INDEX INTRODUCTION 3 EXECUTIVE SUMMARY 4 GLOBAL BUSINESS AND MACROECONOMIC TRENDS 7 Introduction 7 The Macro Indicators 7 Key Drivers of Supply Chain and Price Volatility 10 Implications of Global Economic and Geopolitical Trends 14 2019 TRENDS IN PROCUREMENT DIGITAL TRANSFORMATION 16 Digital-First Mindset 16 “Agile” Procurement as Main Partner to Technology and Overall Business 17 Continued Market Domination of Source-to-Pay Applications 17 Guided Workflows to Enhance Procurement Results and End-User Experience 18 Expansion of Cloud Procurement Solutions Into Direct Procurement and Supply Chain 19 Category-Centric Transformation 19 Disruptive Technologies to Strengthen Data Science Capabilities 20 Disruptive Technologies to Strengthen Smart Automation Capabilities 22 Digitally Savvy, Economically Aware and Analytically Capable Talent 23 SUPPLY MARKET TRENDS AND INSIGHTS BY CATEGORY 24 Direct Materials and Commodities 24 Logistics 27 Information Technology and Telecommunications 31 General and Professional Services 34 Marketing and Advertising 38 CAPEX and Construction 41 MRO 43 Packaging 46 Chemicals 48 Introduction “Praemonitus praemunitus.” Loosely translated from Latin, this means: To be forewarned is to be forearmed. That is, in essence, the mission of our annual GEP Outlook, now in its seventh year of publication. And in today’s climate of sustained volatility, busy procurement and supply chain executives need every available tool they can get to help navigate global supply markets and to guide their teams through opinion and hype. Our annual Outlook report is designed to be a practical planning tool with respect to both macro- level supply chain dynamics as well as category and commodity trends and innovations. It is based on GEP’s collective experience in managing over $125 billion in spend across all sectors and geographies. Our aim is to provide the reader with a broad range of perspectives and thoughtful analysis of the emerging best practices we see as adding measurable value to our clients. And perhaps more importantly, to provide a collection of viewpoints that put these trends into a broader, more strategic context. Context, more than content, is king in a world characterized by sustained volatility of all varieties: economic, political, technological and environmental. To survive and thrive in a volatile environment requires both acumen and agility — to anticipate and react to the shocks and disruptions that lie ahead. A quote often attributed (erroneously) to the great naturalist Charles Darwin states: “It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change.” Procurement and supply chain executives would do well to heed this warning — and to read this report, of course — to ensure smooth sailing for the year ahead. 3 Executive Summary There was plenty of good news for enterprise leaders in 2018 as the global economy delivered healthy GDP growth of 3.1 percent. So why are sales of anti-anxiety products like weighted blankets, essential oils and adult coloring books soaring through the roof? Because, putting it succinctly, 2019 is bringing us much to be anxious about. Despite the headline growth, enterprises experienced new levels of volatility in commodity and energy pricing, in interest and exchange rates, and generally in international trading conditions. 2018 finished with a rocky fourth quarter and now a moderate level of deceleration is expected due to the following factors: • Rising trade tensions between the United States and its major trading partners • Growing levels of nationalism and protectionism that inhibit trade • Uncertainty surrounding Brexit and its larger impact on the European Union • Worsening supply chain risks and costs due to intensifying climate-related events • Volatile energy markets with the U.S. asserting power over OPEC regarding production and pricing • Potential market corrections driven by record debt levels coupled with rising interest rates To adapt to this “new normal” of heightened market instability, procurement and supply chain leaders will further embrace the twin aims of a) building a highly agile and responsive operating model, and b) fully digitizing source-to-pay processes to deliver more effective and efficient services to their stakeholders. Innovations across direct and indirect sourcing categories will abound as digital solutions mature and gain commercial acceptance in all sectors. Enterprises will look to procurement managed service providers (MSPs) to extend their capabilities deeper into core direct materials categories for improved sourcing, risk management and supplier collaboration. 4 With a “Digital First” mindset, procurement leaders will move beyond automating their own activities to become leading advocates for digital transformation writ large — bringing new ideas, suppliers and tech-driven innovations to their stakeholders and helping enable digital-first strategies across all functions. Procurement leaders will also focus on improving end-user experience to increase client satisfaction and self-service capabilities. Intuitive, digitized workflows such as “guided buying” will quickly connect each unique stakeholder with the right product, supplier, pricing, terms and buying channel. End-user empowerment will take significant time and pain out of the ordering process and drive higher savings through improved contract compliance. On the emerging technologies front, 2019 will Blockchain technology that holds be a big year for Internet of Things (IoT)-enabled the potential of streamlining and solutions, as 5G networks come online and disintermediating complex supply new sensor-driven technologies are adopted chains will move beyond initial pilot in the workplace and supply chains alike. phases to more complete solutions. With IoT infrastructure rapidly developing, we expect machine learning solutions to quickly commercialize across all aspects of manufacturing and supply chain management. Data management strategies will rise in importance to underpin these artificial intelligence (AI)-enabled innovations. Similarly, blockchain technology that holds the potential of streamlining and disintermediating complex supply chains will move beyond initial pilot phases to more complete solutions. Industry- specific variations will grow and begin to demonstrate the full power of distributed ledger technologies. Broad levels of adoption will be hampered, however, until national and cross-border trade rules catch up with this disruptive technology. Robotic process automation (RPA) will remain a valuable efficiency driver with efforts evolving from ad hoc approaches to robust centers of excellence. These will be led by cross-functional teams with strong governance models to coordinate all process and system interdependencies and to maintain a growing array of bots in service. 5 The logistics function will take the digital lead in 2019. Chronic driver shortages, increasing transportation costs, and capacity constraints around large cities will push shippers and carriers to continue innovating with fleet optimization techniques such as automated truck platoons, zero- emission cargo ships and “smart warehousing” capabilities. Additionally, AI-enabled service providers and tools will be adopted across marketing, manufacturing and distribution functions to provide predictive analytics, improved planning and more touch-free operations. The role of IT, and IT governance, will continue to diffuse as “Anything-as-a-Service” models grow across all functions. Cybersecurity will become more complex and business-critical as technology-enabled services become more ubiquitous. In general, the softening economy will increase pressure on procurement and supply chain leaders to deliver higher returns and more satisfied customers through digitized and AI-enabled processes and operating models. Market and supply chain volatility will remain high, and supply chain professionals will upskill their digital capabilities to better manage supplier and cybersecurity risks and to provide agile responses to unforeseen market shocks. CONTINUED ... 6 Global Business and Macroeconomic Trends Introduction The global economy, as measured by GDP, grew at a healthy 3.1 percent in 2018. These gains, driven by China, the United States and India, more than offset sluggish activity across much of the remaining large economies including Europe, Japan, Russia and Brazil. Looking ahead to 2019, overall growth is forecast to decline slightly to 3.0 percent. In isolation, the outlook looks quite positive. However, the trading environment is growing more volatile and there are increasing warning signs of potential deceleration. The drivers include lower growth expected in the coming years across Europe and China — and now possibly the U.S. — that may well overshadow expected gains within emerging markets. In this section, we look at the major trends impacting the global economy in 2019 and the underlying drivers of change. We analyze the geopolitical landscape as it relates to global supply chains and trade in general. This involves a review of the implications on global supply chain executives, so they are better prepared to weather the potentially tumultuous trading conditions coming our way. The Macro Indicators Five key indicators help to objectively evaluate the global trading environment in 2019. When viewed in combination, these indicators help substantiate our neutral-to-negative economic outlook for 2019 and highlight the key