Ten Supply Chain Predictions for 2023

As we go into the first week of 2023, many are wondering what’s ahead for global commerce and supply chains.  As I’ve done in prior years, I’ll make a few predictions based on what happened in 2022 – and what I think it means for 2023.  These predictions are perhaps not completely original – but they represent what I think will be important guidelines for supply chain executives to consider.

1. Inflation will persist.  My colleague Jason Miller from Michigan State is an expert at navigating the many different publicly available government database, and interpreting the tea leaves.  He writes a weekly blog on Linked In which I follow religiously.  He is the most accurate forecaster I know, because unlike many speculators and economists, his observations are based on actual data!    He believes that inflation isn’t going to go down going into 2023 – but will persist.  He writes that“While it is good news that we are starting to see the inflation of goods slow down, I would caution anyone who expects goods to go through a deflationary cycle that the data (to me) isn’t pointing in this direction to a meaningful degree. Data below from three series from the BLS PPI program obtained from FRED (with call codes after the labels), all set such that 100 = January 2019.  Implication:  the best-case scenario I see for the price of finished goods is that their prices stay relatively unchanged from the 3rd quarter of 2022….we are going to see meaningful deflation in finished goods prices as we move into 2023, which will in turn impact PCE price index that the Fed monitors for consumer inflation.”   Unfortunately, this also means that the Fed will likely keep interest rates high through much of 2023 – and will likely increase rates again in February and June.  Inflation is indeed going down slowly– but not as fast as the markets would like.

2. Inventory will remain bloated for the first half of 2023, – and supplier relationships will be tested.  Here again, my prior blog notes how much inventory we have in supply chains today – and how certain parties are pushing back their excessive demand forecasts, and punishing their suppliers.   For instance, a large apparel brand requested about 20 of their largest textile mills (many in Pakistan, Singapore, China, and other regions) to travel all the way to San Francisco for a “Vendor Summit”.  They then sequestered each individual in a room, and two individuals came in and told them that they needed to reduce their prices by 20%.  Walmart  is moving their vendors from FOB (Free on Board) to domestic buying, and the shift is happening fast.  Walmart will pay more for domestic sources, but will not be burdened with the inventory and purchasing FOB.  They are also canceling orders, decreasing quantities, and deducting off invoices, which they claim as “chargebacks” for “late deliveries”, from shipments which were received as late as last year.  These kinds of behaviors by buyers will come back to bite them in the future…

3. Despite having more inventory – we won’t stop having shortages. Unfortunately, a lot of the bloated inventory is stuff that consumers don’t want – or can’t afford.  But that doesn’t mean we will stop having shortages of critical materials.  One reason for this is that the COVID crisis in China is escalating to incredible levels, and that is shutting down a lot of manufacturing hubs.  In particular, a lot of maintenance parts for equipment, replacement parts for appliances, automobiles, and larger (>48 nm) chips are still produced in Asia – and we will continue to see shortages of these component parts.  That means that repair may take longer than you think.  Labor and material shortages for factories are going down – but still are at a much higher rate than they were in 2019.

4. Mexico will become a destination hub for many companies in the US – but within reason. As I noted in a prior blog, and as discussed in the New York Times today – Mexico is a great option – but the capacity isn’t there yet.  More importantly, the supply chain isn’t there yet!  I spoke to a CPO who mentioned that his CEO was a big proponent of bringing all supply to Mexico – but despite this fact, we are still largely dependent on China for raw materials!  As pointed out in the NY Times – even apparel manufacturing in Mexico is largely dependent on fabric produced entirely in China!  As such, it is unlikely we are going to lose our dependence on Chinese products.  Price is still the determining factor here.  Chinese manufacturing is of such scale, that moving it to the US or Mexico is unlikely.

5. The US Government will play more of a role in promoting domestic supply chains. Not only did the US government, pass the CHIPS Act – but they are actively promoting the domestic production of semiconductors.  As noted in one of my blogs, however, producing a fab plant is a good step – but the supply chain for chips is still largely in Taiwan.  There is massive flux in the chip industry – which seems to be on a different cycle than most demand cycles.  What was once a one year backlog has shrunk and chips are now readily available – to the point where semiconductor companies are cutting back on capital investment!  This will continue to be a real problem – and I believe we will see “capacity as a service” models begin to emerge in the chip sector – where buyers will reserve capacity based on actual forecasts, not guesses or bets on what they think they will need next year.  This will stabilize production – and lead to improved availability and assurance of supply.
6. Healthcare supply chains will remain strained. Despite having a lot more PPE in warehouses, hospitals are still struggling with a lot of shortages.  Jim Wilson, an expert in medical intelligence, advocates that hospital monitoring programs is a critical area of government investment.  One area is generic drugs – such as amoxycillin.  We wll have shortages of baby formula as well.  For this reason, I believe the government should be creating incentives to increasingly healthcare supply chain.  To address this issue, one recommendation I am advocating would be to create government industrial policies that are targeted at supporting a domestic “stop gap” manufacturing capability. Secondly, partnerships should be developed with distributors to enable visibility into their inventory systems, and ensure they enter contracts which set aside inventory for government allocation under different conditions of duress.  This will require a set of common data standards and a common architecture to create a dashboard and control tower.  In addition, a multi-agency materials inventory portfolio based on in-depth supply market analysis is needed.  At a minimum, this should include specialists in the following categories:  semiconductors, precious metals, electric vehicle batteries, medical supplies (PPE, gowns, gloves), medical devices, pharmaceuticals, plastics and resins, medical equipment, biologics, healthcare personnel, and respiratory products. This will require team of supply market analysts with special knowledge of these categories, that track the condition of critical supply markets for medical supplies, the supply risks within those markets, and acquisition strategies to manage the risks.  Multi-tier supply chain mapping can provide clues as to critical points of risk that can “shut down” the US healthcare sector, based on multiple forms of risk assessment.
7. Growth in 2023 will be positive – but lean. As noted in a lecture by the Economist which I attended, the greatest risks looming ahead are concentrated in 2023.  Next year will see some positive growth but only 1.7%, reflecting slowing growth in the US in China and recession in Europe.  Global monetary tightening will take some time to kick in – likely in the second half of 2023.  The US will likely see only 0.5% growth in 2023, the EU 0.4%, which in turn will impact other regions of the world.  China will likely see a modest rebound after the 2022 slump, moving to only 5% growth.  However, there are always risks that will move the needle, including the escalation of the Ukraine war, more COVID-19 variants, spikes in energy prices, and sovereign debt pile-ups.

8. Government regulation of Artificial Intelligence will increase. As I noted in a blog of a recent SAS INNOVATE conference, Henry Kissinger described AI as the new frontier of arms control during a forum at Washington National Cathedral on Nov. 16. If leading powers don’t find ways to limit AI’s reach, he said, “it is simply a mad race for some catastrophe.”  The former secretary of state cautioned that AI systems could transform warfare just as they have chess or other games of strategy — because they are capable of making moves that no human would consider but that have devastatingly effective consequences.  This is true not just in warfare, but also in supply chains.  As we move towards a digital future where we increasingly will be ceding control to machines who call the shots, not humans, what are the risks of doing so?  Increasingly, more and more data is being stuffed into the cloud, which certainly allows us access to more readily access reams of data which can be processed by algorithms for decision-making.  We have to be able to trust these algorithms to make the right decisions.  But driving towards AI standards to increase trustworthiness is easier said than done.  The UK has also begun pursuing this goal, as has the EU, who are likely to explicitly define AI and how to use it.  The government will begin to mandate a more  comprehensive approach, which spans the entire organization.  Three primary elements determine the fiduciary responsibility for trustworthy AI:  Duty of Care, the Business Judgement rule, and Duty of Compliance Oversight.   These pillars are required to understand the historical biases that so often find their way into AI algorithms, which have created historical injustices and inequities, meaning that the government is surely going to step in.

9. Electric vehicle parts will remain in short supply. In a recent blog, I noted how there is still a massive shortage of the so-called “green metals” required to meet the burgeoning demand for EV’s. Environmentalists and automotive companies have committed to converting all of their vehicles to electric power.  GM has committed to 30 new electric vehicles by 2025.  Ford is committing to an all-electric vehicle platform with zero emissions by 2035.  But nobody is talking about the supply chain for these vehicles, and the capacity required to build them.  Converting an entire supply base of automotive suppliers, who are all focused on building of combustion engine-powered vehicles, and moving them all to electric vehicles, will be a superhuman feat.  What will happen to those manufacturers that can’t or won’t convert?  They go out of business?  And is there enough capacity to produce the new types of vehicles?  And what raw materials are required to convert to EV in the future?  I don’t think executives have really given any meaningful thought to the answers to these questions yet… I predict a rough road ahead for EV’s.  Perhaps I’m a voice in the wilderness – except maybe for Toyota – they have the same doubts as I do.
10. Demand for supply chain graduates will go through the roof in the next two years. To summarize – global supply chains remain fragile – and we are in a period where things are starting to change.  Supply chains will look very different in two or three years from what they are today.  And there is a lot of work ahead to get there – which is good news for supply chain students graduating in that time!