Supply Chain Matters Top Ten Predictions for Global Supply Chains in 2011- Part One

It is again that time of the year when many industry analyst firms and independent bloggers comment of their outlook for the coming year. As we have done in previous years, Supply Chain Matters provides for readers our supply chain related predictions for 2011.  As often noted in this series, we offer these predictions not as a means of proof as to how smart we may be, but rather to provide readers a means to think about their supply chain oriented organizational perspectives, direction and initiatives in the upcoming year.

This year, some in the blogosphere have made ridicule of predictions, claiming that this a mere exercise in lame marketing.  I can assure each of our readers that we at Supply Chain Matters take these predictions with a serious vein, and we actually do a report card both at mid-year and end of year on what actually occurred and whether we went astray.  You can view our 2010 end-of-year report card commentary at this Part One and Part Two web link.

First, we outline our entire listing of 2011 predictions:

1. Business recovery will remain sluggish, but the second-half of 2011 should provide some uptick in product demand and supply chain fulfillment needs.
2. The year 2011 will provide more supply chain cost reduction pressures and the challenges may be tough to overcome.  This may be a year where supply chains will not be able to deliver aggressive cost reduction objectives.
3. As in 2010, incidents of supply chain risk, disruption, and breakdowns in quality will unfortunately continue.
4. Supply chain technology deployment will remain tactically focused and buyers will remain in a favored position for negotiating technology acquisitions.
5. The year will bring a new wave of turmoil, acquisition and market consolidation in certain supply chain and enterprise technology areas.
6. Cloud computing options directed at supply chain business process enhancement will explode in popularity and adoption.
7. Wider scale leverage and adoption of in-memory computing, coupled with broader application of information discovery platforms, could be game changing influences on supply chain wide business analytics.
8. Two industry sectors, B2C and healthcare, will be especially effected by significant supply chain process impacts in 2011
9. The landscape for the global outsourcing of components and finished goods production will shift again in 2011.
10. Supply chain related green and sustainability programs will continue in 2011 and beyond, but at a slower pace.

In this part one commentary, we will review Predictions one through three.

Prediction One: Business recovery will remain sluggish, but the second-half of 2011 should provide some uptick in product demand and supply chain fulfillment needs.

While some business recovery is underway, we believe that the pace will remain sluggish and sporadic, with some select areas of improved growth. While supply chain professionals are starting to feel that the worse may be over, continued diligence to business challenges for supporting top-line growth is required in 2011.

The International Monetary Fund (IMF) currently projects world economic output to decline to 4.2 percent in 2011 vs. a projected 4.8 percent output level in 2010.  The IMF also includes some slowdown in the emerging and developing economies, noting a 6.4 percent growth rate vs. 7.1 percent in 2010.  These projections are an indicator that while a so-called double-dip recession is not anticipated, growth will be sluggish. Also keep in mind that growth projections come from a base of two previous years of severe global recession.

In the latter half of 2010, growth among the euro zone countries slowed sharply because of building economic concerns, and that will most likely continue into the first half of 2011. For the United States, the IMF is projecting a meager 2.3 percent growth in 2011 vs. 2.6 percent growth in 2010.  U.S. purchasing and supply management executives, however, are a bit more bullish on 2011 growth. In its Semiannual Economic Forecast published in early December, The Institute of Supply Management (ISM) noted that the majority of executives expect a 5.6 percent net increase in overall revenues for 2011, compared to a 7.9 percent increase reported in 2011.

We believe that the second-half of 2011 will provide more optimism for growth, but the first half will continue to provide more challenges toward any growth momentum.   Commodity prices are again at all time highs (see prediction #2) and they will also prove to be a major hindrance to growth.

Exports have played a rather significant role in fueling current business growth and that trend will obviously continue. Value and fulfillment chains will continue to be stretched to their widest dimensions.

During 2010, there were two waves of noticeable inventory surges, one in the first half and again in the second half.  This latest ISM forecast indicates that the overall U.S. inventory-to-sales ratio will decrease in 2011 which implies that we may well observe some form of an inventory wave in 2011, probably in the second-half.

Prediction Two: The year 2011 will provide more supply chain cost reduction pressures and the challenges may be tough to overcome.  This may be a year where supply chains will not be able to deliver aggressive cost reduction objectives.

As 2010 comes to a close, many industries are again experiencing significant increased commodity and component costs.  The ISM report notes that survey responses among purchasing executives indicate that 2010 brought an overall 3.4 percent increase in purchased prices, with some industries reporting an average 6.3 percent increase.  The majority of respondents currently project an additional 4.8 percent increase through April of 2011. Major commodities such as steel, copper, aluminum and others have reached two year highs, and supply teams may well see further increases as speculation abounds.

Purchasing executives also expect higher labor and benefit costs in 2011, with the majority anticipating a 3.5 percent increase for all of 2011.

We believe that additional significant cost pressures will come in the area of overall transportation costs, as increasing costs of energy, decreased capacity, and more regulation associated with the effects of terrorism, as driving factors for carrier rate hikes. Similarly, third-party logistics providers may also demonstrate the need for increased service and fulfillment rate hikes.

Given the magnitude of these building cost pressures, along with reality of an overall three years of draconian cost reduction and capacity elimination measures, we believe that supply chain teams will be very hard pressed to deliver any significant cost reduction to corporate balance sheets in 2011.  Suppliers will also be caught in a further margin squeeze and we may well observe another round of financial crisis among certain suppliers, adding more challenges for sourcing and procurement.  The CEO of global auto parts supplier Bosch indicated to the Financial Times that this rebound in commodity prices would put intense strain on industrial companies. Teams will have to significantly step-up their cross-functional and cross-business initiatives to identify any remaining opportunities, and more difficult decisions may have to be made.

On the whole, continuous quarters of gross margin and profitability increases facilitated by supply chain cost reduction initiatives may have peaked in 2010.  Continued initiatives risk cutting into ‘the bone’ of supply chain performance capabilities.

Prediction Three: As in 2010, incidents of supply chain risk, disruption, and breakdowns in quality will unfortunately continue.

While some may downplay the attention to risk, we believe that 2011 will bring even more crisis and senior executive attention to this area.  When a company such as Johnson and Johnson, with a previous stellar reputation for quality and consumer responsiveness and existing in the highly regulated over-the-counter drug industry, experiences a significant quality breakdown,  the cause for concern should be obvious.  Similarly, Toyota’s prior and ongoing incidents of product recalls are having measurable monetary impacts on the brand and consequent vehicle sales.

Many supply chains are operating at precariously fragile states brought on by months of cutbacks in resources and oversight.  Suppliers operate with the thinnest of profit margins, and global dispersed supply chains add more points of risk vulnerability. Unfortunately, there will be more incidents of supply chain risk and disruption in 2011 and, hopefully, we will observe more clarity in management accountability and oversight in identifying areas of risk and mitigating the most vulnerable areas of risk.

We will also provide an out-on-the-limb additional prediction that sadly yet another major corporation will experience significant incidents of risk and disruption in 2011.  Then again, some readers might classify this as a no-brainer.

In our upcoming Part Two posting, we will comment on predictions four through seven.

Please feel free to comment on any of these predictions, as well as offering any that we may have neglected to mention. Readers are also welcomed to participate in our polling question (placed in the lower right-hand panel) regarding the key business priorities for your organization in 2011.

The Supply Chain Matters Team

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