EXECUTIVE SUMMARY

Fundamental changes in political and economic spheres characterized 2016, and will continue to have far-reaching effects on the global business environment in 2017 and beyond. These changes spanned regions across the world as nationalist political movements took root in various countries, challenging the prevailing orthodoxy and status quo. The new leadership, with diverging and often contradictory ideas, is poised to have a lasting impact on how countries and economies interrelate. 2017 is shaping up as a repudiation of current political and economic policies, which is likely to create uncertainty in the global economic and business environment.

Historically, financial markets abhor uncertainty, and enterprises tend to invest less in uncertain times. Lower investments will have a dampening effect on overall global economic growth. The Conference Board projects economic growth to continue to stagnate into 2017.

The policy agenda and personal style of the new U.S. president, Donald Trump, are a wild card. Will he and his administration be able to realize his neo-populist political and economic program or discredit it? The immediate answer is simply not clear. Furthermore, the United States — while still unquestionably a global political, cultural, and economic powerhouse — is increasingly sharing the spotlight with a growing list of emerging global players — the BRICS (Brazil, Russia, India, China and South Africa) nations among the most prominent. We expect this evolution to continue over time, but with countervailing headwinds increasingly possible in the near term. The huge influx of refugees in Europe and across the developed world is pushing social cohesion to its limits and is increasingly being cited as one of the reasons behind the rise of anti-globalization sentiments and nationalism.

TABLE OF CONTENTS

Executive Summary

Global Business and Economic Supertrends and Their Implications

Global Trade, Populism, and Economic Growth

Geopolitical Instability

Lower Commodity Prices

Climate Change Uncertainty

Expansion of Digital Technologies

At a Glance: Trends and Their Impact

Category Trends

Business Travel

CAPEX & Construction

Professional Services – Corporate Real Estate & Facilities Management

Energy & Utilities

Logistics

Marketing – Advertising & Digital Agencies

MRO

IT & Telecom

Packaging

The continuing debate and lack of international consensus on climate change is another possible destabilizing factor. While there had been some measurable progress in global cooperation to combat climate change, increased nationalism is already starting to have a dampening effect on international policy and coordination in this area. On the potentially brighter side, a push for lower taxes, both corporate and individual, as well as reduced government regulation, may provide a stimulus in both the United States and Europe, if enacted. Lower growth in BRICS nations, especially China, would mean lower demand for key commodities. Reduced demand would keep commodity prices in check.

The evolution and adoption of new, innovative technologies, such as the Internet of Things, artificial intelligence, and virtual reality will have a profound impact on the global socioeconomic environment. 2016 saw the expansion of Internet-enabled devices and the increased use of decision-support tools across the value chain. 2017 will be no different, except that the impact of digital will increasingly affect sectors that formerly lagged in the application of digital technology.

Based on the above, GEP has identified the following five global supertrends to watch out for in 2017:

  1. Global Trade, Populism, and Economic Growth
  2. Geopolitical Instability
  3. Lower Commodity Prices
  4. Climate Change Uncertainty
  5. Expansion of Digital Technologies

The impacts of each of these supertrends on the global economic and business environment is discussed in the following pages, along with implications for procurement and supply chain teams.

GLOBAL SUPERTRENDS AND THEIR IMPLICATIONS FOR PROCUREMENT LEADERS

Global Trade, Populism, and Economic Growth

Global populism has come to center stage with the Brexit vote, followed by the election of Donald Trump as president of the United States and the fall of Italy’s reformist government. The anti-globalization sentiment and growing sense of nationalism across the globe will put a strain on international cooperation.

There is uncertainty around trade relations between the United Kingdom and the European Union in a post-Brexit environment, even after Prime Minister Theresa May expressed a commitment to free trade in her speech at Davos. In the United States, President Trump has indicated strongly that protectionism would be the rule of the day under his leadership, but this may be offset by members of his own party and business supporters. President Xi Jinping of China, on the other hand, has talked about the need to make the process of economic globalization more vigorous, more inclusive and more sustainable. The recent decision of the U.S. president to pull out of the Trans-Pacific Partnership deal may mark the beginning of a new role for his Chinese counterpart: — one that the new U.S. leadership is apparently unwilling to play: spokesperson for world trade.

The Conference Board predicts global economic growth to continue to stagnate throughout 2017. Proposed tax cuts and deregulation may provide short-term stimulus, but longer-term issues remain — sluggish growth in advanced countries as well as BRICS, growth of protectionism, and overall weak business investment. Global GDP growth is expected to end the year at a tepid 2.5 percent, with a modest rise to a projected 2.8 percent for 2017.

 

In 2017, anti-globalization and resulting protectionism will drive up cost of imports and goods purchased locally. Economic growth is expected to continue to be tepid in both the advanced economies as well as emerging markets, such as BRICS. Potentially lower taxes and less regulation offer enterprises an opportunity to drive greater profitability.

Procurement Implication: Focus on Cost and Efficiencies

In 2017, the continued push against globalization and protecting national markets will force companies to grapple with higher purchasing costs by attaining savings in other areas. They will have to look for more local supply sources as tariffs and other policies drive up the cost of imported goods. The anticipated continued slowdown in global trade will have an upward effect on overall procurement costs as competition is reduced.

GEP advises procurement and supply chain leaders to focus on improving efficiencies to drive down costs to counter upward pressure from protectionist policies. Additionally, we believe cost control will be even more important in the face of low economic growth. As cost pressures rise, the importance of procurement in the enterprise will be heightened to not only reduce prices of goods purchased, but also to develop long-term collaboration with key suppliers to drive down total cost of ownership.

 

Geopolitical Instability

Political instability was a key theme in 2016 — the refugee crisis and its dramatic impact on Europe, conflagrations in the Middle East, and China and Russia’s assertive stance on regional issues. We are quickly moving to a tri-polar world in which the United States’ political leadership and dominance in global markets is increasingly being challenged by Russia and China.

Moreover, with the wave of anti-establishment populism discussed earlier, the global business environment is characterized by risk. Three of the top five global risks identified by the World Economic Forum deal with fiscal, political, and social instability (see Figure 1).

There’s also growing concern about diminishing commitment to global cooperation — be it through international trade pacts or security mechanisms — on common issues and goals.

The impact of these trends is not lost on business executives — 84 percent believe that overall instability will have an important impact on their global businesses. Business executives are increasingly convinced that economic and political instability will need to be actively managed to minimize negative impacts.

Geopolitical Instability

In the face of unprecedented change, global corporations must build resilient capabilities. The challenge before businesses in 2017 will be to develop and employ the ability to continue to pursue their goals in the face of these events.

2017 will be a year of increased change and greater supply chain risks for global corporations. The ability of enterprises to develop and implement capabilities to effectively manage these risks will determine winners and losers in the global economy. Political and economic instability, disruptive events, and emerging innovation and technology will be the new normal.

Procurement Implication: Proactive Mitigation of Supply Chain Risks

Geopolitical instability is driving an increased focus on managing supply chain risk in 2017. Business leaders will have to develop risk management capabilities to effectively address these risks. Better and more timely information, driven by the implementation and integration of new tools and applications, will help business leaders address these risks, but a more focused effort toward supply chain risk management will be necessary in 2017.

Procurement, specifically, will be expected to identify, mitigate, and monitor supplier performance with respect to potential risks to ensure efficient supply and protect supply performance outcomes. The cost of risk is factored into the overall total cost of ownership. GEP recommends that enterprises develop and implement a well-defined risk management process with clearly documented responsibilities.

Additionally, enterprises must use risk management tools to actively track identified risks and get realtime information on supplier dependencies. This will allow them to immediately know where to focus their efforts to prevent or mitigate the impact of these risks.

Lower Commodity Prices

While commodity prices rebounded in 2016, they will remain relatively low in 2017, largely due to muted economic growth predictions in the backdrop of previously discussed economic and geopolitical trends. In 2016, gains in oil prices were the best since 2009, but the ongoing “resource slump” will continue as wider macroeconomic factors will keep the price of oil historically low in 2017. While we will not experience the decade-low $29 per barrel (January 2016), oil is not expected to exceed $60 per barrel in the near future as shown in Figure 2.

Lower Commodity Prices

Demand for oil is not expected to grow substantially, with slower economic growth driving down demand in former powerhouses like China and the increasing push toward alternative sources of energy globally. Growing concerns around trade relations between the United States and China — due to President Trump’s protectionist policies — have also clouded the outlook for global energy demand and recovery in oil prices. Global demand for oil could shrink further if the United States ramps up its oil production under the new leadership’s ‘America First’ energy plan.

However, there are some factors contributing to recent price increases — OPEC agreeing on a cut in production and supply shocks in oil-producing countries, such as Canada and Nigeria. Overall, the supply picture is still relatively strong, especially as Iran reaches its pre-sanctions output level.

Prices for primary metals and agricultural commodities experienced increases in 2016 as well, but again, broader economic factors will keep them stable this year. Declining economic growth in emerging countries, such as China and Brazil, has weakened the demand for metals. Agricultural production has been hit by natural disasters in various locations (e.g., drought in Brazil, El Niño, etc.) but prices are expected to increase marginally in 2017.

The global economy will be positively impacted by relatively low commodity prices in 2017, especially for oil. Lower commodity prices will keep supply costs low and tend to offset higher costs resulting from political instability and reduced global trade.

Procurement Implication: Drive Overall Value from Lower Commodity Prices

While commodity prices rebounded in 2016, they are expected to be historically low throughout 2017. Enterprises should continue to take advantage of lower prices, but not at the expense of building longterm supply relationships that drive down the total cost of ownership. GEP believes that procurement professionals should develop strategies to mitigate the risk of volatility in commodities markets, not just lower the price of each unit.

Additionally, supply chain risk should be factored into the total cost of ownership and supplier relationships (as noted above). Suppliers may be more open to building collaborative relationships that address customer concerns beyond price.

Climate Change Uncertainty

Environmental risks have a substantial impact on various other risk categories. According to the 2017 Global Risk Perception Survey from the World Economic Forum’s Global Risks Report, four of the top 10 risk interconnections involve environmental risks — with water crises and failure of climate change mitigation and adaptation cited most frequently.

Ineffective management of the earth’s shared natural resources, such as the atmosphere, high oceans, and the Antarctic, could have far-reaching local and global consequences. For example, rapid changes in weather patterns could lead to severe drought situations and water crises. These, in turn, could spark geopolitical and societal risks, such as mass involuntary migration and local or regional unrest, particularly in underdeveloped economies and geopolitically sensitive areas.

While there has been growing global cooperation to combat climate change, the election of Donald Trump as president of the United States and increased nationalism globally may introduce stumbling blocks for global climate change policy. The Global Risks Report cites several positive moves to reduce climate change: ratification of the Paris Agreement, the International Civil Aviation Organization’s agreement to no net growth in aviation emissions after 2020, agreement of parties to the Montreal Protocol to reduce the use of hydrofluorocarbons, and an investment of $266 billion in renewable energy in 2016. However, the change in the U.S. administration can hinder progress if the United States pulls out of the Paris accord or simply does not adhere to the standards.

This is especially important as the United States is the leading producer of greenhouse gases and therefore an important participant in the accord. Additionally, nationalist movements in other countries may end up stalling the successes of United Nations efforts in this area.

However, individual countries have pledged to continue vigorous efforts to reduce greenhouse gas emissions, and many global corporations are on board as well. Continued and, indeed, increased efforts to combat climate change and drive sustainability are underway by companies such as Coca-Cola, Nestlé, Wal-Mart, China Steel, H&M and others. Many are signatories to the Statement on Fiduciary Duty and Climate Change Disclosure, which provides comprehensive and consistent information on climate change efforts. They collectively believe that taking action on climate change is a fiduciary responsibility of corporations since it impacts operations and revenues.

While the United States may opt out of the Paris Agreement on climate change, individual governments will continue to drive stricter regulations to achieve their environmental control targets throughout 2017. Additionally, sustainability efforts by global corporations will grow as these efforts become entrenched in their business strategies and are rewarded by consumers.

Procurement Implication: Drive Broader Sustainability Programs and Goals

While the growth of populism, especially in the United States, has impacted the climate change agenda, individual governments and companies will continue to push green and sustainability initiatives. GEP anticipates this effort to continue and increase in 2017. Global enterprises have been integrating sustainability programs into their business activities for some time, and that trend will accelerate in 2017, even in the face of anti-globalization efforts.

Procurement leaders will need to factor sustainability programs and goals into relationships with vendors. These programs will increasingly gain importance as enterprises include sustainability costs into their calculation of total cost of ownership. Procurement will need to clearly define sustainability goals and objectives and build them into longer-term contracts with suppliers.

Expansion of Digital Technologies

Another key trend that could have far-reaching impact on the global socioeconomic environment is the emergence and adoption of new, innovative technologies, such as the Internet of Things (IoT), artificial intelligence (AI), virtual reality (VR), 3-D printing, and blockchain.

In 2016, we saw the expansion of Internet-enabled devices and the increased use of decision-support tools across the value chain. In 2017, we expect the trend to continue and gain momentum in sectors that formerly lagged in the application of digital technology. Intelligent automation technologies, such as IoT and AI, will continue to gain traction, along with new technologies, such as VR, that have many potential commercial applications.

Gartner predicts IoT will grow to 26 billion units by 2020, representing a 30-fold increase from 2009. This will result in an estimated $1.9 trillion in global value added. The number of mobile devices will continue to increase. Moreover, mobile data traffic is expected to experience dramatic growth through 2020, as outlined in Figure 3. By 2020, mobile-connected devices are projected to generate nearly eight times more traffic than they generated in 2015. This means more people — consumers, business partners, suppliers, etc. — will increasingly be going digital.

Global Mro Market

Additionally, 2017 will see growth in the VR experience — applying this emerging technology to commercial activities. Alibaba’s Singles Day (the largest shopping day in the world) in November 2016 saw transactions worth $17.8 billion in a single day. Shoppers were able to use Alibaba’s Buy+ virtual shopping experience to “shop” in Macy’s in New York City without leaving the comfort of their homes.

2017 will see the continued march of digital capabilities across industries and functions. It will be a driver of growth for those that previously lagged in digital application. AIenhanced tools as well as advanced analytics will continue to grow across the value chain.

For enterprises, information is power, driving smarter, more efficient decisions. Increased use of digital technology is having a profound impact on businesses, their customers, and the relationships between the two. Enterprises across industries are increasingly looking at adopting cloud-computing solutions for core as well as non-core functions. According to the International Data Corporation IDC, the total spend on IT infrastructure products deployed in cloud environments will hit $44.2 billion (£36.6bn) in 2017.

Procurement Implication: Don’t Ignore New Technologies

New technologies are transforming the way companies relate not only to their customers, but also their business partners. The adoption of technology, both devices and software applications, across the procurement function will continue at a rapid pace. GEP recommends that enterprises transition from legacy, on-premises software to cloud-based solutions that are scalable and do not require substantial investments in hardware and maintenance.

As more devices contain processors and Internet access, a growing number of indirect- and direct-spend categories will be monitored automatically without manual intervention. For example, internet-enabled sensors can be used to monitor categories, such as machine or building maintenance, and determine when replacement parts or supplies need to be ordered.

Artificial intelligence is a logical next step as machines “learn.” Procurement specialists will browse, select, order, and process services and products more efficiently using artificial intelligence. This will further reduce the level of manual intervention required. While the impact of cutting-edge capabilities such as artificial intelligence has yet to play out, 2017 will see them become more embedded in how procurement functions. These new technologies will raise the profile of procurement in the supply chain.

At a Glance: Trends and Their Impact

Trend Description Procurement Strategy
Global Trade, Populism, and Economic Growth

Uncertainty around the effect on free trade between the United Kingdom and European Union in a post-Brexit environment

Stagnating global economic growth with weak demand for exports in both developed and developing countries

Potentially lower taxes and less regulation in the United States

Optimize processes and drive greater efficiencies to reduce costs

Identify and develop more local sources of supply

Collaborate long-term with key suppliers to drive down total cost of ownership

Geopolitical Instability

Anti-establishment sentiments around the world to increase business and economic risks

Failure of national governance to impact trade, job creation, and economic development

Develop and enhance supply chain risk management capabilities

Identify, mitigate, and monitor supplier performance with respect to potential risks

Deploy risk management tools to actively track identified risks and get real-time information on supplier dependencies

Lower Commodity Prices

Oil prices unlikely to exceed $60 per barrel due to various macroeconomic factors

Prices for primary metals and agricultural commodities likely to remain stable

Develop purchasing strategies to mitigate the impact of volatile commodities market

Focus on building long-term supply relationships that drive down the total cost of ownership and minimize risk

Climate Change Uncertainty

The new leadership in the United States may have a dampening effect on global climate change policy

Many governments will continue to drive stricter regulations to achieve their environmental control targets

Nationalist movements in some countries may stall the efforts of the United Nations

Overall, sustainability efforts by global corporations will grow

Clearly define sustainability goals and objectives

Factor sustainability programs and goals into relationships with suppliers

Expansion of Digital Technologies

Spend on IT infrastructure products deployed in cloud environments will continue to grow

Continued expansion of internet-enabled devices and increased use of decision-support tools across the value chain in new sectors

Intelligent automation technologies, such as the Internet of Things (IoT) and artificial intelligence (AI), to gain traction

Application of virtual reality (VR) technologies in commercial activities

Transition from legacy, on-premises sourcing and procurement software to cloud-based solutions

Explore robotic process automation and AI-enabled tools for automating sourcing and procurement processes

CATEGORY TRENDS

Business Travel

In 2016, high-profile mergers and Brexit caused ambiguities in the travel industry. In 2017, besides the evolving travel-related technologies and payment solutions, shared-economy consolidation in business travel portfolios and traveler safety will take center stage in corporate travel programs.

Traveler Safety

With nearly 50 percent of travel sourcing managers expecting a rise in travel-related risk, employee safety, security and tracking for cross-border travel assignments will remain an area of focus for employers. Travel risk management companies (TRMCs), such as iJET, SOS, Drum Cussac, and red24, have begun offering clients travel tracking, real-time intelligence, country profiles, medical and evacuation support as well as proactive risk assessment. In 2017, an increasing number of employers will upgrade their travel risk programs from basic duty-of-care subscriptions or technology services to include emergency assistance services.

The shared-economy business model will play an integral role in the corporate travel industry with names, such as Airbnb, Lyft, and Uber, continuing to redefine traditional travel programs. Airbnb has so far partnered with three travel management companies (American Express GBT, BCD Travel, and Carlson Wagonlit) for nearly 10 percent of overall corporate bookings. Ride-sharing apps such as Lyft and car rental companies have gained momentum in ground transactions and, in some cases, also collaborated with each other, making possible a three-way tie-up that sourcing managers can consider during the next negotiation cycle.

Virtual Cards

Another trend in business travel that will continue to gain momentum in 2017 is that of virtual card payments, such as the Sabre virtual payment solution and Amadeus B2B prepaid wallet, for air, rail, car rental and ancillary services. These virtual cards allow corporate travelers to earn rebates, automate payments to suppliers and avoid surcharges on certain merchant transactions. The year-on-year growth of travel agencies using virtual cards increased by 130 percent in 2016.

AMEX GBT acquired the corporate travel and expense management technology firm KDS to boost its online booking presence with the latter’s proprietary online booking platform, Neo, which helps travel managers optimize spend. Similarly, Concur, a travel expense management platform, recently partnered with analytical services firm Scope 5 to simplify tracking of carbon emissions from business travel and internal carbon accounting.

Usage of wearable technology aimed at smart business travel is expected to grow among industry stakeholders. Hospitality firms, such as Starwood Hotels & Resorts Worldwide and International Hotels Group, have developed apps that allow guests to control their room access, navigate the city or even translate multiple languages using an all-in-one integrated system worn on the user’s wrist.

Airfare & Hotel Rates

Airfare in North America is forecasted to increase by 3 to 4 percent in 2017 due to rising oil prices and increasing investments in new products and services. Hotel room rates are also set to increase by about 4 percent due to accommodation shortages and rising investments in technological upgrades.

In the aviation space, Delta and Virgin Atlantic plan to cut capacity for trans-Atlantic routes due to concerns over stagnant business and the impact of Brexit. The Asia-Pacific (APAC) region is expected to witness moderate growth in hotel and airfare rates with key markets, such as China, Japan, and India, experiencing overcapacity. The emergence of new partnerships for low-cost carriers will be something to watch out for in 2017.

CAPEX & Construction

The global Engineering, Procurement and Construction (EPC) market is poised for steady growth in 2017. Major policy changes will drive construction activity in the United States, while investments in India and China will spur construction projects in Southeast Asia. Europe — impacted by policy uncertainty — and Latin American countries affected by economic contraction are likely to see lower growth in 2017.

Infrastructure Push in the United States

The stimulatory policy platform proposed by the new U.S. government is expected to bring favorable changes to the EPC sector in the long term, although its short-term impacts may not be visible. Though the new government has plans to invest almost $550 billion to rebuild the country’s infrastructure, it’s likely that the proposal will not be approved by Congress until fiscal 2018 (which starts in October 2017). Moreover, getting the necessary permits could further delay infrastructure projects. The fiscal stimulus of tax cuts and infrastructure spending would only be reflected in the GDP growth of 2018 and 2019.

Uptick in the Oil & Gas Sector

The slowdown in China impacted commodity and crude oil prices in 2016. However, crude oil prices are predicted to recover and stabilize in 2017 with OPEC’s decision to limit production. This price increase could bring back investments in the oil and gas sector and provide a marginal thrust to the engineering and procurement spend across the industry.

Overall, the CAPEX and construction spend in 2017 will grow by 1 to 2 percent in developed economies and at a marginally higher rate in developing regions. Sales of construction equipment are expected to increase by around 5 percent in 2017, after nearly five years of slowdown.

For procurement managers, “Design and Build” and “Management Bid” will continue to remain the two most popular methods of managing large-scale construction projects.

Professional Services – Corporate Real Estate & Facilities Management

Corporate real estate global leasing for office areas in 2017 will remain near stagnant or exhibit low, single-digit growth in Europe and North America. South America and APAC regions will exhibit stagnant or decreasing growth.

End-clients will focus on benchmarking their real estate KPIs against industry standards and identify opportunities to reduce their footprint. In some firms, the ratio of employee to station is gradually decreasing to one. However, companies that want to maintain their brand image will continue to exempt their global and regional headquarters from these parameters.

In line with the global push for climate change policies and regulations, the use of sustainable real estate practices is an emerging trend in the property management sector. Developing efficient designs to reduce energy consumption by buildings is a high priority, incorporated into the earliest stages of a project. The use of renewable sources and continuous measurement of energy consumption helps managers to maximize cost savings.

In 2017, knowledge management will be the biggest “barrier breaker” between corporate real estate and the facilities management sector. The changes can be in the form of strategic ideas, paradigm shifts or better operational processes. Category managers could turn to service bundling and performancebased pricing models to generate savings and drive innovation among suppliers.

Growth of Integrated Facility Management

In the facility management category, the growth of outsourcing services will remain strong with significant contributions from the emerging APAC markets. As time progresses, enterprises will face higher scrutiny and tighter regulations from health and safety regulatory bodies. Many companies will outsource their regulatory compliance requirements to facility management services providers, with service-level agreements in place, to take on the associated risks.

The Integrated Facility Management (IFM) market, which is expected to grow at a 6 to 8 percent CAGR and touch the $1.3 trillion mark in 2018, will further fuel the growth of outsourcing.

The go-green trend will continue in 2017 and beyond, with increasing number of facility managers looking for ways to make their operations more environmentally friendly through recycling, reducing waste and using environmentally safe products.

Intelligent Automation Technologies

Another key trend in facility management will revolve around the rapid adoption of IoT, which is currently in its early stages. IoT will connect data, objects, processes, and people to make work environments smarter and soon will become the new normal. In the near future, IoT will be supported by Light Fidelity (LiFi), which would provide super-fast wireless network connectivity through LED lighting. This has the potential to minimize infrastructure commitments, reduce associated capital expenses and ongoing operating costs, and also reduce emissions and waste.

Energy & Utilities

The dynamics of the global energy sector continued to change in 2016, with most economies favoring a mixed portfolio of energy supply, including nuclear, coal, oil, natural gas, and renewables, such as wind, solar and biomass. In 2017, declining per-megawatt costs, auctions, technology innovations and favorable policy regulations will drive the growth of renewable energy. This year, the market will continue to see significant gains in renewables and natural gas due to the increasing demand for cleaner energy sources and the price/supply advantages of natural gas.

In 2016, natural gas surpassed coal to become the leading energy source for power, with price difference being a key driver. The outlook for the coal industry in 2017 remains subdued, with declining demand from major energy-consuming economies, such as the United States, China, and India, that are increasingly switching to other sources of energy.

According to Energy Information Administration (EIA) reports, the global oil inventory build is at an all-time high, and 2016 witnessed crude oil prices in the range of $42-$55 per barrel. These prices are expected to moderately stabilize in 2017 if the OPEC and non-OPEC members, including Russia, agree to revert to July 2016 inventory levels. This reduction will account for just 2 percent of the global supply, and the subsequent rise in prices may lead to the United States and OPEC increasing production, resulting in price drops in the latter half of 2017.

In the United States, oil drilling and shale extraction is likely to increase energy independence. The Keystone XL Pipeline is expected to get approval in 2017, supporting the infrastructure-building commitment of the new administration. With factors such as China building strategic reserves and the increasing preference for alternative energy sources, the demand for oil should experience its slowest growth since 2014.

Changing political landscapes in the United States will challenge many environmental regulations, imposed by former administrations, which are viewed as over-reaching and damaging to the economy — particularly the U.S. Clean Power Plan of 2015, which in February 2016 was temporarily blocked by the government. These repeals could, over the next decade, slow down the premature mothballing of usable assets and spur new CAPEX investment.

With growth in confidence in the U.S. economy under lower taxes and less regulation, anticipated federal rate hikes in 2017 are likely to have a negative impact on the high-debt power and utilities business. This may moderate some investments and share prices, but would likely be offset by higher demands from rising GDP levels.

Logistics

The logistics industry witnessed several game-changing events in 2016. The impact of many of these events would continue well into 2017. While the news of Hanjin Shipping’s bankruptcy dominated most logistics discussions, there were many other key changes in the market landscape, including TransForce’s acquisition of Con-Way Truckload (XPO), Schneider’s dual acquisition of both Watkins & Shepard and Lodeso, and other technology-related acquisitions. M&A activity is expected to go up in 2017 as more enterprises view it as a strategy to reduce debt or quickly add capacity.

Internal supply chain changes, such as near-shoring, optimization of networks, or greater reliance on drop shipping, may impact the way enterprises interact with their logistics partners. The churn in the carriers’ client base will increase in 2017 and help keep pricing in check. The $1 trillion infrastructure investment committed by the new American leadership to improve roads, bridges, ports, and airports is only about a quarter of what is actually required, according to the American Society of Civil Engineers. But it will also help mobilize some public-private investment that will further improve infrastructure.

Modal Trends

Truckload: The U.S. economy is predicted to grow at a rate of 2 percent in 2017. Though the first half of 2017 may remain sluggish, conditions may change in the next 12 to 18 months. If it grows at a faster rate, total truckload market capacity will be consumed and carrier prices will increase. To tackle this uncertainty, enterprises must secure rates and capacity with carriers in the first half of 2017.

Less-Than-Truckload: Carriers in this category are reforming themselves to align for a higher market share — evident from recent mergers and increased real estate purchases for expanded cross-dock and warehouse locations. This will help shippers grow and expand e-commerce, and also fulfill drop-ship requirements for many of them. Nominal year-on-year rate increases are expected in 2017.

Ocean: The ocean freight market was in turbulent waters last year, and this situation will continue due to excess capacity. Like Hanjin, several more carriers continue to be at risk. Every aspect of the industry — from shipbuilding to drayage — will focus primarily on survival and gaining market share. Rates are expected to remain lower than pre-recessionary levels for at least another 12 to 18 months.

Disruptive Technologies

Technological advancements will have far-reaching impacts on transportation in the years to come. In September 2016, the U.S. Department of Transportation enacted new rules that allow manufacturers to circumvent a patchwork of state approvals for autonomous/semiautonomous vehicles. Until December 2016, eight states allowed these vehicles on the roads; this number is expected to double in 2017.

Innovations in automotive technology, such as hydrogen-powered fuel cells and lighter and easier-to-maintain vehicles made from composite materials, as well as integrated in-cab dynamic routing — though years away — will change the transportation market quickly.

In 2017, we will see larger acceptance of technology-driven activities, such as “convoying,” “Uber-ing,” “roadies” and “simplifiers,” which take advantage of the complex, data-driven supply chain to engage available market capacities and provide timely, cost-effective service.

Air Freight: Air freight has been impacted by many of the same challenges affecting ocean freight — the global economic slowdown, supply/demand imbalance and currency fluctuations. This drove down carrier load factors and yields, while providing double-digit savings in 2016. Expect 2017 to be stronger for air freight across most trade routes with the exception of Latin America.

Railroads: In 2016, Class I rail lines witnessed the lowest total tonnage in 10 years and this trend is likely to continue in 2017. Weaker demand and pricing will benefit commodities using intermodal transport, but the rail lines themselves will struggle with a glut of previously ordered rail cars as well as lower demand for fuel/shale oil.

Strategies to address short-term market fluctuations:

  • Source in the initial months of 2017
  • Focus procurement activities on driving value, not just savings
  • Infuse innovation into supplier contracts
  • Use data-driven analytics optimally
  • Manage risks and remain flexible to change

Marketing – Advertising & Digital Agencies

The growth rate of the global advertising industry in 2016 was about 4 percent. Major events such as the Rio Olympics and the U.S. presidential elections boosted demand, although slowdowns in China and Brazil restricted the growth rate. The industry is expected to cross the $550 billion mark in 2017 with a steady growth rate of 4.5 percent.

Brexit had no tangible effect on macro indicators, and so had very little impact on the advertising industry. However, the next six months could see reduced advertising budgets across the United Kingdom.

Digital Spend to Continue to Grow

Digital spend is expected to rise from 31 percent in 2016 to 33 percent in 2017, driven largely by mobile and social media. Digital is likely to contribute one-third of the overall ad spend this year.

Mobile ads, which are fast replacing desktop ads, are expected to contribute around 67 percent of the digital spend in 2017, and touch the 70 percent mark by 2019.

Television would continue to grow at 3 percent, while print is expected to decline at 3 to 4 percent.

Greater Adoption of Programmatic Advertising

Programmatic advertising will continue to be the fastest-growing digital channel, with a growth rate of 30 percent in 2017. It is expected to contribute to 55 to 60 percent of the total display ad spend. Many TV, radio and digital OOH platforms have started providing automated inventory data. As more aggregators enter this space, programmatic tool companies will look at expanding their service capabilities.

With increasing spend on programmatic advertising across channels, content disruption will remain one of the major challenges for marketers. An increasing number of digital agencies have begun offering a suite of content strategy and marketing automation technologies to address these challenges.

Clients are demanding better marketing automation and integrated marketing analytics, tools and services. This has led service providers from multiple domains, such as core analytics, digital, marketing automation, and consulting to enter this space. APAC and Latin American markets have witnessed the emergence of new integrators. Many digital activities, such as digital analytics, will continue to be outsourced to emerging markets.

MRO

The global MRO market — estimated at $500 billion in 2016 — is expected to grow moderately in 2017, driven by new capital additions and a drop in the average age of private equipment (around nine years). The demand from commercial, institutional, and government sectors will be stronger compared with the construction and utility segments. General MRO companies, such as MSC Industrial and Wesco, are expecting a sluggish first half in 2017.

The growth of Amazon Business is expected to continue as the marketplace will see a renewed challenge from the online giant. Within its first year (2015), Amazon Business had revenues over $1 billion and by mid-2016 it had about 400,000 accounts. Although the company’s initial target customers were small and medium enterprises, larger firms have also shown interest in buying from Amazon Business.

In the MRO space, Grainger increased its online sales to almost 46 percent of the total share by Q2 2016. With buyers comparing prices and choosing the best offers, this trend of increasing online sales is expected to continue in 2017. Amazon Business goes a step further and offers negotiated prices, customized for each buyer. Currently, the Amazon Business product portfolio is much broader than Grainger, MSC Industrial, and W.B. Mason.

Rationalization and supplier consolidation continue to be the preferred avenues for cost savings for many enterprises. Bundling value-added services, lower freight costs, and payment discounts are some additional means through which buyers can capture further savings.

IT & Telecom

This sector witnessed events in 2016 that will have far-reaching impacts in 2017 and beyond for both the supply- and demand-side stakeholders. Sweeping changes in the supply landscape resulting from multiple amalgamations across IT categories, subdued spending sentiments arising from uncertain global politics, increasing consternation surrounding enterprise security, and the massive onslaught on the laborarbitrage economy led by the rapid emergence of automation/AI is set to transform buy- and sell-side equations as never before.

Rise of Bimodal IT Enterprises

The rise of bimodal IT enterprises has changed the rules of engagement between enterprises and suppliers. While Mode 1 of the bimodal setup primarily focuses on the traditional technology stacks that are predictable and well understood, Mode 2 will be more enterprising and risk-taking in approach. In 2017, IT sourcing and procurement executives will be expected to realign approaches and category strategies — not only with the CIO but also other stakeholders, such as the strategic business unit heads and the CMO, who are expected to own the budget on digital and emerging technology stacks.

Receding Labor-Arbitrage Economy

Several factors, such as sub-optimal buyer experiences, lack of innovation and an overt focus on cost reductions, have supported the rise of the automated economy. While the impact of automation on innovation is questionable, its impact on generating incremental and unmatched cost savings is unquestioned. There will be a spurt in insourcing activities in 2017 and beyond as buyers will seek to lessen their dependence on labor-driven outsourcing relationships and introduce automation approaches in their own offshore captive centers.

Third-party advisory services will be sought to identify the right automation platform and vendor. Traditional IT outsourcing service providers will remain afloat — some will evolve into go-to-market partners for automation software and platform providers, and others will invest in their own automation initiatives to propose “economical” outsourcing partnerships to their prospective bidders.

Cloud 2.0

In 2017, enterprises will look at incorporating the multi-cloud element into their infrastructure and software category strategies. In the past, IT sourcing organizations have experimented with multiple providers and contracts for PaaS, IaaS, and SaaS, but in 2017 — as the Cloud 2.0 phase kicks in — enterprise buyers will target building strategic vendor relationships and seek to consolidate their vendor portfolio. Service providers offering an aggregated bundle of IaaS, PaaS and SaaS offerings are likely to benefit from this shift. As we move closer to 2018, the acceptance and penetration of cloud-based products will increase, and getting stakeholder buy-ins for the on-premises approach will become increasingly difficult.

Impact of Software-Defined Everything (SDx) on Spend Portfolios

The Open Networking Foundation-led software-defined movement is beyond theory, with commercial offerings and use cases around networking (SDN), wide-area networks (SD-WAN) and storage (SDS) being available. With many enterprise hardware contracts nearing their end, IT sourcing and procurement executives will be pushed to evaluate SDx offerings that offer increased flexibility and better cost savings than traditional hardware. SDN and SD-WAN technologies will be more popular as the use cases point to savings in the range of 30 to 45 percent over traditional hardware approaches (for a three- to five-year contractual arrangement).

Telecom Services and Media Stacks

Saturation in subscriber growth has impacted traditional revenue streams of communication service providers. In 2016, leading telecommunication services companies lined up to acquire media and advertising firms in a bid to expand and diversify their revenue streams. In 2017, communication service providers will focus on providing integrated omni-channel experiences for their user base and have a transformative impact on sourcing and procurement. It is expected that budgeting decisions for communication services and media/content distribution services will be consolidated, and procurement executives will need to seamlessly collaborate with the CMO and CTO offices for the consolidated portfolio. In 2017, expect sourcing executives to drive aggressive savings discussions (and seek to generate savings in double digits) as the spend portfolios converge.

In 2017, IT sourcing and procurement managers cannot simply confine themselves to tactical tasks and metrics that are largely targeted toward cost savings. With the increasing relevance of a bimodal approach, IT sourcing and procurement managers will be challenged to be more agile and responsive. Many IT global category managers will choose to have two separate teams — a core cost-optimization team that focuses on delivering incremental cost savings, and a new cohort of category experts that deliver on the non-tactical strategic goals of innovation and risk mitigation.

Packaging

The packaging industry enjoyed higher profit margins in 2016 due to falling oil prices. However, 2017 will be unpredictable, factoring in OPEC’s cutbacks on production and muted demand from the world’s largest consumer, China. Packaging manufacturers are expected to absorb the volatility until oil prices stabilize, while growing at 3.4 percent annually to reach $60 billion in 2020. GEP expects global pricing to increase on average by 3 percent in paper packaging and by 5 percent in plastic packaging in 2017.

Digitalization will govern buyers’ outlook toward packaging, and competitive pressure will compel enterprises to quickly adopt new products and innovative technologies. Packaging is likely to get more interactive and socially connected in 2017.

Influenced by connectivity and mobility, packaging labels are becoming interactive through Near Field Communication (NFC) and Bluetooth Low-Energy (BLE). This smart, active and intelligent packaging stores information, such as whether the product is genuine or has been opened and resealed. Companies like Wal-Mart and Amazon are pushing intelligent packaging to new levels with help from innovative digital companies. Wal-Mart leveraged technology to provide its suppliers instant access to inventory via smartphones, while Amazon Go enabled checkout-free stores with RFID-embedded packaging that interacts directly with smartphones.

The industry will continue to move rapidly toward sustainable packaging made from recycled or biodegradable material. While North America and Europe lead the globe in sustainable packaging, Asia is expected to catch up quickly. With the pressure of environmental legislation to reduce the ratio of packaging to product weight and new lines of high-performance resins for packaging, the industry is expected to down-gauge materials. 3-D printing, active packaging and Modified Atmospheric Packaging (MAP) will gain traction to fight waste production in the supply chain.

 

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