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Friday, July 25, 2014

Growing Worldwide Middle Class Will Challenge Supply Chains

One of the biggest challenges supply chain professionals will confront in the coming years is growth of the global middle class. The resultant global demand for consumer goods will cause shifts and sea changes in the global supply network.

Right now, 29 percent of the world’s 7.1 billion people are in this category, but by 2030, about half of the forecast population of 8 billion will be middle class, representing an increase of 2 billion in 17 years.

Tony Abate

Tony Abate

The middle class will be defined differently around the world in buying power. Tony Abate, vice president and CPO of healthcare provider Cigna, says that globally it will include households with incomes of $6,000-$30,000 per year (based on 2007 purchasing power parity figures). This is low by Western standards but significant for countries with rapid economic growth and populations with historically low incomes, such as China and India.

Speaking last week at Aberdeen Group’s Ninth Annual Chief Procurement Officer Summit in Boston, Abate said that the rise of the middle class worldwide would bring benefits and drawbacks for companies in supply chain management, especially those looking to transition from commercial to retail supply chains.

The benefits supply chain companies will see from a rising global middle class include greater competitiveness and lower prices for goods and services, growing markets for higher-value-added exports from the U.S. and other countries, greater market share of exports from home countries, and redeployment of labor to higher-value-added jobs.

Drawbacks for the U.S. (and other developed countries) include greater dependence on lower-cost imports, domestic job losses, and downward pressure on wages as global competition increases.

Credit: ddpavumba at FreeDigitalPhotos.net

Credit: ddpavumba at FreeDigitalPhotos.net

Abate acknowledged that reshoring is bringing some manufacturing back to the U.S. but said that labor costs still need to be competitive. This means that while wages for reshored jobs will be higher compared with other sectors of the economy, they will not match the standards of pay and benefits from previous decades.

Abate advised that organizations need to decide which operations to move offshore and which to keep at home, based on criticality and, of course, company size and overseas markets. Many complex support services can be effectively operated offshore if vendors are properly vetted and supervised.

“Cigna operates in 31 countries,” Abate said. “Companies in each understand capitalism and competition and want to compete for business.”

As Cigna expanded global operations in recent years, it recast key areas of procurement and supply chain operations. For example, the company emphasized training, adopted new technologies, eliminated inconsistent contracting practices, developed an entrepreneurial infrastructure, extended best practices across global operations, and reduced the size of its supply chain and thus supply chain expenses.

The next Procurement Journal article will look at some specifics of how Cigna broadened global operations and the impact that its strategy has had on company profitability and supply chain returns.

 

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