Commentary: Welcome to 2017

Sean Monahan, a 30-year supply chain practitioner and partner with A.T. Kearney, said that uncertainty on growth rates, trade flows, transportation rates, fuel costs, technology and other factors will make decisions hard for supply chain professionals.    Supply chain professionals are particularly skilled in dealing with uncertainty, but 2017 will test even the best of us. Uncertainty regarding growth rates, trade flows, transportation rates, fuel costs, technology, and other factors will make decisions – including near-term (next 12 months), but particularly mid-term and longer-term – particularly difficult.

Domestic Growth. During the past year, the International Monetary Fund (IMF) World Economic Outlook projections for United States 2017 GDP growth have declined from 2.6 percent in January to 2.2 percent in October (post Brexit). If nothing else, the post-election debate has fueled arguments pro and con, but in the medium, term most of President-elect Donald Trump’s policies are at least viewed as potential stimuli to the economy, particularly proposed increases in spending on infrastructure and defense. The former is desperately needed, per the American Society of Civil Engineers’ Report Card for America’s Infrastructure, which projects a need for $3.6 trillion in funding by 2020.

Global Trade. After a dramatic step back during the 2008-2009 financial crisis, global trade (as a percentage of GDP) rebounded for a few years, but has declined steadily since 2012. A number of factors contribute to continued uncertainty, though generally pointing to continued decline: prosperity, macroeconomic uncertainty, geopolitics, and rising nationalism and protectionism.
   Prosperity in emerging economies has increased local markets for locally produced products, but it has also brought higher wages, shifting production of those same products closer to home markets.
   Given persistent uncertainty in macroeconomic trends, business leaders are choosing to invest in the safe harbors of developed markets. This was reflected in the 2016 A.T. Kearney Foreign Direct Investment Confidence Index®, wherein seven of the top 10 countries are developed markets.
   Geopolitics has also made a comeback in recent years and is playing a crucial role in the current phase of the global economy. Geopolitical tensions can lead to negative economic implications, not only for those markets directly involved in disputes, but also for their neighbors, as well as for the regional and global economy. Key geopolitical hotspots today include Russia and Eastern Europe, East Asia, and the Middle East.
   One of the centerpieces of President-elect Trump’s platform is related to addressing trade policy and actions to protect American producers from unfair practices. Whether these actions will be made within existing agreements or via all-out trade wars remains to be seen. The repercussions, however, will most likely be a contraction in U.S. and global trade regardless of the method.

Transportation Rates. From early 2015 through mid-2016, shippers across most modes, but particularly ocean, air, and truck, benefited from steady – and at moments dramatic – declines in freight rates. While some analysts pointed to slow economic growth as the culprit, the reality is this favorable window was the result of investments in capacity that greatly exceeded actual growth in demand.
   Through a combination of bankruptcies, most notably ocean carrier Hanjin Shipping, idling of assets, slowdowns in purchasing, and outright scrapping of assets, capacity is coming back in line with demand and rates are reversing their downward trend. While the magnitude remains open for debate, the upward trajectory is clear.

Fuel Costs. January 2015 was the beginning of a year-long decline in fuel costs that reversed in February 2016. Although still well below 2012-2014 levels, the Energy Information Agency (EIA) forecasts fuel costs to continue their upward trend.
   However, in light of President-elect Trump’s pledge to “unleash America’s $50 trillion in untapped shale, oil, and natural gas reserves, plus hundreds of years in clean coal reserves,” as well as uncertainty surrounding an OPEC deal that would cap oil production, it is foreseeable that forecast increases will be tempered.

Technology. We are at the forefront of the Fourth Industrial Revolution, faced with a pace of technological innovation that will bring unforeseen shifts in product and service innovation and productivity.
   The Internet of Things (IoT) will bring connectivity and visibility to anything, anywhere. Advances in computing power, advanced analytics, and artificial intelligence will bring breakthroughs in process optimization and decision making. Wearable technology such as augmented reality will drive unprecedented improvements in worker productivity and quality. Technologies such as advanced robotics and 3D printing will covert “bits to atoms,” as digital commands and designs are converted into physical products.
   As these technologies advance, they will disrupt economies of scale and the role of low-cost labor in manufacturing. While the debate on most of these technologies has shifted from “if” it will happen to “when” it will happen, the exponential pace of development heightens the uncertainty and risk associated with decisions on physical infrastructure that may be disrupted by technological advances.
   So, what to do in the face of uncertainty? Embrace it, or at least engage with it. Don’t ignore it. At a minimum, when faced with a decision mired in uncertainty, fully assess the implications of alternate outcomes on your decision before moving forward.
   An even better approach is to leverage scenario planning. Scenarios enable us to explore how complex interdependencies will manifest in the future, and allow us to work back through the circumstances and events that led there, highlighting critical inflection points and milestones along the way. These inflection points and milestones can then be used as early warning signals for corrective action. Scenarios can also allow us to identify “no-regret” actions that are suitable across a range of potential futures.

   Sean Monahan is a 30-year supply chain practitioner and partner with A.T. Kearney, a global management consulting firm with offices in 40 countries. He can be reached by email at sean.monahan@atkearney.com.