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UPS Holiday Quarter Performance Provides Added Evidence of B2C Online Fulfillment Implications

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Supply Chain Matters provides added insights to recent financial and operational performance reports from major companies. We begin with United Parcel Service (UPS) which recently reported results for the December-ending holiday quarter which generally disappointed Wall Street. UPS_Natural_Gas_Van

The headlines included a 5.5 percent increase in top-line revenues yet falling profit margins for the global parcel delivery firm. While revenues grew 5.5 percent, the transportation firm reported a loss of $239 million compared to $1.33 billion in profitability in the year-prior quarter. Total operating profit climbed more than 13 percent to over $700 million but during the quarter, UPS recorded a non-cash after-tax mark-to-market pension charge of $1.7 billion.

During Q4, UPS delivered more than 712 million packages globally, a 16 percent increase over the same period last year. The record volume was reportedly driven by strong and steady e-commerce demand throughout the period. B2C shipments grew at 11.5 percent in the quarter. Despite completing nearly 200 facility projects and announcing 7 million square feet of new capacity during the year, volume levels obviously taxed the overall network. Average delivery stops reportedly increased 4.6 percent and average daily volume was up 5 percent. The carrier’s ORION delivery management system managed to hold daily package miles to only a 0.3 percent increase, a testament to technology’s contribution to the bottom line.

Management indicated that the expansion of e-commerce is expected to continue, with another year of double-digit growth.

Since UPS and FedEx are often viewed as the bellwether of the economy as well as the trending of logistics and transportation it is important to dwell on management’s observations regarding the latest holiday fulfillment quarter.

In the case of UPS, the takeaway from our lens, are twofold. First, as noted in our 2017 predictions, the tide for more consumers to opt toward online buying continues but the implications for increased parcel volumes and logistics costs continue evident as well. UPS indicated that 55 percent of shipments handled in Q4 involved deliveries to residential addresses. That number peaked to 63 percent in December, a month that included its usual share of winter weather disruptions. As a result, the global parcel carrier has now announced plans to invest another $4 billion, a 33 percent increase from 2016, in increased automation. UPS CEO David Abney indicated to analysts: “If this quarter taught us anything, we’ve got to quicken the pace.

The other takeaway reflects on top-line revenue growth. Despite significant rate increases in both 2015 and 2016, UPS’s cost structure continued to increase. Having one of the more automated and technology savvy transportation providers experience such cost pressures is a further indication, from our lens, for the potential for increased rates and surcharges for large or smaller volumes shippers in the months to come. Such increases will likely also target peak shipment periods that adds to network stress. A hint to that possibility was a further statement from Abney: “We have put more emphasis on making sure that we pass on to our customers the increase in costs that e-commerce deliveries can bring.” Further added was a comment that actions from larger shippers relative to rate increases have not reflected the usual pushback garnered in any year of rate negotiations. We imply the latter to indicate that online consumers paying for shipping charges are likely to be the biggest target of rate increases in the coming months, especially during peak customer fulfillment periods.

With every passing quarter, the implications of online and Omni-channel commerce from operational and cost perspectives continue to become more visible, and so are the realities for supply chain team efforts at responding to such needs.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Amazon’s Q4 and 2016 Performance- Compelling Operational and Platform Momentum

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Amazon reported financial results for the December-ending quarter this week, exceeding Wall Street expectations in profitability. There were additional nuggets of information that add even more emphasis toward the online provider’s momentum in providing an online fulfillment fba_sizedplatform not only for its own retail businesses, but for a growing number of other sellers as well.

Highlights of the all-important holiday 4th quarter included:

  • Total revenues of $43,7 billion, up from $35.7 billion in the year earlier quarter. This was a 24 percent increase on a constant currency basis.
  • Net income of $749 million, compared with $482 million in the year-earlier holiday fulfillment quarter.
  • Paid unit growth (volume) occurring on the Fulfilled by Amazon platform grew 24 percent in the quarter.

Highlights of the 2016 full year:

  • Total revenues of $136 billion compared with $107 billion in the prior year, a 27 percent increase.
  • Operating income of $4.2 billion compared with $2.2 billion in the prior year, a 91 percent increase.
  • Net income of $2.4 billion compared with $596 million in the prior year, a considerable and noteworthy increase.
  • The Fulfillment by Amazon platform reportedly grew 70 percent year-over-year in 2016.

Culling through the senior management briefing, associated documents, and business media reports, we noted other interesting data.

Industry competitors and observers of Amazon, along with external logistics providers, wonder aloud how the online retailer can afford to invest billions in added logistics and customer fulfillment capabilities. The simple answer is the contribution offset from other businesses the Cloud-hosting Amazon Web Services (AWS) business. According to senior management, AWS is running at an annual run rate of $14 billion. AWS operating income in 2016 was $3.1 billion, nearly double that of the prior year.

While on the topic of added investments in logistics and transportation capability, a combination of 26 warehouses and/or fulfillment centers were operationalized in 2016, 23 of which were in the second-half of the year. Executives noted that there was 20 percent growth in fulfillment center square footage in 2015, followed by 30 percent similar growth last year. That was to prepare for the 40 percent surge in volume that occurred in the final quarter.

One analyst queried management on this buildout, asking whether this was directed as just Amazon’s volume needs or building out direct connections for suppliers as-well. Company CFO Brian Olsavsky acknowledged that constantly supplementing capacity is both for Amazon as well as FBA seller needs. Regarding the recently announced additional plans for Cincinnati (Hebron Kentucky Airport) serving as the U.S. air hub, the CFO indicated that the airport will create thousands of jobs over time. Readers can interpret that latter statement in many ways, but think for a moment how many workers are employed in air hubs of either FedEx or UPS today. Moving forward, the indication was that future investments would be balanced more globally.

Finally, we provide some additional background information relative to our 2017 prediction that Amazon will continue duel with Alibaba for global online platform dominance. Responses to analyst’s questions indicated that in China, the strategy is to provide that country’s online consumers a trusted and authentic product, both domestically and from international brands through the Amazon Global Store.  With India, efforts were described as “still very early” but encouraged from the response being received from both online customers and sellers alike.

From all the data, we reviewed to-date, it’s clear that Amazon’s ongoing fulfillment momentum and capabilities are the more pertinent headline as we begin 2017. As noted in our prior posting relative to 2017 challenges for retail industry supply chains, Amazon is a compelling industry presence requiring a lot of attention by the broader industry.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Predictions- B2C, B2B-to-C and Traditional Retail Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.

As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America .

We then dived into Commercial Aerospace Manufacturing Supply Chains.

Next-up:

B2C, B2B-to-C and Traditional Retail Focused Supply Chains  hands-typing-4

In August of 2016, The Ferrari Consulting and Research Group, published a research advisory titled: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains. (Available for complimentary downloading in our Research Center) The prime takeaways from that advisory was that 2016 marked the beginning of the newest phase of B2C online retail fulfillment, namely the consequences of permanent changes in consumer shopping habits beginning to impact the long-term presence of brick and mortar retail and their supporting supply chain strategy frameworks.  Consumer preferences and desires have permanently changed in retail, and online platforms and consumer loyalty programs such as that of Amazon are rapidly garnering consumer loyalty and dependence. Amazon itself continues to pose a serious threat to traditional retailers as well other consumer-facing businesses, but the increasing cost challenges of online fulfillment and transportation also present an ongoing challenge for the industry as-well.

In early 2017, with the bulk of results of the industry all-important 2016 holiday fulfillment quarter now reported, the implications of permanent reductions in physical foot traffic among traditional retailers have become ever more profound. While retail sales grew an overall 4 percent during the holiday period, online sales will likely have increased in a range of 16-20 percent. Traditional retailers such as Kohls, Macys, Sears and Target reported declining sales involving physical stores.  Additional store closings are planned for 2017 as our efforts to invest more in online capabilities. Wal-Mart announced two rounds of headcount reductions in 2016, one involving retail store support positions and one involving a trimming of corporate staff including some initial online commerce executives an IT support staffers.

Amazon’s juggernaut as a dominant online retail platform notched more consumer market-share with one estimate indicating the online retailer captured nearly 40 percent of total online holiday focused sales.  The online retailer further demonstrated the first clear signs of integrated logistics, transportation and last-mile fulfillment that has been deployed since late 2015. Traditional retailers have now learned that competing head-to-head with Amazon is a daunting and rather expensive effort, with a likely better strategy being that of a differentiated strategy that emphasizes customer fulfillment capabilities that Amazon cannot. Retailer Best Buy has been the best example among specialty retailers while Dollar Shave Club served as a great example in the online services segment. There are opportunities and they will more than likely be focused segments that emphasize the brand and the experience.

As predicted in 2016, and now again in 2017, the retail industry will continue to come to grips with the notions that the physical store is now the virtual online store, and that the physical store may be one advantage over Amazon.  In this new online dominant environment, merchandising is now about analytics-driven knowledge of customer needs and inventory management is anchored in more sophisticated item level planning that involves the end-to-end supply chain supporting all retail fulfillment channels, both online and physical.

The physical store now serves as an extension of online, and supply chain strategy and business process must accommodate or influence this changed thinking. The supply chain is not a cost center to essentially support inventory warehousing and store replenishment, but rather a collection of collective capabilities directed as supporting an Omni-channel customer fulfillment capability.  In 2017 and beyond, the alternatives are in-house, outsourced, or hybrid capabilities.

The same principles apply to outsourced logistics, transportation and customer fulfillment partners. In addition to customer-facing capabilities, it is now clear that what Amazon has been building is a well thought out, customized online retail logistics, transportation and last-mile fulfillment capability to support multiple merchants in addition to Amazon. Third-party logistics and transportation providers seeking continued partnerships with retailers need to think more innovatively as well.

We predict that retail industry supply chains will begin to improve capabilities at supporting analytics-driven, demand-driven planning, multi-channel and more intelligence based customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics. The concepts of supply chain segmentation strategy will continue to take hold among traditional retailers supporting both online and physical stores.

The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-Suite executives. Supply chain leaders will either get on board with integrated capabilities or suffer the same consequences.

The industry implications and trends are compelling as well as inescapable in 2017 and the retail industry and its associated supply chains must adapt or suffer the consequences.  It’s tough messages, but then again, this an industry dealing with unprecedented forces of change.

 

This concludes our 2017 prediction related specifically to retail industry supply chains. We are still in the process of finalizing data and inputs for other industry specific supply chain sectors and expect additional postings next week.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Deep Dive on 2017 Prediction Eight- Alibaba and Amazon Continue to Position for Global Online Platform Dominance

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful 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 customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

Prediction Four- Increased Anti-Trade Geo-Political Forces Provide Added Global Sourcing Challenges

Prediction Five- Continued Global Transportation Industry-wide Turbulence

Prediction Six- A Renaissance in Supply Chain Focused Business Services and Technology Investments

Prediction Seven: Enhanced Supply Chain Intelligence Capabilities Among B2B Network Platform and Managed Services Providers Will Pay Dividends for Industry Supply Chains

 

In this deep-dive series posting, we drill down on our next prediction. hands-typing-4

2017 Prediction Eight: Amazon and Alibaba Continue to Position for Global Online Platform Dominance

Included in our 2016 Predictions was an anticipation that dominant online B2C and B2B-to-B2C customer platform providers Alibaba and Amazon would continue to expand their presence in last-mile customer fulfillment capabilities that included transportation and logistics. These strategies support the strategic goal for creating a dominant online retail platforms and eventually broader B2B selling platforms, either by premium buying services such as Amazon Prime or ubiquitous online presence and fulfillment control capabilities such as Alibaba.

This 2016 prediction turned out to be what occurred.

During the 2016 holiday customer fulfillment period, Amazon is believed to have taken even more market share in the B2C online area among major online providers in the North America market. In addition to leasing upwards of 40 branded air freighters and hundreds of semi-trailers, the U.S. based online retailer began offering 3PL and freight forwarding services as an ocean freight broker for shipment of goods from Chinese suppliers to its warehouses and customer fulfillment centers across the United States. A Wall Street Journal published report cites data indicating that Amazon helped in the shipping of at least 150 containers of goods from China to the U.S. from October through December of 2016, for inventory stocking on behalf of Chinese producers. Amazon is thus well positioned on the road towards not only being a powerful online marketplace but a global scale logistics and last mile customer fulfillment provider as well.

As of December 2016, Alibaba’s two core online market platforms, T-Mall and Taobao, reportedly included 493 million monthly users, which accounted for $6.71 billion in revenues in Q3 2016 alone. The China based online provider discloses less information regarding Cainao, its logistics other than that entity is: “enabling 57 million package deliveries per day.” Also in 2016, Alibaba managed to build various direct or indirect footprints all over Southeast Asia.

Looking to 2017 and Beyond

In 2017, we predict that Amazon and Alibaba will aggressively continue to deploy strategies directed at global online buying platform dominance, but will remain cautious to perceptions of outright head-to-head competitors. We further anticipate that both will step-up efforts to market respective B2B platform capabilities among strategic geographies. This will be a competitive battle focused on individual capabilities among various levels of online marketplace maturity levels.

We concur with Asia based business publications and industry observers that one of the primary battle grounds in 2017 will be India and Southeast Asia. We further anticipate an increased presence by Alibaba in the United States, offering U.S. businesses direct online platform presence across China and other Asian countries.

India

This country is on-track for becoming the third largest nation of Internet users over the next few years. The B2C online sector in India, is expected to reap the benefit of this growth given the rising middle class in this country and prospects for large numbers of added consumers turning to online for the first time.  By some estimates, upwards of 75 percent of India’s Internet users span an age group of 15-34 years old, a population that aspires to growing aspirations and is quite comfortable in shopping online for the latest trends. Another compelling trend is the increased adoption of mobile and smartphone use among India’s population, now expected to further increase across rural based areas. This is expected to accelerate the notions of online buying convenience utilizing such mobile devices. Some forecasts currently predict upwards of $120 billion in e-commerce sales by 2020 from a current level of approximately $50 billion. India has also upped its in-country logistics capabilities, rising 19 places in the World Bank’s Logistics Performance Index.

The government of India currently restricts Foreign Direct Investment in that country’s established brick and mortar retail sectors, but not so for the online retail segment. Thus, online retail efforts will come from joint investments, ownership alliances and technology exchange among existing in-country players and foreign investors. An increased emphasis in online B2C further adds to the attraction of B2B-to-B2C capabilities as well, a capability that both online providers has been nurturing for some time in their core geographic markets.

Amazon India

Amazon Founder Jeff Bezos visited India in 2014 and provided a direct message to executives of Amazon’s start-up venture in India at the time. According to news accounts, he was perturbed by Amazon’s failure to capture a significant share of China’s online retail sector, and he did not want that to happen again in India. He essentially directed India executives to do whatever it takes to succeed, and true to Amazon’s corporate culture, don’t worry about the cost.

Since that time, Amazon has plowed upwards of a reported $5 billion in current and planned future investments, a considerable strategic sum. Areas have included logistics and online customer fulfillment capabilities that feature smaller and more localized fulfillment capabilities. The largest Amazon fulfillment center, opened in 2015, has a size of 280,000 square feet. Investments have included many highly-automated customer fulfillment centers and the logistics that control of bulk of last mile delivery to consumers. India’s overall logistics infrastructure is undeveloped, thus online providers must take on localized delivery challenges through more direct control of last-mile fulfillment. Regarding the latter, such deployment includes multitudes of motorcycle delivery persons with huge backpacks that can process cash transactions on delivery.

Because of the local ownership rules, Amazon essentially operates a marketplace platform, selling only goods offered by local producers, regional or local brick and mortar retailers or small businesses. Some reports point to hundreds of thousands of India’s small business owners being recruited for the Fulfilled by Amazon online platform.

Already this year, Amazon India has opened its platform to support individual sellers in peer-to-peer online sales for product categories such as refurbished mobile phones or laptops, used books, watches or video games, or local artisans and craft sellers. The model reportedly takes aim at existing classified sites such as OLX and Quickr. The service, like others, is customized for customers in India, with user-friendly features, door-to-door pickup and delivery and seller aides in areas such as pricing and promotion.

According to a published report by The Wall Street Journal in November 2016, Amazon reportedly has 80 million products on its India website, and cited data from Bank of America Merrill Lynch estimated that by the end of 2016, Amazon would control 28 percent of India’s total online gross merchandise sales compared to current industry leader Flipkart’s 43 percent share. At the time of penning this prediction, Wal-Mart was reportedly in talks to invest a significant investment in Flipkart.

Today, the top three e-commerce platforms in India are Flipkart, Snapdeal and Amazon.

Southeast Asia

The collective countries that make-up Southeast Asia, countries such as Malaysia, Singapore, Thailand, the Philippines, Vietnam, and other countries have a growing Middle Class that is highly mobile enabled.  The region also represents a fast-growing online Internet marketplace dominated by a younger population. Estimates point to upwards of 250 million smartphone users. The region further consists of a number of smaller but growing regional online marketplaces.

One of the more dominant has been Singapore based Lazada.com.  Founded in 2012, this online marketplace serves six different countries and has a building capability for delivering goods to Southeast Asian online consumers from merchants in other countries. Logistics capabilities include 12 warehouses and over 90 distribution centers while leveraging over 100 logistics partners for last-mile delivery. In April of 2016, Alibaba made one of its largest overseas investments with a $1 billion deal for control of Lazada Group. Business media and industry watchers characterized this deal as acquiring more leverage to expand online activities beyond just China.

 

Alibaba

China’s Alibaba has a strategic business goal for having 40 percent of its revenues flowing from outside of China over the next ten years. Its business model has always included the ownership and control of its own buying platform and logistics subsidiaries, but also includes initial equity investments in local start-ups with innovative online focused technology.

The Chinese online retailer’s co-founder Jack Ma wrote to investors in October 2016 indicating that now that China’s explosive double-digit growth in Internet users is now flattening to single-digit growth: “in the coming years we anticipate the birth of a reimagined retail industry, driven by the integration of online, offline, logistics and data.”  There was a further vision expressed by some Alibaba executives that Amazon and Alibaba could one-day collaborate on a singular global online platform, but that statement did not get a lot of global visibility.

While Amazon continues an aggressive B2C presence in India, Alibaba’s plans for India have been somewhat elusive.  China’s online dominant retail platform enterprise understands the strategic importance of India, although it has not revealed a detailed strategic plan up to now. In March of 2016, Alibaba group president J Michael Evans visited the country and declared plans to enter India’s e-commerce market. Thus far, Alibaba’s investments have been multi-million-dollar equity investments in online payments technology provider Paytm and e-commerce provider Snapdeal. Regarding the former, the Caixin News Service reported that since 2015, Paytm has seen its user numbers grow from 40 million to 140 million, with online payment services offered in 50 major Indian cities, which now accounts for upwards of 74 percent of the country’s online payments. Part of the equity investment included advanced technology sharing from Alibaba subsidiary Ant Financial, which holds a dominate mobile payments presence in China. That includes promoting quick-response (QR) code payment technology that allows consumers to pay by scanning a bar code with their mobile devices.

In 2016, the Chinese online provider’s finance arm was in talks with two e-commerce logistics firms, Delhivery and Xpressbees in investments to build out logistics infrastructure.

Alibaba’s strategy for India therefore appears to focus on three areas: platform, payments and logistics capabilities. Speculation continues as to whether Alibaba continues to invest in various online infrastructure interests or attempts a full-blown platform presence to compete directly with other existing players including Amazon. The provider’s success in China initially came from an online B2B capability and later expanded to online B2C. Speculation is that a similar model may evolve in India.

Alibaba is not the only China e-commerce firm with interests in India. Internet firms Tencent Holdings and Baidu have been actively scouting investments in India’s online sector.

The Wild Card

From our lens, what makes Alibaba a wild card is its built-out capabilities for supporting large-scale mobile payments based transactions in online B2C commerce along with its network of logistics infrastructure delivery vehicles and delivery persons who navigate complex or vague delivery addresses or who must utilize ingenious means to transport these significant volumes of packages among dense urban streets, alleyways or rural addresses. The rest of Southeast Asia still lacks cohesive or dominant online payment systems. Overall logistics infrastructure to support higher volume individual parcel deliveries remains a work-in-progress, but maturity levels are being addressed.

As we pen these predictions, Alibaba’s founder Jack Ma has been traveling quite a bit, making overtures to various governments and existing online focused technology providers. In late December, after visiting with government officials in Thailand, an agreement was signed to assist that country’s small-and-mid-sized businesses to succeed in E-commerce.

In early January, Ma was making direct overtures to then U.S. President-Elect Donald Trump, promising new jobs and opportunities for upwards of one million U.S. small businesses and farmers to directly market and sell their products across China and the rest of Asia. We believe that this will present a threat to Amazon in its core home market and will motivate more aggressive investments across Asian and Middle East online markets.

Our Takeaway

In 2017, the dominant online strategic battleground may well involve India, the United States and Southeast Asia and do not be surprised if additional major moves and announcements revolve around these and regions involving the B2B-toB2C online area. This is all about strategic presence, online platform, and logistics fulfillment capabilities among challenging but online commerce growing regions. The stakes are obviously high.

 

This concludes our Prediction Eight drill-down. In our next posting of this series, we will explore Prediction Nine reflecting our belief that business self-interest will fuel continued momentum in supply chain sustainability initiatives.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Deep Dive 2017 Prediction Six- A Renaissance in Supply Chain Focused Business Services and Technology Investments

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply ChainsSupply Chain Matters Blog

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful 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 customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

Prediction Four- Increased Anti-Trade Geo-Political Forces Provide Added Global Sourcing Challenges

Prediction Five- Continued Global Transportation Industry-wide Turbulence

In this deep-dive series posting, we drill down on our next prediction.

2017 Prediction Six: A Renewed Renaissance in Business Services and Technology Investment

As industry supply chains enter 2017, we believe their there are distinct signs for a renewed renaissance in business services and technology investments that will specifically include compelling needs in supply chain related business process and decision-making needs. While current high levels of uncertainty in global markets persists, we believe that many organizations will not hold back on needed or overdue technology investments related to the broad umbrella that includes augmented supply chain management business process needs. The one gating factor to inhibit such investments remains the availability of talent to harness the benefits of the advanced technology, which opens the door wider for augmented business services.

Changing Business Environment

In the U.S., with the election of Donald Trump as President, and with a Republican Congressional majority, business leaders have turned more optimistic towards a period of expected lower corporate taxes, a means to repatriate cash profits currently held in foreign entities, and a climate of regulatory rollbacks. Within the Eurozone, a political climate fueled by increased populism and a need for more accelerated economic growth similarly lead to a more positive business investment support climate.

Across many industries, the trend of plowing excess cash into stock buyback or increased stockholder dividends have taken a noticeable toll on supply chain and manufacturing business process adaptability needs. Increased profit performance has subsequently been stymied by lack of top-line revenue growth or in increased worker productivity levels and continued reduced supply chain costs. By November 2016, the U.S. unemployment rate had dropped to 4.6 percent with active skilled labor force participation believed to be much lower. Many industry settings are further under pressure by upstart disrupters or more aggressive competition which additionally drives needs for added technology investments to support new digitally-enabled business models.

With advanced business process technology and services buying decisions more centered on line-of-business vs. singular based IT influence, Cloud based technology and services make such decisions more viable since many come with subscription or usage based expense costing vs. fixed capital appropriation.  That allows the flexibility to make changes as the business warrants or to augment technology needs based on required bandwidth at any given point. The overriding concern of potential business disruption looms large, which also weighs toward a Cloud-based target business process approach that minimizes significant disruption to mission critical business processes and reduces the managed scope of the technology investment.

Expected Investment Areas

Supply chain leaders have tended to be somewhat conservative, reluctant to embrace perceived new or unproven technology. The adage, “if it ain’t broke, no need to fix it” continues but we predict that will change regarding certain process areas in 2017 as CEO’s require enhanced, digitally-driven top line revenue growth. As noted in Prediction One, industry and global supply chains will be especially challenged by increased risk levels and needs for more informed, analytical-driven decision-making anchored in more predictive decision-making methods. Increased risk levels will manifest in more high-profile cyber and DDoS attacks on corporate networks which spillover or originate in supply chain focused systems.

The continuing effects of always-on online and Omni-channel customer fulfillment will additionally drive needs for added foundational investments in digital supply chain transformation, again focused in areas of mining information insights, more predictive analytics and data visualization trending from vast amounts of existing data. We anticipate further investments in achieving broader end-to-end supply chain network visibility, coupled to inventory, capacity and risk management process and decision-making needs.

In 2017 we concur with some tech vendors that anticipate additional attention from certain industry and supply chain segments in what is being described as “autonomous or low-touch planning systems” that allow the technology to take further control of supply chain planning activities without the need for constant planner intervention and involvement. That can free-up existing planner time for more strategic and tactical planning needs.  We anticipate similar autonomous concepts to gain traction in procure-to-pay and order-to-cash processes.

Internet of Things (IoT) Focused Technology

Despite ongoing information security and consistency of global standards hurdles, we predict that early phase or pilot line-of-business driven efforts to prototype new Internet-of-Things (IoT) enabled business models will continue. They will do so because of the need by industry competitors or disruptors to achieve first mover advantage in locking on to new customer revenue streams. Such initiatives will move forward because of needs to develop new competencies in a digital-driven business process and in addressing specific challenges related to data security, interoperability among various edge and core business systems. Initiatives supporting top-line revenue growth while augmenting information security processes are more likely to receive executive and board level approval.

Blockchain Technology

Blockchain technology is being identified by supply chain focused technology providers for applicability in providing higher levels of intelligence regarding the movement of materials across a supply chain or B2B network. Originally developed to support digital bitcoin currency use, this technology is a shared digital ledger, or a continually updated list of incremental transactions. This decentralized ledger keeps a record of each transaction that occurs across a fully distributed or peer-to-peer network, either public or private. The technology is likely to gain broader recognition in 2017 due to its applicability in recording and keeping track of assets and materials.

Industry supply chain teams will likely hear more from technology vendor efforts in developing blockchain technology methods in areas related to supply chain wide transactional automation or supply chain-wide product genealogy and authentication. While we do not anticipate wide-scale mainstream investment in this technology during 2017, industry supply chains should play close attention as to technology vendor developments and planned process support areas since this type of technology has breakthrough potential in certain process areas.

Increased Vendor Merger and Acquisition Activity

A renaissance in multi-industry business process and technology investment activity will surely lead to further merger and acquisition activity involving either the enterprise software, supply chain, Equipment Manufacturing, IoT, and management decision support vendor communities. Autonomous driving, shared riding services and artificial intelligence driven technology will remain of hot interest as will predictive analytics. The name of the game for tech vendors is current and future top-line revenue and profitability growth, specifically cloud and subscription based revenue flows. Signs further point to a more friendly IPO market in 2017 allowing up and coming new technology providers needed capital to expand.

We predict one or two acquisitions involving high-profile supply chain best-of-breed vendors along with a continuation of acquisitions surrounding IoT focused technologies. We anticipate that enterprise vendors will continue to be active in this area along with industrial companies transforming themselves to software companies.  Likely players will be Amazon, IBM, General Electric, Google, Oracle, PTC, Siemens, among others. There may well be one or two blockbuster M&A deals in the above segment.

This concludes our Prediction Six drill-down. In our next posting of this series, we will dive into Prediction Seven that calls for enhanced decision-support capabilities among B2B business network and managed services providers.

Stay tuned.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 

 


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