Global Recession : Are We Becoming Wiser?

Recession, business cycle, bubble are not new for this world. Right from 1930's onwards, there is an ample record of economy movements & major recessions, their causes & impacts. Have we learnt any lesson from each of the down turn or just become good at analysing it post facto? With so much of experience, knowledge, sophisticate modeling capability or merely improved common sense, why can't we see it coming? Why do realize it when we are only deep into it?

These questions are difficult to answer and many experts may claim that they saw it coming but as a collective human race, we have been again fooled by our psyche. Just a few months back the whole world was dancing to the tune of growth. Oil & commodity prices crossed the limits of any imagination but the greed of producers continued to grow without any limit. They kept on increasing prices to make a hay while sun shines. Same was the story for the real estate sector fueled by strong consumer demand that soon turned into a bubble with entry of investors colluding with builders. The sensex, having crossed 10000 mark did not look back, with every increase sharper & faster than before till it touched 20000 mark. Experts even forecasted sensex crossing mark of 30000 in near future.The stock market sharp rise was nothing but another bubble being built by FIIs pouring dollars into a stock market. Rupee sharply rose against dollar & analysts forecasting further strengthening of rupee.

While the experts were building castles in the air, the US economy was getting into troubled waters right from beginning of 2008. Japan was already on the edge of recession. There was increasing unemployment in US resulting in lower consumer demand. In the middle 0f 2008, alarms were raised on sub-prime concerns with many banks declaring losses. Experts failed to read the signal & assess the impact. This was another bubble waiting to burst. The experts strongly believed in it's not over until the fat lady sings.The sharp increase in food prices was attributed to food shortage due to increased consumption in India & China..... another cover story to ignore the reality.

The story of India is very peculiar. The economy was growing at 8-9% and expected to touch double digit oblivious to what was happening to commodity prices until inflation started hitting both the industry as well as common man. When crude oil prices crossed USD 100, government had no option but to increase fuel prices. Prices of common items, food and vegetables went up 30-40%. The government that was gung-ho about growth had to resort to practices of reducing liquidity in market & restricting exports but failed to make any dent on inflationary trend. That was a swing to completely opposite extreme. FIIs pulled money out of stock market to meet US financial crisis and Indian investors pulled money from real estate to face stock market crash. As a result real estate bubble also burst. Now government has reacted to recession by swinging to another extreme of loosening credit in the market. The impact of the additional money in the market is yet to be seen.

Coming back to the key issue i.e. why we didn't see it coming and took proactive steps. We became victim of our own success. Who is responsible for this? Banks, who over sold the mortgages in US? Or commodity producers who kept on increasing prices assuming demand is not sensitive to any level of price? Or investors flush with funds, who kept playing with stock & commodity prices in the market? Clearly, it is all of them. They all belong to a new sect of unregulated free economy that doesn't mind killing itself for the short term gains. They not only kill themselves but harm the entire mankind the way it hurts the most. They are a greater threat compared to any other foreseen dangers to mankind.

Are we learning a lesson & preparing to tame this sect so that we do not face similar situation in future? Hope the world will gain wisdom, amend policies, put in place some basic regulations in the free market. economy.

Role of Supply Chain In Riding Over Financial Crisis

The US economic crisis has taken all the economies, big or small, by storm. Or should we say a "Typhoon" with no signs of receding in near future? Financial liquidity has tightened & credit dried up, especially for the small businesses. In these troubled times, it is very important to be able to keep head above water. It is critical that not only you but your business partners, be it customers or suppliers, are able to survive the crisis.

Supply Chain Managers can play a very critical role to help the businesses ride over the "Economic Tsunami". Here are few suggestions, based on my own opinion and that of some of the experts:

1. Go lean on Inventory. Availability of Cash is the biggest need of the hour to sustain the business. Building inventory for strategic or speculative reasons, under these circumstances can be a disaster. Even if it means keeping your capacity or manpower idle that would erode margins, is a better option than keeping inventory for an uncertain demand that would block cash needed for meeting operating requirements of the business.

2. Don't push Inventory to Customers. It is like shooting in your own foot. There is a general tendency to push inventory to customers to achieve sales target numbers. It only converts your inventory into higher credit in market or outstanding from customers. The financial risk goes up if your customers are facing liquidity crunch and some of them go bankrupt or don't pay at all. By pushing inventory to your customers, you are not only increasing your own risk but may kill the customer with high debt.

3. Plan, Replan & Replan. In a scenario of uncertain demand, do not pre-commit resources & materials in advance. Build visibility into your demand chain and align your supply / production more frequently than you have been doing in past. Catch the demand signal early & do not hesitate to change the production schedules, even if it means more changeovers or setups on production lines.

4. Stop producing slow moving or not so fast moving items against the forecast. Rely more on the actual demand signals than on the forecast. Or best agree with your customers to produce/ assemble these items against their orders. It may lead to increase in response time but unlock the capital blocked in such items.

5. Service efficiently. It doesn't mean service at lowest cost or cutting corners. Redesign your network that can service smaller lots and at a higher frequency to your customers. If your network cannot support frequent & smaller deliveries, use a reliable 3PL. Consolidate number of service providers & shipments. Evaluate alternate modes of transport e.g. Railways, multimodal shipments that are economical as well as reliable.

6. Form alliances. Taking a cue from the alliance reached between Jet Airways and Kingfisher Airlines, it is not a bad idea to share assets wherever synergy is feasible. Join hands with others, including like mind competitors, to find collaborative ways of saving costs in manufacturing, servicing and logistics. Remember, recession is a bigger threat compared to your competitor.

7. Follow lean processes. Tough time is also an opportunity to re-engineer your processes. Evaluate your processes, cut out wasteful activities and minimize wastage in the supply chain. Order processing time, inventory idle time, supply lead times are some of the few candidates that would need a very close look. Inventory inaccuracy or leakage in warehouse, transit damages, storage conditions would require stricter controls.

8. Pay your suppliers on time. Don't push your liquidity crunch to your suppliers by delaying their payments. The suppliers sustainability is as critical as your own business continuity. Incentivize your suppliers to reduce lot sizes & implement JIT, Vendor Managed Inventory / Replenishment. Consolidate suppliers & shipments for economy of scale. Renegotiate the contracts & shift to "value" suppliers, wherever possible.

9. Motivate people & upgrade their skills. The economic scenario can dampen the spirits of SCM people due to pressures from suppliers, customers & internal stakeholders. It is important to help them overcome difficult situations, upgrade their functional & leadership skills. Motivate them to take difficult decisions that benefit overall business.

10. Network with Supply Chain professionals from similar or different industries, learn how they are coping with difficult situations, share your learning and help each other in solving the problems.