Supply & Demand Chain Executive October 2014 Special Issue

EXECUTIVE INTERVIEW: Striving for Procurement Excellence p.5 November 2014

Global Solutions for Supply Chain ROI

Procurement Excellence Accelerate Performance in 2015 OUTLOOK

Where are the PRICING PRESSURES in 2015? p.7 How to Effectively EVALUATE Sourcing Risks and Opportunities p.12 Key Steps to IMPROVE PERFORMANCE Metrics p.22 INSIGHTS REVEALED Asia Labor Market p.14 Global Sourcing/Risk Survey Results p.16 Pulse of the Industry: MRO p.19

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Industry information and expertise… from copper to communications Every decision matters.

That’s why leaders rely on IHS to help them make the best choices.

As the premier provider of global market, industry and technical expertise, we understand the rigor that goes into decisions of great importance, guiding them with thinking that matches the scope of their needs.

IHS… when decisions matter

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November 2014

table of contents Volume 15

Issue 5

INSIDE 4 Editor’s Note

Will You Compete at the Next Level?

Procurement excellence requires mastery of operating within a new global context

5 Striving for Procurement Excellence

For today’s best-in-class organizations, continuous

procurement improvement is a state of mind— not a destination

7

IHS Material Price Outlook

Where Are the Pricing Pressures in 2015?

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

SPECIAL EDITION

Facing a New World

12 Supply Chain Risk: How to Effectively Evaluate Sourcing Risks and Opportunities

This year’s theme at the World Economic Forum (WEF) annual meeting was “The New Global Context.” The WEF said, “We live in a fast-paced and interconnected world, where breakthrough technologies, demographic shifts and political transformation have far-reaching societal and economic consequences. More than ever, leaders need to share insights and innovations on how best to navigate the future.”

Organizations can use this in-depth look at the framework to accurately evaluate risk and purchasing opportunities

14 Emerging Asia Challenged by Labor Market Dynamics

Businesses across the region face tough decisions as they struggle to pay workers higher wages while competing for skilled workers

15 Modeling the Effects of Weather on Crop Price Volatility

IHS’ Global Agriculture Team developed a 15-year scenario analysis quantifying the effects of weather and climate change on global agriculture markets

In this special edition, we’ll examine some of the ways supply chain operations can deal with this “New Global Context.”

16 Global Outsourcing and Supply Chain Risk

More than two-thirds of companies view the mitigation of supply chain risk as significant to their operational plan

IHS Contributors

18 Shifting Gears: The Changing American Rail Landscape

Tevia White, Sr Solution Marketing Manager Rory King, Director, Thought Leadership

With the coal industry diminishing, the railroad industry

Laura Hodges, Director, Pricing & Purchasing

turns to alternate sources of business to keep itself on track

Katie Tamblin, Director, Supply Management Ana Hilstad, Sr Solution Marketing Manager

19 Pulse of the Industry

Jeff Ladner, Sr Director of Operations John Mothersole, Director, Lead Nonferrous Metals Ryland Maltsbarger, Principal Economist, Agriculture Howard Rappaport, Senior Director, Chemicals John Anton, Principal Economist, Ferrous Metals Jason Kaplan, Sr Manager, Pricing & Purchasing Brandon Kliethermes, Senior Economist, Agriculture

Companies are paying more attention to maintenance, repair and operations, but not as quickly as they should

22 Improve Performance Metrics through Integrated MRO Management Inconsistency can have dramatic effects on the MRO supply chain and disrupt asset management programs

John Scholle, Sr Economist

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November 2014 • Volume 15 • Issue 5

editor’s note

®

Global Solutions for Supply Chain ROI

Will You Compete at the Next Level?

Procurement excellence requires mastery of operating within a new global context

By Barry Hochfelder

T

he World Economic Forum kicked off 2015 with its Annual Meeting convening under the strategic theme of “The New Global Context.”

It said, “We live in a fast-paced and interconnected world, where breakthrough technologies, demographic shifts and political transformations have far-reaching societal and economic consequences. More than ever, leaders need to share insights and innovations on how best to navigate the future.”

To me, this vividly depicts the challenges and opportunities confronting our readers’ organizations and the increasing role that procurement plays in determining their company’s success.

Most procurement organizations have a seat in the C-suite and drive strategic imperatives in areas such as innovation, quality or sustainability. The challenge for many is that they know where they want to go, but can’t get there—largely due to talent shortages, a predisposition towards tactical procurement and difficulty navigating external influences on their business.

According to global information and analytics firm, IHS, the next generation of performance will come from continuous improvement, knowledge sharing and better use of information. In order to benchmark, compete and operate more effectively in this next generation, procurement must understand the context of the company, its operations and its supply chain in relation to interconnected global markets and other external influences.

To give us a better understanding of what to expect, we asked IHS to contribute to this Special Edition and examine some of the global issues affecting procurement in 2015.

On Page 7, we begin a comprehensive annual preview of key global commodities in the 2015 Material Buyer’s Guide. Recognized industry experts break down the key issues, 4

risks and buying opportunities for everything from steel and chemicals to skilled labor and agriculture. Arm yourself with insight to avoid pitfalls and capitalize on opportunities.

Speaking of agriculture, did you ever wonder how weather variability and changing climates impact crops around the world?

Find out on Page 15. Everyone from financial lenders and equipment manufacturers to chemical producers of fertilizer will have something to gain from new studies modeling the future impact of weather on global crops.

Asia continues to be a hot topic. On Page 14, we discuss whether an emerging Asia hit stumbling blocks in its labor market. On Page 16, we observe trends and shifts in sourcing strategies, as we reveal findings of our annual outsourcing and risk study. We examine regional hotspots around the world according to your peers, as well as their thoughts on increasing risk in the supply chain.

Energy is increasingly important. On Page 18, we discuss the changing face of energy in the United States, and what changes in the coal and unconventional energy segments mean to domestic rail transport that may impact your company or its transportation costs.

So, it’s not your imagination—global pace, complexity and competition are all accelerating around you and your organization. To navigate this new global context and compete at higher levels, most companies are focusing on procurement excellence as part of a broader pursuit of operational excellence. In fact, IHS research shows that more than 70 percent of organizations have operational excellence goals and objectives driving supply chain and procurement initiatives right now.

Thus, we have begun a new chapter in procurement’s history, which requires knowledge and mastery of the new global context in which organizations operate within.

How well will you compete at the next level? ■

Supply & Demand Chain Executive Special Edition/November 2014

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executive interview procurement excellence

Striving for Procurement Excellence For today’s best-in-class organizations, continuous procurement improvement is a state of mind—not a destination

By Barry Hochfelder

W

e’re midway through what will probably wind up as a multi-decade transformation in the way that organizations procure goods and services. According to Katie Tamblin, Director, IHS Supply Management Solutions, this revolution kicked off about 10 years ago as procurement came into focus as a game-changer for companies with the potential to add direct value to the bottom line.

“We see a shift in thinking and a new recognition of the positive impact that procurement excellence can have on important performance indicators, like costs and spending,” said Tamblin. “Business leaders are able to get out in front of this shift and demonstrate that, when done well, procurement can transform the way an organization operates.”

This paradigm shift became even more prominent over the last few years thanks to a prolonged recession and the limited global growth that took place during the downturn.

These two forces greatly pressurized margins and pushed companies to become more creative in extracting profits from their normal operations. “To grow profit in the current environment is seen as noteworthy,” Tamblin explained. “Many of the organizations achieving this goal are limiting costs rather than growing revenues spectacularly.”

As part of their quests to grow profits, organizations are focusing more intensely on procurement knowing that the best and most effective way

to limit costs—without massive operational impacts—is to improve the way you buy products and services.

Concurrently, financial analysts that track public companies are starting to ask more questions about procurement, said Tamblin, and paying attention to how firms are operating within certain roles, such as sourcing and procurement.

“In order to be able to analyze your procurement operation and think strategically, you must have good data, which is a foundational building block of procurement excellence,” said Tamblin, who sees large organizations save millions in annual spend by implementing procurement excellence initiatives. “These examples are making organizations sit up and take notice of the importance of procurement excellence as a driver of improved financial performance.”

Undertaking Transformational Changes When undertaking transformational changes in procurement, leading organizations leverage internal and external data to shift focus to strategic buying vs. tactical procurement.

When those elements are combined, organizations gain unprecedented visibility over their procurement functions and better leverage its role in increasing profitability. The goal, said Tamblin, is to use good, harmonized, accurate data to assess spend, understand supply markets and make better buying decisions going forward.

“Companies that have good, harmonized data around their spending tend to be the best performers when

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it comes to procurement,” said Tamblin. “Put simply, you have to know what you spend money on in order to improve the way you spend that money.” The manufacturer purchasing raw materials, for example, must gain an understanding of the change in spending year to year in order to proactively pinpoint (and address) any significant fluctuations.

More Strategic Buying Plans Once equipped with a high level of detail around where procurement dollars are going on a daily, monthly, quarterly and annual basis, organizations can make significant strides toward procurement excellence. Analyzing data, for example, becomes easier, and issues like price discrepancies can be identified and mitigated quickly.

As Tamblin pointed out earlier, strategic focus is another critical component of procurement excellence.

Unless team members are on board with the initiative—and until they are ready to use the data for more effective decision-making—traditional, tactical procurement habits will likely prevail. Tamblin said that, historically, buyers would receive a need from the manufacturing floor for X number of parts, for example. After putting the order out for bid, buyers would select a vendor, and procure the good or commodity. This tactic is often referred to as “three bids and a buy” procurement.

Today’s best-in-class organizations are taking a more strategic approach to buying. Rather than being reactive to internal needs, for example,

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executive interview procurement excellence procurement agents are reviewing what was spent last year, assessing budgets and planning purchases out at least a year in advance. By donning their strategic thinker hats, buyers can more readily make proactive decisions. In some cases, those plans may center on acquiring 600 widgets from a single supplier that offers bulk discounts. In other situations, it may pay to wait until mid-year to buy those widgets—based on expected price drops—often driven by fluctuating commodity prices that form the input costs to widget production.

“Rather than saying ‘I need 600 widgets for my production line’ and buying them from the cheapest provider,” said Tamblin, “procurement professionals are factoring in all of the widgets that the firm will need over the coming year, reviewing future costs and contract structures, and coming up with more strategic buying plans.” An integral part of strategic buying plans is focused on an understanding of where markets are going. According to Tamblin, reactive, backward-looking strategies are fundamentally limited in their ability to contribute to cost savings.

However, proactive, forward-looking strategies, based on future supply market conditions, can transform procurement decision-making and contribute millions of dollars in savings to an organization’s bottom line.

Cycles of Improvement Achieving procurement excellence sounds straightforward in theory, but these types of initiatives can quickly get sidelined in today’s rapidly shifting business environment. “The ground is constantly shifting beneath us,” Tamblin acknowledged, “and, to quote a chief procurement officer (CPO) who spoke at a recent procurement event, as soon as you complete a cycle of improvement, you need to start over and do it again. As soon as you think 6

you’re done with that three- or fiveyear plan, you’re already behind the curve again.”

Often, the most difficult element of achieving procurement excellence is managing change. Just because senior leadership recognizes a need for new procurement practices, it does not necessarily mean that front-line buyers or facility/project managers appreciate the need. Many tactical procurement professionals can be reluctant to change and reticent to apply new, strategic principles to their existing buying practices. Tamblin recommended that procurement leaders recognize the need for extensive change management, and execute procurement excellence initiatives with relentless focus and discipline.

In this dynamic, unpredictable environment, Tamblin said that maintaining a consistent, but evolving focus on procurement excellence is the best way to overcome immediate and future challenges. In other words, you don’t just achieve procurement excellence and then stop the effort; you keep pushing on for more improvements and accomplishments to support longterm organizational goals.

Developing Procurement Teams Having the right people on board and in the right positions also goes a long way in supporting long-term procurement excellence goals. The next step is to ensure that those professionals are well-equipped to not only manage supplier relationships, but also embrace and support the organization’s improved approach to procurement.

“Procurement is a very diverse department that many times includes buyers who were doing things their way for the last 10 years,” said Tamblin. “Buyers not only have to understand how to procure the widgets, but to truly support a culture of procurement excellence, they also have to understand how the price

of those widgets behaved in recent months and what it will do over the coming months.”

Transforming your procurement practices will take time and require a shifting skill set for your colleagues.

Building a strong skill pipeline is integral to creating lasting, positive change within the organization. Managing change includes training your teams and fostering talent at all levels within the supply chain organization.

Tamblin said that, in some cases, buyers who are more tactical in nature can be paired up with strategicthinking category managers who are charged with setting the strategy around certain sets of buys. When the latter sees that widget prices are on track to rise later in the year, he or she can suggest that all buyers procure the products at the best possible price right now—rather than later.

“Ideally, you want a centralized strategic thinker who can apply the market conditions, and his or her understanding of the market conditions, to a specific situation,” said Tamblin, “and then make the best procurement decisions around that information.”

Many organizations are implementing training and career path tools to promote skill set alignment and develop less experienced talent. By rewarding innovation and strategic thinking, the procurement team can evolve over time to foster effective decision-making at all levels.

With an increasing number of organizations focused on reducing costs and boosting performance, more and more of them are turning to continuous improvement strategies to achieve those goals. By combining information, analytics and expertise with best practices, companies can pinpoint their weak spots, and effectively address those issues on the path to attaining high-level goals like organizational profitability and overall corporate performance. ■

Supply & Demand Chain Executive Special Edition/October 2014

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2015 material price outlook

IHS Material Price Outlook:

Where Are the Pricing Pressures in 2015?

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

T

he demand environment is improving and supportive of commodity prices.

After declining in the first quarter, U.S. gross domestic product (GDP) rebounded at a 4.6 percent annual rate in the second quarter of 2014. Real GDP is now projected to increase 2.2 percent in 2014 and 2.7 percent in 2015, supported by balanced gains in household and business spending, according to IHS Director Laura Hodges. With federal bond purchases ending in October 2014, however, a potential headwind to material price escalation is predicted. As for interest rates, Hodges says that formal increases won’t come until mid-2015 at the earliest.

Other forces impacting the world economy right now include China’s housing market, which continues to deteriorate—with falling prices weighing on residential construction starts. Although targeted stimulus may help near-term growth prospects, Hodges says, long-term structural risks are yet to be addressed. “That’s something to watch closely as you establish buying plans for 2015.”

Based upon insight from the IHS Pricing & Purchasing Service,

Stronger Growth Is Coming

Source: IHS

this report provides vital market, price, and cost information for critical commodities in order to help organizations make informed sourcing and procurement decisions through 2015 and beyond.

The Carbon and Stainless Steel Outlook Throughout 2014, IHS continued to track a significant oversupply in the carbon steel market. Combined with the threat of imports, this oversupply continues to suppress prices. North America is faring best through this period, according to IHS Senior Manager Jason Kaplan, although some prices saw increases through the

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year, low utilization is keeping mill profitability low. “In 2015, we’ll see capacity forcibly removed from world supply and a subsequent price spike,” says Kaplan, who predicts a buyers’ market for carbon steel through the end of 2014 followed by a slip into a sellers’ market in 2015.

“Mills cannot keep losing money forever,” says Kaplan. “In 2015, capacity will be forced out of the market and prices will spike up as supply fears increase.” For buyers, that could mean a shift to a sellers’ market during the coming year.

“Delivery will be more of a worry than price.” To offset these trends, Kaplan advises buyers to qualify at

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2015 reduction, material price outlook discipline and lifting demand Capacity production allows “stainless” to avoid “carbon’s” disruption next year now, rather than buying on the spot.

Stainless 304 ($/metric ton) 5,000

United States

Europe

China

6,000

4,500

5,000

4,000

4,000

3,500

3,000

304

2,500

2012

2013

2014

2015

0 2006

2016

As always, avoiding them Several factors willbrings influence calmer price profiles chemical markets in 2015, including

2008

2010

© 2014 IHS

least two sources before procuring carbon steel and to also try to lock in contracts. For 2015, spot buyers should budget prices that are 10 percent higher in North America, and 15 to 25 percent higher in Europe and Asia. “Even if your supply is secure,” he concludes, “beware that others will need to source material.”

In assessing crude steel production economics, Kaplan says that mills need at least 80 percent utilization to be profitable, although some can sustain lower utilization and maintain profitability. He predicts a benign pricing structure through the remainder of 2014, but says that supply shock could drive prices up during the first quarter.

“We see additional capacity coming online after the supply shock,” says Kaplan, “with the price spike dissipating by 2016.”

The stainless steel market remains better balanced, but is still historically cheap, according to Kaplan. He points out that stainless steel prices are rising steadily due to demand and reduced supply. Nickel (and molybdenum) stabilized and will 8

2016 still well below 2008’s levels.”

430

Nickel and moly have leapt this year Chemicals

Capacity reduction, production 2,000 discipline and lifting demand allows stainless to avoid carbon’s disruption1,000 next year. — Source: IHS

3,000

2,000 2011

Stainless alloy“Prices surcharges will rise steadily over the next ($/metric twoton) years on base prices, but will end

trade in narrow ban, he adds.

Although a risk, Russian sanctions and the Indonesian export ban are unlikely to affect nickel supply or price during the coming year.

“Stainless is more consolidated than the carbon steel market. Supply and demand may not yet be fully in balance, but they are a lot closer than the carbon steel market,” Kaplan adds, “and increasing demand is making mill profitability sustainable within the stainless steel market.”

He advises buyers to lock in prices

energy prices (crude and natural gas), supply issues (new capacity/ operational sustainability) and demand growth. IHS Senior Director Howard Rappaport says that these forces can take precedence in the market, and either drive prices up or down. “There’s new capacity coming online in several regions, and also the issue 2014 sustainability 2016 of2012 operational and stability,” he notes. “We had some unexpected outages and13extended maintenance downtime recently, for example, that influenced supply.”

Natural gas is a major driver in North America and the Middle East, while other regions rely on crude oil.

Waves of new capacity are coming in the U.S. (based on ethane and propane), however, it will be at least two to three more years before we see a major impact, says Rappaport.

Europe will continue to consolidate capacity, while the U.S., Asia and the Middle East continue building.

“Chemical industry margins are

Henry Hub Natural Gas (USD/mmBtu)

4.5 4.1 3.7 3.3 2.9 2.5

2010 2011 2012 2013 2014 2015 2016 Source: IHS

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2015 material price outlook robust in the U.S. and are expected to erode slowly over the next 18 to 24 months,” says Rappaport, adding that supply issues and price volatility associated with propylene and butadiene will work themselves out with new “on-purpose” plants.

“The U.S. will have to become more of an exporter as new capacity comes on,” says Rappaport. Buyers can expect at least another two to three years before the wave of new capacity has a significant impact on the situation with both supply-demand and pricing in the U.S. “Markets are still balanced to tight and the wave of new capacity coming will have an influence on market conditions,” Rappaport says, “but not right away.”

The U.S. ethylene market will remain balanced to tight over the next year, with effective operating rates at or above 95 percent. The U.S. and the Middle East will continue to export ethylene and derivatives due to cost advantages.

Concurrently, regional ethylene prices will be relatively flat, with the U.S. average price (mixed contract and spot) trending slightly lower, says Rappaport.

Chemical industry prices are trending near record highs for many products, according to Rappaport, who expects producer margins to erode slowly over the next 18 months. “We don’t think prices

are going to be dropping all that rapidly,” he says. A changing profile of propylene sources in the U.S. will result in an emergence of additional capacity, says Rappaport, with more coming from propane dehydro (PDH) and less coming from ethylene crackers.

As industry feed-slates trend lighter, propylene production from both steam crackers and refineries will not be able to keep pace with demand growth. Thus, on-purpose production remains the main avenue to support that growth. Rappaport says that PDH in the U.S., Middle East and Asia, along with coal to olefins in China, are winning the on-purpose race. “The PDH units in China being added will be based on propane imports that compete with the fuels market,” he notes. “China coal to olefins will face water and environmental issues, and are very high capital cost.”

For 2015, Rappaport predicts a smoother price profile with slight downward potential “if we see any softening in energy prices.” He sees no need for buyers to build inventories if the chemical and refining industry complex is running smoothly, and expects producers to attempt to pass along any cost increases, no matter how small. “New capacity will not be here in time to have a major impact on 2015 prices,” says Rappaport.

“We are definitely coming down from peak pricing and some modest relief is in sight (some of it will be in the form of reduced volatility),” says Rappaport, “with increases in Chinese consumption as one factor that could temporarily soak up some of the available spot material and create a temporary tightening of supply.”

Global Labor Markets On a global level, the strength of the labor markets is reduced or at least stabilized in many countries. Wage growth was scaled back for many countries, says Hodges, and growth in emerging markets was hit hard. “One of the stronger markets—the United States—will see improvements next year,” says Hodges, “but even there, wages will only lift from 2 percent this year to closer to 2.5 percent over the next two years.”

That said, Hodges sees pockets of growth pressuring wages higher for some occupations and sectors.

“Expect to pay more in these pockets of growth, in the U.S. and even globally,” she says.

Pointing to Manpower’s most recent Talent Shortage Survey as an example, Hodges says current shortages have yet to reach prerecession levels in terms of the percentage of firms reporting difficulties filling jobs. Overall, just under 40 percent of employers are

Pockets of the US are tight

Wage outlook has scaled The wage outlook wasbeen scaled back. back

Pockets of the U.S. are tight.

Unemployment Rate, 2015Q1, Percent

(Percent change in 2015)

12 10 8 6 4 Percent

2

3.0 to 4.7 4.7 to 5.8

0

Australia

Brazil

China

2013Q3 Forecast

Germany

Mexico

2014Q3 Forecast

5.8 to 6.5

South Africa

6.5 to 8.0

Source: IHS © 2014 IHS

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Source: IHS

46

39

© 2014 IHS

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2015 material price outlook No discernible wage pressure … so far

Markets tighten for US college graduates

No discernible wage pressure … so far.

Markets tighten for U.S. college graduates.

US average hourly earnings

Unemployment rate, college graduates (Percent)

Percent change vs. year-ago

4.5 4.0

6

3.5

5

3.0 2.5

4

2.0

3

1.5

2

1.0

1

0.5 0.0 2007

Source: IHS

2008

2009

2010

2011

2012

2013

44

© 2014 IHS

having difficulty filling jobs. In the Americas and Asia-Pacific (APAC) regions, that number increases to 50 percent. Positions that are hardest to fill include skilled trades, engineers, technicians, sales representatives and accounting/finance staff.

With labor market conditions improving in the U.S. and with the domestic economy adding 1.6 million jobs during the first eight months of 2014 (compared to 1.4 million jobs during the same period in 2013), Hodges says conditions could turn the corner in the U.S. in 2015. And while the largest share of jobs created are in low-paying industries (trade, transportation, administration, leisure and hospitality), she says the market is tightening for U.S. college graduates. “That’s something to be concerned with going forward,” says Hodges, “knowing that you may potentially be paying more for these types of workers.”

Geography also plays a role in the U.S. labor market, particularly in states like Texas with an unemployment rate close to 5 percent. “Texas is a real star of the U.S. economy; that’s where the action is,” says Hodges, “and where you can expect to pay a higher aboveaverage rate for your workers.”

In 2015, Hodges says finding qualified and skilled workers will be a challenge. Labor markets are

0 2007

2014

2008

2009

2010

2011

2012

2013

2014 45

© 2014 IHS

improving in the developed world, including the U.S., Japan, the UK and Germany, but this is from a relatively low growth rate. “Workers in India and China will continue to receive strong wage gains due to strong demand and inflation,” says Hodges, who concludes with, “Pockets of growth (particularly skilled workers) should be your concern during the coming year.”

Agricultural Outlook Corn World corn production is forecast to expand over 2013, according to Brandon Kliethermes, IHS Senior Economist, who says that after three years of low stocks, production gains and corn carry-over from 2013/14, the 2014/15 stocks will grow significantly.

“Corn stocks are forecast to remain high as production continues to outpace consumption,” he says.

The surge in corn prices over the last three years led to a significant increase in world corn area, says Kliethermes, who predicts a decline in world corn area over the next two years. “In 2015/16, area harvested is expected to be mostly flat with the previous year, but risk remains for further retracement given the drop in global prices,” he adds.

World corn prices continue to soften following a large global corn crop. For the rest of the calendar year,

Kliethermes says corn prices should slide lower, though at a slower rate than June, through harvest. Finally, he says that, for the 2014/15 season, an expansion in corn for ethanol use will keep corn prices from settling well below $3.5 per bushel.

Wheat World wheat production is expected to be up in 2015/16, although for the short term, world wheat production will grow at a slower pace. “World wheat production will keep up with demand, allowing stocks to grow year over year,” says Kliethermes.

Global wheat prices continue to be pressured lower with a large global supply estimate for 2014/15.

And, as milling quality wheat was downgraded in some countries, a premium for milling quality wheat is expected. At the same time, U.S. durum prices also witnessed major price support following a lower expected production, a slow crop development/harvest and higher shipping cost. “In general,” Kliethermes predicts, “longer term wheat prices should ease further through the first half of 2015.”

Cotton Global cotton production continues to outpace growth in demand, leading to an increased level

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2015 material price outlook of stocks in 2014/15. Concerns of the Indian monsoon worsening lessened, says Kliethermes, planting progressed well and areas increased. “Declining global area during the next couple seasons follow lower prices,” he adds, “however, competing crops also have lower prices, weakening the magnitude of decline.”

he says, and “there appears to be some rebuilding going on with both heifer and beef cows.”

In terms of cattle supply, Maltsbarger says that calf crops will reach a bottom in 2014. “We’re optimistic about this and also about the breeding activity, which should show up in a significant gain in calf crop in 2015,” he notes, adding that pricing could fluctuate based on activity in the sector in the coming year. “I’m somewhat doubtful that we’ll see beef prices rally to the level that we saw in 2014.”

Livestock It was a record year for the U.S. livestock industry, thanks in part to improving consumer demand for meat products. “Looking at the index numbers, we can see improvements in consumers’ willingness to pay more for meat products,” says IHS Principal Economist Ryland Maltsbarger.

“That’s good news for the meat and livestock industry in general, including beef, pork and chicken.”

In reviewing 2014 U.S. inventory and cattle slaughter levels, Maltsbarger says that herd expansion is on the rise mainly in response to calf prices. In 2014, beef cow inventories began the year about 5 percent below the five-year average,

Hogs and Chickens

the coming year, tight hog suppliers will likely be prevalent. “We kept up a stronger pace of hog slaughter, which will lead to lower pork prices through the end of 2014 and into 2015,” says Maltsbarger.

The broiler market continues to post strong net returns, according to Maltsbarger, who says 2014 production is weak in the sector despite a strong net returns outlook.

“The year ahead appears likely to be stronger,” he says. “We saw the industry begin to hold steady during the third quarter—a time when you’d usually see seasonal declines.”

Starting in late 2013, the spread Conclusion of porcine epidemic diarrhea virus As evidenced by this report, (PEDv) significantly reduced commodity prices will remain hog production, according to volatile into 2015 and beyond. By Maltsbarger. “That reduction led actively monitoring weekly—or to a ramp-up in prices through the even daily—price movements, first three quarters of 2014,” he says, trends and other forces, buyers can noting that lower-than-expected position their companies for success breeding activity also helped to in markets that aren’t always easy to drive those prices up. And while predict. ■ GLOBAL AGRICULTURE MARKET OUTLOOK / MAY 2014 sow farrowing was up modestly in July and August in anticipation of

Livestock Outlook US cattle supply outlook Livestock Outlook: U.S. Cattle Supply Outlook 38

15.0

37

14.5

36

14.0

35

13.5

34

13.0

33

12.5

32

12.0

31

2007

2008

2009

2010

2011

Calf Crop

2014

2015

2016

2017

2018

2019

11.5

Source: IHS © 2014 IHS

SDC_IHS1014_07-11_PriceOutlook.indd 11

2013

Cattle on Feed, Jan. 1

Source: IHS

© 2014 IHS

2012

Cattle on Feed (Million Head)

Calf Crop (Million Head)

2015 Calf Crop Looks For a Rebound, Cattle Placements Continue to Struggle

Special Edition/November 2014 Supply & Demand Chain Executive 11 45

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sourcing risk

Supply Chain Risk: How to Effectively Evaluate Sourcing Risks and Opportunities An in-depth look at a framework organizations can use to accurately evaluate risk and purchasing opportunities

By John Mothersole Supply Chains Expand in Risky Geographies When it comes to identifying supply chain risk and effectively tapping into global business opportunities, many organizations overlook the fundamentals and wind up making wrong and costly decisions. Earlier this year, when IHS and Supply & Demand Chain Executive magazine surveyed supply chain executives, they learned that 50 percent of executives view China as one of the most likely sources of volatility within their supply chains.

Curiously enough, 25 percent of the respondents pinpoint China as an area where they were likely to expand their supply chains in the future.

This brings up a pressing question: Why would firms knowingly expand their supply chains in countries that

they know pose the most risk and potential for volatility? “We believe the answer lies in a fundamental mispricing of risk,” says John Mothersole, IHS economist. “This situation can be avoided by joining country risk analysis and price forecasting analysis.”

Take commodity grade steel sheet, for example. Used to make everything from automobiles to air conditioners, steel sheet is produced in several countries around the world. “Because of this international scope,” says Mothersole, “companies can take a step back, and look at the price and risk profiles in many different regions.”

The process starts with a thorough country risk analysis through which organizations can develop

unique risk profiles for specific source decisions based on the sourcing relationships themselves.

A steel purchase, for instance, is transactional in nature. There’s no servicing contract associated with the buy, no replacement parts to worry about and very little quality differences between countries. “As a result,” says Mothersole, “the risk profile for steel is fairly simple.”

Establishing Risk Probabilities Next, says Mothersole, establish subjective probabilities for these three key risks: enforceability of private contracts, losses due to corruption and losses due to crime. Enforceability of private contracts carries much of the weight, he notes, because the buyer’s goal is to get his or her hands on the

Country Risk Scores Weight

Japan

United States

Germany

Turkey

Brazil

Mexico

China

Enforceability of Private Contracts

60%

2

2

2

18

10

12

25

Losses due to Corruption

20%

5

5

8

34

58

60

50

Losses due to Crime

20%

2

10

10

30

57

84

42

2.6

4.2

4.8

23.6

29

36

33.4

Steel Sheet Risk

Source: IHS Global Risk Service, 2014Q3 Forecast

12 Supply & Demand Chain Executive Special Edition/November 2014

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sourcing risk Hot-Rolled Sheet Price Comparison Europe

China

United States

Brazil

Japan

Mexico

Turkey

1500

1200

900

600

300

2009

2010

2011

2012

2013

2014

2015 Source: IHS

Identify Supply Chain Risk and Opportunities

steel—and because most producers possess histories of low crime and corruption.

After developing a forecast for risk and price, you need a framework to combine the two together. Because risk scores vary from country to country, it’s important to reduce that dispersion and ensure the risk section doesn’t do all of the heavy lifting in the final calculation. “Take the natural log of each of these scores to compress them down,” says Mothersole. “In the end, you still have relative differences, but they are slightly smaller than they were previously.”

Steel Sheet Country Risk Scores The risks laid out in the Country Risk Scores table illustrate the probability of the triggering of a defined event. In this case, such an event would either be a worsening of contract enforceability, or an increase in losses from corruption or crime. Not surprisingly, the U.S., Japan and Germany lead from a risk perspective. “What may come as a surprise,” says Mothersole, “is China’s position as a high-risk country due in large part to problems with contract enforcement.”

In assessing price forecasts for steel, the key factors to consider include raw material prices, wage rates, productivity, profitability, and supply and demand for each country. This information can then be used to build forecasts for those countries. As you can see from the chart above, the Latin American producers (Brazil and Mexico) are notable outliers on the high side, whereas the Asian producers (China and Japan) are on the lower end of the pricing picture.

The final step in effectively identifying supply chain risk and purchasing opportunities is to multiply the scores by the price forecasts to get single-sourcing risk scores for each country. The results for the steel example reveal that, even though China’s position as the lowcost producer is expected to hold over the next five years, its higher profile doles out enough punishment to push China towards the bottom of the riskadjusted sourcing score list.

“Japan and the U.S., on the other hand, which were in the middle of the pack of our price discussion,” says Mothersole, “move to the top of the sourcing score list reflecting their superior risk profiles.”

When it comes to identifying supply chain risk and effectively tapping into global business opportunities, many organizations overlook the fundamentals and wind up making wrong and costly decisions. Equipped with market insight, accurate price histories and information about target countries, organizations can effectively price risk and tap into potential opportunities with the knowledge that sourcing decisions are made taking into account both price and risk. ■

Summary Cost

Risk

Sourcing Score ([a*ln(b)])

Sourcing Score ([a*ln(b)]; US=1)

China

672

33

2357

2.25

Japan

709

3

677

0.65

Turkey

673

24

2128

2.03

Brazil

1056

29

3554

3.40

Mexico

779

36

2790

2.67

United States

729

4

1046

1.00

Germany

692

5

1085

1.04 Source: IHS

SDC_IHS1014_12-13_SourcingRisk.indd 13

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regional insights: asia

Emerging Asia Challenged by Labor Market Dynamics Businesses across the region face tough decisions as they struggle to pay workers higher wages while competing for skilled workers

By Laura Hodges, Director of Pricing and Purchasing Service, IHS Operational Excellence & Risk Management

W

hile much attention is being paid to China’s rising labor costs recently, wages are climbing at above-average rates in most emerging Asian markets as demand for labor accelerates. Businesses across the region face tough decisions as they struggle to pay workers higher wages while competing for skilled workers.

In 2000, the average Chinese manufacturing wage was 2.5 percent of the average U.S. wage. Currently, that ratio is 10 percent and will approach 25 percent by 2023, according to IHS. At US$3.50 per hour, Chinese wages remain relatively low, but their growth changed the cost calculation for many companies manufacturing, outsourcing or sourcing their goods in China. Global companies looking to mitigate these rising labor costs are turning to Thailand, Vietnam, Indonesia, India and the Philippines.

But higher minimum wages, limited skilled availability and strong labor demand are pushing these countries’ wages higher, decreasing their cost advantages over China.

Moreover, many Asian countries raised minimum wages recently.

In 2013, Indonesia instituted a 40 percent minimum wage increase in Jakarta and surrounding areas; Malaysia implemented its first-ever minimum

Robust wage increases across Asia are not expected to hinder growth in manufacturing

Annual percentage increase in average manufacturing wages for 2010-2015 and average hourly wage rates in US$ for 2014 Country China India Indonesia Philippines Thailand Vietnam

2011 17.9 12.9 5.6 2.9 4.7 20.3

2012 14.3 11.1 20.4 4.7 20.0 13.8

2013 7.8 11.4 4.2 3.3 9.7 7.6

2014* 10.4 10.2 6.7 4.9 9.2 8.0

2015* 10.1 10.3 8.2 5.0 9.4 9.2

Rates in US$, 2014 3.24 2.17 1.26 2.04 2.09 1.57

*Forecast

standards; and Thailand set a national minimum wage of 300 baht per day or about US$9.20.

Adding to the concerns of employers in emerging Asia is their difficulty in filling skilled and professional positions, owing to the lack of access to quality educational resources.

While education is improving in the region, tertiary enrollment rates still fall well shy of those in the developed world. The result is lower productivity, reduced competitiveness and staff turnover.

Over the past decade, manufacturing output more than doubled in most Association of Southeast Asian Nations (ASEAN) economies, further straining the labor force and fueling wage growth. The Chinese manufacturing sector is now over seven times larger than in 2000 and represents over 40 percent of its economy. Since its 2007 World Trade Organization (WTO) accession, Vietnam’s manufacturing sector quadrupled and now comprises 24 percent of its economy.

Looking ahead, Asia (excluding Japan) is expected to overtake North

14 Supply & Demand Chain Executive Special Edition/November 2014

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2010 9.9 14.9 10.2 4.5 2.1 16.3

Source: IHS

America as the largest region, as measured by real gross domestic product (GDP), within five years. The region’s growth rates will outpace all others through 2020 and provide leverage, particularly to skilled workers, for wage gains.

IHS predicts that, while manufacturing wages in emerging Asia will increase robustly in the next few years, pay levels, particularly in Indonesia and Vietnam, will remain comparatively low, helping attract manufacturing (see table).

Chinese workers are enjoying strong wage growth since 2000, shifting lower-valued manufacturing to countries such as Indonesia and Vietnam; however, wages are rising in most emerging Asian markets. While labor cost is a key input for manufacturers, infrastructure, political stability, availability of high-quality materials and worker productivity must also be considered when choosing among sourcing or manufacturing locations. ■ For more information, visit ihs.com/EQ13AsianLabor.

To visit IHS Quarterly, go to ihs.com/ihsquarterly

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weather and price volatility

Modeling the Effects of Weather on Crop Price Volatility IHS’ Global Agriculture Team developed a 15-year scenario analysis quantifying the effects of weather and climate change on global agriculture markets

By Ryland Maltsbarger, Principal Economist of Agriculture Services, IHS Operational Excellence & Risk Management

G

lobal agriculture markets experienced increased price volatility in recent years. While this volatility has many root causes— the global financial crisis, distorting trade and agricultural policies, and supply chain issues—weather variability and climate change are key influencers.

Many organizations struggle with price volatility, and how to plan for its impacts on key crops and livestock in diverse regional markets.

With this in mind, IHS’ Global Agriculture Team developed a 15year scenario analysis quantifying the effects of weather and climate change on global agriculture markets by major product and region.

The scenario invokes increased global weather volatility in lieu of the conventional assumption of future average weather—the latter representing the baseline forecast— to examine the impact of increased weather variability on global crops and livestock.

The scenario’s assumptions are that: (1) historical weather events are indicative of the outcomes of future weather events; (2) crops that share a similar agronomic calendar are more likely to be impacted similarly by weather; (3) geographically proximate countries are more likely to be To visit IHS Quarterly, go to ihs.com/ihsquarterly

SDC_IHS1014_15_Weather.indd 15

impacted similarly by weather; and (4) “climate change” is manifested as increased frequency of extreme weather events.

There were three key findings from the scenario: ■■ While weather volatility is a driving force behind crop price variability, for a majority of grains and oilseeds, the high price levels of recent years will not be revisited as a result of bad weather alone.

Rather, a combination of supply and demand shocks would be required to set record highs, e.g., a biofuel mandate followed by a drought in corn-growing regions.

■■ Long-term stability of global oilseeds and grains production, even during more volatile weather, points to an improved ability of crop growers in major producing countries to absorb weather-driven yield shocks.

World wheat production, for example, trended higher as weather variability increased, which supports the idea that, as regions or hemispheres experience varying weather conditions, producers in opposite hemispheres and non-neighboring regions allow for continued growth to satisfy global demand.

■■ The massive global expansion of oilseeds and grains planting beyond their traditional climatic zones makes their yields, hence their prices, more susceptible to changes in weather. This differs from crops, such as cotton, sugar and rice, that continue to be planted substantially within their traditionally favorable weather zones.

The major crops most impacted under the scenario (as compared to baseline) were sunflower and rapeseed; their mean percentage price change from baseline over the forecast period registered 41.2 and 32.2 percent, respectively. In part, this reflects the fact that these crops are grown in a relative handful of northern countries, so their proximity to each other means that they are more likely to be impacted by the same weather events.

The major crops least impacted under the scenario were generally those like rice and cotton— 9.8 and 6.9 percent mean change from baseline, respectively—with high yields that continue to be grown largely in their traditional climatic zones. ■

For more information on this topic, visit ihs.com/Q13CropClimate.

Special Edition/November 2014 Supply & Demand Chain Executive 15

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survey summary

Global Outsourcing and Supply Chain Risk Companies around the world are nearshoring, led by North America

T

he latest results from Supply & Demand Chain Executive magazine and IHS’ Global Outsourcing and Supply Chain Risk survey confirm the results from the 2012 and 2013 surveys. More than two-thirds of companies view the mitigation of supply chain risk as significant to their operational plan. Companies around the world are nearshoring, led

by North America. There are some companies moving away from China as a sourcing location, but on net, the country is still growing its importance in supply chains.

More than 69 percent of supply chain professionals believe the financial impact of supply chain disruptions are increasing and yet just 27 percent are prioritizing supply chain risk mitigation as the most important part of their operational plan this year compared to nearly 40 percent last year. IHS and Supply & Demand Chain Executive surveyed more than 500 business leaders from a broad background to take their pulse on the latest trends in supply chain risk, share the latest insights on best practices in supply chain organization and update the outlook on sourcing in China.

Supply Chain Risk Mitigation Trends Supply chain risk concerns and sourcing locations still not aligned Although consciousness of supply chain risks and concerns about the

Figure 1: China Has the Most Volatile Cost Environment U.S. E.U. China Other Asia Other Europe

Figure 1 represents the share of respondents who answered the country of their primary sourcing location and which country they felt was most volatile in terms of costs.

India South America Canada

0%

10% 20% 30% 40% 50% 60% 70% 80% Primary Sourcing Locations

financial impacts are on the rise, these insights did not yet fully translate on the risk mitigation front. China is considered the most volatile cost location, but is also the third most common sourcing location. Canada is the least volatile cost location, but is also the least common sourcing location. Despite the rising impacts of doing so, companies are still prioritizing low cost over low risk.

Regional Sourcing Trends Asia and North American Free Trade Agreement (NAFTA) regions are the winners from latest supply chain adjustments Rising energy costs in Europe and the shale gale in the United States

Most Volatile Cost Locations

pushed companies to increase their sourcing in the United States and Mexico. In fact, Mexico saw the greatest net inflow of any country in our 2013 survey and remains in the top three this year. Asia and, in particular, India, is the other pillar of growth. Figure 2 represents the net results of companies responding that they are increasing or decreasing their sourcing presence in these respective countries. Rising regulations and falling economic prospects caused a drastic pullback in South America, with the region barely seeing a net increase in sourcing this year, despite being in the top three regions in 2013.

16 Supply & Demand Chain Executive Special Edition/October 2014

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survey summary Figure 2: Mexico and India Viewed as Strong Sourcing Destinations

China was not displaced as the hub of global manufacturing supply chains, but the United States is seeing a renaissance and Mexico is coming of age as a stable, low-cost sourcing location. These moves reflect the lagged impact of a reevaluation of supply chains in light of rising financial costs from disruptions and will guide supply chain professionals in the years to come.

Although more than 75 percent of the companies were based out of the United States or Europe, their operations were scattered globally.

The survey was similarly broad in the industries and company sizes surveyed, with no single industry accounting for more than 10 percent of the responses.

This broad scope offers the best assessment of the current outlook from supply chain managers, reducing the impact of industry-specific dynamics. â–

U.S. Canada Mexico E.U. Other Europe Other Asia China India South America 0%

10% 20% 30% 40% 50% 60% 70% 80% 2014

2013

Diffusion Index: >50=expansion

Source: 2014 IHS and Supply & Demand Chain

China Sourcing Trends

Executive MRO Study

As with overall trends, the United States and Mexico also gain the most from companies leaving China Although sourcing trends still favor China as a low-cost region, a number of companies are looking elsewhere.

Unsurprisingly, given their prominence in overall sourcing growth trends, the United States and Mexico stand to gain the most from companies leaving China. In fact, the only other country to show a net gain from movement into and out of China is Indonesia, a rising source for low-cost production.

On the other hand, economic growth hiccups and currency risks are leading many companies to reevaluate India as a viable alternative to China. Figure 3 represents the net share of respondents answering the sourcing destination as a result of moving to or moving away from China. Despite the strong inflows outlined in the previous section, India actually sees a net loss of companies going to China.

Figure 3: The U.S. and Mexico Win as a China Alternative Brazil Eastern Europe India Indonesia Mexico Russia United States -30

-10

Moving From, To China

SDC_IHS1014_16-17_SurveyGlobal.indd 17

-20

0

10

20

Moving To, From China

30 Net

Special Edition/October 2014 Supply & Demand Chain Executive 17

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transportation insight rail

Shifting Gears: The Changing American Rail Landscape With the coal industry diminishing, the railroad industry turns to alternate sources of business to keep itself on track

By John Scholle

A

Finding New Sources of Business

right now, with most other rail car types exhibiting little or no growth.

s America’s coal industry Much like other industries whose continues to diminish, the mainstays were readjusted both during nation’s railroad industry and after the recession, railroads are Full Speed Ahead is facing some significant seeking out new ways to fill capacity.

In addition to energy, sectors like headwinds. Coal once One alternative route is the transport of grain and intermodal both present filled 40 percent of carloads being oil that’s generated by unconventional opportunities for the rail industry. transported across the country—that methods. Petroleum traffic is up 150 Grain is on an upswing, for instance, number has dropped to closer to 30 percent since 2011, for example. As it with last year’s harvest producing a percent, according to the Association happens, rail is a primary method for much larger crop than that of the of American Railroads. To offset that 10 moving oil—a natural resource that’s previous year (when there was a percent reduction in market share, the frequently extracted in far-flung locales drought to contend with). Intermorail industry is turning to capitalizing on that lack pipeline infrastructure. Other dal also remains a bright spot as more the very factor that’s undermining the important materials used in the oil companies use multiple modes of Rail Traffic 150%sand) since 2011transportation to ship goods domescoal sector: the nation’s unconventional Petroleum extraction process (i.e.,Up fracking energy boom. areCarloads) also frequently transported via rail. tically and internationally.

(Weekly PRESENTATION NAME / MONTH 2014

Filling the Widening Gap With rail rates largely driven by demand in today’s market, the industry is seeking out new ways to fill capacity.

This is an interesting twist, given the fact that rail rates moved in lockstep with fuel costs both before and after the national recession. With fuel and labor costs declining or stagnating for the last several years, railroads were able to increase their prices based on improving demand.

But not every sector presents good news for the rail industry. The coal segment, for example, is particularly weak. Undermined by the availability of cheap natural gas, and accordingly, the nation’s unconventional energy boom, the domestic coal industry’s production has declined. Carload traffic for coal is down about 25 percent compared to the pre-recession timeframe, according to IHS experts, or roughly equal to that of the mid-1980s.

Petroleum rail traffic up 150% since 2011

18000 16000 14000 12000 10000 8000

Source: IHS

6000 4000 2000 0 2000

2002

2004

2006

2008

Rail’s recent movement into the alternative energy field is not only influencing traffic, but it’s also impacting equipment purchases. Tank cars comprise about 50 percent of the rail cars that were delivered in 2013, according to IHS, which expects similar production levels for 2014. Covered hoppers are also in high demand, namely for their ability to transport fracking sand and other critical extraction materials.

Those are the two main sectors that are showing strength in the rail car industry

© 2014 IHS

2010

2012

2014

Looking ahead, IHS experts predict that the rail industry will post 2.5 to 4.0 percent year-overyear price growth over the next 18 months. This is fairly normal for the sector in which rail rates tend to increase faster than those of other transportation modes. And while coal isn’t expected to rebound any time soon, energy and other opportunities remain bright spots for the nation’s railroads in the coming year. ■ 2

18 Supply & Demand Chain Executive Special Edition/October 2014

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pulse of the industry mro

MRO Supply Chain Study Companies are paying more attention to maintenance, repair and operations, but not as quickly as they should

W

hen companies strive for efficiency and cost savings in their supply chains, one often overlooked element is MRO— maintenance, repair and operations.

By not paying enough—or often, any—attention to it, hundreds of thousands of dollars or more can be left on the table.

According to information and analytics firm IHS Inc., MRO is seen as a cost of doing business with companies ignoring the fact that related inventory serves a purpose in the grander scheme, affecting asset utilization, safety and operational performance. Involvement is limited to infrequent requests to cut MRO inventory or find cheaper suppliers, with little thought given to the broader role impacting an organization’s profit margins, shareholder value and operational excellence goals.

To learn more about how organizations are using MRO, Supply & Demand Chain Executive magazine and IHS conducted a benchmarking study of the opportunities and challenges that could potentially impact asset performance, capacity, cash flow and operational risk. Its primary focus was to benchmark the maturity and performance of peer MRO programs, as well as understand linkages between MRO supply chain improvement initiatives and operational excellence programs.

percent are North American-based (U.S. and Canada), global firms are well-represented in this survey.

About 17 percent are in Europe, 20 percent in Asia (including China and India) and just over 5 percent in South America. Not surprisingly, their industries range across the board in most manufacturing and nonmanufacturing verticals.

Demographics

MRO: A Clear Priority for Investment in Performance Improvement Initiatives

Of the survey’s approximately 200 respondents, two-thirds work in Sourcing & Procurement (26.74 percent), Manufacturing & Operations (20.32 percent) and Supply Chain—including Supply/ Supplier Management—(20.32 percent). The bulk of the respondents were at the managerial or director level with about 15 percent at the vice president or C-suite level.

Asked to select their top two areas of concentration for the coming year, MRO supply chain processes and workflows (31.18 percent), and inventory management (30 percent) were named as top priorities. Supplier performance management was next at 19.41 percent, closely followed by materials spend management at

MRO supply chain processes and workflows (31.18 percent), and inventory management (30 percent) were named as top priorities.

Almost half of the respondents represented companies reporting revenues of $1 billion to $10 billion or more. These clearly are businesses that can leave large amounts of money on the table if their MRO operations are not up to par. Although more than 50

SDC_IHS1014_19-21_SurveyMRO.indd 19

The survey was created with three objectives in mind: ■■ Establish the current health of MRO programs within global, asset-intensive companies.

■■ Identify drivers and challenges for improving MRO programs.

■■ Explore peer operational excellence management systems and linkages to performance improvements.

18.82 percent and enterprise resource planning (ERP)/enterprise asset management (EAM) consolidation at 16.47 percent. Operational risk management (12.35 percent) and asset performance management (10.59 percent) also received notable responses.

Special Edition/October 2014 Supply & Demand Chain Executive 19

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pulse of the industry mro Figure 1: How would you describe your MRO data and the governance necessary for maintaining an optimized master catalog?

When asked to describe the current state of their MRO data, approximately 80 percent of respondents disclosed that their organizations had no governance systems in place to maintain their material masters cleansed and standardized. Thus, if these organizations were at any point operating with clean data, they are still at high risk of compromising the accuracy of their catalogs once new material item descriptions are introduced.

Unclean, no governance Clean, somewhat structured, no governance Clean, structured, no governance Clean, structured with governance, not globablly integrated Other, not listed Unsure 0%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: 2014 IHS and Supply & Demand Chain Executive MRO Study

Seemingly, some companies established their 2014 budgets with MRO in mind. Just less than 25 percent slated more than $2 million for MRO spend, 9.1 percent planned to spend between $100,000 and $300,000, and 8.24 percent budgeted for $700,000 to $1 million. Another 7 percent planned to spend between $1 and $2 million dollars.

In actuality, 23.5 percent of respondents said that they were on budget and 14.71 percent were below budget. The remaining 46 percent (less the 15.69 percent who answered “don’t know”) were over budget by anywhere from 1 percent to more than 20 percent. This shows that the preponderance of the respondents and their companies are aware of MRO’s importance, but perhaps not acting on it with enough emphasis.

And what were they budgeting for? The two largest areas by far were MRO supply chain processes and workflows (31.2 percent), and inventory management (30 percent).

Just below 20 percent targeted

supplier performance management and materials spend management.

Organizations that responded to this survey are planning to spend in the upcoming 12 months: 40.5 percent said that it will be on inventory optimization, which ties into the previous year’s budgeting plan. Another 32 percent will invest in supplier consolidation, which will provide more visibility into their supply chains. Other MRO-related areas that will see investment include asset management (18.3 percent), spend analytics (16 percent), predictive (14.5 percent) and preventive maintenance (9.9 percent).

In addition, about 26 percent plan to invest in ERP.

MRO Systems, Data, and Governance a Top Concern Data governance is a growing discipline, whereby organizations are seeking more control over their processes and methods in gathering and using data. Yet almost 20 percent of survey respondents said that, not

only was their data unclean, but they also had no governance in place. A third of them said that their data was clean and even structured somewhat, but did not have governance. Another 27 percent said, yes, their data was clean and structured with governance, but not globally integrated. Only 8 percent acknowledged that their data was clean, structured with governance and globally integrated. The remainder said that they didn’t know.

So, less than one in 10 respondents had clean, structured data throughout their entire organization. It’s obvious that there is much work to do. One respondent wrote, “The biggest road block moving forward is dealing with a disjointed workflow process due to multiple applications being used, and the unwillingness of purchasing and logistics to move over to an integrated EAM/ERP system.”

Facing Disaster There are many scenarios that can cause organizations to fall short of meeting performance objectives and/

20 Supply & Demand Chain Executive Special Edition/October 2014

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pulse of the industry mro Figure 2: What is the top driver for improving your MRO program?

Inability to conduct preventative or predictive maintenance programs

It is clear that the majority of respondents have various drivers for improving their MRO programs. Some investment plans are seen as more urgent than others based on budget plans. Remarkably, in a subsequent survey question, over 23 percent of respondents said that they didn’t have plans to make any sort of investments to improve performance.

Unmanageable MRO master catalog with inconsistent and unstandardized data and no data governance Significant increase in MRO spend, year over year Multiple asset failures/disruptions Poor product quality Lack of inventory management program Workforce productivity issues Major spills, injuries and fatalities from catastrophic equipment failures 0%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: 2014 IHS and Supply & Demand Chain Executive MRO Study

or production quotas. Those causing the greatest concern for the survey respondents were grouped together within a few percentage points.

For example, “inconsistent and unstandardized MRO master catalog from lack of taxonomy, technology, processes and best practices” and “overspending on MRO inventory because have no way to track and manage spend, and consolidate suppliers” were at 14.9 and 14.1 percent, respectively.

Grouped at around 12 percent were “MRO inventory issues: stockouts, no critical part identification, inaccurate lead times;” “high risk of catastrophic events, such as major environmental spills, injuries and fatalities due to extreme asset failure;” and “poor product quality and possible recalls due to inefficient asset management and quality management programs.”

So, what’s the top driver? What will it take to get companies to take action and improve their MRO programs? Around 31 percent

said that significantly increased MRO spend year over year would do the trick. Another 20 percent pointed to an unmanageable MRO master catalog with inconsistent and unstandardized data, and no data governance. Respondents cited multiple asset failures and disruptions (11.6 percent), and a lack of an inventory management program (11.6 percent).

Not everyone is ready, though.

When asked if they have any plans to rationalize their MRO spare parts and establish data governance for ongoing catalog maintenance, just 20 percent answered in the affirmative. About 9 percent budged for 2014 and 19.2 percent for 2015, while 23.7 percent said within three years and 27.4 percent said they had no plans at all to make this vital investment.

Operational Excellence (OE) More than half of respondents have an operational excellence initiative and supporting framework, a quarter said

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that they didn’t and the remainder didn’t know. Most of those who have the initiative did so recently, 63 percent within the last four years and 15 percent of them within the last 12 months.

Of those with operational excellence systems in place, the study followed up by asking if they saw improvements within their team’s performance by linking their functional goals and objectives to the corporate OE strategy. The responses indicated that there is a significant correlation between companies that have strong OE programs and functional areas that experienced notable improvements in performance. Around 79 percent of respondents saw either “some improvement” or “great improvement” in their functional areas. Another 8.7 percent cited “significant improvement” in their particular area. Almost 2 percent said that their companies had a “complete performance transformation.”

And isn’t that what we’re all after? ■

Special Edition/October 2014 Supply & Demand Chain Executive 21

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asset performance metrics

Improve Performance Metrics through Integrated MRO Management Inconsistency can have dramatic effects on the maintenance, repair and operations supply chain, and disrupt asset management programs

By Jeff Ladner, Senior Director of Operations, IHS

M

aintenance, repair and operations (MRO) materials consume a significant portion of operating costs with companies reporting expenses as high as 15 percent. The longer an organization exists, the higher the odds that it relies on MRO master catalogs comprised of inconsistent and poorly structured data, and inefficient business processes. These inconsistencies can have dramatic effects on the MRO supply chain and disrupt asset management programs.

Many recent studies identify poor asset management as the root cause of overall performance problems, such as poor asset utilization, low maintenance efficiency, high MRO costs, and risk of safety, health and environmental incidents. According to ARC Advisory Group, the cost of poor asset information management for a typical assetintensive organization can be close to 1.5 percent of sales revenues.

Tracking, measuring and analyzing key performance indicators (KPIs) that are specific, measurable and actionable enables organizations to maintain a continuous path of improvement and leverage those metrics into successful operational excellence initiatives. Then again, selecting the right asset performance KPIs may be challenging.

Consider how a production manager’s view of asset performance management differs from a procurement or environmental health and safety (EHS) manager. The produc-

tion manager focuses on productivity, and asset performance metrics that provide insight on asset reliability and availability, while a purchasing manager is concerned with material costs, contract compliance and supplier performance. An EHS manager worries about risks associated with people, assets and communities.

The one thing that these functional areas share is the MRO materials master and underlying data that keep company assets running smoothly. By neglecting inefficiencies in the MRO supply chain, business processes and foundational data, companies are compromising performance metrics.

The most effective approach to MRO supply chain management includes promoting the global integration of structured master data and the metrics driving performance improvements in the following areas: 1. Procurement. A few areas to measure and analyze include historical MRO spend, contract compliance, supplier performance and open work orders from maintenance.

2. Maintenance and engineering.

Plant engineers and maintenance staff are typically most responsible for the execution of an asset performance management program. Key KPIs should at minimum include scheduled maintenance compliance, emergency maintenance, unplanned downtime and work order closure rates.

3. Operations. Look at important measures like capital expenditure, asset life ratio, overall utilization and performance.

4. Production. Critical production KPIs include asset reliability, equipment failure ratios, product quality ratios, overall equipment effectiveness, availability, and percent uptime or downtime.

5. EHS managers. Organizations need to manage inherent risks in operations, and reduce the likelihood of major events and operational losses, tracking not only total incident recordable rates, but also process execution for corrective and preventive actions, risk ranking and vulnerability to high risk, etc.

6. Warehouse/logistics. Important KPIs include inventory stock-out ratios, lead time ratios, order point and quantity ratios, and critical inventory ratios.

7. Senior management. Senior management can contribute a number of KPIs, including profit margins, share value and enterprise investments related to continuous improvement in operations.

Understanding which metrics are critical to driving performance improvements within an organization is a key step in the operational excellence journey. But, just as important is to enable all stakeholders to streamline their workflows, integrate their supply chain, and maintain accurate and complete MRO master data. â–

22 Supply & Demand Chain Executive Special Edition/October 2014

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Big Hurdles Lead to Huge Opportunities

How is your MRO master data affecting your overall performance?

Maintenance, Repair and Operations (MRO) master data is no trivial matter for asset-intensive organizations. Neglecting the integrity of foundational data and business processes not only negatively affects profit margins, but also impedes ROI from strategic investments.

As the leader in MRO data management solutions, IHS helps companies uncover huge opportunities for asset performance improvements, cost reduction and risk mitigation, and enables operational excellence initiatives. Our experts have leveraged decades of experience to develop the methodology and best practices that power our world-recognized, multi-language dictionary and data governance software designed specifically for describing and maintaining MRO materials.

eveRy decisiOn MatteRs ihs.com/mro

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OPerAtIOnAl excellence & rIsk MAnAgeMent

Drowning in data, but starving for insight?

Insight and analysis for faster, more confident decision-making IHS is more than a data provider. We offer a model-based framework for analyzing price change and driving value.

Our team provides the most robust and accurate insight, analysis, and forecasts available on the market today.

A strategic partner to help you • gain visibility into supplier cost structures • know when to lock in a contract price • spend less time gathering information and more time making thoughtful decisions • support both tactical and strategic decision-making • reduce your total spend up to 10%

www.ihs.com/PricingPurchasing

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