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  First Thoughts

    Dan Gilmore

    Editor

    Supply Chain Digest



 
July 26, 2019

Supply Chain Saves the Economy?


Wall Street Journal Economist Says Just in Time Inventory Practices Key to Record Length of Current Expansion

 

As I have written several times before, now is a great time to be a supply chain professional.

First, there is the growing recognition of the role supply chain management in making the world a better place.

How? By getting the products people need where they need them at a very low relative cost versus decades past.

Gilmore Says....

The Australian economy has grown on an annual basis for an amazing 27 consecutive years, even through the Great Recession.

What do you say?

Click here to send us your comments
 

That in fact was the main theme of Art Mesher's excellent acceptance speech when he won CSCMP's Distinguished Service Award in 2008 – now unbelievably more than a decade ago. "Be very proud of what you do," Mesher told the audience.

Moving goods efficiently from point A to B really does promote the social good – though I will acknowledge not many outside of supply chain understand that, but it's true.

As I have also written several time, these are also highly exciting times to be a supply chain professional, given the unprecedented advances in technology and other innovations. Drones, autonomous trucks, mobile robots, AI, efulfillment innovation – I doubt we will ever see such times again, after this run (which has many years to go) comes to something of a plateau.

But here's another thought to add to your "feeling good to be in supply chain frame" of mind. It just might be supply chain that is keeping the economy humming along.

That is the opinion of Andy Kessler, a columnist for the Wall Street Journal.

Writing two weeks ago in the Journal, Kessler notes that the US currently is in the longest continuous economic expansion in the country's history, with GDP growth every year since 2009. Every quarter sets another record.

"Did you ever wonder why we are enjoying a decade-long run?" Kessler asks. "What has changed?

Everyone wants credit, he says.

Was it the Federal Reserve and its relentless stimulus? Obama or Trump policies? A divided Congress? Demographic shifts? A strong or weak dollar? Actually, none of the above, according to Kessler.

The surprising correct answer, he says, is this: just-in-time supply chains.

"In the previous era, before pervasive computing, economies would live and die by inventory cycles." Kessler days. "The expansion starts, consumers buy, investment and hiring ramp up, wages and prices rise, inflation emerges, consumers buy ahead of price increases, investment peaks, inventories build, consumers are tapped out, recession starts, inventories are drawn down, and layoffs begin - then start all over every four years. Until recently, price signals didn't travel very fast, and inventory was tracking used clipboards."

He notes an example from the early 1980s, when the videogame industry had a huge bonanza that ended in 1983 with bust of the highly anticipated "E.T. the Extra-Terrestrial" game. Warner Communications literally buried about 700,000 unsold cartridges of "E.T." and other titles, and lost more than $500 million.

The semiconductor industry also got stuck with loads of chips in inventory that had to be written down. And after that was a similar inventory mess related to inventory of personal computers.

As a result, the tech world started implementing just-in-time (JIT) delivery. Companies like Compaq would ask for chips to be delivered Tuesday for PCs shipped on Wednesday. This gradually smoothed out the inventory cycles of a very volatile industry.

Now nearly four decades later, Kessler says related JIT thinking now permeates every industry.

"Digital cash registers and bar codes log consumer purchases. Logistics software allows manufacturers to track every production detail everywhere on the globe. Data is fed into giant databases that forecast demand," Kessler writes. "Manufacturing, transportation and retail are a highly choreographed water ballet of delivering inventory right before it's needed. Exactly the right amount of toothpaste is magically dropped onto Walmart shelves each night."

Now, we can debate the accuracy of that last thought. The Bullwhip effect is far from dead. And Walmart itself is finding it has lots of opportunities to reduce inventories even in its vaunted supply chain. (See Amazon, Alibaba, Pushing Walmart and other Retailers to Up their Supply Chain Games.)

But the key point, with which I do agree, is that supply chain practice and frankly software have reduced inventory risk for most companies dramatically. As a result, when demand slows, the hit to a company's bottom line and balance sheet is much less than it likely would have been the case not many years ago – so the pain and reaction are also much reduced. And just maybe across all companies the effect of a decline in demand is muted and more temporary, giving firms and the economy the ability to ride past a brief speedbump and regain momentum.

Kessler notes a related factor: Price signals move around the globe in nanoseconds instead of months, squashing inventory excesses before they happen.

So has supply chain killed the business cycle? Certainly not. Any number of events can put a hit on the economy.

Even Kessler notes that "The current expansion may have already ended for all we know, stabbed in the back by tariff daggers. But I don't think so - this could go on for a while."

And you know, it really could. In the course of putting this column together, I came across an interesting fact. The Australian economy has grown on an annual basis for an amazing 27 consecutive years, even through the Great Recession. Maybe they are even better at supply chain down under than we are here in the US.

There were more than 50 responses to Kessler's column, and many thought he went a bit too far with his thesis.

"JIT lessens the shocks, but it can't eliminate them," one reader wrote.

Another said that "The biggest single factor by far in the long expansions since 1991 has been the entry of China into the global economy. Their billion-person labor force has made deflation a reality, and inflation almost impossible, for the past 30 years. BUT, THAT GAME HAS REACHED ITS NATURAL LIMIT."

I will just say advanced supply chains obviously did little to stop the long and significant recession of 2008 and 2009, the result of a seismic financial crisis – when many companies did get caught with far too much inventory.

But I think I will indeed add to my list of good things about being in supply chain that we can reduce the length and severity of down business cycles – and may be a key factor in a record expansion that will soon be an amazing 10 years old.

Do you think supply chain is playing a key role in keeping the economy going? Let us know your thought at the Feedback section below.


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