This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four

Predictions Five and Six

Prediction Seven: Expect additional M&A and strategic partnership activity among supply chain technology, consulting services and ERP providers as vendors shore-up application areas with the best prospects for sustained future growth.

This is the natural follow-on to predictions five and six.  As concepts of supply chain control tower, more leveraged deployment of predictive analytics, multi-channel supply chain operations management and cloud computing options gain more traction and interest among technology buyers, the vendor community will make additional market moves either in acquisition or strategic partnerships to shore-up overall product offerings for buyers.

While we predicted high activity in 2011 which do not come to pass, we believe that 2012 will provide more motivation, namely because overall spending on software is predicted to decrease in 2012. This makes any path to growth dependent on a keen focus on near-term customer buying needs, quickly filling gaps in technology offerings or gaining market growth by outright acquisition.

Supply Chain Matters believes that two smaller vendors in the planning area, and perhaps one or two vendors in the B2B procurement area are likely targets in 2012 from multiple larger acquirers and we will anticipate, as our readers, on what actually transpires.

We expect more acquisition efforts by the major ERP, B2B cloud services and procurement technology providers, and do not be surprised if some leading vendors in these new adoption areas get acquired by larger players. Some targets will be acquired with high multiples to prevent competitors from scooping them up.

B2B commerce and collaborative planning and execution networks will most likely be the hottest area for deals and shifting of players and anticipate more announcements as big players IBM, Salesforce, Amazon, Google and  possibly Microsoft square-off and bankroll for control of online commerce infrastructure and business process control.  Similarly, SAP and Oracle will continue to fill-in advanced supply chain technology software gaps, particularly in cloud and control tower areas.

Prediction Eight: The challenges related to higher incidents of counterfeit products, cargo theft and other unscrupulous activities within and across global supply chains will finally motivate government and industry to step-up process standards and corrective mitigation efforts.

This collective area has been percolating for many years and we anticipate that 2012 will be the year when government and industry finally become motivated to take action to address the growing incidents of non-conforming materials that have penetrated multi-industry global supply chains.

In the U.S., legislative leaders and industry groups have become much more alarmed with the existence of counterfeit electronic parts penetrating defense and industry oriented supply chains, much of which is alleged to be originating from China and other countries.   The U.S. government has already discovered 1800 cases of suspect counterfeit electronics being sold to the U.S. Defense Department from commercial and military suppliers.  The Semiconductor Industry Association testified that U.S. semiconductor companies face more than $7.5 billion in costs related to counterfeit parts each year as non-conforming electronic microelectronics are being embedded in automotive, aerospace, communications, medical device, and other industry supply chains.

In our industry-related prediction pertaining to Pharmaceutical and Healthcare, we noted that increased shortages of drugs has led to more unscrupulous and criminal behavior relative to grey market supply, cargo theft and prescription drug abuse.  Increased outsourcing of production to global contract manufacturers and API providers adds to the problem.

Regarding cargo theft, brazen criminals have stepped up their sophistication of methods in stealing whole cargo shipments, by utilizing active surveillance of driving patterns, GPS global tracking and other means to circumvent existing security measures.   A challenged economic environment often leads to increased criminal behavior, and in 2012, the criminals can leverage more sophisticated means and methods. Stolen cargo adds to the problem of non-conforming products.

Look for governments to increase the pressure on industry players to accelerate initiatives in authentication, tracking and genealogy of components, parts and raw materials. In the U.S., state wide initiatives and efforts were enacted to overcome lack of any concerted action by the federal government. In Pharmaceutical and healthcare, the looming deadline is the California anti-counterfeiting and diversion legislation which requires pedigree tracking.  After numerous industry lobbying efforts to postpone the implementation, the program remains target for implementation in 2015.  Serialization and authentication program mandates continue to evolve across the Eurozone countries and Brazil has called for implementation of serialization and track and trace requirements in 2012.

As the deadlines come closer, and the costs in terms of revenue, liability and implementation costs loom ever larger, we believe that industry teams will become much more actively involved in influencing some forms of global-wide process standards and inter-industry cooperation in sharing product movement information across global supply chains. We may finally have the opportunity to observe industry teams stepup efforts to actively influence global standards and enhanced mitigation initiatives in prevention as well the tracking and interception.

This concludes Part Six of our Supply Chain Matters 2012 Predictions.  In Part Seven, we will explore our Prediction Nine, our continued belief in wider-scale adoption of and leverage of in-memory computing technologies harnessed into predictive analytics and decision-making process needs.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

I had the opportunity to attend the latest session of the MIT Forum for Supply Chain Innovation on October 29^th.  The theme of this fall session was Strategies for Brand Protection, Material Assurance and Anti-Counterfeiting, and the presenters represented a cross-section of pharmaceutical industry, high-tech industry, and U.S. government and defense agencies. My takeaway from the sum total of all the presentations and discussion was that the problem of counterfeit or bogus materials infiltrating both industry and defense-oriented supply chains has become widespread, much more than even I anticipated.  In fact, many conference participants including myself, after viewing the presentations, commonly expressed ore reaction to the current problem as “sobering.” Robin Gray, Executive Vice President of the National Electronics Distributors Association (NEDA) summarized the problem as “widespread and pervasive and involving all segments of the economy.”

The reasons for increased occurrence of bogus materials within supply chains are numerous, but center upon profit motives.  Scrupulous players have found that there are more monetary and other incentives for engaging in this activity, more so than illicit drugs or other forms of organized crime.  Criminal laws covering this activity are generally weak. On the buying side, suppliers offering parts and components below current market prices lure buyers into spot buying or new contract arrangements in order to meet cost-reduction goals. And finally, suppliers and other players have discovered more sophisticated means to alter the composition or stated quality of parts, more often beyond current means to detect such deficiencies.

Incidents have occurred at all tiers of the supply chain.  In fact, a soon to be released U.S. Department of Commerce research study indicates that over half of counterfeit incidents involving defense-oriented supply chains are never reported, because of negative incentives. There is also speculation that the increased focus on green supply chain initiatives, specifically the recycling of parts or packaging materials, may be fueling a further problem.  Recycled parts make their way to unscrupulous players, mostly in China, who breakdown finished electronics to harvest internal components and later rename them as other or similar parts.  Other highly sophisticated players contract to receive original packaging materials from recycling, allowing them to both re-label and package bogus parts to look the same or even better than an original part shipment.  Amazingly, counterfeit parts are not merely focused on high-value products, or products that are no longer in active production.  The NEDA findings indicate that the most prevalent price range is $1 to $10 in unit costs, and the U.S. government was surprised to learn that current incidents are much more prevalent among parts in active production.

A lot of initiatives are currently underway in attempt to combat this problem.  Industry associations such as the NEDA are stepping-up awareness and recommending that procurement of materials been focused solely from OEM’s or their authorized distributors. Pharmaceutical companies such as Bayer AG and other partners are running European based pilot processes to test product verification and product serialization processes in preparation for more wide scale deployment. The U.S. General Services Administration, Defense Department, and associated military procurement agencies are stepping-up efforts to tighten-up procurement practices and screen both existing inventory and new shipments of electronic components. 

Much more awareness, grunt work and sophisticated technology need to be brought to bear on this problem.  The risks are huge and widespread, ranging from failed products, damage to a corporate brand or reputation, or even human safety.

My sense from this latest snapshot, compliments of MIT, is that industry and government are still not sensitized to the magnitude or growth in this supply chain risk category.  My advice to readers is to make sure your organization has its eye on the problem of counterfeit parts, and has definitive plans and timetables to address forms of mitigation.  The problem is widespread, and it is growing.

 Bob Ferrari