Economic Recovery Signals New Direction

Five catalysts that will drive profound change for supply chain professionals.


The economy will turn around. No one can predict exactly when, but it is inevitable. Make sure your clients, whether they are internal or external to your organization, are prepared.

To best serve their clients, corporate real estate and supply chain professionals need to understand the forces that are shaping tomorrow’s supply chain.

For companies, smart management of the following ?ve catalysts of change will be required:

1. Globalization

With access to sources all over the world, corporations will always seek out low-cost raw materials and labor. Today’s trend is toward diversifying sources—“near sourcing” or “right sourcing”—to minimize the risks of supply chain disruption.

CSCOs surveyed in a global IBM study predict that in the next three years materials will increasingly be sourced in Asia—not surprisingly—but also in Eastern Europe. Eastern European sources, representing approximately 6 percent of global sourcing, are expected to see a 43 percent gain, and a proportional surge is predicted for the fraction of the market represented by Central and South America and Africa. China still leads the pack, providing an average of more than one-third of global sourcing. CSCOs expect China’s percentage to rise by two-thirds, concurrent with a steep 45 percent average decline in sourcing from the United States, Mexico, Canada and Western Europe.

The trade-off for lower costs associated with global sourcing and operations is a more complex supply chain, with all of the attendant risks. Longer lead times are part of the bargain. Unreliable commitments and delivery issues plague CSCOs. Quality issues arise that can attract harmful media attention.

2. Risk mitigation

With a supply chain that spans the globe, the opportunities for disruption are greater, and companies need to manage that risk with more than one solution. Increasingly, risk mitigation strategies include the outsourcing of some supply chain operations to third-party logistics (3PL) providers. Advanced technologies providing real-time interconnection can meet the growing need for supply chain visibility and real-time information, allowing managers to pinpoint and analyze potential problems and act to mitigate their negative effects.

As the economy improves, transportation capacity constraints may allow demand to outstrip supply, undermining customer and consumer con?dence and, at least for some time, creating challenges in getting sufficient trucking capacity. CSCOs can mitigate that risk with a supply chain system that maximizes proximity to multimodal logistics hubs with access to truck, rail, intermodal, air and ocean transportation options.

Political dynamics and currency exchange rates create a higher-risk climate. CSCOs must consider a country’s stability before establishing operations there. In recent years, the strong Euro has had a negative impact on investment in Europe, while the weak dollar is creating more foreign investment interest in the United States

3. Volatile oil prices

It is our view that oil prices will continue to rise, from today’s $80+ per barrel costs to highs approaching, and even possibly exceeding, previous highs of $140 per barrel. As oil prices rise, their volatility becomes a major catalyst of supply chain change, affecting decisions that have important implications for commercial real estate professionals.

Rising fuel costs will drive companies to re-evaluate and recon?gure their supply chain networks to take advantage of increased proximity to customers by multiplying their companies’ distribution facilities. The trend will be to “more/smaller” vs. “fewer/larger,” as when a single, mega-sized national distribution center is either replaced or complimented with a regional hub distribution network.

4. The expansion of the Panama Canal

Signi?cant change in the global supply chain will result from the completion, on schedule for 2014, of the $5.3 billion widening and deepening of the Panama Canal to accommodate modern, super-sized “mega ships.” These larger, “post-Panamax” container vessels, capable of carrying as much as 50 percent more TEUs (twenty-foot equivalent units, a measure used to describe container size), will enable signi?cant economies of scale.

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