For the sixth consecutive year, GEP has compiled its latest market insights, observations and predictions into its annual Procurement Outlook Report. Drawing upon the combined excellence and perception of our global leadership and client service teams, we have created and published this report to help leadership across procurement, supply chain and adjacent functions refine and successfully execute their business strategies in 2018 and beyond.
2018 will add complexity to the volatility and uncertainty we have witnessed in markets during 2017 with the redrawing of the global political and economic landscape. Developing and executing an effective global operations strategy will require a greater understanding of both the current macroeconomic trends and the impacts of new technologies across supply chain and business processes.
Despite the big reduction of the U.S. corporate tax rate, the protectionist policies of the U.S. and the U.K. will create new barriers to global trade and increase bottom-line costs in 2018, resulting in slower levels of strategic investment. Financial markets will continue to see the fall of the pound against the dollar and euro arising from Brexit. In addition, we anticipate a resurgence of the dollar to pre-2016 election levels as a result of the combined U.S. interest rates, lower U.S. corporation tax rates and increased demand for shale gas.
GDP growth globally is expected to reach 3 percent with the majority coming from emerging Asian markets where 5-plus percent sustained growth is forecast until 2020, while the U.S. and eurozone are anticipated to see marginal growth with the U.K. continuing to decline.
Commodity price increases will see both COGS and SG&A costs rising in 2018. Oil prices are forecast to stabilize and grow to $60 a barrel in 2018 with continued support from OPEC and Russia on production constraints. Food commodities are expected to remain stable due to reduced supply balanced by plentiful stock levels.
China’s “Belt & Road” infrastructure investment initiative will continue boosting the emergence of China both regionally and globally as the U.S. retreats from the global stage. We see Chinese growth forecast at 6.4 percent in 2018. The Middle East and North African conflicts are anticipated to continue into 2018 resulting in ongoing regional supply chain disruption and operational risk across global supply lines.
2018 will see the development and adoption of artificial intelligence (AI) accelerate into practical business operations. Robotic process automation (RPA) is no longer new and we anticipate the rapid rollout of RPA in 2018. We anticipate productivity gains (approximately 40-plus percent) to be delivered to the P&L in 2018.
Supply chain and procurement should be leveraging RPA process cost benefits by building them into their supply agreements and also adopting them internally across order-to-cash and source-to-pay processes to avoid redundant overhead.
Blockchain may be the next big disruptor to impact procurement and supply chain operations, but not in 2018. The key for 2018 is adopting RPA and AI, and embedding them within digital operating models while continuing to monitor developments in blockchain with an eye toward 2020.
We believe 2018 will be the year for procurement to develop a new digital operating model. The barriers between the buyer and supplier are disappearing and the ability to leverage real-time data from automated processes is very much here. As a result, we anticipate an increase in advisory support to help enterprises develop and launch their digital procurement organizations.
The strategic imperative is to understand the new interactions, roles and capabilities that are required to produce effective and efficient procurement and supply chain organizations. The key question for leadership is, “Are we shaped, sized and costed right to deliver in the digital era?”
2018 will see cost pressure increase across direct and indirect categories. Food commodity prices, as noted earlier, are forecast to hold steady due to a combination of supply shortages and excess stock levels. Oil prices will rise due to production constraints resulting in increased energy costs that will impact most indirect categories by 1-2 percent. Technology convergence in the capital and MRO space will see opportunities to leverage technology while IT cybersecurity spend is anticipated to increase. Logistics and distribution will see the impact of fuel price rises and we also anticipate an increase in demand for financial advisory and regulatory changes that will result in marginal price increases.
The U.S. tax reform cut the corporate tax rate from 35 percent to 21 percent. Nevertheless, global levels of strategic investment will be slowed by protectionist policies in the U.S. and U.K. Procurement and supply chain leaders will want to incorporate new trade barriers and costs into their TCO models in North America and Europe.
Procurement and supply chain leaders will want to revise their supply line strategy to incorporate new trade barriers and costs into their TCO models in North America and Europe due to “America First” and Brexit impacts.
We expect to see further escalation of the volatility and uncertainty that afflicted the business community during 2017 with the redrawing of the global political and economic landscape. Developing and executing an effective global operations strategy will require a greater understanding of both the current macroeconomic trends and the impacts of new technologies across procurement and supply chain organizations.
It will be a challenging year for leadership teams both in top-line growth and bottom-line cost reduction. An increased level of complexity in markets will put further pressure on margins and result in the need for more agile operations while leveraging new technology to offset cost increases.
If we choose one word to describe the global political and economic landscape of 2017, a good word would be “turbulent.” The current prospects for 2018 are not much different, as we await the continued impacts of the policy changes and economic repositioning pursued last year by the major world powers and leading global corporations.
In the United States, President Trump’s first year in office has been marked by political challenges to his agenda and legal challenges to a variety of key policies. The administration has, however, achieved its first significant legislative win with the first major U.S. corporate tax reform in the last 30 years.
The EU has also seen a dramatic shift in the balance of political power and influence. It has become clear that the U.K. intends to leave both the EU and the Customs Union. The exact nature of the future relationship and whether a free trade agreement will be reached remains to be seen. In Germany, Chancellor Merkel has been struggling to reach a final agreement on the formation of a stable coalition government. These events have created space for France’s President Macron to increase French influence on European Union policy.
China’s economy is estimated to have grown at 6.8 percent in 2017 and is forecast to grow at 6.4 percent in 2018. China continues to pursue expansionist economic and geopolitical policies. Its ambitious “belt and road” initiative has seen China spending roughly $150 billion a year on infrastructure investments in 68 countries along the old Silk Road linking it with Europe.
The Middle East and North Africa continue to be dominated by regional conflict. The ISIS caliphate has effectively been demolished but fundamentalist terrorism remains a threat from Mali to Pakistan and Syria to Kenya as well as in Europe and the United States. Saudi Arabia and Iran have continued their rise to the position of regional superpowers with competing strategic and economic interests. Peace negotiations between Israel and the Palestinian Authority remain stalled with little immediate prospect for progress, and the recent U.S. announcement recognizing Jerusalem as the capital of Israel has raised tensions further.
Q4 2017 indicators point to a period of stabilization and global real GDP growth forecasts of approximately 3 percent in 2018. While the G7 nations will see a slight decrease in 2018 from 1.9 percent to 1.8 percent in real GDP, the Emerging 7 Nations (E7) will fuel global GDP growth with a continuation of 5-plus percent growth with a focus on Southeast Asian markets continuing the expansion into 2019 and beyond.
Looking forward, we see slow continued growth in the period 2018-19 with the emerging markets fueling the global growth average of 2.9 to 3 percent.
Economic growth for the Gulf Cooperation Council (GCC) area was subdued at 1.5 percent in 2017 but is estimated to reach 2.8 percent in 2018. Analysts expect economic growth to pick up in all GCC member states over the medium term (2018-2021).
The U.S. dollar spent much of 2017 on the defensive. It suffered an 11 percent decrease in 2017 through Q3 due mainly to the lack of ability of the U.S. President to deliver on election promises, but also due to belief that the Federal Reserve would lift interest rates as the year closes.
The recent U.S. corporate tax reform legislation will see a significant reduction in taxation for business from 35 percent to 21 percent that will likely fuel increased GDP growth and strengthen the U.S. dollar in currency markets. The likely implications are a return to 2016 pre-election foreign exchange rates during 2018.
Euro and Sterling
There are indicators that the continued Brexit negotiations have stalled investments, both in the U.K. and key European markets as the uncertainty continues. The trade-weighted measure of sterling value is 13 percent below its pre-referendum level, so the currency’s risk premium is already very large.
The resulting forecast for 2018 will see continued volatility in sterling with fluctuations around the Brexit negotiation outcomes over the divorce bill and future trading arrangements.
Oil prices are forecast to rise to $60 a barrel in 2018 from $53 in 2017, with some analysts predicting spikes during the year toward $80 and flattening out to $60 by the end of 2018. This is a result of growing oil demand, production cuts and stable shale oil production. The OPEC and Russian agreement in December to maintain 2017 production levels will stabilize pricing. Developed and emerging market growth, with the exception of the U.K., will drive continued demand to support rising energy prices.
The continued OPEC capacity constraint is a positive development for North American shale producers and explorers, who are forecast to increase exploration and production budgets.
Agriculture prices are expected to edge up in 2018 due to reduced supplies, with grain, oil and meal prices rising marginally. Agricultural commodities markets are well-supplied and the stocks-to-use ratios (a measure of how well-supplied markets are) of some grains are forecast to be at multiyear highs.
However, favorable weather patterns, well-supplied global food markets, and relatively low prices do not necessarily correlate to universal food availability. Drought has led to crop failures in parts of Ethiopia, Somalia and Kenya, resulting in severe food shortages. Conflicts in South Sudan, Yemen and Nigeria have driven millions of people from their homes and left millions more in need of emergency food. (Source: The World Bank) Climate Change, Sustainability and Corporate Social Responsibility (CSR)
Climate change is impacting global supply chains more frequently and will continue to do so. Emerging and developing markets, where growth and investment is targeted, have a higher level of risk. This is primarily due to the lack of infrastructure investment and poor economic and social conditions, and the resulting inability to recover from natural disasters. As a result, the cost to global supply chains is rising, along with the need to invest in more resilience, both in the supply chain and from emerging nations who are committing to clean and renewable energy and reduction in carbon footprints.
The implication for supply chain and procurement planning is the increased cost to serve and the need to invest in socially responsible sourcing as part of the investor community. The period 2018 to 2025 will see a significant shift in investor-driven policies that will influence and change sourcing strategies.
In 2017, we observed the boycott of Qatar, China’s territorial disputes with neighbors such as Japan and India, a military takeover in Zimbabwe, and many other upheavals. As expected, China has tried to fill the global leadership vacuum as the United States recalibrates its stance and positions on Russia, North Korea and the Middle East. The respondents to the 2017 World Economic Forum survey provided insights on the uncertain business environment fueled by such developments. The top six risks remained unchanged from the 2016 survey, but the higher rankings of risks such as terrorist attacks (up seven places) and large-scale involuntary migration (up three places) show the fear and uncertainty being generated by economic, political and societal factors.
The Middle East: Shifting Sands
The Middle East and North Africa are likely to see continued instability and military conflict as the regional powers (Saudi Arabia and Iran) continue to pursue divergent strategic interests. The “Iran-Saudi Arabia proxy conflict” continues to contribute to regional political instability as does the “Qatar-Saudi Arabia proxy conflict.”
The global superpowers and their major allies (United States, Russia, France and the United Kingdom) are likely to continue attempting to exert influence in post-conflict areas such as Syria, Libya, Lebanon and Egypt. They will also seek to manage and influence oil supply policies and potential nuclear expansion.
The refugee crisis continues across the region as political and economic migrants continue to seek their futures in Europe. Recent agreements between the EU and Libya are aimed at reducing the number of refugees reaching the Mediterranean, and 2018 is likely to see the repatriation of many refugees to their home countries.
United States: America First
The Trump Administration, focused on an “America First” economic policy, is expected to continue to seek the renegotiation of global trade agreements, including the North America Free Trade Agreement (NAFTA), the Trans Pacific Partnership (TPP) and bilateral tariffs with China and Europe. In the short term, this is likely to impact the ability of U.S. corporations to pursue global investment strategies. In parallel, the U.S. corporation tax reform will see a reduction in the headline rate of corporation tax — from 35 percent to 21 percent — aimed at “bringing home” foreign revenues and fueling growth in the U.S. economy.
The administration has also stated its intention to renegotiate key foreign policy agreements, including the International Atomic Energy Agency agreement with Iran for non-military atomic energy. It is also focused on dealing with the ongoing escalation with North Korea, which is contributing to regional insecurity both in the Middle East and Asia-Pacific regions.
Brexit and the European Union
As the first phase of Brexit negotiations comes to an end, the realities of Brexit for British and European businesses are emerging. The U.K. is facing a post-Brexit financial commitment estimated to be in excess of
£39 billion over a number of years. Also, the potential ending of financial passport arrangements between the U.K. and the EU presents a significant risk for the British economy. The City of London has already seen several major British and U.S. banks relocate their European operations to either Frankfurt, Brussels, Paris or Dublin.
Geopolitical instability and protectionist agendas in the U.S. and Europe are adding greater unpredictability to the global business environment and to corporate operating costs. Enterprises will need to re-examine risk strategies and evaluate possible new markets for their products.
Key sectors including consumer goods, life sciences and industrial manufacturing face similar challenges. Post-Brexit, operating models and operations across a number of industry sectors are expected to emerge in 2018.
Other key policy considerations within the EU that may impact business confidence relate to proposals on digital commerce taxation and EU tax harmonization. This has been driven by the growth of digital commerce, led by U.S. e-commerce tech giants, and the corresponding rapid decline of tax revenue in nationstates within Europe. In parallel, the attempt to standardize taxation rates across the EU 27 will raise further questions about whether large and small economies should be viewed side by side.
President Xi Jinping further consolidated his position at the Communist Party National Congress. Most global observers expect him to continue the ambitious “belt and road” direct investment program mentioned earlier in this paper.
The South China Sea continues to see China exerting its military muscle, with international water disputes related to natural resources and challenges to the regional influence of the United States.
Leadership teams are challenged with finding new growth opportunities. We can clearly see emerging markets as a source for growth in 2018 and beyond, but this must be balanced against increased trade barriers, rising fuel and energy costs, foreign exchange changes and climate change risks.
Key Factors to Consider
We expect world GDP growth to remain healthy in 2018, although that assumes world governments successfully manage risks posed by record debt levels, trade protectionism and geopolitical uncertainties — all of which have the potential to erode business and consumer confidence worldwide.
For global operations to maintain continuity and increase value addition across procurement and supply chain, the focus needs to be on increasing supply chain agility, building emerging market sourcing capability, value chain engineering and financial modeling as core business partnering capability.
We will look back on 2017 as a pivotal year in the rapid maturing of several artificial intelligence (AI)-related technologies and the initial adoption of these emerging innovations within the procurement domain.
2018 will bring its set of challenges and disruptors, from global economic uncertainty to the rapid advance of emerging technology. More than 80 percent of procurement organizations believe that digital transformation will fundamentally change the way they deliver services. However, only 32 percent of procurement organizations currently have a formal digital strategy and only 25 percent have the needed resources and competencies to deliver such transformations. (Data Source: Hackett)
Organizations that have invested considerable time, money and effort in transforming their procurement functions are now asking themselves — was it all worth it, how should we adapt the model and where do we go from here?
RPA, natural language processing (NLP), and predictive analytics are the top three AI-related domains that, along with blockchain technologies, are collectively powering a new wave of digital-led procurement transformations. New-age digital transformations assess how new technologies can drive enhanced performance and business benefits (e.g. savings) rather than merely enable them as a tool to support improved processes and organizational structures.
Virtual Assistants like Siri (Apple), Cortana (Microsoft) and Alexa (Amazon) can now follow natural language voice commands to quite effectively perform a range of procurement-related tasks including:
And these devices continue to “learn,” improve and adapt to our preferences through machine learning applications that will themselves evolve and gain the ability to handle even more complex, reasoning-based activities. In short order, we can expect further practical applications in procurement to emerge, such as proactively monitoring supply risks (and opportunities) and enhancing both spend classification and spend analysis functionalities.
RPA, the darling of last year’s Big Trend reports, has quickly achieved industry-wide acceptance and maturity. Today, many companies demand these capabilities from their transaction-based providers of services such as procure-to-pay and accounts payable. And these companies are demanding the commensurate year-on-year productivity improvements and cost reductions that these “bots” afford.
In procurement, which is transactional by nature, RPA and cognitive computing such as machine learning can help procureto-pay processes move away from an arbitrage-heavy model to improve overall delivery speed and quality.
Paradoxically, we expect the RPA trend to fuel further outsourcing of all transaction-based activities — rather than making these outsourced services redundant through the deployment of a well-orchestrated army of bots. Humans will be “in the loop” for some time to come, but their numbers will reduce significantly as discrete tasks and standard processes become fully automated. Transaction-based service providers now must compete on more than just low-cost country labor arbitrage and efficient service operations. They now must demonstrate digital expertise in RPA as a top selection criterion and competitive edge.
The advantages of RPA capabilities, along with the capital investments needed to build them, provide further advantages to managed service providers as they solidify their role in today’s archetypal high-performing procurement model. We see further RPA applications quickly emerging to support other “high volume/high touch” procurement activities such as:
NLP technologies enable the understanding of voice and free text commands. It’s unclear at this early stage how prominent NLP will become within the procurement arena. Adoption will likely mirror the (millennialdriven) adoption of voice activated commands within the consumer sector. That said, we are already seeing NLP technologies enabling certain procurement activities and we expect to see more in the areas of:
Predictive analytics is a form of machine learning that involves data mining and analysis of both structured and unstructured data sources, and is used as a high-powered decision-support utility. Predictive analytics tools can identify patterns and make predictions based on a multitude of factors and are underpinned by self-improving algorithms. Within the procurement domain, we expect to see advances with this technology in the following areas:
Blockchain technologies may end up transforming the procurement and finance functions more profoundly than the other emerging technologies. Traditional banking functions such as supplier financing can be completely reimagined with far fewer intermediaries and steps involved. Indeed, blockchain technologies have the potential to upend traditional corporate banking relationships, full stop, as niche fintech innovators chip away at the raison d’être of corporate banks.
Early targets for blockchain innovation include:
The maturity of AI technologies will steadily impact the procurement function. The question is no longer if, but rather when. Our view is that adoption will be quicker with some technologies (e.g. RPA) and slower with others (e.g. blockchain) but their combined impact will be powerful and transformative. It will take several more years for these technologies to fully mature into affordable and effective solutions within the procurement arena. That said, plenty of early adopters across sectors are currently piloting and learning their way into how to harness AI. And we expect that trend to accelerate in 2018.
Procurement operating budgets are expected to grow by less than 1 percent in the coming year, most likely requiring procurement to prioritize and self-fund its goals of improving agility, responsiveness, customer-centricity and supporting enterprise digital transformation. Therefore, reducing third-party expenditure and driving more value from supplier relationships will remain a key enabler for procurement transformation programs in 2018.
The evolution of a digital-first procurement model will result in procurement organizations that focus on more strategic, differentiating activities. Although they will continue to deliver cost savings, they will also be measured on contributions to business results, such as higher earnings per share, faster time-to-market, and improved supplier innovation.
More enterprises will look at adapting their operating model to technology. Rather than replacing procurement teams, technology will enable more value add in areas that have large potential for automation, e.g. accounts payable or contract management, so that procurement teams can spend more time on strategic activities. This integration will require a rethink of the existing source-to-pay process — how will supplier selection or invoice processing be impacted by these technologies and an increase in automation? This could also increase the focus on outsourcing.
Procurement leaders need to future proof the procurement organization and align to the broader enterprise digital strategy. Understanding the implications, opportunities and talent needed to succeed in a digital supply chain is the priority for 2018.
S2C process disruption looks at how technology-enabled changes drive efficiencies, i.e. “do it quicker, cheaper,” and effectiveness, i.e. “do it smarter” across the value chain. In 2018, we will see both the adoption of automation across S2C and the beginning of leveraging of technology-enabled ecosystems with suppliers and partners. The trends and implications for procurement include:
Today, suppliers have responsibility for a large and increasing portion of enterprise operations (not to mention receive an increasing percentage of revenues). As a result, the team managing them has a significant opportunity to impact the top line, as well as avert disruptions and introduce innovation.
The Buyer of Tomorrow — Digital Talent Strategy
The New Marketplace in E-Commerce — The Role of Amazon in B2B
The New Ecosystem — Supplier-Led Innovation and SRM
Change will be the constant for procurement in 2018, and the focus will be on understanding the new business environment and planning for transformation. Procurement organizations and service providers face the same challenges: the digital value chain, their role within the business, and how to achieve value with partners.
2018 will bring continued productivity enhancement to the procure-to-pay function as investments in RPA continue to grow and automation projects begin delivering realized value.
P2P software providers continue to invest in and/or acquire RPA capabilities. This will continue in 2018 with the development of next-generation P2P processes. Automation of routine requisition to purchase order (PO) approval workflow and intergation with smart contracts and mobile platforms will be key investment areas in 2018 onward.
Even though executives see digitalization and RPA as having the greatest impact on their procurement processes over the next 10 years, adoption of automated systems in procure-to-pay is still low. That will begin to change as new tech tools like RPA make the payoffs of automation too significant to evade.
Additionally, leaders in the procurement software arena will use automation to further integrate key tools, such as category cards and contract metadata, into the procurement process to maximize savings realization and minimize rogue spend. RPA projects will drive workflow simplification, where complicated data collection and categorization of requisitions will be replaced by rules-based assignments, making the ordering process easier for end users while increasing the quality and completeness of transaction data. This will drive enhanced reporting and analytics capabilities and expectations.
Result: RPA will begin to significantly reduce tail spend by increasing compliance at the time of transaction in place of the reactive management process that is typically used today.
An offshoot of the focus on RPA will be a renewed focus on industry benchmarking as clients and providers alike re-evaluate the relevance of traditional service level agreements (SLAs). Typical SLAs that focused on turnaround times and data accuracy will quickly become outdated. Replacing these standard metrics will be a greater focus (and higher expectation) in areas such as savings maximization and risk minimization.
Risk assessment will be another area of focus in procurement operations as companies are increasing their awareness and focus on seemingly routine changes in the global social and economic environment. Integrated solutions that help evaluate potential risk at the transactional level will rise in importance, and procurement’s agility to react to changes will become a key consideration for senior management as well as an integral component in future partnership development.
Capital & Construction
The global EPC (engineering, procurement, construction) market is expected to maintain a steady pace of growth in 2018, increasing by 2.8 percent to $7.35 trillion. North America remains the largest market by size valued at $1.9 trillion. The initiation of the $1 trillion infrastructure plan by the Trump administration will provide a boost to the capital sector in the United States, with several greenfield and brownfield projects slated to start in 2018. Asia is expected to maintain its high pace of growth fueled by China, India, Indonesia and Vietnam.
Digitization will emerge as a key trend impacting the capital and construction sectors, with implementation of smart factories emerging as a major disruptor for the manufacturing sector. Further, offshoring of engineering services will continue to expand, driven by the business need to increase market reach and associated cost benefits.
Globalization of Engineering Services Outsourcing
In line with the general economic trend, the engineering and construction services industry is inching toward globalization. Firms in emerging economies that have spent the past decade building up internal expertise and financial strength are now expanding outward and seeking to compete against established global players. The accentuated competition from these firms has led to increased pressure on margins, resulting in cost stabilization and market consolidation. The global engineering services outsourcing industry, valued at $70 billion, has been growing at a CAGR of about 30 percent, with Asia-Pacific accounting for the largest market share. India, China, Vietnam, and the Philippines were the most sought-after global outsourcing destinations.
The threat of intellectual property (IP) confidentiality breaches remains, especially in a few offshore locations where prosecuting IP offenders is perceived as difficult due to weak legal enforcement. Limited local knowledge regarding project conditions, such as local codes, standard construction practices and materials, and language barriers in Europe and Latin America, continue to be a challenge to using offshore vendors. The offshore engineering services segment is expected to continue its push for greater revenue share of the market in 2018.
Adoption of Smart Factory in Manufacturing
Organizations have started implementation of Industry 4.0 concepts with the intent of achieving higher productivity, lower cost, greater flexibility, efficiency and green manufacturing. While automation and controls have existed for decades, use of IoT, big data and cloud-embedded manufacturing have gained traction recently.
Five trends are pushing this drive toward smart factory: 1) rapidly evolving technological capabilities 2) increased supply chain complexity and global fragmentation of production and demand 3) growing competitive pressures from unexpected sources 4) organizational realignments resulting from the marriage of internal and stakeholder (suppliers, clients, customers) infrastructure and 5) ongoing talent challenges.
According to a survey conducted by one of the leading IT solution providers, penetration of smart factory into the manufacturing organization is highest in the United States (54 percent) and Europe (~40 percent), followed by India (28 percent) and China (25 percent). Smart factory is estimated to generate investment in the range of $0.5 billion to $1.5 billion in the global economy over the next five years, indicating significant opportunities for the CPO to strategize and implement this framework.
The global MRO market — estimated at $510 billion in 2017 — is expected to grow moderately in 2018, driven by steady global economic growth and pending tax reforms in the United States. Enterprises of all sizes continue to move toward integrated, outsourced MRO programs to simplify operations and reduce total cost of ownership. Distributors are investing in end-to-end solutions and established integrators are expanding their service portfolio and geographic footprint. Asia-Pacific will continue to be an area of focus for integrated suppliers, given the relatively low market supplier consolidation, as exemplified by the merger between Brammer and IPH in Europe, is anticipated to continue in 2018.
Smart factory is estimated to generate investment in the range of $0.5 billion to $1.5 billion in the global economy over the next five years, indicating significant opportunities for the CPO to strategize and implement this framework.
As the major market players continue to expand penetration. M&A is most notably a catalyst for integrator growth in Europe, the Middle East, and Africa. The trend of both vertically and horizontally, the proliferation of integrated equipment networks is changing the fundamentals of service delivery.
Traditional preventative equipment maintenance strategies are being replaced by increasing levels of “at-the-asset” maintenance enabled by mobile technology and big data. Real-time equipment condition monitoring allows maintenance technicians to perform service and replace parts based on actual operational data. Barcodes and QR codes provide equipment-specific condition information along with consumable and spare part specification guidelines. The availability of this real-time, “at-the-asset” data greatly increases maintenance productivity levels. MRO suppliers will continue to invest in enabling technology, which furthers the level of integration with storeroom data and maintenance planning systems.
Amazon has been on the horizon as a potentially disruptive force for the past several years in North America and parts of Europe. In 2018, Amazon is expected to establish a much stronger foothold with midsize enterprises by displacing established distributors. Amazon’s product catalog depth, with over five million unique items, greatly surpasses that of its established MRO supplies competitors. Its efficient operations and low overhead contribute to a highly competitive price structure across this wide range of products. However, with respect to product support and services, other distributors still retain a competitive advantage as they provide in-house representatives for technical support. The rapidly emerging presence of Amazon and other online retailers such as Alibaba in China is forcing established market players to leverage their core service-related strengths while continuing to invest in technology.
2018 will continue to present challenges for CIOs and information technology departments. While most companies are increasing their IT budgets to ensure business continuity and profitability, many others are recognizing the role of IT in enterprise growth. Revenue-driving initiatives, such as e-commerce and business process optimization, are highlighting the impact that IT departments can have on the bottom line. The dichotomy of this is that while IT budgets may be increasing, they can still be an impediment to IT leaders, limiting their ability to deliver and forcing prioritization of precious resource dollars. Approximately 80 percent of IT budgets are “trapped” in support functions like system maintenance, upgrades and security. That leaves only 20 percent or less of IT budgets for innovation activities.
IT and procurement must work together to offload and pay down this “technical debt” and free up resources (people and budget) for new and expanded cloud, mobile, data analytics, AI, and other modern digital initiatives that can provide a competitive advantage to the company.
The shift to cloud computing is now the default option for many companies when it comes to infrastructure products/services. While Amazon continues to retain over 35 percent of the market share of cloud infrastructure provisioning, Microsoft, IBM, Google, and Alibaba continue to make strides to grab their share of the IaaS market by forming alliance partnerships with software manufacturers, implementing automation into their delivery model, and leading the charge in AI to differentiate their offerings.
Companies need to be aware that the shift to cloud can also introduce new/changing costs and new risks not seen before in the infrastructure domain, such as active cost management, stranded capacity, cloud integration, and the shift to opex (operating expenses) as a standard. Managing the shift to cloud will be a key to success in 2018 to ensure the organization receives the anticipated value of its cloud investments.
Security for protecting company assets while providing flawless service is paramount for every IT infrastructure department. IT security remains on everyone’s high priority list — governments, enterprises and individuals.
Blockchain technology is evolving into an enterprise/government solution to transmit confidential or proprietary data across the internet. Blockchain is emerging as a mechanism to make and verify transactions on a network instantaneously, without a central authority. This could speed up transactions and cut costs while lowering the risk of fraud.
Overall, IT security is cumbersome and costly, and “shadow IT” may cause unknown risks to the organization. Threats to companies are evolving and growing — both in impact and frequency. Many companies are leveraging their third-party suppliers to manage and improve their IT security across multiple domains, including their cloud infrastructures and in-house data centers.
Demand is high for experienced IT resources. Many companies are struggling with the current IT talent shortage. Technical skills and know-how are required in today’s complex digital world, and many companies are investing in internal training and development to retain and educate existing resources. Companies are utilizing outsourcing and managed services to shore up their run cycles, which also frees up internal resources to focus on the most important aspects of their IT business support. The cost of outsourced/managed services is on the rise; therefore, companies must ensure sourcing decisions are well thought out to enable value alignment and achieve market-competitive pricing.
IT automation and analytics investments are generating significant benefits for large enterprises. Nearly all the major consulting suppliers are investing heavily in both RPA and AI. These investments, for autonomous decision-making and automated processing, are anticipated to dramatically increase over the next 10 years. Even though automation is essentially in its infancy now, companies are beginning to introduce AI and RPA in their business processes and are seeing real value in terms of hard dollar savings. With routine IT processes increasingly being automated, enterprises are realizing year-over-year cost reductions in application maintenance. We are seeing automation permeate nearly every area of IT, from application support to big data analysis and even in security for early threat detection and avoidance.
2018 will see a broader acceptance of SD-WAN as network appliances improve and offer more reliability with cost savings of around 20 percent. The wireless market will be changing again in 2018 with the beta testing of 5G wireless technology nearing completion in 2017; both AT&T and Verizon are setting the stage for releasing 5G widely, starting in 2018. The 5G wireless technology will allow for higher-speed networks that can support high growth in content-related transmission demand. Challenges from new players, such as Amazon, Google, and cable companies, have yet to make any significant impact.
Wireless continues to grow in both the personal and commercial markets and is beginning to take on a more global posture. U.S. carriers are aggressively moving into the wireless markets in Canada and Mexico. European carriers are required by “roam like at home” rules to eliminate roaming charges more widely through 2018, and the EU regulators have mandated compliance by the end of 2018. Intercontinental rates are dropping rapidly as alternative calling methods, such as Skype for Business and Wi-Fi calling, continue to mature.
Companies will see continued rate increases for “local” services across all geographies. Telecom aggregators such as Granite and MetTel have developed mature businesses that not only offset rate increases but can also potentially reduce costs by 25-35 percent and simplify the management of a messy portfolio of multiple supplier services. Similar services are evolving in Europe and are expected to become more widespread in 2018. It is recommended to limit telecom commitments to two years (wireless) or three years (network) and competitively bid interim agreements among providers and aggregators with goals of 20 percent savings.
Advertising & Media
Global advertising expenditures were forecast to close out 2017 at about 4 percent annual growth versus 2016, falling slightly behind growth of the general economy. This pattern is expected to continue up to 2019, with global ad expenditure growing at an annual rate of approximately 4 percent. Regions will vary in rates of growth for 2018, with the United States expecting 3.4 percent annual growth and 2.7 percent for Latin America. For Western and Central Europe, there will be a cautious mode, driven, in part, by Brexit uncertainty, but this may be offset because 2018 is a World Cup year; we anticipate around 2.6 percent annual growth.
Further political uncertainty in the Middle East will reverberate in advertiser confidence in the region and this is likely to manifest itself in a possible decline of 6 percent year-over-year growth for the Middle East and North Africa in 2018. Eastern Europe as a bloc is expected to witness the highest growth rates across all regions at around 9 percent per annum. Buoyed by a football World Cup on home territory and a somewhat monopolistic media-trading landscape, Russia is anticipated to face strong upward media pricing pressure. Regarding Asia, we expect an overall average growth rate of 2.8 percent until 2019.
On a country-by-country basis and possibly unsurprisingly, we anticipate more than 50 percent of the growth in global ad dollars to come from the United States and China in 2018, largely a consequence of their sheer scale. These will be supported by strong growth in certain Asian markets — notably India and Indonesia — as well as regular stalwarts in Europe such as Germany and the U.K.
Investment in digital advertising will continue to expand across the world. Overall, digital is expected to grow annually by 14 percent. This is largely fueled by advertiser interest in mimicking the audio-visual benefits of TV, with online video growing at 20 percent annually. And this will be issues around brand-safe placement, audience measurability and independent verification.
Quality content, whether it be broad- or narrowcast via digital media, is increasing, and this is another structural aspect further sustaining the growth in increased digital consumption across demographics.
The marketplace is increasingly dominated by two players, Facebook and Google. However, there is despite the increasing dissension expressed by major advertisers regarding no sign of advertisers voting with their feet and divesting from these major platforms despite calls for such outlets to demonstrate improvements in their audience measurability characteristics. Simply put, the recognition that audiences — particularly younger demographics — are migrating to digital as a normalized consumption behavior, is already here. Quality content, whether it be broad- or narrow-cast via digital media, is increasing, and this is another structural aspect further sustaining the growth in increased digital consumption across demographics.
We expect to see increasing exploration by both established and new entrant businesses of direct-to-consumer business models. This will be aided by two key factors: the increasing breadth of low-investment D2C communication opportunities offered by social media, and the increasing range of digital fulfillment models offered by intermediaries such as Amazon (e.g. Amazon buttons). Additionally, we expect to see successful startups swallowed up by major established corporations (e.g. Dollar Shave Club/Unilever in 2016) where they offer a distinct threat to the status quo.
2018 and Beyond
Digitization progress will be uneven and will be led by those companies where technology is at the core of their business proposition, and where it is fundamental that marketing, technology and data teams must work together. We expect to see innovation led by tech-centric companies such as Google, Alibaba, Amazon, Apple, IBM and Tencent. We expect some of those innovations to materialize in clear B2C or B2B opportunities that come to the market in 2018. We also expect such innovations to be seized upon by both market research and marketing communications companies as they seek to identify opportunities for their clients.
Shippers are increasingly considering TMS/4PL solutions to provide end-to-end supply chain visibility as well as optimize consolidated shipments, routing, etc. The adoption rate of TMS/4PL solutions by small and midsize companies is increasing due to reduced implementation costs from earlier years.
2017 was a moderately challenging year for shippers based on the trends within the global logistics industry. After a year of low freight prices, the price increases in ocean, trucking and warehousing impacted end users in the latter half of 2017. The freight price increase was also driven by the increase in the price of crude oil and diesel (North America: 14-plus percent, Europe: ~15 percent). The fuel price is expected to increase by 3-5 percent in 2018, impacted by the volatile political situation prevailing in the Middle East.
The trend of large M&A activities in the logistics sector was muted in 2017 in contrast to the previous years, barring the alliances among ocean liners. In 2018, some large M&A activities are expected. Shippers are increasingly considering TMS/4PL solutions to provide end-to-end supply chain visibility as well as optimize consolidated shipments, routing, etc. The adoption rate of TMS/4PL solutions by small and midsize companies is increasing due to reduced implementation costs from earlier years.
North American warehouse markets have seen a moderate price increase of 5-plus percent since Q3 2017. E-commerce firms, 3PLs and distributors are the three key end-user segments that drove warehouse demand in 2017. The need to improve warehouse productivity has pushed the demand for modern logistics space.
It is expected that warehouse demand growth will slow down in 2018 from previous years. Warehouse rental growth is expected to be moderate at 2-3 percent from the earlier rental growth of ~5 percent.
When the 2017 numbers are tallied, European warehouse absorption is expected to be in excess of 19 million square meters and the European aggregate vacancy is expected to fall to 5 percent. Despite the low supply of quality warehouses, rental growth was flat in most of the markets across Europe. With speculative building around 22 percent of the under-construction space, we expect the European market to have similar vacancy levels in 2018. Increased accelerated growth in Europe might result in higher rentals.
Within Asia-Pacific, rising wage levels are expected to result in increased warehousing costs. Specific to India, large end users are in the process of re-establishing their supply chains after the recent implementation of GST. Based on this, the demand for large, modern warehouse spaces in logistics hubs should remain strong.
• Road Freight
Due to cyclical changes in industry fundamentals and disruptions due to hurricanes, North American truck rates for 2017 hit the accelerators in Q3/Q4. The natural disasters affected as much as 10 percent of truck routes nationally and allowed carriers to push rate increases because of the increased demand. Carriers turning down loads was also widespread in H2 2017. We expect the rate increase to continue through H1 2018 due to increased economic momentum. Carriers have been reluctant to add capacity, which will be reflected in next year’s rates. The truckload segment is still seeing driver turnover above 90 percent and carriers are expected to face a tight supply of drivers. We expect an increase of 2.4 to 5.3 percent in the 2018 contracted rates in the North American market.
A major process disruption that might see an increased uptake in 2018 is technology-enabled brokerage service providers like Convoy and Uber Freight, fueled primarily by increasing traditional freight rates. Adoption will mainly depend upon the service levels offered by these providers at the initial try-out phase for various shippers.
In the European market, a rate increase of 5 percent is expected, with true rate impacts varying by country. The recent market situation has deteriorated significantly, and transportation providers have a huge challenge on their hands in the form of driver availability in the labor market. Significant impacts are being felt in the German domestic market (truck capacity has never been so low, according to local players) and in Central/Eastern European countries, especially for the “outbound” routes as trade flows are completely unbalanced and it is harder to secure capacity (Poland outbound has recently seen a double-digit increase).
Implementation of GST in India is reducing transit time by 4-5 percent and this cost reduction will be passed on to the end customers by the transport providers once the market stabilizes.
After two consecutive years of slow growth, 2017 saw contract rate increases for most of the global lanes due to supplier consolidation, increase in bunker prices, slower capacity growth and better capacity management by carriers. A few lanes, especially in Asia/China, had rate increases as high as 50-60 percent.
Late 2017 saw a slight drop in spot rates, without any weakening in capacity or service cuts.
In 2018, the growth in supply is expected to be ~5.1 percent while the growth in demand is expected to be 3.2 percent. With supply exceeding demand growth, we expect the rates to increase moderately due to idle fleet management and highly consolidated market structure. Across the lanes, moderate increases of freight rates in the range of 2-10 percent are expected, depending upon the trade lanes.
The global packaging industry will continue to grow at a healthy pace of 3-4 percent year-on-year and cross the market value of $1 trillion by 2022. The growth will be led by emerging countries from Asia, Eastern Europe and Africa, creating new opportunities for the market players in those regions. In parallel, mature regions like the United States and Western Europe will undergo significant business and demographic changes that will transform value chains in the packaging segment.
The desire to maximize the end-user experience, cost optimization and recyclability, catalyzed with technological developments, will be key influencers in the packaging market. This market is susceptible both to gradual changes in technology and to the need to satisfy rapid market developments.
For example, Alibaba’s Singles Day (November 11) impacted the global packaging industry more than many analysts would have expected. Alibaba posted ~$25.3 billion in sales on November 11. Emerging markets such as China and India are increasingly shopping online, preferring digital convenience over physical retail experiences. This is prompting changes to several key aspects of packaging. For example, 20-30 percent of online purchases are returned, meaning that their packaging must be easily opened and resealed.
Gradual changes along the supply chain brought by technology developments like 3-D printing, the Internet of Things (IoT), cloud computing and high-performance materials will have great implications for the future of “smart,” “active” and “intelligent” packaging. These categories include pure absorbers, oxygen scavengers, microwave susceptors, moisture or humidity absorbers, odor absorbers or emitters, anti-microbiological packaging, data communicators and others. These technologies are expected to address rising concerns about food safety, waste reduction, regulatory compliance and counterfeiting.
Due to increasing public pressure on governments, brand owners and retailers to reduce the environmental impact of packaging, the industry will continue to focus on reuse and reconditioning of packaging, rather than down-gauging to cut its carbon footprint.
The packaging industry will also focus on innovations that will boost both mass-market affordability and product demand. As a result, suppliers in emerging countries will start manufacturing fast, low-tolerance packaging lines in their own backyards.
Strong competition between rigid plastic packaging and flexible plastic packaging will continue to impact the way the industry moves. With massive capacity expansions planned in the United States and China, there would be no shortage of raw material for these types of packaging whatsoever. From a cost perspective, the flexible packaging segment is better placed in relation to its rigid counterpart, as the combination of environmental pressures and volatile polymer prices still exists. Flexible packaging as a segment uses fewer resources and is less energy dependent than rigid polymers, and this directly results in substantial reductions in packaging costs, materials use and transport emissions.
The packaging industry will focus on innovations that will boost both mass-market affordability and product demand. As a result, suppliers in emerging countries will start manufacturing fast, low-tolerance packaging lines in their own backyards.
A glass bottle costs 10-20 percent less than a PET bottle, and this price advantage probably will be largely responsible for the supremacy of glas