there remain a lot of uncertainties and many potential downside risks.
Global Economic Themes
The IMF Global Economic Outlook Forecast anticipates 3.2 percent GDP growth for 2022, followed by 2.7 percent GDP growth in 2023. Of added concern, the three largest global economies (Europe, United States, China) are expected to stall.
As noted in our ongoing Supply Chain Matters updates, there are now shifts from primarily supply constrained product demand that occurred in 2021 and early 2022, to predominately demand constrained conditions which places a top priority on preserving sales revenues, cash preservation or profitability among businesses.
Some regions, particularly Europe, China and Taiwan are more exposed to these product demand constrained forces. As an example, in November 2022, China’s exports and imports declined at their steepest rates in over two years. Exports to other countries declined 8.7 percent, the steepest drop since February 2020, the height of the pandemic. The country’s imports declined by 11 percent, the largest decline in 30 months. As we publish this blog commentary, China’s government leaders have now elected to ease many of the Zero Covid policies that were in-place for the bulk of 2022. The S&P Global Taiwan Manufacturing PMI® index was reported as its lowest level since 2009 by the end of October 2022 while the S&P global Eurozone Manufacturing PMI® fell to a 29-month low. Leasing indicators for both reflected lowering levels of business optimism.
Business Strategy and Supply Network Themes
Supply chain management teams should anticipate a continued focus on business and supply chain strategy alignment at the C-Suite and line-of-business levels.
With the majority of C-Suite executives expecting forms of economic recession occurring in Europe and the U.S. in the coming year at various degrees of severity, efforts will be concentrated in cash preservation and risk mitigation. Geo-political trade reduction, the ongoing effects of climate change, a global energy shortage, broader Environmental, Social and Governance (ESG) concerns, and other risks have increased requiring added prioritization of supply network resiliency and likely added agility actions.
We believe that with a high percentage of businesses experiencing significantly higher supply chain related costs, parts shortages and lost business opportunities, senior executives will continue to home in on short and longer-term strategies that are needed to overcome existing risk and be better prepared for the next market shifts, including economic recovery. This is likely to include select areas of added business and supply chain digital transformation, but in more managed and focused scope.
Procurement and supply management leaders will be expected to provide both leadership for supply resiliency and added value, but also supply network cost reductions. In the latter category, renegotiation of transportation and logistics contracts will be an obvious action as will analysis of other supply chain cost reduction opportunities. We anticipate that this will be a delicate and perhaps challenging balance of priorities, with leveraged use of advanced technology software tools providing a benefit.
A China Plus sourcing stance has become ever more important as is longer-term alignment to government induced supply chain policies and legislation initiatives for deemed critical materials. Higher cost levels will need to be mitigated or reduced. As the year 2022 comes to a close, business and supply chain focused media reports already point to increased supplier and manufacturing investment in regions such as Mexico, Eastern Europe, India, Vietnam and other regions.
Anticipated Supply Chain Business Process and Technology Enablement
Recognized learning after three years of pandemic and global wide supply chain disruption remains that organizations that invested in business process, talent and supplemental technology capabilities were better prepared than those that did not. That stated, the scope and frequency of such disruption was such that supply chain response playbooks and scenario-based methods have been the most appropriate capability.
We anticipate that businesses and their supply chain management teams will not be able to address their enhanced visibility to multiple-tiered supply network risks without more effectively tackling a multi-layered data and information rationalization strategy. This requires the leveraging of streaming data lakes as the foundation of an advanced analytics set of exceptions sensing and the existence of more timely decision-making capabilities. We stated this in our 2022 predictions, and we echo the same in for 2023.
With upwards of $30 billion of private equity and shareholder investment channeled into areas of end-to-end physical and digital supply chain visibility along with advanced data rationalization and analytics, a new collection of supply chain control layer technology approaches will evolve in the coming year. Such approaches avoid the need to rip and replace existing software applications, but rather providing an effective control layer for key business planning and customer fulfillment needs. We will share added perspective in our detailed predictions.
The Supply chain technology market itself will continue to be rather dynamic in the coming year including added merger, acquisition or privatization deals among existing players leveraging either for increased market share, market consolidation or strategic needs. We further anticipate a shakeout of software technology and certain technology integration players by the second half of 2023.
Global Wide Transportation and Logistics
Predictions surrounding the global wide transportation and logistics industry vary, depending on the source and the stakeholder interests. They range from the ability to maintain leverage of higher rates, dealing with the headwinds of reduced overall demand to an all-out competitive war to maintain market share. While shipping lines will exercise all of their newly acquired market tools to stabilize rates and ancillary fees, a global wide capacity imbalance has usually been the fallout of global wide decreased demand. We will provide further perspectives in a detailed prediction for this area.
Human Resource Skills and Talent
Talent retention, reskilling or development must again take center stage in 2023 for both operations, control and management areas. The coming year will present continuous challenges in worker demands for added compensation and work-life benefits after over three years of continuous demands for extraordinary worker performance. This is already being manifested in labor contract dynamics involving major global ports, logistics and trucking providers. After the existing U.S. West Cost labor agreement expired in July 2022, there is yet no firm agreement timetable.
We further anticipate that areas for process automation will again be prominent on the senior management agenda, but investment funds for wider scale supply chain automation will limited by overall business investment restraints. Automation will thus be focused on the most pressing areas and flexible automation as a service models such as those offered by autonomous mobile robot (AMR) providers are garnering increased adoption by businesses.
Summary Thoughts
Thus are the themes that business, industry and global supply chain teams will tackle in the coming year(s). In 2023, industry supply chains will not only continue to be responsible for either anticipating, overcoming and mitigating continued supply shortfalls and ongoing disruption, but transforming the learnings of the past three years into a cohesive and collaborative business-wide framework of prioritized business continuity actions. One of the biggest mistakes that business leaders can make is in believing that the events over the last three years were one-time exceptions, aberrations or Black Swan in nature. Instead, there is fundamental change occurring in geo-political, global trade, climate change and the dimensions of industry competitiveness.
Over the coming weeks we will unveil on Supply Chain Matters extracts of each of our ten specific predictions for industry supply chains in 2023, and that will be followed by the publishing of our annual Ferrari Consulting and Research Group’s 2023 Predictions for Industry and Global Supply Chains advisory report which will publish in January 2023.
Stay tuned.
Bob Ferrari
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