CPO Exchange - Palm Beach, Florida

Presented by: Graham Leary

October 20, 2015

Global trends impacting procurement: Towards 2020 and beyond

1

Agenda

• A look back at historical procurement contributions and U.S. corporate profit growth

• Examples of emerging global trends that could impact procurement into the year 2020 and beyond

• Discussion of how the procurement profession may need to adapt in light of expected changes

2

Technology innovations, process improvements, and global sourcing have contributed to major corporate profit growthin recent years

U. S. recessions

Source: U.S. Dept. of Commerce: Bureau of Economic Analysis

Corporate profits after taxBillions of dollars

0

200

400

600

800

1000

1200

1400

1600

1980 1990 2000 2010

Competitive inquiry

P2P

Partnering continuous improve-

ment

Cost modeling

E-sourcing

ERP systems

Global sourcing

Multi-step sourcing process

Indirect sourcing

Low-cost country sourcing

3x increase

in corporate

profitsfrom late

1990s through

early 2000s

Out-sourcing

Spend analytics

3

Procurement costs have also benefited from continued low rates of inflation (buying “tail-winds”), but overall recessionary effects may not be healthy in the long term

0

1

2

3

4

5

6

7

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Inflation (CPI) – Total, Annual growth ratePercent

Source: OECD

OECD inflation averaged ~2% since 1998

Global economic weakness = limited pricing power

"Economic oxygen" caused by reserve banks’ easy money policies – likely unsustainable

4

Agenda

• A look back at historical procurement contributions and U.S. corporate profit growth

• Examples of emerging global trends that could impact procurement into the year 2020 and beyond

• Discussion of how the procurement profession may need to adapt in light of expected changes

5

Key factors affecting global procurement

6

-

Supply/ Demand Pressures• Population growth• Changing consumption

behavior• Rising landed costs from

China

Technology Levers

• Supply/demand optimization• Transactional

innovations

Energy & FinancialUncertainties•Unclear trajectory

of oil prices• Expected higher

financing costs

Other trends: Robotic workforce, 3-D printing

Recognized demographic analysts project worldwide population growth of 500M by 2020 and 800M by 2025

World population projectionsBillions

0

1

2

3

4

5

6

7

8

9

10

1960 1980 2000 2020 2040

Source: World Bank

World population projection:• 2014: 7.2B• 2020: 7.7B• 2025: 8.0B

7

8

The middle class in China and India is projected to grow between 8-10% in the coming yearsMiddle class in China and India Millions of households

10

44

116

156

216

282

923

3953

78

109

2000 2007 2013 2016 2020 2024

China

India

Percent, total country

China

India

Forecast

CAGR2013-24Percent

8.4

9.9

3

5

11

10

26

15

34

19

44

27

56

35

Note: The middle class in India includes households with an annual income of more than $10,000; the middle class in China (including Hong Kong) includes households with an annual disposable income exceeding $15,000

Source: Euromonitor; Bain analysis

Consumption behaviors in the developed world are changing

28

26

25

25

21

19

20

15

19

17

13

11

Source: The Hartman Group Health & Wellness Reports 2007-2013

Consumer response to: When shopping, I look for foods and beverages that . . .Percent

Are minimally processed

Contain only ingredients I recognize

Are locally grown or produced

Have the shortest list of ingredients

2013

2010

2007

9

Comparative 3-year stock performance of Chipotle vs. McDonalds suggest a growing preference for healthier food

10

Chipotle

McDonalds

Diversification of consumer preferences may suggest a need for a more segmented approach to producing and marketing food

1114

1818

2021

222222

2428

3031

323333

3537

4148

Source: FMI U.S. Grocery Shopper Trends (2014)

Product claims important to U.S. shoppersPercent

Whole grainLow sodiumLow sugarHigh fiberNo preservativesNo trans fatsNo chemical additivesLow calorieNo/low fatNo HFCSNaturalLow carbNon-GMOLow cholesterolHeart healthyAntioxidant richCertified organicVitamin enrichedCalcium fortifiedGluten free

11

Developing countries, like China, are also changing their food consumption patterns

Source: Matthew’s Asia; USDA, FAQ; Mekannen and Hoekstra (2010)

China meat consumptionMillions of tons

0

10

20

30

40

50

60

1975 1985 1995 2005 2015

Water needed to produce proteinThousands of liters per kilogram

0

2

4

6

8

10

12

14

16

Eggs Chicken Pork Nuts Beef

Pork

Chicken

Beef

Ovine

12

What are the potential implications?

Rising wages and a transition to a domestic-driven economy are increasing landed costs from China, prompting companies to reexamine their sourcing strategies

0

5

10

15

20

25

30

35

40

45

2004 2006 2008 2010 2012

Total landed costComposite index

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

2005 2010 2015

China wages in manufacturingThousands of Yuan

U.S.

China

Mexico

India

Source: AlixPartners analysis; China Bureau of Labor Statistics 13

As China industrializes, pressures to reduce CO2 levels will likely lead to even higher costs because of its economic size relative to countries that industrialized earlier

Source: Matthew’s Asia

Average daily levels of atmospheric CO2

Parts per million

250

300

350

400

450

500

1920 1940 1960 1980 2000

Critical threshold

U.S.1941

U.K.1957

Japan1968

China2010

Bubble sizes correspond with the size of the economy at roughly U.S. $8,000 GDP per capita

14

Key factors affecting global procurement

15

-

Supply/ Demand Pressures• Population growth• Changing consumption

behavior• Rising landed costs from

China

Technology Levers

• Supply/demand optimization• Transactional

innovations

Energy & FinancialUncertainties•Unclear trajectory

of oil prices• Expected higher

financing costs

Other trends: Robotic workforce, 3-D printing

As new energy sources such as U.S. oil shale enter the supply chain, OPEC’s 2014 forecast projects oil at $110/barrel in 2020 –lower than today's prices in real terms

110.0 110.0

123.9

139.6

157.3

177.4

105.795.4 96.9 98.5 100.0 101.6

2015 2020 2025 2030 2035 2040

OPEC reference basket price assumptionsDollars per barrel

Nominal price

Real price (2013)

Source: OPEC - World Oil Outlook (2014) 16

Current price

Interest rates will start to rise again which could have flow-on impacts to investment, currency fluctuations, and prices

Source: Thomson Reuters; Bloomberg; The Economist (Oct. 21, 2014)

Benchmark policy interest ratesPercent

0

1

2

3

4

5

6

7

2007 2009 2011 2013 2015 2017

Bank of England

European Central BankU.S.

Federal Reserve

Projected

17

Key factors affecting global procurement

18

-

Supply/ Demand Pressures• Population growth• Changing consumption

behavior• Rising landed costs from

China

Technology Levers

• Supply/demand optimization• Transactional

innovations

Energy & FinancialUncertainties•Unclear trajectory

of oil prices• Expected higher

financing costs

Other trends: Robotic workforce, 3-D printing

Other industries are finding innovative ways to utilize available capacity, potentially offering models for procurement in a resource-constrained environment

19

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Deliv Inst

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rtcouchsurfing

GofundmeLendingclub

Prosper

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CrowdspringPivotdesk LIQUIDSPACE

Rel

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scoot

onefinestayHomeExchange

Bre

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DesksNearMe

Getaround BlaBla Car

HAIL

A “collaborative economy” enables people – and businesses –to get what they need from each other

20

The advent of digital currencies technology could revolutionize transacting speeds and costs globally

21

Agenda

• A look back at historical procurement contributions and U.S. corporate profit growth

• Examples of emerging global trends that could impact procurement into the year 2020 and beyond

• Discussion of how the procurement profession may need to adapt in light of expected changes

22

Looking ahead as a profession, past success will be foundational and future value will be created by adapting to global changes

23

• ERP systems

• Globalization

• E-sourcing

• Cost modeling

• Indirect sourcing

• Capacity optimization via technology

• Diversified global sourcing

• Customer and sourcing segmentation

• Transacting efficiency

Current procurement foundation

Adaptations for the next decade

As trends evolve, adaptation strategies will help us gain/maintain competitive advantageEmerging trend Potential impacts Potential adaptation

strategies

Population growth, demographic and psychographic changes

• Supply demand pressures• Fewer, larger suppliers• Niche suppliers

• Tech driven capacity optimization

• Post-manufacturing differentiation

Changing consumer food preferences: non-GMO, organic, protein, antibiotic-free

Higher costs to serve • Good, Better, Best procurement and marketing strategies

• Local sourcing

China’s transition from a global low-cost manufacturer to a domestic economy

Higher imported cost for consumer goodsand materials

• In-sourcing• Broaden global sourcing

strategies

Energy supply/demand Lack of clarity on direction of energy costs –impacting manufacturing, packaging and transportation costs

Hedging

Rising interest rates Increased interest and capital costs Currency and capital investment optimization

Digital currency Instant transactions, lower costs Monitor for potentialefficiencies

24

Other trends: Robotic workforce, 3-D printing

What trends do you foresee and how should we prepare to adapt

?

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