As industry supply chain teams continue efforts in achieving 2017 year-end strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to look back and review our prior 2017 Predictions for Industry and Global Supply Chains that we published at the beginning of this year.

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. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year. After completion of looking back and scoring the current year projections, we will then transition into the unveiling of our 2018 Predictions.

As has been our custom, our scoring process is 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 individual predictions in feedback comments.

Prior postings in this series included Part-One– a look back at our 2017 overall global economic outlook and our specific predictions related to sourcing and procurement.

Part Two featured a revisit of our prediction related to a supply chain talent perfect storm as well as increased anti-trade geopolitical forces providing added sourcing challenges.

Part Three contained a revisit of our predictions relative to continued global transportation industry turbulence along with a prediction calling for a renewed renaissance in business systems and technology investments.

Part Four revisited our believe that Alibaba and Amazon would continue to position for global online platform dominance along with a prediction that business self-Interest would fuel continued efforts in supply chain sustainability initiatives.

In Part Five we began revisiting our industry-specific 2017 predictions with a look back at North America Automotive, Global Commercial Aerospace industry supply chain developments.

 

For this posting, we complete our self-evaluation process with a review of the remaining industry-specific predictions.

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

Self-Rating: 3.8 (Max Score 4.0)

We predicted in 2016, and again in 2017, that the retail industry, along with it associated supply chains, would 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.

Throughout the year, and now in the unfolding holiday peak period, there is clear evidence that the industry has absorbed learning from the prior two years and is increasingly, and in some select cases effectively, incorporating the physical store as the extension of an overall online experience. The most visible retailers thus far have been Wal-Mart and Best Buy, while Target has been making some initial progress as-well. Analytics-driven knowledge of customer needs has initially become visible from certain retailers as is signs of more sophisticated item-level planning that supports both online and in-store fulfillment needs. Other evidence now points to retailers beginning to understand that a better strategy for competing with Amazon is with unique differentiation in services and capabilities that Amazon cannot do.

We further predicted that B2C and 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 would continue to take hold among traditional retailers supporting both online and physical stores.

The best evidence of this prediction has been the unfolding online and in-store strategies that Wal-Mart has been executing, which includes placement of unique promotional merchandise exclusively within only one channel while instituting dynamic pricing strategies for broader merchandise categories based on daily or hourly volumes. Reuters has exclusively reported that the global retailer is in striking distance of matching Amazon’s online prices for the first time. The analysis data indicates that Wal-Mart is now only 0.3 percent more expensive than Amazon, and in some categories, somewhat lower. Likewise, retailers Best Buy, and Target have been rolling out some innovative merchandising and pricing strategies that counter Amazon’s offerings.

 

Apparel and Footwear Producers and Respective Supply Chains

Self-Rating 3.0 (Max Score 4.0)

Somewhat like the automotive industry, there is no industry as globally supply chain linked as that of apparel and footwear.  Supply chains are global in nature with many interlinked, and sometimes, hidden flows. Because of the high content of direct labor involved in the production of apparel and footwear, the cost of direct labor is a prime determinant as is the overall cost of transportation to move goods to designated geographic markets.

We anticipated that the geopolitical forces of increased trade protectionism would impact U.S. apparel producers and retailers rather significantly in 2017, either in a border adjusted tax on imports, a trade war with China, or a breakdown and collapse of NAFTA trade negotiations.

Thankfully for the industry, our prediction was pre-mature for 2017, but the overall threat of trade tensions leading to increased tariffs remains over the coming months.

A further 2017 prediction that we declared for this industry focused on the “Fast Fashion” industry disruptors who would continue to leverage supply chain near-shoring strategies to provide far more agile responses to the latest and most prominent fashion trends. Their appeal to higher margin, in-demand fast fashion supports higher pricing and thus flexibilities to support near-shoring of fast production. Our belief was that such strategies would prove to be a significant strategic advantage and opportunity in 2017

High profile footwear and apparel manufacturers exercising such strategies this year, among others, were Adidas, Nike, and Reebok. Nike CEO Mark Parker outlined a strategy of supply chain speed as the key to long-term growth. To that end, the company has partnered with contract manufacturing services provider Flex in rolling out a pilot near-shoring strategy to serve North America based customers by moving more manufacturing to Latin American regions. Plans call for the delivery of over 3 million pairs of shoes from such facilities in fiscal year 2018. More than a quarter of this production volume will be produced with a “responsive model” with shorter lead times. The goal is move overall lead times from upwards of 60 days to 10 days or less as a means to respond to market and consumer tastes. Reebok has been exploring a strategy of augmenting existing production capacity with near-shored smaller factories that produce products in smaller lots through automated techniques. A plant in Lincoln Rhode Island uses a liquid to “draw” the outsoles of shoes as contrasted to developing individual molds.

Reebok has a slightly different strategy that includes opening up what it terms as its “Speedfactory.” One such facility is already ramping up in Germany and one is scheduled to open shortly in Atlanta Georgia to serve the U.S. market.

Thus, we self-rate our prediction related to fast-fashion slightly higher in that evidence continues to point to movement towards more agile supply chain response models based on near-shoring strategies. Here again, negative trade developments such as a collapse of NAFTA talks could derail such efforts.

 

Pharmaceutical and Drug Supply Chains

Self-Rating: 3.0 (Max Score 4.0)

For the first time, we included pharmaceutical and drug supply chains in our industry-specific predictions for 2017. The principal reasons were twofold and somewhat inter-related. We believed that the increasingly global reach of the industry’s various supply chains provided continued vulnerabilities for risk and disruption. Of late, there has been a shift of manufacturing away from the U.S. to take advantage of lower manufacturing cost and tax savings. The bulk of active pharmaceutical ingredients, the primary raw material compounds related to other drugs, are sourced in China and India, making the United States the largest importer of pharmaceuticals from other countries.

Shortly after taking office, President Trump had met with a group of high-level industry executives to communicate his desire to have more pharmaceutical and drug manufacturing production to occur in the U.S. Since that time, Mr. Trump’s interest in his desire seemed to have moved on to other priorities. As noted in our other industry-specific predictions, the U.S. Congress appeared to back away from an import-tax approach as part of corporate tax reform. No doubt, a lot of industry lobbyists had some influence on such matters because the implications to current global sourcing strategies would have been rather costly from a product margin perspective. At this writing, it is still unclear as to whether final U.S. tax revision legislation will have specific impacts to this industry.

In January of 2017, the U.S. Federal Drug Administration(FDA) was reporting a total of 57 critical drug shortages. As of this writing in early December, that listing now includes 69 drugs. Much of the increase has been a result of the catastrophic hurricanes that literally destroyed the infrastructure of the island of Puerto Rico, where in excess of 20 pharmaceutical production facilities are sourced. The island is approaching its third month without electrical power, the longest reported blackout in U.S. history. While various pharmaceutical and drug brands have been utilizing inventories from other facilities to make-up from the days of disruption, shortages are building and so will the added threat of more supply shortfall if the island’s electrical grid is not restored by early December.

The second component of this industry challenge, within the U.S. especially, remained an enormous groundswell of political and social backlash directed at what is perceived as artificially high and inflated pricing stemming from conflicting buyer self-interests across the industry’s extended supply chain.

During the year, many high-profile industry executives were summoned to Congress to account for headlines for artificially high prices. One high-profile and controversial drug company executive was convicted of criminal charges. Perhaps the most troublesome aspect of political backlash involves the growing opium drug addiction crisis impacting the United States and other countries. As of September, a bipartisan coalition of 41 U.S. state attorneys general have jointly filed subpoenas to major opioid distributors and manufacturers challenging how prescription drugs are marketed and distributed, and where a blind eye to excessive shipments might have contributed to the epidemic.  That has placed major drug wholesalers and big-name manufacturers again in the spotlight of litigation and added oversight. Some states have subpoenaed actual numbers of opium shipments highlighting specific pharmacy’s and clinics that received extraordinarily high levels of opium drug shipments without raising alerts and concerns.

On a more positive note, we observed a lot of evidence that many pharmaceutical and drug supply chain organizations are investing in people skills, more streamlined processes and in more leveraged use of advanced technologies in production quality assurance, direct and B2B procurement and end-to-end supply chain planning. Manufacturers such as Amgen, Bayer, Merck, and others have made significant progress in supply chain transformation efforts.

We thus lowered our self-rating with a belief that we did not grasp the lobbying and influence powers of this industry. We further understated transformation efforts, but more important, the industry is making positive strides in supply chain people, process and technology investment.

This concludes the final look-back and self-evaluation of our Supply Chain Matters series of 2017 Predictions for Industry and Global Supply Chains.

We are now in the process of nearly completing the formulation of our 2018 predictions while will be unveiled during the remainder of this month.

Once again, if readers and specific technology and services providers wish to contribute their thoughts relative to what to expect in 2018, please insure that you contact us no later than next week. Again, please utilize the email address; feedback <at> supply-chain-matters <dot> com to contact us with your inputs.

Bob Ferrari

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