In Part I of our review of Succeeding in a Dynamic World: Supply Management in the Decade Ahead, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPS, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. Today, we will dive into the first four of these eight major forces and explain not only why they are important, but what can be done about them.
The report notes that the impact of China on the world economy will continue to be enormous over the next ten years and that, to prosper, companies will have to embrace China as both a market as well as a source of supply for their goods and services. As China continues to modernize and urbanize, China will consume an increasing share of the world’s raw materials, driving up prices and / or creating shortages. The growth of China as a supply and demand market will create opportunities for all and those that embrace the China opportunities will have profound advantages over those that do not. Furthermore, enormous intellectual capital exists in China that can be tapped for invention, innovation, and new technology.
The report also notes that other developing countries will continue to emerge as attractive supply sources and bases of growth and identifies Russia, Mexico, and India. Personally, I think India will emerge as the next great shaper of the global economy and challenge China for supremacy. See my predictions on the winner of the talent war and the loser of the innovation challenge.
Merger, Acquisition, & Supply Market Consolidation
To meet the onslaught of new competition, companies headquartered in developed economies will need to increase in size with improved economies of scale and market power to survive. This will thus force many companies to merge and consolidate. As the M&A game plays out, supply management will be tasked with assessing the impact on the supply chain, including costs, risks, and opportunities. Supply management will need to understand the new supply base, how it can be used to gain advantage, and how to find the forecasted cost savings. In addition, when oligopolies are created by supplier consolidation, power will shift in the marketplace and diminish customer bargaining power while creating a major threat for buying companies.
This is one recommendation that I disagree with. To meet the onslaught of new competition, companies headquartered in in developed economies will need to do something to maintain their place in the market, but increasing in size and market power through consolidation isn’t the only option. They could survive by finding a niche and being the best player in the niche, or they could survive by generating greatly improved economies of scale through the application of innovative processes and methodologies. Now, I know that the approach most big companies take to innovation is to buy it, but it doesn’t have to be this way. Look at Apple.
Increased Government Regulation
Government legislation and regulation of business will only continue to increase, requiring companies to dedicate sufficient resources to ensure compliance, especially in the U.S. and EU. This will lengthen contract negotiations which will have to discuss government regulations and privacy legislation to make sure all parties will be able to remain in compliance. In addition, government actions to support or restrict economic development, such as tax incentives and trade restrictions, will have a large impact on supply strategies.
Government legislation and regulations will continue to multiply, but I believe that China and India could pose just as many issues in the next decade as the US and EU do now. China is already pursuing its own version of RoHS due to the extreme amount of e-Waste that companies are trying to dump there. India is trying to become the next great knowledge and service economy and will eventually enact regulations necessary to satisfy the requirements of dependent nations in terms of privacy and IP. Furthermore, there’s more than one way to deal with the legislation onslaught. The first is to add resources, as the report suggests, but a company could choose to implement systems to manage the data gathering and reporting requirements without increasing resources. These systems are rare today, relative to other supply management solutions, but will become more common as niche providers will rise up to address a problem that companies, who are currently paying millions of dollars just to generate compliance reports, will pay handsomely for.
Technology breakthroughs will continue to cause major changes to how products and services are provided. These changes will ultimately lower the customer’s total cost of ownership. Core technologies of many industries will become commoditized, forcing geographic consolidation and concentration of the supply base. Shortages of key raw materials will lead to technology changes and the use of alternative raw materials.
I have to agree wholeheartedly here, but point out that the early winners will be those that latch onto new technologies early, lowering their cost and ushering in the era of commoditization. In the software industry, on-demand and SaaS providers will be the big winners next decade, as will providers who can deliver enterprise systems based on low-cost open source technologies and make their money off of services.