Executive Insights: 12 Macro Trends Impacting Supply Risk


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 05-24-2016 14:49

  

A recent study by A.T. Kearney identifies 12 macro trends that will play a major role in the current and future operating environment for businesses and in particular for global supply chains. The study concludes that managing risk may be deprioritized, leaving Procurement organizations vulnerable to supply disruptions. So what should be on companies' radar? DCAT Value Chain Insights (VCI) takes an inside look.

For global supply chains, certain risks are the results of behavioral changes while others are based on changes in market structures caused by innovation. Understanding the behavorial, structural, and geopolitical changes and how they affect supply chains is critical for building required agility, redundancy, and transparency in supply chains to mitigate risks and lead long-term strategies. So what do the experts suggest?

12 macro trends 
The report, “Is Your Luck Running Out? Managing Supply Risk in Uncertain Times,” by A.T. Kearney and Rapid Ratings International, suggests that supply-chain risk management has declined in priority, and as a result Procurement organizations struggle with resiliency with most chief procurement officers citing lack of bandwidth and budget as the biggest roadblocks to proactively managing supply-chain risks.

“For most organizations, it is not a matter of if but when a supply disruption will occur,” says Carrie Ericson, vice president with A.T. Kearney Procurement and Analytics Solutions and co-author of the study. “Although most acknowledge this fact, few have invested in the systems and programs needed to respond.”

A.T. Kearney’s Global Business Council issued a report, “Divergence, Disruption, and Innovation: Global Trends 2015–2025,” which analyzes the key trends expected to impact global supply chains over the next decade. These trends are outlined below. 

1. Geopolitical realignment. A key overall issue identified by the report is increasing geopolitical uncertainty in the Middle East, North Africa, and South Asia and shifting economic influence in the world. The study points out that the International Monetary Fund projects that Brazil, Russia, India, Indonesia, and China (BRIIC) will be among the 10 largest global economies by 2020, ahead of the United Kingdom and France when measured in gross domestic product at purchasing power parity. This increased power will put more pressures on resources and heighten competition for top-tier suppliers although that might be offset by weakening prices for the commodities that these countries’ economies depend on for growth.

2. Continued global extremism. The report points out that the US-based National Consortium for the Study of Terrorism and Response to Terrorism shows more than a six-fold increase in the number of global terror attacks in the period of  2006 to 2014. A consequence of this will be increased governmental controls over international banking and shipping routes, which could potentially affect speed and ease of use for legitimate business networks and lead to longer lead times and potential supply-chain disruptions.

3. US economic resurgence. The US economy is projected to grow at a 2% annual rate through 2020 and be the main engine of global economic growth. The US economic resurgence is causing an appreciation of the US dollar, which makes imported materials and services that go into US products (cost of goods sold) less expensive, which improves the competitiveness of supply chains, according to the report.

4. The 2020 Seven Growth Economies. The report identifies seven new emerging markets with strong potential: Chile, China, Malaysia, Mexico, Peru, the Philippines, and Poland. If these economies continue strengthening, it will require a change to supply chains as companies seek to not only supply these markets but also structure their value chains to serve these growing markets, according to the report.

5. A resource slump cycle. Global supply and demand factors have ushered in a 15-year period of lower commodity prices. Recent forecasts from the International Monetary Fund and the World Bank project that the global resource slump cycle will continue through at least 2020. Supply chains that rely on resource-exporting countries vulnerable to this slump could be at risk for supply interruptions from political instability resulting from slower economic growth.

6. Accelerating global climate change. Extreme weather events have the potential to cause supply disruptions and contribute to economic and political instability in countries affected.

7. Depopulation waves. Although emerging markets will face outward migration and brain drain, an aging population in developed markets will create significant depopulation challenges, according to the report. The United Nations World Population Prospects estimates that global population growth will decrease from an annual average rate of 1.8% in the second half of the 20th century to 1.1% from 2000 to 2025 with developed markets most affected in the near term. Certain countries, such as Japan, Germany, France, and Canada, will have more than 20% of their population aged 65 or older, and South Asia is expected to lose 10 million people from 2015 to 2025 due to migration and brain drain. The results of this depopulation on the supply chain are labor shortages and weakening transportation infrastructures as reduced populations cause tax revenue shortfalls and higher labor costs due to increased competition for workers.

8. IT revolution 2.0. The report identifies the importance of current information technology (IT) trends that have the potential to change regulations in various sectors and challenges traditional business modes, including increased vulnerabilities to supplier and partners risks.

10. The rise of machines. Increased technological sophistication, including smart devices, unmanned systems, and robots will change industrial production and supply chains, according to the report. A Gartner forecast projects that Internet of Things (loT) devices will increase from fewer than 4 billion in 2014 to 25 billion in 2020, which will increase connectivity and provide opportunity for better analytics. Current, 53% of loT devices are in the US, Germany, South Korea, and China. Such connectivity and related data will enable movement of goods and services that will be more responsive to changes in market demand and at the same time enable a decrease in costs in supply chains as well as reduce risk.

11. Evolving artificial intelligence. Advances in artificial intelligence are creating opportunities in research and development, but it is still unclear of the impact on worker productivity and employment. A recent Pew Center Research Center survey said that 52% of experts say technology will not displace more than jobs that it creates in the next 10 years. The adoption of such technology and advances has the potential to decrease costs in the supply chain and allow for more efficient resource allocation.

12. Changing nature of power. Technology and greater access to information have increased expectations for services, transparency, and customization among individuals while at the same time have reducing enterprises’ control of information. At the same time, urban areas will continue to be major sources of population with projections of 58% of the world’s populations concentrated in urban centers by 2025. This growth creates other issues, including traffic congestion and concentration in end markets, which in turn, requires a re-examination of supply chains that serve those markets.

These trends are significant as Procurement organizations are faced with increased responsibility for managing risk. According to A.T. Kearney research, most companies (78% of typical companies and 90% of Procurement leaders) expect that their Procurement organization will be given more responsibility for managing risk in the next two years. Eighty-three percent of all companies predict a growing need for their organizations to implement a procurement risk-management strategy within the next three years.

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