First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  Jan. 7, 2016  

The Year in Supply Chain 2015


It was again a very interesting year in supply chain for 2015 - but aren't they all these days?

This week, I will summarize what I feel are the most important key themes and trends of the supply chain year that was. Next week in our OnTarget newsletter, we'll publish our popular timeline of key events over the past year. Later next week, I will be back for a review of the year in numbers and graphs.

You might also be interested in our list of the top Green supply chain stories of 2015, some of which will make it into our overall top stories, and my blog take on the 2015 Christmas season in supply chain.

So let's get right to it, starting with the really big picture.

Gilmore Says: is a force all its own. Ignoring the law of large numbers, it continued to grow merchandise sales in the mid-20% range in 2015.

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As always, the state of the economy was key to how we managed our supply chains, and once again in the US we saw sluggish growth, with what is likely again to be full year real GDP growth in the 2% range, in fact maybe a little under that. Once again, as with 2013, Q1 began weakly, up just 0.6%, followed by solid growth of 3.9% in Q2 and then 2.1% in Q3, with Q4 looking like it will be on the low side – and worrisome economic news clearly all round.

That bad news of course includes stock markets tanking this week on a global basis, and the US Purchasing Managers Index, which measures the state of US manufacturing, falling below the critical 50 mark that separates expansion for contraction in both November and December, after 35 months of manufacturing growth.

Euro and Japanese economies as usual were even weaker than in the US, and globally deflation remains a real worry. A major factor was the continued slowdown in the Chinese economy, which several news organizations named as their top story of the year. Officially, the Chinese economy grew just 7%, its slowest pace in many years, but some suggest the real number was 4-5% growth or maybe even just 2-3% grown.

That slowdown has all kinds of ripple effects, most notably continued downward pressure on commodity prices (as Chinese demand cools substantially), a gyrating Chinese stock market, Chinese employment issues and more.

The commodity price collapse and other factors have also slowed growth in most developing economies substantially, bringing into question the strategies of many multi-nationals that bet emerging markets would be their growth salvation, as was all the rage coming out of the Great Recession. That, for now, is no longer the case.

World trade continued to slow, growing about just 2% in 2015, below global GDP growth of about 2.5%, when until recent years global trade generally exceeding GDP growth, often substantially. This is not a good sign, and of course is the key factor in the financial woes of the container shipping industry.

Geopolitically, it was another rough year, with continued tensions over Ukraine that remain simmering and could boil over, growing (and very worrisome) issues with China claiming territory in international waters in the South China Sea and beyond, even worse than usual Mideast conflict led by the growth of ISIS and a resurgent Iran, and a resultant migrant crisis in Europe. The world, frankly, is a mess. The "end of history," Francis Fukuyama famously wrote in the early 1990s. Hardly.

With that high-level overview, here are what I view as the three key trends or themes relative to supply chain in 2015:

Robotics Reaches Critical Mass: There were usually multiple stories daily about some advance in robotics for home and business. Consider now that robots have really become almost as much a digital technology as a mechanical one, meaning they are advancing along the lines of the famous Moore's law for microprocessor development. Just ponder the implications of that for robotics progress.

A related development to all this is the renewed interest in artificial intelligence. Facebook CEO Mark Zuckerberg recently announced his plan to build a computerized butler of sorts using AI that will let friends in by looking at their faces when they ring the doorbell, help Zuckerberg "visualize data in virtual reality" and "understand my voice to control everything in our home."

I want one for Christmas next year. Meanwhile, Amazon announced it would deploy some 15,000 of its Kiva robots in its fulfillment centers in 2015, and sponsored its first robotic picking contest, where university teams from around the world competed to build a robot that can select small items out of static shelving.

One province in China has embarked on an official "robots for humans" program in factories in the region, while Google rather secretly is apparently working on all kinds of robotics, envisioning droids that for example will replace the UPS man. (Will they be made of brown metal?).

In 2015 I believe we reached an inflection point in robotics, the ramifications of which are simply unknown.

ecommerce and The rise of ecommerce continues unabated, with growth in the US (and I assume elsewhere) up consistently 14-16%, quarter after quarter. This of course is driving nearly all retailers to aggressively pursue ecommerce or "omnichannel" strategies, with Walmart spending huge sums to catch up to Amazon, Target rolling out item-level RFID to achieve better in-store inventory accuracy, many retailers moving to store-based fulfillment to increase sales from more inventory to sell, and more.

Yes, there will always be a role for brick and mortar, but 2015 frankly raised a lot of questions relative to what that role will be, with many retailers praying "click and collect," using the store as the pick-up point, will be their salvation. However, several researchers found decreasing in-store traffic in 2015. Macy's, ironically an on-line leader, just announced it was shuttering some 40 US stores after a very tough Christmas season.

"I think Macy's is likely to be a canary in a coal mine," said Ken Perkins, president of Retail Metrics, a retail research firm.

This revolution will in the end have a significant impact on the supply chain strategies and networks of both retailers and thus consumer goods manufacturers.

But then, is a force all its own. Ignoring the law of large numbers, it continued to grow merchandise sales in the mid-20% range in 2015, much higher than overall US ecommerce sales. New analysis from Macquarie Research just this week claims Amazon took an astounding 51% of all US ecommerce sales growth last year. I think that is a little high, as it counted Amazon revenue not coming out of ecommerce (e.g., web services) but it is probably not that far off. Wow.

Amazon refreshed its drone design as it lobbies for easing testing rules, appears to be building its own air cargo capabilities, is pursuing rapid same day deliver all over, as it uses Amazon Prime as a brutal competitive weapon.

Can Amazon be stopped by anyone, individually or collectively?

Oil and Commodity Price Collapse: Despite never ending Mid-East turmoil, oil headed still lower in 2015, after the collapse started in the last 3-4 months of 2014. WTI oil prices started the year just under $60 per barrel, and incredibly ended the year at about $37.00.

These low oil prices helped offset the impact of rising trucking costs in the first half of the year, helped the wobbling economy a bit, and pushed some rail/intermodal cargo back to trucks, while helping to keep inflation low (maybe too low). Who would have believed we'd see this in the summer of 2008, when oil hit more than $140?

The IHS Materials Price Index, which tracks commodities (including energy),is also down about 55% since July 2014 – good for many manufacturers, but not all, and devastating for many economies globally, sending Canada into recession in 2015, for example. Again, a stunning change.

Those are my key 2015 supply chain themes. Again, we will have our full 2014 timeline next week in OnTarget, but the top events for me include: chaos at US ports, especially LA/Long Beach, in first half of year; new US highway bill at last passes, modestly increasing spending, no longer or heavier trucks, 34-hour restart rules again suspended; Walmart in mid-year said to be greatly extending payment terms, and asking vendors to pay a "handling charge" for products moving through its DCs.

Add in the FAA finally issues drone rules that make testing almost impossible; huge explosion/fire in China's Tianjin exposes more SC risks; Mexican truckers at last permitted to operate in US; US carriers substantially increase driver pay but does little to stem shortage; and UN climate agreement reached in December, but with little teeth to it, and no immediate impact on supply chains.

Look for the timeline next week, and the year in graphs next week in this space.

What do you see as key themes, trends or events in supply chain last year? Let us know your thoughts at the Feedback button or comment section below.

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