Procurement Outlook Report 2017

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

Historically, financial markets uncertainty, new style of US leadership; enmerging global players; lack of international consensus on climate change and innovative technologies, such as the Internet of Things, artificial intelligence, and virtual reality will have a profound impact on the global socioeconomic environment. Based on these key issues, here is what GEP have identified five global supertrends to watch out for in 2017...

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

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

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

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

2. Geopolitical Instability
Political instability was a key theme in 2016 — the refugee crisis and its dramatic impact on Europe, conflagrations in the Middle East, and China and Russia’s assertive stance on regional issues. We are quickly moving to a tri-polar world in which the United States’ political leadership and dominance in global markets is increasingly being challenged by Russia and China. Moreover, with the wave of anti-establishment populism discussed earlier, the global business environment is characterized by risk. Three of the top five global risks identified by the World Economic Forum deal with fiscal, political, and social instability.
There’s also growing concern about diminishing commitment to global cooperation — be it through international trade pacts or security mechanisms — on common issues and goals. The impact of these trends is not lost on business executives — 84 percent believe that overall instability will have an important impact on their global businesses. Business executives are increasingly convinced that economic and political instability will need to be actively managed to inimize negative impacts.

Procurement Implication: Proactive Mitigation of Supply Chain Risks:
Geopolitical instability is driving an increased focus on managing supply chain risk in 2017. Business leaders will have to develop risk management capabilities to effectively address these risks. Better and more timely information, driven by the implementation and integration of new tools and applications, will help business leaders address these risks, but a more focused effort toward supply chain risk management will be necessary in 2017. Procurement, specifically, will be expected to identify, mitigate, and monitor supplier performance with respect to  potential risks to ensure efficient supply and protect supply performance outcomes. The cost of risk is factored into the overall total cost of ownership. GEP recommends that enterprises develop and implement a well-defined risk management process with clearly documented responsibilities. Additionally, enterprises must use risk management tools to actively track identified risks and get realtime information on supplier dependencies. This will allow them to immediately know where to focus their efforts to prevent or mitigate the impact of these risks.

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

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

Procurement Implication: Drive Overall Value from Lower Commodity Prices: While commodity prices rebounded in 2016, they are expected to be historically low throughout 2017. Enterprises should continue to take advantage of lower prices, but not at the expense of building longterm supply relationships that drive down the total cost of ownership. GEP believes that procurement professionals should develop strategies to mitigate the risk of volatility in commodities markets, not just lower the price of each unit. Additionally, supply chain risk should be factored into the total cost of ownership and supplier relationships (as noted above). Suppliers may be more open to building collaborative relationships that address customer concerns beyond price.

4. Climate Change Uncertainty
Environmental risks have a substantial impact on various other risk categories. According to the 2017 Global Risk Perception Survey from the World Economic Forum’s Global Risks Report, four of the top 10 risk interconnections involve environmental risks — with water crises and failure of climate change mitigation and adaptation cited most frequently. Ineffective management of the earth’s shared natural resources, such as the atmosphere, high oceans, and the Antarctic, could have far-reaching local and global consequences. For example, rapid changes in weather patterns could lead to severe drought situations and water crises. These, in turn, could spark geopolitical and societal risks, such as mass involuntary migration and local or regional unrest, particularly in underdeveloped economies and geopolitically sensitive areas. While there has been growing global cooperation to combat climate change, the election of Donald Trump as president of the United States and increased nationalism globally may introduce stumbling blocks for global climate change policy. The Global Risks Report cites several positive moves to reduce climate change: ratification of the Paris Agreement, the International Civil Aviation Organization’s agreement to no net growth in aviation emissions after 2020, agreement of parties to the Montreal Protocol to reduce the use of hydrofluorocarbons, and an investment of $266 billion in renewable energy in 2016. However, the changein the U.S. administration can hinder progress if the United States pulls out of the Paris accord or simply does not adhere to the standards.

Procurement Implication: Drive Broader Sustainability Programs and Goals: While the growth of populism, especially in the United States, has impacted the climate change agenda, individual governments and companies will continue to push green and sustainability initiatives. GEP anticipates this effort to continue and increase in 2017. Global enterprises have been integrating sustainability programs into their business activities for some time, and that trend will accelerate in 2017, even in the face of anti-globalization efforts. Procurement leaders will need to factor sustainability programs and goals into relationships with vendors. These programs will increasingly gain importance as enterprises include sustainability costs into their calculation of total cost of ownership. Procurement will need to clearly define sustainability goals and objectives and build them into longer-term contracts with suppliers.

5. Expansion of Digital Technologies
Another key trend that could have far-reaching impact on the global socioeconomic environment is the emergence and adoption of new, innovative technologies, such as the Internet of Things (IoT), artificial intelligence (AI), virtual reality (VR), 3-D printing, and blockchain. In 2016, we saw the expansion of Internet-enabled devices and the increased use of decision-support tools across the value chain. In 2017, we expect the trend to continue and gain momentum in sectors that formerly lagged in the application of digital technology. Intelligent automation technologies, such as IoT and AI, will continue to gain traction, along with new technologies, such as VR, that have many potential commercial applications. Gartner predicts IoT will grow to 26 billion units by 2020, representing a 30-fold increase from 2009. This will result in an estimated $1.9 trillion in global value added. The number of mobile devices will continue to increase. Moreover, mobile data traffic is expected to experience dramatic growth through 2020, as outlined While the United States may opt out of the Paris Agreement on climatechange, individual governments will continue to drive stricter regulations to achieve their environmental control targets throughout 2017. Additionally, sustainability efforts by global corporations will grow as these efforts become entrenched in their business strategies and are rewarded by consumers.

Procurement Implication: Don’t Ignore New Technologies:
New technologies are transforming the way companies relate not only to their customers, but also their business partners. The adoption of technology, both devices and software applications, across the procurement function will continue at a rapid pace. GEP recommends that enterprises transition from legacy, on-premises software to cloud-based solutions that are scalable and do not require substantial investments in hardware and maintenance. As more devices contain processors and Internet access, a growing number of indirect- and direct-spend categories will be monitored automatically without manual intervention. For example, internet-enabled sensors can be used to monitor categories, such as machine or building maintenance, and determine when replacement parts or supplies need to be ordered. Artificial intelligence is a logical next step as machines “learn.” rocurement specialists will browse, select, order, and process services and products more efficiently using artificial intelligence. This will further reduce the level of manual intervention required. While the impact of cutting-edge capabilities such as artificial intelligence has yet to play out, 2017 will see them become more embedded in how procurement functions. These new technologies will raise the profile of procurement in the supply chain. 

See the full white paper at GEP Procurement Outlook Report 2017



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