Category Archives: Economics

Is Your Supply Chain About To Get A Lot Leaner?

We already knew that food prices are rising considerably across the board. They’ve risen so much (29% in the past year) that the World Bank estimates that 44 Million people have been forced into poverty since last June as a result.

If this isn’t enough, thanks to the skyrocketing price of cotton (which has more than doubled in the past year, hitting all time highs), “clothing prices are set to rise 10% this spring” (BlazeMedia). Considering that the average household spends about 15% of their budget on food and 5% on clothing, which are not discretionary expenses, the average household is now looking at a total increase in their non-discretionary food and clothing expenses of 5%. Given that, after housing, food, clothing, transportation, health care, insurance, and debt payments, the average household had less than 15% of their funds for discretionary expenditures, this says that the average household now has less than 10% of their funds for discretionary expenditures. That’s a 33% reduction in discretionary funds in less than a year!

This says that any company that provides a discretionary product or service to an average consumer is now fighting over a market-share that might have shrunk by a 1/3rd. Someone is going to lose and someone’s market share is going to get smaller. This means that a number of supply chains are going to have to get a lot leaner this year for those companies to survive. Is yours ready?

Why Your Supply Chain Needs To Be Flexible

Thanks to economics, your forecasts will be right only 30% to 40% of the time, as per this recent article over on BBC News that asks why do economists get it so wrong. Whether you care to admit it or not, all forecasts implicitly assume that the general economic condition will stay the same, since that determines not only how much money your potential customers will have, but how much they will be willing to spend. But since the foundation of the economy — humans, resources, wars, natural disasters, technology, etc — are in a constant state of change and flux, all of the models used to describe the economy are flawed.

Thus, your forecasts are only likely to be right at the macro level. Since nearly every economic forecast will be right at some point, every product line forecast will be right at some point, but like a broken clock, may only display the correct volume 0.13% of the time. If you have years of past behaviour, you’ll be able to create a good forecast at the macro (year) level, but it will get less and less reliable as the time period shrinks, no matter how much you throw into your model. That’s why you need an adaptive and flexible supply chain that allows for relatively quick replenishment — so you can ramp up production and distribution when you need to, but not have too much inventory on hand when you don’t.

Another Headline from the Land of D’oh! Financial Crisis of 2008 avoidable

According to this recent BBC article, which summarized a report from the US Financial Crisis Inquiry Commission, Regulators, politicians and bankers were to blame for the 2008 US financial meltdown. Well, duh!

From page 17 of the report:

The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.

The only thing the report, and article, got wrong was that the cause of the crisis is the same fundamental cause of the financial crises for the last 30 years. Simply put, it was greed.

  • Greed (by the lenders and the regulators, who wanted to believe the market was strong) led to the tide of toxic mortgages
  • Greed led to reckless actions by executives
  • Greed led to households taking on too much debt
  • Greed led to fundamental breaches in accountability

And while the report may be correct when it states that to pin this crisis on mortal flaws like greed and hubris would be simplistic because it was the failure to account for human weakness that is
relevant to this crisis, the reality is that, despite the repeated financial crises of the past 30 years, federal regulators have yet to put checks in place for greed. And until regulators recognize that they have to be looking for greed whenever markets rise too fast (because that’s what produces unsustainable evaluations and toxic assets) and actually do so, their hubris is going to allow these crises to happen again and again. The boom and bust will repeat until the economy just can’t take it anymore and future historians discuss the fall of the great American Empire along side the fall of the great Roman Empire.

Deferred Spending Isn’t A Recovery

A recent article over on CNNMoney.com on “Made in America. Staying in America”. (CNN Money, Jan 28, 2011) reported that a turnaround in the U.S. economy is contributing to the solid fourth quarter profits reported by manufacturers that have been staying afloat by making a killing by selling industrial goods to customers in emerging markets.

As the CEO of Eaton said, people that deferred maintenance eventually have to buy new products. And people who prolonged a product’s life with maintenance eventually have to buy new products. And after two or three years of deferred spending, no matter what efforts are made to keep old machinery working, it’s going to start to break and the organizations are going to have to replace it. This doesn’t mean that there’s a recovery in the works or that demand is going to skyrocket, and acting like this is the case will only lead to the appearance of the bullwhip effect in your forecasting. And that’s not good for anyone.

The economy will recover, but it’s going to be a slow-and-steady recovery this time. Not only is the North America is tired of the boom-and-bust cycle of the past decade, but the jobless recovery and continuing mortgage crisis is going to ensure that it will be a while before exuberance returns to the market. So take it slow. Your supply chain will thank you.

It Truly Is The Great Recession

A recent inforgraphic on “The Great Recession” over on Focus.com really puts things into perspective on how bad the Jobless Recovery really is. As the infographic begins, Americans are suffering the highest figures of unemployment since The Great Depression, and the worst part, there’s no end in sight. Employers are still intending to make do with what they have for as long as possible, even though job satisfaction is at an all time low.

Considering that it will take the US nine more years to recover the jobs lost during the recession at the current rate of job creation, it’s unlikely that the economy is going to bounce back quickly. The end of the recession is going to linger on and when the emergency benefits run out for the 4.04 M people on it, it’s going to be obvious that it truly is the Great Recession.