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A probable future for Supply Chain Management

It is time to stick your neck out and predict the future. Oh! well, it is time for me to stick my neck out and predict the future of supply chain management. And unfortunately for everyone in this space, it is going to be a dismal one. In short, I’m predicting dark and gloomy times ahead for supply chain management and allied activities. Let’s start with the different constituents:

Supply Chain Software – Bug fixing and maintenance is in your future and not code rewrites from scratch with some fancy new hookups. Unless you plan to dramatically hunt overseas for markets. I am thinking that this space is probably dead for another 3-5 years.

3PLs – A lot of consolidation will happen in this space as smaller and medium firms are pushed to the brink – the larger firms will get to binge in a bit.

4PLs – I think we can safely consign them to the dustbin of history – a bridge too far and a manager of managers is not where this space is headed.

Supply Chain Integrators and Consulting services – I think that the ones that have an overseas presence will stand to make something of the shift that is occurring. As for stateside, they will get leaner and leaner still.

Green Supply Chain – I think you’ll hear a lot of noises, needless calculations and carbon offsets in this space but any growth here is predicated on a robust global economy or rather one would need a green supply chain if there was a real growth in the supply chain to begin with. What if the scope and scale of supply chains themselves decrease? Of course governments are willing and able to tack on numerous regulations to the activity of global commerce but global commerce at what level – at the 2007 peak or the 20xx trough. Further, why would consumers be willing to accept the increased costs that producers will pass on to them in an environment in which consumption itself is being curtailed? Besides the green supply chain is a malady of the developed world and there is every indication that the growing economies of the world would discard it outright.

Supply Chain Prognosticators (such as moi) – Twiddle dum and Twiddle dee. I suppose I’ll find something else to blow hot air about.

On a more serious note, there is likely going to be a lot of work to do overseas but just not here. Don’ t take my word for it but growth is what higher and more complex abstractions of Supply Chain Management products and services manage, not flat lining or worse yet contraction. Some time ago, the refrain used to be, “Go West, young man, go west.” Well, I think we’ve come to the point where it begins to ring true yet again. And don’t let a trifle such as the pacific ocean get in the way.

On a still more serious note, such reading of the entrails demands extraordinary evidence. Actually, it doesn’t. It just demands ordinary evidence of which I have one very important data point. Better yet, it is available for free (Actually not, you just paid for it already) : U.S. Household Deleveraging and Future Consumption Growth

It’s a short piece. It’s timely and absolutely worth reading.

Some highlights,

Where we came from,

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.

Where we are at now,

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income.

I’ll let that number sink in a bit. And I’ll tell you why – if you felt like the world was ending, that was in reality based on a mere 3% reduction of leverage. In other words, we received something like a pin prick. Further, there is a hammer the size of the Empire state building coming straight at you.

A parallel can be found in the Japanese experience (but treat it as illustrative and not indicative of anything)

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

I suppose the comparison to Japanese household would have been skewed because of their natural saving habits. Who knows? If a similar scenario were to occur stateside and a reduction in household leverage of about 30% were to take place or say even 15%, what effect would that have on the supply chain industry? That is my question, to you and to myself. To me, it seems that all this shaking and quivering has taken place before the real earthquake hits.

In their conclusion of the likely scenario going forward,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change. An even larger subtraction from consumption growth would occur relative to a baseline in which the saving rate were declining, as occurred prior to 2005. In either case, the subtraction from consumption growth would act as a near-term drag on overall economic activity, slowing the pace of recovery from recession.

By the way, everything in this post can be condensed into one sentence – “Leverage is gone. And it is not coming back for a long time.” I think you will find that this statement will be a sort of touchstone for many in these times.

“Go west, young man, go west.” Go where the growth is going to be.

It’s inflation. No, it’s deflation. No, no, it’s hyperinflation.

No, it’s stagflation. Perhaps, not. Whatever it is, it is indignation to me. Not because we find ourselves in this pickle. It’s that all the bright minds in the world cannot tell whether it is pickle or jelly. Or something else. Well, whatever it is, it has rendered very many individuals rather immobile. And that’s all one can say about it.

Personally, I find little sense in talking about Demand or Supply and therefore Supply/Demand Chain Management when everything is just downright frozen, moving neither here nor there. Of course, where you might be, you might be seeing activity galore but from where I am it is quieter than the Western front. And there is a foreboding in it even though perhaps in hindsight, one might ask oneself, what the fuss was all about? There is, I think, in ignorance and obliviousness a kind of remedy that one would be warned to do well without but in curiosity a persistent malady of wrong turns and guesstimates that exacts a terrible price on the mind. In so far as much, you find yourself tired, buffeted and tossed, let me hope that is because of the latter and not the former.

First off, the oft quoted standard definitions (from Investopedia):

Inflation:

.a sustained increase in the general level of prices for goods and services.

Deflation:

.the general level of prices is falling. This is the opposite of inflation.

Hyperinflation:

.unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system.

Stagflation:

.the combination of high unemployment and economic stagnation with inflation.

But what about the causes? For brevity’s sake, I’ll delve into inflation and deflation as the other two are shades of inflation.

Two mainstream theories about the cause of inflation:

Demand-Pull Inflation

This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation

When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

And from the Austrians,

The idea here is that,

inflation is an increase in the money supply, rising prices are merely consequences.

And further,

This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply. In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.

On the other hand, what causes deflation?

The following causes are referred to depending on the school of thought that provide  them.

From Wikipedia,

In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.

And from the Austrians,

Growth Deflation

If supplies of certain goods in the economy increase due, for example, to increased saving and investment in additional capital goods or to technological progress, as is the usual case in the historical market economy, then, all other things equal, their producers will be induced by competition to offer more units of their product for a dollar. [Assuming a fixed supply of dollars].

Cash-building Deflation

[Cash] hoarding is nothing but an increase in what is called the “cash-balance” demand for money, that is, the average amount of money that the individual desires to keep on hand over a period of time.

Bank Credit Deflation

. a decline in the supply of money that results from a collapse or contraction of fractional-reserve banks that are called upon by their depositors en masse to redeem their notes and demand deposits in cash during financial crises.

Confiscatory Deflation

This form of deflation involves an outright confiscation of people’s cash balances by the political and bureaucratic elites.

So what’s happening right now? Staking an answer to this question with some timeframes is key to deciding how to orient oneself during this period. If you chose inflation (or its cousins), then you’re banking on some sort of a recovery in the next two or three quarters. Another open question here is whether such a recovery would be accompanied by an employment recovery. If you chose deflation, then you’re thinking that the situation might meander along for another quarter or so before worsening significantly as the unemployment situation worsens. The situation is really no different for firms either – the more astute managers will have a plan for any of the economic scenarios outlined above. The problem is that these scenarios unfold over multiples of quarters as we search out the way forward with a good dose of personal biases thrown in.

As for me, I’m biased towards deflation. Deflation has its vicious cycle that plays out in the following manner:

Falling Demand -> Falling prices -> Debt defaults -> Bankruptcies -> Layoffs and Wage Reductions which leads to further fall in demand and so on. Meanwhile, the signs of a second wave of destruction are beginning to emerge and I hope to write up a post on that. Also, as  I was traveling, I had some time to think about the rationale of the stimulus and how the debate and execution of economic stimulus parallels experiences in the manufacturing world. The idea here is that government stimulus is quite like push-based manufacturing unlike pull-based manufacturing.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

@ SCM Clustrmap

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