By Kevin Baker | August 25, 2022
Editor’s note: In a report on industry for Orange leadership prepared this summer, Orange Silicon Valley analyst Kevin Baker examined the technological innovations driving transformation through the interconnection of physical and digital systems. The shift, referred to in this report as the fourth industrial revolution, will shape production and distribution in the years to come in ways we are just beginning to understand. This report is now being made available for our Orange Silicon Valley website readers in a series of five weekly articles. Part 2 looks at strategy and planning. Other articles in the series include part 1, introduction; part 3, procurement and sourcing; part 4, manufacturing; and part 5, distribution. For questions or additional information, please contact Kevin Baker.
Industry 4.0 — more than manufacturing, part 2: strategy and planning
Inflation is forcing an emphasis on supply chain efficiency
Global supply chains have been malfunctioning for two years, ever since the early stages of the Covid-19 pandemic. Factors such as obstructed distribution channels, unpredictable workforces, and changing consumer preferences have created bottlenecks in transport worldwide. This has led in turn to pent-up demand due to shortages of goods and rising transport prices, as supply chains operate at maximum capacity. For context, the spot rate for utilizing a 40-foot container to ship goods from Asia to the US is up by ~5x from pre-pandemic levels. The effects of backlogged supply chains have been particularly salient in the US, a nation that imports approximately 50% of its goods and recorded an all-time high trade deficit of $860 billion in 2021.
The rising costs of supply chains have rippled throughout the economy, catalyzing the highest inflation rate in 40 years (over 8%) as businesses pass the rising costs of production and distribution onto customers. However, the costs producers face are outpacing the costs passed onto consumers. According to the Bureau of Labor Statistics’ producer price index, the price of processed and unprocessed goods rose ~20% and ~50 respectively year-over-year.
Corporate profits are beginning to bear the brunt of producer prices outpacing price increases that can be passed onto the consumer. Walmart and Target both saw significant decreases in year-over-year profits this quarter at -25% and -50% respectively, despite revenue increases. Profit margins fell in parallel with profits, and both companies missed earnings expectations. Both companies attributed poor results to supply chain-related price pressures, such as high fuel costs, excess inventory, and elevated labor costs.
Venture Capital investment into supply chain technology increased over 100% year-over-year
Investors are betting on companies looking to increase efficiency to offset increasing costs. Venture capital funding for supply chain/logistics technology companies in the US and Europe increased over 100%. Large investments are flowing into tools for warehouse management, optimization of transport routes, and information sharing among stakeholders. New applications incorporate real-time visibility into operations, AI, and data analytics to speed up decision making and pave the way for autonomous planning.
The strategy of passing rising costs onto consumers is unsustainable. Ultimately, consumers will get priced out of markets and cut personal spending if inflation remains at its current levels. However, companies have not yet felt the full shock of a significant drawback in consumer demand. In a recent survey by Gartner Consulting, 50% CEOs reported their top response to inflation is to raise prices. This is compared to only 22% whose top response is to increase productivity and efficiency. While these statistics are telling about the current state of markets, CEOs will be forced to turn to productivity and efficiency solutions once markets reach the inflection point at which consumers refuse to absorb further price increases.Continued in Industry 4.0 — more than manufacturing, part 3: procurement and sourcing
Kevin Baker is an analyst covering Industry 4.0 in Orange Silicon Valley’s Business Group. He investigates trends related to enhancements in connectivity between the physical world and the digital world and believes that future convergence of the physical and digital will create profound transformations in industry and society. Kevin’s professional background is a combination of Management Consulting, Equity Research, Program Management, and Engineering. He holds a Bachelor of Science in Materials Science & Engineering from Stanford University.
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