Supply & Demand Chain Executive January 2014 Special Issue

SPECIAL REPORT: Material Price Outlook – A 2014 Buyer’s Guide p.5 January 2014 ©

Global Solutions for Supply Chain ROI

Strategic Agility How to master risk, complexity, and opportunity in 2014

p.4

Unlocking Talent Keys to a Sustainable Workforce

p.14

Global Sourcing Will China Keep its Low-Cost Edge?

p.20

MRO Supply Chains A Bold Prediction for 2014

p.22 Insight Revealed!

HOT TOPICS IN 2014 Sourcing & Procurement p. 9 Chemicals & Resiliency p. 12 Outsourcing & Risk p. 17 Find out what industry has to say.

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Advancing Decisions that Advance the WorldŽ IHS is the leading information company with comprehensive content, insight and analytics in key areas shaping today’s global business landscape. Businesses and governments rely on our products, services and solutions to make faster and more confident decisions.

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Table of Contents January 2014

Volume 15

Issue 1

INSIDE 4 Executive Memo Challenge Your Thinking In this special edition of Supply & Demand Chain Executive we look at several different aspects of supply chain operations today.

5 IHS Material Price Outlook A 2014 Buyer’s Guide

Knowledge is definitely power in today’s business world, where having the most accurate and reliable data at your fingertips quickly translates into a competitive advantage, more confident decision-making and stronger bottom lines.

9 Sourcing and Procurement in 2014

SPECIAL EDITION

Industry peers weigh in on top issues

Strategic Agility

The World Economic Forum (WEF) Annual meeting 2013 really summed up the state of today’s supply chain operations when it said, “Today, we live in the most complex, interdependent and interconnected era in human history.

We are increasingly confronted by major adaptive challenges as well as profound tranformational opportunities. This new leadership context requires successful organizations to master strategic agility and to build risk.”

This special edition will take a look at some of the key issues affecting and driving supply chain operations.

Ranging from Operational Excellence strategies to supplier negotiation tactics, the insights are compelling and provide a quick read on the pulse of the industry.

12 Market Insight: Chemicals Chemical supply chain insight is key to managing risk and becoming resilient

Chemicals are the building blocks of industry, but the market is susceptible to volatility of oil prices, global economic swings, political turmoil, weather and more. All can negatively impact a chemical company’s ability to operate profitably and grow at a desired rate.

14 The Sustainable Workforce Collaboration between aging and younger works

Faced with the challenge of managing a cross-generational workforce, leading companies are implementing a mix of mentoring programs, flexible staff management policies and innovative learning opportunities to get ahead of the generational curve.

17 Global Outsourcing & Supply Chain Risk New global outsourcing and supply chain risk survey uncovers key insights into a broad range of sourcing and outsourcing issues

20 Executive Report

Is Chinese Manufacturing’s Low-Cost Run Coming to an End? An in-depth look at the key factors that are expected to push the low-cost pendulum away from China.

22 Final Thoughts A Bold Prediction: MRO Supply Chains

Page 5 to Become Strategic in 2014

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executive memo

©

Global Solutions for Supply Chain ROI

Challenge Your Thinking Special edition reveals strategies to master risk, complexity, and opportunity in 2014

A

year ago, Resilient Dynamism was the key theme for the World Economic Forum (WEF) Annual Meeting 2013 as it hosted global business leaders to deliver on its visionary 40-year mission of improving the state of the world.

It aptly summed up the state of today’s supply chain operations when saying, “Today, we live in the most complex, interdependent and interconnected era in human history. We are increasingly confronted by major adaptive challenges as well as profound transformational opportunities. This new leadership context requires successful organizations to master strategic agility and to build risk resilience.”

Fast-forward to present-day Switzerland.

As it hosts its Annual Meeting 2014, The Reshaping of the World: Consequences for Society, Politics and Business, the WEF suggests that we have a long way to go to meet these needs when it proclaims, “the international community remains focused on crisis rather than strategically driven in the face of the trends, drivers and opportunities pushing global, regional and industry transformation.”

Within this global operating environment of extreme complexity, risk, and interconnectedness as the backdrop, this Special Edition of Supply & Demand Chain Executive magazine looks at several different aspects of supply chain operations today, proposing several ways for organizations to become more strategic, agile, and competitive in 2014.

The article “IHS Material Price Outlook: A 2014 Buyer’s Guide (pg. 5)” outlines the key issues facing global commodities in 2014 as told by industry experts, and how organizations can more comfortably ride the volatile commodity roller coaster.

Extending the supplier and material cost theme, our pulse of the industry

Barry Hochfelder

Editor Supply & Demand Chain Executive Bhochfelder@sdcexec.com

feature (pg. 9) has peers weighing in on top sourcing and procurement issues, ranging from Operational Excellence strategies to supplier negotiation tactics. These primary findings will help readers benchmark their own performance and understand ways of driving competitive advantage within their organizations.

Shifting gears, our market insight feature “Chemical Supply Chain Insight is Key to Managing Risk and Becoming Resilient” (pg. 12) provides an in-depth look at the interconnected nature of global supply chains and how companies can leverage market insight to effectively sense and respond to change.

Talent management is of great interest as many organizations wrestle with strategic initiatives around unlocking their global talent pools while dealing with the harsh realities of talent churn, an aging workforce, and reductions in force. “Sustainable Workforce” (pg. 14) discusses collaboration between aging and younger workers to effectively manage knowledge across departments, borders, and generations.

China is a topic of great importance to our readers. In fact, our 2013 Global Outsourcing & Supply Chain Risk study results are revealed (pg. 17) showing that 67.2 percent of respondents use (or plan to use) China as a source of supply in 2014, while a similar percentage are very interested in monitoring almost every aspect of the country’s performance.

These new findings uncover key insights into supply chain risk, as well as companies’ current and future plans for assessing, addressing, and mitigating a broad range of sourcing issues. “Is Chinese Manufacturing’s Low-Cost Run Coming to an End?” (pg.

20) shares an expert perspective on the key factors expected to push the low-cost pendulum away from China.

Finally, we end with a bold prediction for 2014 around the increasingly important role that maintenance, repair, and operations (MRO) supply chains will play in the future.

Each of these Special Edition articles can challenge your thinking to become more informed, proactive, and strategic in order to drive winning performance within your organization in 2014.

Supply & Demand Chain Executive Special Issue • January 2014 • Volume 15 • Issue 1 Executive Vice President, Technology & Transportation Group Gloria Cosby Vice President, Marketing Gerry Whitty Publisher Jolene Gulley Staff Editor Barry Hochfelder Associate Editor Carrie Mantey Art Director Barbara Pineiro Production Service Representative Suzette Schear Audience Development Manager Angela Kelty Corporate Sales Publisher Jolene Gulley, jgulley@sdcexec.com Sales Stephanie Papp, spapp@sdcexec.com Editorial Advisory Board Tim Feemster, President, Foremost Quality Logistics John M. Hill, Board of Governors, Material Handing Industry of America William L. Michels, President, ADR North America Julie Murphree, Founding Editor, Supply & Demand Chain Executive Andrew K. Reese, Former Editor, Supply & Demand Chain Executive Bob Rudzki, President, Greybeard Advisors Raj Sharma, CEO, Censeo Consulting Group Kate Vitasek, Founder, Supply Chain Visions Circulation & Subscriptions P.O. Box 3257, Northbrook, IL 60065-3257 847-559-7598, Fax: 800-543-5055 Email: circ.sdcexec@omeda.com List Rental Elizabeth Jackson, Merit Direct LLC 847-492-1350, ext. 18, Fax: 847-492-0085 Email: ejackson@meritdirect.com Website: meritdirect.com/cygnus Reprint Services Nick Iademarco, Wright’s Media (877) 652-5295, ext. 102 niademarco@wrightsmedia.com Cygnus Business Media John French, Chief Executive Officer Paul Bonaiuto, Chief Financial Officer Ed Wood, Human Resources Julie Nachtigal, Vice President, Audience Development Curt Pordes, Vice President of Production Operations Rob Brice, Senior Vice President, Cygnus Expositions Lester Craft, Director of Digital Business Development, Technology and Transportation Group www.SDCExec.com Supply & Demand Chain Executive [USPS #024-012 and ISSN 15483142 (print) and ISSN 1948-5654 (online)] is published five times a year: March, May, June, September and December by Cygnus Business Media, 1233 Janesville Avenue, Fort Atkinson, WI 53538. Periodicals postage paid at Fort Atkinson, Wisconsin and additional entry offices. POSTMASTER: Please send all changes of address to Supply & Demand Chain Executive, P.O. Box 3257, Northbrook, IL 60065-3257. Printed in the USA. SUBSCRIPTION POLICY: Individual subscriptions are available without charge in the United States, Canada and Mexico to qualified individuals.

Publisher reserves right to reject nonqualified subscribers. Oneyear subscription to nonqualified individuals: U.S., $30; Canada and Mexico, $50; and $75 for all other countries (payable in U.S. funds, drawn from U.S. bank). Single copies available (prepaid only) for $10 each. Canada Post PM842773848. Return undeliverable Canadian addresses to: Supply & Demand Chain Executive, P.O. Box 25542, London, ON N6C 6B2.

The information presented in this edition of Supply & Demand Chain Executive is believed to be a­ccurate. The ­publisher cannot assume responsibility for the validity of claims or p­ erformances of items appearing in editorial presentations or advertisements in the publication.

4 Supply & Demand Chain Executive January 2014 – Special Edition

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special report buyers guide

IHS Material Price Outlook:

A 2014 Buyer’s Guide Knowledge is definitely power in today’s business world, where having the most accurate and reliable data at your fingertips quickly translates into a competitive advantage, more confident decision-making and stronger bottom lines.

Top industry analysts provide valuable insight on pricing, availability, and production of key global commodities for the coming year.

Introduction

A

ccording to a recent IHS survey of 200 senior-level supply chain, sourcing and procurement professionals, the top commodities of concern in 2014 are chemicals and plastics, followed by nonferrous metals (i.e. aluminum, copper, lead, nickel, tin, titanium and zinc, brass, etc.), and ferrous metals (i.e. stainless steel, carbon steel, iron etc). For this reason, the IHS Material Price Outlook: A 2014 Buyer’s Guide is broken into three sections focusing each section on these top commodities of concern, covering a mix of high-level insights

and observations plus detailed data and analysis. Based upon insight from the IHS Pricing and Purchasing Service, this report provides vital market, price, and cost information for critical commodities in order to help organizations make informed sourcing and procurement decisions through 2014 and beyond.

Elevated costs and pricing volatility will prevail in the chemicals and plastics sector for 2014 as crude oil values remain high and demand for these fundamental feedstocks stay strong. World events have also impacted pricing for chemicals and plastics, which are highly affected by geo-political turmoil and weatherrelated disasters. “Producers of a number of these commodities are enjoying strong margins right now,” says IHS Senior Director of Chemicals, Howard Rappaport, “and we don’t expect to see much change until later in 2014.”

Prices could be driven down by the introduction of new capacity (driven by low-cost feedstocks and integration strategies in North America, Asia, and the Middle East) in 2015 and beyond, but the additional supply isn’t Ethylene Price Outlook

Chemicals & Plastics: The Fundamental Building Blocks Chemicals and plastics are essential building blocks for just about every industry, ranging from energy to electronics, transportation to packaging and consumer products.

U.S.Large Buyer Contract Ethylene

West Europe Contract Ethylene

Southeast Asia Spot Ethylene

South America Ethylene

Figure 1: The turnaround schedule in the first half of 2014 for crackers could affect spot pricing starting in January as market players start pre-building inventories.

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special report buyers guide likely to change short-term market dynamics in the plastics and chemicals markets. With high crude oil prices continuing to pressure the cost side of the equation, the likelihood of significantly decreased prices is low.

“Price levels will remain elevated for most products,” Rappaport explains, “but more stable with downside potential later in the year.”

Taking a closer look at the basic building blocks that comprise many chemicals and plastics, ethylene prices remain high—yet costs (particularly in North America) are low relative to history—and continue to yield record margins for producers. And while ethylene prices could spike slightly due to recent supply related issues, Rappaport expects them to remain “relatively flat” throughout most of 2014, primarily due to increased availability. “We expect a huge surge in ethylene capacity over the next several years in North America,” he adds, “while producers in Asia and the Middle East continue to build as planned.”

Propylene prices should remain “slightly higher” in 2014 but will continue to be volatile due to supply issues brought on by planned refinery outages and other events. Buyers of benzene should brace themselves for elevated prices over the next 1218 months, while those procuring butadiene will find pricing to be heavily influenced by crude oil, beginning to trend higher in the second quarter of 2014.

Figure 2: More “on purpose” production will drive global propylene capacity growth.

Chemicals & Plastics: Implications for Buyers Chemicals & Plastics • Ethylene • Slightly lower prices near term, but higher in early 2014 • Keep an eye on hurricane activity in USGC (season ends 11/30) • Big investments coming in US capacity longer term = better pricing • Propylene • Tight supply in the US near term • Higher prices in early 2014 • More “on purpose” production will provide relief • Benzene • Closely following oil price trends • Prices will remain above $4 per gallon through 2014 • Butadiene • Recent high prices coming down early in 2014 as supply improves • Continuing volatility will plague rubber prices until “on purpose” capacity arrives

Base Metal Markets: Range Bound As 2014 comes into view, companies buying aluminum, copper, and nickel should collectively expect to see prices move in a fairly narrow band. Known for their volatility, base metal prices have fallen some 30 percent since their most recent peak in February 2011. We believe, however, that production costs will limit any substantial downside moves from this point. But the upside is also capped. Relatively sluggish demand growth coupled with ample capacity or high inventory levels look to restrain any upward price moves.

“The global recovery is on track,

Figure 3: No return of the “Supercycle” – prices look flat 25 percent below their recent peaks.

but it’s slow and sluggish,” says IHS Lead Nonferrous Metals Analyst, John Mothersole. “There’s a bottom forming right now with a mild uptick in pricing expected as we move through 2014.”

Global nonferrous metals consumption growth remains relatively modest, with China being the wildcard in the market right now.

“China is becoming more focused on domestic consumption rather than investment and exports,” Mothersole points out, “and is therefore not likely to show the same strength in metal consumption that characterized the middle of the last decade.” The chart below illustrates this and suggests a different demand profile going forward.

Global Metal Consumption

Figure 4: Global metal consumption growth improves, but remains modest in 2014.

Figure 5: China’s impact on base metal prices.

Aluminum, which remains in a large surplus condition, is plagued by a huge inventory overhang. Perversely, the physical market exhibits a degree of tightness because much of this inventory is locked up in so-called financing deals. These financing deals are essentially arbitrage plays that take advantage of the large difference

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special report buyers guide between forward and spot prices right now. Higher interest rates would end this carry trade and release metal back onto the market, dampening prices. At the same time, however, softer prices, which are already below costs for many producers, would force production cuts, narrowing the market’s surplus and setting up price increases. “Aluminum prices are unsustainably low right now,” says Mothersole. “There’s nowhere to go but up.”

Nickel prices—another market currently oversupplied—will fluctuate in a fairly narrow range during 2014. “Nickel prices are also below production costs right now,” Mothersole explains. “That limits any downside move, but it will also be difficult for nickel prices to move up even modestly given market conditions.”

Copper is our one exception next year; prices should fall steadily across 2014. The reason is a growing surplus based on continuing strong growth in mine production. Current prices are well above production costs, meaning the downside in copper is potentially large if there is a substantial inventory build during the year.

While fundamentals do differ as a group, non-ferrous metal prices

Figure 6: market looks well supplied with prices falling well below $6,500/ mt next year

in 2014 “look to move sideways,” according to Mothersole.

Non-Ferrous: Implications for Buyers Nonferrous Metals

• Aluminum • Prices are unsustainably low • But another surplus in 2014 and a huge inventory overhang limit the upside • Watch interest rates – they will signal the beginning of the end for financing deals and lower premiums • Changes in LME warehousing rules slated for April may also have the same effect • Copper • Prices are headed lower • Surplus widens in 2014, with inventory heading higher • Downside is only limited by production costs, which are well below $6,000/mt • Nickel • Like aluminum, prices are unsustainably low • But also like aluminum, another surplus in 2014 and high inventory limit the upside

The Steel Markets: Good News for 2014, but Danger Lurks Organizations shouldn’t feel pressed to buy steel right now or through much of 2014, that is unless they want to lock in today’s prices with

Figure 7: Nickel inventories are at record highs with a rising coverage ratio

Where are the bargains?

China • China is overproducing as mills favor tonnage over profits • Prices are often $150/metric ton lower than in the U.S., $70 below Europe Other Asia • Low Chinese prices pressure Korea and Japan, who have excellent quality Europe • Prices hover between those in Asia and North America • Quality is often very high North America • Well above those already mentioned, but delivery is fast and quality is high South America • Protectionism makes South America one of the worst places to buy

the knowledge that costs could jump slightly over the next few months.

“Prices on steel should be flat in 2014,” says John Anton, Director of the IHS Steel Service within the Pricing & Purchasing group.

“Companies that lock in now would basically be mitigating risk; this is a good time to buy just to make sure the climate doesn’t worsen.”

Credit China with helping to keep steel prices at bay over the next 12 months. Mills in the country are over-producing to the point where the profit on an entire ton of steel equals a single bowl of rice. “They’re losing money,” says Anton. That lack of profitability could translate into a very different scenario in 2015 as low prices cause mill failures and, subsequently, higher prices.

In specific ferrous categories, hot rolled carbon sheet remains in high demand in NAFTA and China, but less so in Europe. Expect a slight price increase in late-2013 to retreat by early-2014. Anton advises locking in pricing now to minimize risk, but notes that there is “otherwise no reason to rush into procuring hot rolled carbon sheet.” Demand for plate, on the other hand, should

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special report buyers guide Conclusion

United States Europe China

United States Europe China

Source: IHS, 2013

rise significantly in the coming year as premium over sheet is currently “much narrower than normal,” says Anton. “Try to lock in current levels for 2014, especially Asian prices.”

Demand for merchant bar will increase in 2014 in line with overall manufacturing trends and as idle capacity remains rampant. “Try to fight North American price hikes,” Anton advises. “In other regions, lock now if cautious and buy spot if you are daring.” Concrete reinforcing bar (rebar) should also see a spike in demand for 2014—also due to high levels of idle capacity—and a premium exists for this commodity sector, albeit not as wide as it does for other products. “Buy soon,” says Anton. “The price is low and the logical direction is upwards.”

Due to an expected price increase of nickel, buyers should expect an increase in nickel-bearing stainless steel. “Nickel is only 10 percent of the chemistry, but 70 percent of the cost,” says Anton. “This is a very good time to lock in any nickel-bearing stainless.” For 2014, chromium prices are sideways, so if you’re not buying nickel-bearing stainless steel, you will be less pressured to buy now. There’s less pressure on 400 grades than 300 grades. If you’re buying 300 grades buy as quickly as you can. Right now, buyers are seeing the best prices they’ve seen since 2004.

Stainless Steel

• Input costs (surcharges) will rise in 2014 • Nickel selling at/below cost • Stainless mill capacity is high, utilization is fairly low • Prices will rise in coming years • Ni, Cr, other alloy metals increase for 2014 and beyond • Beware of labor and electricity problems in South Africa • Advice: buy ASAP

United States Europe China

Source: IHS, 2013

Commodity prices have become less stable. Their sting is now felt throughout the supply chain to a greater degree and at a greater speed than previous decades.

Buyers can turn turmoil into opportunity by buying on dips during volatile times. To achieve success at this strategy, buyers must be actively monitoring weekly or even daily price movements.

IHS has created a volatility price indicator to help identify turning points and future commodity price swings. Understanding the characteristics of recent periods of volatility can provide valuable guidance in how to face volatile times to come.

The IHS Pricing & Purchasing Service enables supply chain cost savings by providing timely, accurate cost and price analysis.

Armed with a better understanding of suppliers’ cost structures and market dynamics, organizations can effectively negotiate prices, strategically time buys, and boost the bottom line.

Learn more at www.IHS. com/PricingPurchasing.■

Ferrous: Implications for Buyers Ferrous Metals

• Sheet • Sit on your wallet until February or March, unless you are offered a full year at a reasonable price.

• Plate • Lock in current bargains. 2014 will not explode, but right now there is opportunity.

• Bar steel – Commodity grades • Buy soon or sit until 2014 Q2. Not extreme, but up.

• Watch out for US protectionism on rebar and wire rod.

• Bar steel – Special bar • Live hand to mouth. Prices should fall sharply in coming months.

• Stainless • Buy now! This is our most clear cut advice.

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pulse of the industry

Sourcing and Procurement in 2014 Industry peers weigh in on top sourcing and procurement issues, ranging from Operational Excellence strategies to supplier negotiation tactics. The insights are compelling and provide a quick read on the pulse of the industry.

Here’s what they had to say.

62% of sourcing and procurement teams have initiatives linked to their company’s

Operational Excellence strategy.

Total Cost Savings achieved is the most important criteria used to measure organizational performance.

About this Research: Pulse of the Industry: Sourcing and Procurement in 2014 provides a select subset of findings from surveys taken among executive leaders, senior managers, and sourcing/procurement professionals in supply chain industries throughout 2013.

Primary research was conducted by IHS Inc., during thought leadership series of sourcing and procurement events hosted by the IHS Pricing & Purchasing service of IHS, Inc. IHS (NYSE: IHS) is a global information company with world-class experts in the pivotal areas shaping today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. It employs more than 8,000 people in more than 31 countries around the world.

Visit www.IHS.com/pricingpurchasing

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pulse of the industry

Chemicals

are the top commodity of concern for 2014, while coping with price volatility will be a major concern for nearly two thirds of industry peers.

Nearly 1 in 4 of your peers will participate in 25 or more supplier negotiations this year, the results of which can have a

significant and lasting business impact.

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pulse of the industry

Commodity Price, Cost, and Market Analysis are

used to level the playing field and prepare for supplier negotiations.

Objective 3rd party information helps justify a negotiating position, attain a favorable outcome, and gain

competitive edge with suppliers.

Disclaimer: This working report is distributed for purposes of comment and discussion only, without representation or warranty of any kind. The authors believe the information in the report to be accurate. However, the information is provided “as is,� and the authors shall not be liable for errors or omissions with respect to the report. Nothing herein shall be construed as constituting an additional warranty, and readers of this report assume sole responsibility for their interpretation and use of the materials contained therein. The report may not be reproduced without express permission of the authors and is subject to change without notice. Questions and responses may have been modified slightly for the purposes of editorial or contextual representation, however this was not deemed to alter the original context of the data. Figures in percentages may not add up to 100% due to rounding or the ability of survey respondents to select multiple responses.

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market insight chemicals

Chemical Supply Chain Insight is Key to Managing Risk and Becoming Resilient An in-depth look at the interconnected nature of global supply chains and how companies can leverage market insight to effectively sense and respond to change What you need to know: ■■Chemicals are the building blocks for numerous industries and interdependencies exist between upstream and downstream supply chains that can significantly impact one another.

■■The chemicals industry is also susceptible to volatility from influences such as macroeconomic shocks, geopolitical concerns, market gyrations, and energy prices.

■■Political unrest, weather disturbances, and plant outages are a few recent examples of real disruptions to the continuity and profitability of chemicaldependent supply chain operations.

■■Armed with the right mix of market insight, industry knowledge, and commodity information, organizations can more effectively sense and respond to changes in the landscape before they occur and faster than others.

All Supply Chains Rely on Chemicals The chemicals and plastics markets have long been susceptible to volatility in crude oil prices, market gyrations,

global economic swings, and fluctuating demand for its products. These and other factors—such as political turmoil, natural disasters, weather events, or unexpected plant outages—can negatively impact an organizations’ ability to operate profitably and grow at a desired rate.

“All of these dynamics are constantly churning on a daily basis,” says Howard Rappaport, senior director of chemicals at IHS, “and impacting not only the price of materials, but also availability on the supply/demand side of the equation.”

Chemical firms are also vulnerable to the interconnectedness of the industries that they rely on for raws materials, that they sell into and that they partner with. Here’s one example of this interdependency between chemicals and adjacent players in the supply chain: ■■The chemical industry relies heavily on the energy sector both as a source of raw materials and for the resources to operate chemical and plastic production facilities.

■■Oil and gas are converted to petrochemicals, which in turn become the building blocks for other intermediate products like adhesives, plastics, and other chemical derivatives.

■■After going to a convertor or

fabricator, those derivatives become finished goods that are transmitted to consumers via a retail distribution channel.

As you can see from this example, chemical supply chains converge across many different industries and impact numerous organizations and consumers. To operate at optimal levels during good and bad times, these supply chains must be built on industry knowledge and market insights that enable effective decision making. This decision-making is critical to ensure that the companies involved can capture opportunities, optimize their supply and demand networks, and overcome or mitigate future risk.

Supply Chain Disruption— Not If, But When Plant explosions, weather-related catastrophes, and political unrest can all take their toll on profitability goals.

In 2013, during a fire and explosion at its ethylene plant, Williams, a Geismar, La.-based owner of interstate gas pipeline and midstream operations, immediately witnessed a ripple effect throughout the industry. At the time of the explosion, the company was producing 2.5% of the U.S.’ total ethylene capacity and about 1.5% of the nation’s propylene. Louisiana was 2 million tons short of ethylene at the time of the explosion, so the event further exacerbated that challenge.

Because ethylene is a critical component in several key plastic products, the disruptive event at Williams impacted the production of ethylene dichloride, ethylene oxide, and

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market insight chemicals other downstream products. Because Williams was in the midst of expanding its facility and increasing capacity at the site, the fire and explosion created an uncertain environment for the proposed expansion. Finally, the event had a moderate impact on spot prices for both ethylene and propylene in the U.S. market.

With the right mix of industry knowledge and foresight into market trends, chemical companies that have a dependency on the chemical industry can effectively sense and respond to change better than others.

“Everything from production levels to interdependent relationships to downstream products are very important considerations from a ground-level perspective,” says Rappaport. “At IHS, we track this to make sure our clients are well aware and able to effectively plan ahead for events like this fire and explosion.”

In some cases, the disruptive events involve outside forces. Every year between June and November, for example, the Gulf Coast of the U.S. becomes a hurricane zone. With a high concentration of natural gas drilling in Texas, Louisiana, and adjacent states, drilling platforms and rig operations – and the associated downstream chemical and related derivatives – can quickly find themselves targeted by these destructive storms. “We all know that it’s impossible to control or manage the weather,” says Rappaport, “but it’s certainly something that has elements of predictability, probability, or disruptive implications that we can monitor very closely to learn of any potential impact on supply chain operations.”

Using market insights, chemical companies no longer have to fly blind and be susceptible to market gyrations and swings—even when the culprit is seemingly abstract influences such as geopolitical instability surrounding

“Whether you’re a global or regional player in today’s markets, you must have a handle on the events that will impact your business.” oil-producing countries. For instance, earlier in 2013, the prospect of political change in Egypt witnessed oil prices jumping dramatically by 2-3 percent within a few days span.

Such significant price jumps in crude oil—a key building block for the chemical industry and related products – negatively impacts a wide range of downstream products. Usually temporary, these situations can also sustain themselves for long periods of time and have “a critical impact on the cost structure in the supply chain,” says Rappaport. “Whether you’re a global or regional player in today’s markets, you must have a handle on events that will impact your business.”

Resiliency, the Key to Managing Risk As you’ve read in this report, it’s not a matter of if disruptive events will impact a chemical company’s operations and profitability; it’s a matter of when it will happen. Using IHS market insight, chemical companies and their customers can map out their materials, suppliers, and/or supply chain operations obtain firsthand knowledge of macroeconomics, markets, company/ suppliers, countries, materials, and other influences to monitor and manage their performance.

By taking these key steps, firms can examine potentially disruptive events, determine how they will impact a company’s operations, and then take the necessary actions to reduce or eliminate those impacts: 1. Map the upstream and downstream dependencies of the supply chain to critical commodities such as chemicals, plastics, and their suppliers 2. Understand the cost structure

of these materials and how the materials’ supply chains are linked to other industries (i.e. energy) and external influences (i.e. economics, geopolitics, infrastructure, trade flows) 3. Obtain market data, industry knowledge, commodity information, and analytical tools to monitor the historical performance, current conditions, and future outlook for each of these dynamic, interdependent influences 4. Identify where the weak links and biggest threats are within existing operations to proactively circumvent risks, closely monitor specific situations, or tightly-couple within business continuity or disaster recovery measures 5. Perform ongoing predictive modeling to evaluate the impact of potential global scenarios (even “the unlikely”) to act upon situations that present opportunity or that deviate from acceptable risk to the enterprise (i.e. total cost, market pricing, supplier viability, continuity of operations, etc.)

“Using market insights and analysis, companies who depend on chemical supply chains can not only improve their bottom line, but also implement sense-and-respond strategies to become more agile—helping to lessen the trickle-down effect of market variability or the acuteness of impacts from major shocks to the system,” says Rappaport.

“This foresight enables companies to become more resilient and capture market opportunities, optimize supply and demand networks, and overcome and mitigate future risk.” ■

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special report the workforce

Sustainable Workforce Collaboration between aging and younger workers

By Margaret Beetem

I

n the post-millennium world, many engineering and supply chain functions are finding themselves increasingly relying on a generation of workers that have much-needed “pre-millennial” technical knowledge regarding the application of principles and techniques to specific tasks. At the same time, companies are looking to younger staff to help them adapt their processes to take advantage of rapidly changing technologies, shifting economic conditions, and expanding global markets.

Faced with the challenge of managing a cross-generational workforce, leading companies are implementing a mix of mentoring programs, flexible staff management policies, and innovative learning opportunities, all with the goal of getting ahead of the generational curve.

workforce skills, education and job flexibility in the production process is increasing, and the younger workforce can harness their knowledge of, and openness to, new technologies and processes to help transition and automate a company’s workflows.

“We look to oldergeneration employees for experience…And the younger generation is very familiar with technology. I’d say the mentoring goes both ways.”

The success of the crossgenerational workforce depends on both the experienced staff and the new workers coming together.

Many organizations are turning to mentoring and similar programs to leverage the strength of both generations—and they are finding that the mentoring can work in both directions.

Companies are proactively implementing mentoring programs, lunch-and-learns and hands-on training as a way of facilitating crossgenerational knowledge sharing.

These environments bring together team members of various ages in a setting where all can be comfortable with what they know and what they can learn.

Kate Liosis, 29, a supervisor with Denver-based FirstBank, says she experiences no problems with managing older employees. “We look to older-generation employees for experience—they’re very familiar with the foundations that FirstBank was built on,” she said. “And the younger

Mentoring Works in Both Directions Organizations reliant on knowledgeable workers must keep their older, more experienced staff involved while also engaging their incoming, younger workforce. Both generations are equally critical: ■■Legacy systems still need production workers, inspectors, testers, and design engineers with tribal knowledge, and the historical experience and skills of the older workforce constitute the knowledge foundation at any given company.

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special issue the workforce generation is very familiar with technology. I’d say the mentoring goes both ways.”

These kinds of programs are becoming widespread. For example, a 2011 Working Smart survey of technical oil company professionals age 55 or older, in partnership with the American Association of Petroleum Geologists (AAPG), showed 77 percent of the respondents were currently mentoring younger staff. When that knowledge is shared, it then becomes part of a company’s knowledge base.

who have the skills that are needed by our economy.”

Different Habits Produce the Same Result

Generational Shift Changes With every generation, there are skills, attitudes and perceptions that flavor the future of that cohort.

For baby boomers, the invention, growth, and maturity of computers took engineering and manufacturing from slide rules to CAD-CAM tools. Amber-screen bulletin boards of yesteryear have been replaced by websites that reach out to millions— old and young alike, sharing knowledge and experience through white papers, articles, analyses and software tools that help workers and students in professional fields.

The same kind of innovation, enthusiasm and curiosity that baby boomers had for their professional choices are also evident in the upcoming generation. The workforce challenge then becomes one of changing perceptions about work habits, attitudes and an overall cultural shift within a company.

Peter Capelli, Director of the Center for Human Resources at the University of Pennsylvania Wharton School, stated, “Supervisors have to manage in a way that is more empowering. They have to say, ‘Here is a project; we want your ideas on how to get it done.’ ” Process standardization and

the implementation of document management systems where nuances can be shared among workers instead of scattered among desktops is one approach to sharing tribal knowledge.

Many companies subscribe to these standardization tools while supplanting manual supply chain processes with supply chain management systems that are fully integrated into mature CRM and enterprise management systems and fully automated manufacturing shop floors. Having these systems in place eases the changes inherent not only in generational shift changes, but also in job and worker changes in general.

Alicia Munnell, Director of the Center for Retirement Research (CRR) and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, states, “The U.S. labor market isn’t a closed box with a fixed number of jobs, where one younger worker directly substitutes for one older worker. Instead, the overall labor market is flexible and dynamic, and can absorb workers of all ages

To the younger, tech-savvy workforce, communication is expected instantaneously and curiosity gratified almost immediately. Being subjected to presentations and lectures is not always the best way for them to learn.

Growing up under the affluence of their parents—the baby boomers— their approach to learning, work, and their personal lives is very different from their predecessors. But at the end of any given work day, the measure of productivity for both older and younger worker is still the same—the success of their company and the feeling that they have made a difference in people’s lives, even if it is only their own.

The need to be in a building for 40 to 60 hours a week is mind-boggling to younger workers. Work time can still be 40 to 60 hours, but the new millennial workers want more flexible schedules. Moreover, in a globally run company, work hours can happen anytime of the day or night, making flexible schedules essential.

Even though flexible schedules in a manufacturing environment are more difficult, it can be done and is being done. Consider that a General Social Survey found that approximately 45 percent of the employees in the manufacturing sector report that they are never allowed to change their schedule, compared to 30 percent of employees in other sectors.

More recently, in a 2012 National Study of Employers report, funded by the Alfred P. Sloan Foundation, employers providing flexible work options have increased from 2005 to 2012. These include flex time (from 66 percent to 77 percent); flex place

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special report the workforce “Kids come out of school and they’re really bright, but it’s going to take years before they really understand and can grasp all the concepts of what happens in the power industry.”

— Becky Blalock, prior CIO of Southern Company

(from 34 percent to 63 percent); choices in managing time (from 78 percent to 93 percent); and daily time off when important needs arise (from 77 percent to 87 percent). The same report found additional options provided to employees that include moving from part-time to full-time and back again (from 54 percent to 41 percent); and flex career options such as career breaks for personal or family responsibilities (from 73 percent to 52 percent).

Educational Experiences Beyond the Classroom Many younger workers have good college degrees, sometimes several, and trade schools are also a solid foundation for a working knowledge base. But even with a structured education, younger workers still lack real-world experience, which is where the true knowledge-sharing disconnect happens.

Becky Blalock, prior CIO of Southern Company, commenting on the energy industry, says: “This is a very old industry. The average worker is way up there, and they’re going to retire. I’m a great example of that…

You don’t just walk into this industry and understand it Day One. It’s very, very complicated, and I think it takes years.” She adds: “Kids come out of school and they’re really bright, but it’s going to take years before they really understand and can grasp all the concepts of what happens in the power industry.”

The knowledge sharing gap between older and younger workers is being resolved by innovative solutions

such as Harvard’s iLab projects, where experiments are run in real-time, but in safe, online environments. In addition, industry leaders from the older workforce are working with universities and local trade schools to help create curricula that present the foundation of the knowledge required. Also, by joining specialized committees or becoming members of professional organizations like IEEE or ASTM, both young and old alike can share in the vision, enthusiasm and innovation of their career choices—and in an environment that is not subject to performance reviews or objective setting. With more and more retired and semi-retired workers supplementing their incomes, interests and enthusiasm for the world around them, these memberships can be critical knowledge that ensures a successful workforce. Knowledgesharing in these forums is honest and open and puts both sectors on equal ground—the older generation can share their stories, and the younger generation can share their unbridled imagination. ■

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survey summary

Global Outsourcing & Supply Chain Risk New global outsourcing and supply chain risk survey uncovers key insights into companies’ current and future plans for assessing, addressing, and mitigating a broad range of sourcing and outsourcing issues.

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he results of Supply & Demand Chain Executive magazine’s Global Outsourcing & Supply Chain Risk survey are in and they reveal increased organizational focus on identifying and mitigating supply chain risk, close attention to supplier viability and failure, concern over the financial impact of supply chain disruptions, and an uncertainty over the ability to recover from a major disruption.

The survey was based on input from 220 supply chain, sourcing, and manufacturing managers and executives located primarily in the U.S. and the EU. Companies represented a diverse range of sizes including a nearly-equal balance of large (in excess of $1 billion in annual revenues), midsize, and small organizations operating. Similarly, they very evenly represented a broad range of manufacturing, healthcare, and transportation/logistics sectors. Respondents shared internal information on supply chain risk measurement, their companies’ level of preparation for disruptive events, and their current and future sourcing/outsourcing strategies.

Figure 1: Scale indicating the significance of supply chain risk mitigation within 2014 operational plans

Supply Chain Risk Mitigation Strategies Supply chain risk and financial impact of disruption are on the rise When asked to rate the importance of supply chain risk mitigation strategies on a scale of 1-10, most participants (72 percent) said between 7 and 10, with 18 percent calling such initiatives “critical.”

About 68 percent indicate that supply chain

Figure 2: Dual threat of increased supply chain risk and financial consequence from disruption

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survey summary risk is increasing. Beyond the obvious concern of this finding, it is extremely ominous considering that two-thirds also say that the financial impact of supply chain disruptions is also rising. As for their experiences, since 2011 alone, most survey respondents (60 percent) have experienced between one and five supply chain disruptions that have materially impacted operations. Not surprisingly, most of the companies surveyed (81 percent) have been subject to reactionary discourse as a result of these disruptions.

Supplier risk and modest risk preparedness still the norm For 2014, respondents say their top global supply chain concerns are supplier volatility or failure, followed by weather and commodity volatility. Less than 5 percent of companies are fully prepared to manage such disruptions, just 2.4 percent feel “completely prepared,” and 25 percent rank their organizations below the midway point on this scale.

In light of catastrophes like the garment factory collapse in Bangladesh, 63 percent of firms are incorporating safety and treatment of workers into their sourcing decisions.

China still a wild card for economic, labor, and material volatility When asked what other economic or disruptive events are of concern right now, respondents said regulations, sub-tier supplier management/control, politics/geopolitics, and delivery performance/ integrity are top of mind. Primary sourcing options include the U.S. (for 66 percent of companies), followed by the EU (32 percent) and China (32 percent). Companies see the latter as having the most potential for economic, labor, and material volatility.

Figure 3: Disruptions faced by organizations are real and materially impact their operations

Figure 4: Scenarios posing the greatest concern to supply chain organizations

Sourcing & Outsourcing Strategies Companies are almost exclusively dependent on outsourced operations Currently, 78 percent of the organizations surveyed outsource labor, materials, finished goods, and/or manufacturing to third parties, while just over half obtain about 40 percent such goods and services from other regions. Only 1.5 percent fully outsource manufacturing and roughly one in every 10 firms manufacture between 60-99 percent of their products in other regions.

China’s low-cost status is now in question While China remains the low-cost frontrunner for sourcing and outsourcing, about 46 percent of

Figure 5: Perspectives on whether or not China remains a low-cost option the next 12-24 months

companies say the opposite is true. The top three countries where companies source or manufacture goods today include the U.S. (59 percent), China (42 percent), and the EU (38 percent). Over 50 percent of firms expect to maintain their sourcing/outsourcing strategies in 2014. Those that plan to increase sourcing and manufacturing will do so within the U.S. (48 percent), in China (33 percent), or in other Asia/Pacific

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survey summary Rim countries (27 percent).

Regulations are influencing outsourcing strategies A clear influencing factor on outsourcing decisions was the role played by regulations according to written commentary submitted by survey respondents. This was also apparent in risk-related concerns. As one supply chain professional put it, “[I am concerned about] disruptions due to additional governance and legislation put upon suppliers by our U.S. government (like Buy America and Conflict Minerals) that impede suppliers ability to provide their goods at a reasonable price.”

China plays dominant role in most supply chains When asked where organizations plan to decrease sourcing and manufacturing over the next five years, the U.S., the EU, and China topped the list. These three global regions are, however, also of most interest for sourcing and manufacturing right now – including China (16 percent), the U.S. (15 percent), and the EU (13 percent). Looking specifically at China, the survey found that nearly two-thirds of all respondents (67 percent) plan to use the country as a source of supply.

Figure 6: The planned role for China within companies’ sourcing and outsourcing strategies

China Strategies China is a mixed bag for supply chain strategies In assessing their companies’ Chinese sourcing and manufacturing strategies, 34 percent of survey respondents say they’re buying materials there to support manufacturing elsewhere, 30 percent are buying finished goods to sell in other markets, and 19 percent are operating manufacturing facilities in the country. Clearly, China remains a region of great interest among supply chain and sourcing professionals, nearly 60 percent of which rate their interest in the 7 to 10 range (on a scale of 1-10).

Cost the primary driver for China but other issues are revealing themselves Concerns like quality issues (63 percent), price inflation (45 percent), and wage growth (41 percent) persist for companies doing business in China, most of which (73 percent) either plan to increase or maintain current levels of outsourcing to the country.

Lower cost remains the clear driver for 53 percent of firms deciding to increase their presences in China.

U.S. plays a key role in strategies for both, moving toward and away from, China Of those companies planning to increase their presences within China, most will move away from the U.S. (31 percent), Mexico (19 percent), and Brazil (14 percent) in order to do so. And for those

Figure 7: Primary criteria for companies increasing China’s role within sourcing/outsourcing strategies

Figure 8: Primary criteria for companies decreasing China’s role within sourcing/outsourcing strategies

firms that are decreasing their presences in China, many will be moving to U.S. (23.5 percent) and Mexico (20.6 percent).

India, Eastern Europe, and Malaysia were among the top five destinations. Most indicated that they are exiting China in order to move operations closer to home, diversify suppliers and operations, and transfer manufacturing and/or sourcing to what they see as a lower-cost region. ■ Special Edition – January 2014 Supply & Demand Chain Executive 19

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executive report

Is Chinese Manufacturing’s Low-Cost Run Coming to an End? An in-depth look at the key factors that are expected to push the low-cost pendulum away from China

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or years, manufacturers have benefitted from China’s low labor rates as a critical benefit of outsourcing production to the region.

That attraction could be coming to a close as wage rates in China continue to grow at an accelerated speed that’s expected to outpace countries like Indonesia, Vietnam, and Mexico through the end of the current decade.

Currently only 10 percent of the average U.S. manufacturing wage, China’s wages will grow until they equal 25 percent of U.S. wages by 2015. Combine this fact with growing concern over supply chain risk and it’s clearly time for at least some of the world’s manufacturers of low-cost, low-value goods to source their products elsewhere.

“Recent studies suggest that China will lose its low-cost status over the next three years,” says IHS Senior Industry Economist Laura Hodges.

“With wage rates in China growing at an accelerated rate, we predict that the country will lose its low-cost edge for high-labor intensive products in the near term.”

The trend could have a significant impact on global organizations.

According to the 2013 Global Outsourcing & Supply Chain Risk Survey, conducted by Supply & Demand Chain Executive magazine, 26.9 percent of organizations have plans to increase sourcing and manufacturing to Asia-Pacific Rim countries (outside of

China and Japan), while 32.5 percent are still looking at China and 44.7 percent at the U.S. Just 25.4 percent of organizations plan to decrease their current levels of sourcing and manufacturing in China, with the primary drivers being the desire to move operations closer to home, work with a more diverse pool of suppliers and operations, and move to a lower-cost region.

China as a Production Powerhouse China’s role in U.S. trade has grown tremendously over the past decade. As its prowess among U.S. firms has increased, China has also played a much larger role in the end-to-end supply chains that it participates in. “Over the past decade,” says Hodges, “a larger and larger share of materials have been produced in China.” For example, the country currently produces almost 50 percent of the world’s steel, just over 40 percent of base metals, and nearly 60 percent of cement.

“China has truly emerged as a manufacturing powerhouse,” says Hodges, noting that the country also overtook the U.S. as the world’s largest car producer in 2009.

In 2010, China passed Germany as the largest

exporter and by 2020 it will take over the top spot as the world’s largest economy. Right now, for example, the U.S. represents 23 percent of the world GDP and China claims 9 percent. By 2020, the latter will rise to 19.6 percent and the U.S. GDP will fall to 16.9 percent. Clearly, China established a manufacturing advantage.

Additionally, other factors play an important role when assessing the total cost of doing business in China. Productivity gains, for example, have been strong and are often overlooked when developing complete manufacturing cost pictures. Real manufacturing output per worker in the country is currently $42,000 at an average hourly wage of $2.50, compared to $120,000 at $27 an hour in the U.S. “Productivity in China has nearly doubled since 2005,” says Hodges, “thus reducing the true impact of higher wages and making Chinese workers among the most productive in the world.”

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executive report Still Intact, but Slowly Changing

The fact that shipping rates have stabilized and capacity has increased in the wake of the economic recession is also helping China’s cause.

According to the Baltic Dry Index (BDI), shipping prices skyrocketed from 2005-2008 and then fell when the market crashed in late 2008.

“Rebound in trade and even fuel costs haven’t pushed the BDI any higher,” says Hodges. “There’s plenty of capacity and new ships coming online. Abundant supply has kept rates low and will continue to do so in the near future.”

However, rising wages will threaten its low-cost status. The average Chinese manufacturing worker earns approximately $3 per hour or more than $6,000 per year in base pay. This reflects a more than 12.5 percent growth over the last decade, according to Hodges, who sees strong upward pressure on wages beginning to surface in China.

“Minimum wages are rising by more than 20 percent annually in some provinces, where inflation is increasing along with higher food and energy costs,” Hodges explains.

Wages in China are expected to more than double in the next 10 years and grow 8-11 percent annually over the next decade.

“This year we expect growth to be on the lower end of that range and then pick up as we move closer to 2015,” Hodges adds.

Using the steel casting sector as an example, Hodges uses material costs, worker productivity, and average manufacturing wages to estimate a 23 percent cost advantage currently in China versus in the US. And while exchange rate appreciation and supply chain risks do cut into these double-digit savings, the offshoring trend continues as companies seek out affordable manufacturing options.

That trend will level off as China becomes a less attractive target for companies, and as organizations look to other countries for less expensive labor and/or closer proximity to home. Right now, Bangladesh and Cambodia are estimated at 25 percent of the average Chinese wage. And while such countries often pose new challenges for firms that do business there, companies like IHS provide organizations with a complete picture when evaluating a country during the sourcing decision process.

“It’s important to be aware of each country’s unique risks before setting up operations there,” advises Hodges.

“Right now, it’s the high-labor, lowmargin organizations that should be using tools like IHS and the World Bank’s Annual Cost of Doing Business Survey to analyze global labor markets and find good sourcing targets.”

It’s Time to Start Sourcing Elsewhere With China on track to become less competitive for basic manufactured goods by the end of the decade, Hodges says global firms must acknowledge the fact that it’s time to diversify sourcing options by taking a closer look at other countries.

What you need to know: ■■ China is on track to become less competitive for basic manufactured goods by the end of the decade.

■■ Over the next decade, Chinese wages are expected to increase from 10% of U.S. wages to 25% of U.S. wages.

■■ While it still may make sense to source from China, the margins are narrowing.

■■ China does retain manufacturing advantages, and manufacturers need to look at the complete picture before making their next sourcing decision.

And the 2013 Global Outsourcing & Supply Chain Risk Survey suggests that they are. While China is still seen by many as a low-cost frontrunner the next 12-24 months, there is a significant number who have begun to say the opposite.

“China will retain its low-cost status, but it does depend on the labor intensity of the manufacturing process itself,” she says, noting that labor remains the primary advantage to operating in China, and those costs are rising. “Brace yourself for wages to grow nearly 10 percent this year.”

As China’s labor prices rise, its lowcost manufacturing status will decrease.

“It’s time for producers of high-labor, low-margin goods to start looking for alternative, low-cost countries, such as Indonesia or Vietnam,” says Hodges, “or options that are closer to home, like Mexico.” ■

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final thoughts

A Bold Prediction: MRO Supply Chains Become Strategic in 2014

By Barry Hochfelder

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oday, most business leaders don’t associate organizational, transformative changes with their companies’ maintenance, repair, and operations (MRO). Yet, this critical supply of spare parts, materials, chemicals, equipment and supplies is necessary to keep plant and facility assets operating safely at optimal levels of performance.

According to industry experts, companies spend millions (and in some cases, billions)—more than 40 percent of their annual expenditures—consuming precious working capital on maintenancerelated costs. And, MRO inventory is literally stored worldwide, across hundreds of individual locations peppered throughout the manufacturing asset base.

Enter DuPont, the 200-year-old recognized global leader. Its name has been synonymous with “excellence,” which many attribute to the science and innovation behind the company’s products. True, but the firm is also regarded as a pace-setter on the transformative journey toward Operational Excellence.

At DuPont, MRO plays a role within its Operational Excellence model—a strategic commitment that seeks to deliver global business competitiveness.

MRO supply management is featured within a process for extracting “the maximum value from a manufacturing asset base,” Asset Productivity. DuPont attributes this as having delivered a visible competitive advantage—a 3 percent to 5 percent yearly increase in

cost productivity globally for the past 10 years.

In Delivering Operational Excellence to the Global Market, DuPont describes this integrated systems approach and the associated vital steps to achieving Operational Excellence. It provides a blueprint to help organizations apply best practices to drive sustained improvements and business benefit from three pivotal areas: Asset Productivity, Capital Effectiveness, and Operational Risk Management.

It begged the question, “Would industry as a whole dramatically change its view of MRO from a tactical cost of doing business to a key contributor to successful enterprise strategy?”

Reading the tea leaves, some may agree that this isn’t much of a leap.

Evidence suggests that business leaders who consider their asset performance dramatically favor asset availability and uptime over maintenance efficiencies and cost reduction. Is it too far-reaching to connect Operational Excellence with Asset Performance and MRO Supply Chains? Makes you wonder.

The Untapped Opportunity One of our magazine’s Top 100 vendors is IHS Inc. Among other things, the company specializes in MRO supply chain performance.

They tell us that there is a very lucrative opportunity for organizations to tap into their MRO supply chain and unlock significant enterprise benefits.

This is especially true for assetintensive companies that rely upon significant asset and human capital

investments to operate effectively.

MRO improvement initiatives can be self-funding from simple benefits such as 10 percent reduction in inventory, 35 percent reduction in black stock, a 15 percent reduction in annual MRO spend, and a 95 percent reduction in duplicate items.

Moreover, the data governance, analytics, and best practices put in place serve as a foundation for enterprise strategies such as operational excellence, operational risk, or talent enablement.

Board room to storeroom, MRO supply chain performance seems like a proverbial “win-win” with limited downside, fine print, or caveats.

Companies can mine their untapped potential for tangible bottom- and top-line benefits, while contributing to their most critical strategic initiatives.

I’m putting a stake in the ground now and making a bold prediction for 2014: the light bulb finally goes off and industry begins to shift its thinking about MRO. 2014 will begin its ascent from dirty, shop-floor “wrench-time” tactics to a strategic enabler of operational excellence —just the kind of transition we’ve witnessed from regulatory compliance assurance to enterprise sustainability.

How does your organization view its MRO materials and the supply chain needed to sustain assets—a tactical cost of doing business or strategic enabler of enterprise excellence? I want to know. As for DuPont, in today’s global marketplace, such “excellence is not an option; it is essential to success.” ■

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Exceed Targets. Expand Margins.

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The IHS Pricing & Purchasing Service provides 10-year commodity and wage forecasts, as well as detailed analysis of prices, costs, demand, productivity, and margins enabling organizations to: Time key buys Negotiate contracts Evaluate pricing

Source globally Estimate costs Benchmark spend

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