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Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains in Detail- Part One

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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 Supply Chain Matters Blog- Independent analysis and insights on supply chain managementhelping 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

 ©2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.

Content appearing on Supply Chain Matters® may not be used by any third party without the permission of the The Ferrari Consulting and Research Group.


Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains

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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 Supply Chain Matters Bloghelping 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 process 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 of our 2015 predictions that occurred in late November.

In this initial posting, we will unveil our complete listing of our ten predictions for the coming year with summary descriptors. In subsequent postings spanning the remaining weeks of December we will dive further into each of our predictions. In early January, we will publish the complete Ferrari Consulting and Research Group research report, 2016 Predictions for Industry and Global Supply Chains that will incorporate all of our predictions along with even more details and supporting data related to each prediction. This report will be made available to all of our consulting clients and will further be made available for no-cost complimentary downloading in the Research Center of Supply Chain Matters.  Anticipate general availability in mid-January with an announcement on this blog.

Let’s therefore begin the process with the unveiling our ten 2016 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.

 

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 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.

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.

 

2016 Prediction Three:  Turbulence and Continued Change Surrounds Global Transportation and Logistics

As we enter 2016 we are once again compelled to predict another year of turbulence and continued change surrounding global transportation and logistics with particular emphasis in the third-party/fourth-party logistics, global ocean container and air freight segments. We are predicting more consolidation and mergers to occur among ocean container shipping lines and one North America based rail merger to occur in 2016.

 

2016 Prediction Four: Widening of Supply Chain Talent and Skill Gaps Will Require Organizations to be More Innovative and Purposeful in Recruitment, Career Planning and Training Efforts

We predict that the existing widening skill gaps will compel industry supply chain executives to be more creative and purposeful in recruitment and training. That includes facing the realities of competitive compensation and purposeful career planning for individuals. We expect organizations and recruiters to more broadly define supply chain related jobs in skill dimensions and in expected performance parameters for both current and future organizational needs. Individuals who possess required cross-functional hard and soft skills, including in-depth technology prowess will continue to experience a seller’s advantage.

 

2016 Prediction Five: Noted Supply Chain Industry-Specific Challenges

In 2016, challenges will remain in B2C Online Retail, Commercial Aerospace, Consumer Product Goods (CPG) and Automotive industry sectors.  We have added a further 2016 industry challenge, that being current efforts to deploy more sustainable and health conscious agriculture and food based supply chains.

 

2016 Prediction Six: Certain Industry S&OP Processes Will Morph to Broader Forms of Integrated Business Planning and Product Management.

The term integrated business planning is often depicted as a specific technology vendor term but in reality, it is a desire that all functions of a firm are aligned at a single set of financial, business, supply chain and operational outcomes.  As multi-industry business challenges continue in speed and complexity, S&OP processes will need to foster more agility to effectively deal with change. In 2016 we anticipate that certain S&OP teams, those experiencing high levels of value-chain complexity and business change, will begin to morph S&OP process and decision-making with broader information and contextual decision-making components and begin to identify and address obstacles for incorporating key information integration from product management and financial systems.

 

2016 Prediction Seven: Internet of Things (IoT) Initiatives Continue to Dive into Realities of Line of Business Strategy and Deployment

In 2016, we anticipate that B2B focused manufacturers and services providers will broaden their perspectives on connected devices and services, especially in the notions of the realities for being a software-driven vs. a hardware-driven enterprise. That includes leveraging intellectual property and software knowledge into more innovative products and services that result in new revenue streams. Thus, the value of products will increasingly be defined by the embedded sensors, software and consequent added services that products provide for customers.

 

2016 Prediction Eight: Geopolitical Developments Centered on Global Trade Agreements Will Present New Concerns and Challenges for Specific Industry Supply Chains.

Details of the recently adopted Trans-Pacific Partnership will continue to unfold in 2016 while individual sponsoring countries undertake the process of ratification. As TPP details emerge, industry supply chains will begin to uncover certain strategic and tactical impacts related to current global sourcing strategies. China will continue to drive and influence its One Belt, One Road (OBOR) initiative placing additional political and specific industry pressures on certain TPP participants. Industry supply chain teams will thus be caught in the middle of geopolitical pressures and forces in relation to pending strategic sourcing or value-chain design strategies.

 

2016 Prediction Nine: Alibaba and Amazon Will Expand Their Presence in Customer Logistics Fulfillment.

There are stronger indications that online giants Alibaba and Amazon will expand their presence in last-mile customer fulfillment. Increasing transportation rates and surcharges from both FedEx and UPS in 2015, and in the coming year, make this prediction more viable for the most influential online retailers as well as more evidence pointing to such capabilities.

 

2016 Prediction Ten: A High Visibility Supply Chain Snafu or Event with Business Implications

This is a prediction that we are obviously reluctant to publish for readers and clients. However, our observation of industry supply chains being whiplashed with unprecedented business change and growing global chain risks leads us to this prediction.

 

Keep your browser pointed to Supply Chain Matters as we dive into each of the above 2016 predictions in more detail. 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

©2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.

Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and our parent, The Ferrari Consulting and Research Group.


Both China and the U.S. PMI Levels at the Same Values: Should This Be a Concern?

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This week, Supply Chain Matters was reviewing the various global PMI indices (reporting of production and supply chain activity) for November and we noticed a noteworthy development.  Both the ISM PMI, the reflection of U.S. based activity, and the Caixin China PMI, recorded the exact same value of 48.6, a sign of activity contraction. The 4th quarter is traditionally one of robust activity as manufacturers close out the year with holiday and other end-of-year related orders.

As readers are most likely aware, the China number should not surprise. That country’s production activity has been on a significant downslope for several months now and once again crossed below the 50 contraction value in March of this year. What should be a surprise, well as a concern for industry supply chain teams is the state of U.S. activity as we approach the start of 2016. The headline associated with the latest reported number was depicted as contraction for the first time in nearly three years, since November of 2012.

U.S. activity began the year at a value of 55.5 after a rather robust year in 2014. In reality, the U.S. was the leading global PMI benchmark providing signs of solid resiliency. However, that number has fallen nearly 7 percentage points since the start of this year.  Other concerning indices were New Orders decreasing by 4 percentage points, with the Production Index falling to nearly the same level. Of the 18 industries polled, only five indicated growth. The remaining industries reporting contraction are somewhat significant and included Apparel, Plastics and Rubber, Machinery, Appliances, High Tech, Fabricated Metal and Chemical Products.

As noted in our prior commentaries, U.S. based manufacturers have been challenged by the current high value of the U.S. dollar compared to other currencies, making manufactured goods more expensive than goods produced in other global locations. While the U.S. economy seems to remain robust, contraction signs are appearing in supply chain activity. We believe this should be of some concern for supply chain executives responsible for strategic sourcing.

We elected to publish this commentary as a reference point, a time when the world’s two largest economies and engines of supply chain activity both reported similar PMI readings. While negative changes surrounding China’s PMI garners immediate business headlines, attention should be pointed to what’s going on in the U.S.

We should all know more in the coming months.


Report Card for Supply Chain Matters Predictions for Industry and Global Supply Chains- Part Three

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While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.  Supply Chain Matters Blog

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.

As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.

We focus this commentary on our prediction for industry specific supply chain challenges.

2015 Predictive Five: Noted Industry Supply Chain Challenges

Self-Rating: 3.5 (Max Score 4.0)

Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.

B2C and Retail

In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.

A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.

Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.

Consumer Product Goods

Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would 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 year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”

Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.

Commercial Aerospace

Our prediction was that 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 that were expected in 2015 would 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. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.

We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.

Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.

Automotive

At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.

While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.

Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.

In our next posting in our look back on 2015, we will review Predictions Six through Eight

In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Optimistic Retailers Feel the Pressure of Inventory Overhang- Who Will be the Winners?

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We provide a contextual follow-up to our ongoing Supply Chain Matters observations and insights regarding the current holiday focused surge period among retail supply chains. This week, The Wall Street Journal observed (paid subscription required) that unsold goods and added inventories are piling up on retailer’s shelves possibly making it challenging for some retailers to hit their earnings targets in this critical quarter of performance.

We have previously called attention to the implications for this year’s expected online fulfillment volumes, a recent consumer sentiment survey indicating shoppers may elect to shop earlier this season, and the important technology enabling considerations for the rapidly changing Omni-channel world.

The WSJ report cites supplier sources and industry watchers as indicating that some department stores have experienced an overhang of inventories in anticipation of the coming holiday period, and beliefs that with far lower energy prices and higher employment levels, consumers will spend more on gifts in the upcoming holidays. The publication indicates that specialty stores and apparel manufacturers are each experiencing a “build-up in inventories beyond the natural increase ahead of the holidays.”

Separate reports this week indicate specific retailers such as Macy’s and Wal-Mart specifically stepped-up inventory buying activity to offer more attractive promotions and selection for consumers. Earlier this week, Cowan and Company published a warning to investors indicating that inventory is above sales growth across the retail industry.

Amidst this collective optimism among many retailers, the WSJ observes that industry executives are beginning to question whether this year’s sales predictions have been too optimistic. While the gap is reportedly not as wide as that in 2013, it is concerning, since new inventory brought in for the holidays must compete with unsold inventory overhang, some as a result of last year’s U.S. West Coast port debacle which had holiday goods arriving after the holiday period had passed.

The implication remains that retailer’s, and their associated customer fulfillment teams will need to promote and fulfill merchandise orders earlier in the holiday period rather than later. The upcoming Thanksgiving holiday and the days leading into early December will be critical determinants of whether inventories will be sufficiently depleted among both online and physical stores, and whether sales and profits will meet business expectations.

The ability for sales and operations teams (S&OP) to quickly assess multi-channel sales volumes, remaining network-wide inventory levels associated and profitability outcomes will likely differentiate winners from losers, especially when considering that online fulfillment costs may be prove to be more than traditional sales channels. Waiting to discount merchandise later in December could be troublesome because retailers will likely be aggressively competing among themselves for limited consumer interests in categories such as apparel, footwear, jewelry and home goods vs. electronics and gadgets while risking added or peak-period shipment costs among parcel carriers.

Supply chain wide visibility, analytical and intelligent fulfillment capabilities have never been as important as they are for this holiday surge.

Bob Ferrari

 


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